Silver Supply

The price of silver, as each price, is determined by the market forces of demand and supply. The supply is the amount of a good offered for sale at each price. Therefore, the silver supply is the amount of silver offered for sale at each price. The silver supply in that sense should not be confused with the annual supply of silver, which comes from the mining production and recycling.

Many analysts focus on the mining production as an important driver of the price of silver. However, about half of the silver ever mined is still held in some form. The major silver producing countries are Mexico, China, Peru, Russia and Australia. Although the silver holdings are smaller than in case of gold, they are still impressive compared to other commodities. Hence, with about 780,000 tons of silver in existence above ground (as of 2014), the mining adds only about 3.2 percent to the total supply each year (and in a rather stable and predictable manner). The amount equal to annual mine supply is changing hands in a few weeks on the London market alone, therefore the impact of mining production on the silver price is limited. For example, in July 2018, 210 million ounces were transferred in July. Actually, the silver price significantly influences the mining industry, but not the other round way. In other words, the silver production costs do not affect the silver prices (the casual link between these variables is reversed)

Look at the chart 1. As one can see, the mining production has been constantly rising since mid-2000 to mid-2010, but it did not prevent the price of silver from rising until around 2010.

Chart 1: Silver mining production (red line, right axis, in metric tons) and average annual silver prices (blue line, left axis, in $) from 2005 to 2017.

silver supply

Therefore, silver should not be analyzed as a typical commodity, because it is a monetary asset and no other commodity (with the exception of gold, of course) has a comparatively high stock-to-flow ratio. This is why the mining production is a small fraction of the total silver stock and, thus, does not drive the silver price. The annual supply is modest compared to the overall supply. Hence, investors should ignore commodity-type approaches when analyzing silver market since they often lead to the wrong investment conclusions.

Instead, they should acknowledge that silver has a dual nature: it is a monetary asset and an industrial commodity. Just like with other monetary assets, the supply of silver comes from the holders of silver who decide to bring it into the market. The supply side of the silver market is determined not only by the miners but also by the owners of the world’s existing stockpile of silver. In some sense, every ounce of silver is for sale at some price. It is just a matter of price and people’s preferences. For example, if the supply of silver increases it means that sellers value their silver less intense and are willing to sell it at a lower price.

What does influence the supply of silver? Well, silver has very high positive correlation with gold (often more than 90 percent), so its market is influenced, like gold, by the US dollar, real interest rates, or the risk aversion. For instance, when people believe that the greenback will appreciate, they could bring their gold and silver (which follows gold with a certain lag) into the market more willingly, increasing the available supply of bullion and exerting the downward pressure on the price of silver.

However, silver also has an industrial aspect, which explains why the white metal is often positively correlated with the level of business activity and industrial production. Last but not least, the price of silver is also influenced by the situation in the base metals markets, since silver is mined as a by-product of them.