Approaching Hubbert's Peak of Silver?

St. LOUIS () -- Many silver bugs have been following the progress of Barclays' silver ETF since its submittal to the U.S. Securities and Exchange Commission (SEC) in June of last year. So it came as no real surprise when the price of silver surged almost 8% in one week upon news that iShares Silver Trust had "" at the SEC. On January 31, the spot silver price hit $9.91, its highest level since April of 1984, but still investors say it is drastically undervalued.

After speaking with a contributing Hubbert's Peak-aware analyst, Resource Investor investigated the possibility of silver approaching peak production and how Barclays' silver ETF could help prolong this eventuality.

First off, "Hubbert's Peak," although generally used as synonym for 'Peak Oil,' can also apply to the production rate of metals. Any metal, like oil, is a non-renewable, absolutely exhaustible resource that exists in limited amounts of exploitable ore at high enough grades in the ground. The production rate over time of any metal, like that of oil, follows a bell-shaped curve, where the highest point is called Hubbert's Peak. This is in honour of geologist M. King Hubbert, who first formalized this concept in 1949, although the best explanation might be in his 1976 paper.

So why is silver so interesting in this perspective? According to the analyst, of all metals, silver is nearest to Hubbert's Peak. This assertion can be substantiated by examining the numbers in the 2006 issue of the "Mineral Commodity Summary" for silver prepared by the U.S. Geological Survey (USGS), said the analyst.

This document states that for 2005, in metric tons (mt):

  • World mine production totalled 20,300 mt;
  • World reserves stood at 270,000 mt (13.3 years of production);
  • World reserve base at 570,000 mt (28.1 years of production).

The USGS reserve base includes those demonstrated (measured plus indicated) resources that are currently economic (reserves), marginally economic (marginal reserves) and some of those that are currently sub-economic (sub-economic resources).

A comparison with the data for other metals from their respective USGS commodity summaries will show that silver has the lowest reserves/production and reserve base/production ratios. Silver guru Ted Butler did this comparison a year ago using data for 2004, the analyst said. And, at that time, reserves and reserves base for silver stood at 14 and 29 years respectively, so with the passage of one year the world has one year less remaining in silver reserves and reserve base.

Silver Demand

Source: Silver Institute

According to stats from Silver Institute, total fabrication demand for 2004 stood at 836.7 million ounces. However, overall mine production was only 634.4 million ounces. Supply of silver from above-ground stocks decreased by a dramatic 39.8 million ounces to 202.3 million ounces. So should we be more concerned that world is running out of silver?

The Silver Users Association is most definitely concerned, but for different reasons. You can view their comment to the SEC opposing Barclays' ETF, as well as all other comments on the SEC website. But as Jason Hommel, Editor of Silver Stock Report, recently , the SUA has it "exactly backwards."

Hommel said that if the ETF can eliminate elements currently holding the price back, mining companies are likely to the open and reopen many mines deemed unfeasible at current prices. Ultimately, this would ramp up silver production as more deposits came back online and further increase exploration, he said.

The contributing Hubbert's Peak-aware analyst asks which of the following should be the wise path for the SEC?

  1. Approving the ETF, thus allowing the ensuing accumulation to increase above ground stocks from the current extremely low levels, at the same time causing the price to rise which in turn will discourage non-essential consumption and encourage exploration, or;
  2. Rejecting the ETF, thus preventing the market from having the price signals that "play a key role in conserving scarce resources, directing those resources to their most highly valued uses?"

The answer seems quite obvious from this perspective.

As a basis of comparison, the analyst made light of remarks by Federal Reserve Chairman Alan Greenspan last October concerning energy scarcity.

"The experience of the past fifty years - and indeed much longer than that - affirms that market forces play a key role in conserving scarce energy resources, directing those resources to their most highly valued uses," said Greenspan.

"Barring political impediments to the operation of markets, the same price signals that are so critical for balancing energy supply and demand in the short run also signal profit opportunities for long-term supply expansion," he added.

Now replace 'energy' by 'mineral,' and think about where the price of silver is right now. Friday's close of silver futures on the New York Mercantile Exchange was $9.42 an ounce, still far from the high of $48.70 in 1980.

The analyst concluded by asking, how do you induce people to start conserving a scarce critical resouce other than by higher prices?

Although the point-of-view may differ from analysts previously interviewed by RI, this analyst still subscribes to the same school of thought: "Let the market decided the price."

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