Has Silver Peaked in the USA?
Has silver mine production in the United States of America finally peaked never to recover? Never mind the ongoing debate about Peak Oil, what about the case for Peak Silver in America?
Thanks to those helpful people at the United States Geological Survey, I was able to download an Excel spreadsheet of American mine production and chart it out. I added the US mine output for 2003 and 2004 from their regular bulletins and the result is the graph below.
What does this graph tell us about mine production in the USA? For a start, we would point out that production has indeed been falling since 1997 when production hit 2,180 tonnes. The number for 2004 was 1,200 tonnes or a fall of 45%, which is a considerable drop. Indeed, the last time US mines collectively dug out that much silver was in 1986 when production was 1,070 tonnes. But in terms of multi-year drops in production, the graph shows that this kind of event has not been witnessed for magnitude since the Second World War when mines were effectively brought under government control for the war effort. This time though, there is no nationalisation of mines to account for the 7-year decline.
However, if we scan the chart from 1900 to 2004, some things become evident. For a start, it appears that silver mine production in the USA actually peaked in 1916 at 2,450 tonnes! Since that unsung day, production declined with the great silver deflation of 1920-1947 which was temporarily brought back to life by the Silver Purchase Act of 1934 when the government obliged itself to buy silver until the price reached $1.29 an ounce. The Government then intervened again with World War II nationalisation to cause production to plummet to a double bottom low of about 710 tonnes.
Then we had a quiet period of about 40 years after the war where mine production channelled in a range of 1,000 to 1,400 tonnes per annum. Then suddenly production was off and running again with the double top formation of 1990 (2,120 tonnes) and 1997 (2,180 tonnes).
So much for the history, how do we account for the drop since 1997? For those familiar with supply-demand economics, it is not a given that a drop in production is down to resource exhaustion. As we have noted, supply and demand can be government controlled or it can be market controlled as in deflationary episodes. One way that this can be answered is to look at the equivalent graph for world production. The same USGS source gives the 1900-2002 world production figures to which we added the latest 2003 and 2004 numbers. The graph is presented below.
The first thing we would note is the climbing gradient of supply-demand since the end of the Second World War. This doubtless reflects the rebuilding of prosperity in Western nations as well as the rise of the Asian economies. Note however that production since 1997 has continued upwards unabated. The overall increase in world silver production since 1997 is about 20% compared to the US decline of 45%.
This would seem to be a good argument that American production has declined because of resource exhaustion rather than a drop in global demand. Of course, we are not implying that there is not enough silver to be had, it is just that even within a price range of $4 to $8 in that 1997-2004 period, the available reserves were just not economical enough to extract. There is also the question of silver production in other countries as globalisation outsources cheaper costs abroad.
Also, unlike the situation with South African gold mines, American silver mines do not have to contend with political instability, strikes or a strong currency. Dollars are cheap compared to the end of the 1990s, but that is still not enough to eke out enough silver from those underground reserves to surpass old production highs.
So, at this point in time, we can say that American silver mining may now be in irreversible decline. Sure, there may be times when production picks up as silver continues to climb in price, but as we can see in the above US chart for the late 1970s when silver rocketed, that is no guarantee of anything.
What is the USGS saying about remaining silver reserves in America? Their 2005 summary estimates there are economically recoverable reserves of 25,000 tonnes and an overall resource base of 80,000 tonnes. These still represent about 9% and 14% of world reserves respectively. But since over two-thirds of that silver is tied up as a by-product of copper, zinc and lead deposits; future production is very much linked to future demand for these base metals.
Performing a simple calculation of dividing the economic reserves of 25,000 tonnes by 2004 production gives a reserve lifetime of about 20 years. We wonder how viable that number really is if production has already been in decline for seven years now? After all, economically recoverable ores at 2004 prices implies that production should still be a viable enterprise. Only time will tell as annual production figures are made available.
So, what are the implications of declining US silver production for the price of silver? The answer appears to be "not much" at this point. While world demand can be supplied from other major producing countries such as Mexico, Peru and China, the game goes on. However, the analysis of world reserves against world demand is not looking too pretty from our point of view either.
The other question of interest is renationalisation of American reserves. If it could be proven that an important national resource was in decline, how would the government react to this news? In peaceful times, when prosperity is the lot of many and trade is reasonably free between nations, this may not seem much of an issue. But with government stockpiles all but empty, an above ground inventory problem looming and a possible geological depletion worldwide in the next decade or two, when will government decide to turn silver reserves into the equivalent of the ANWR region for oil?
We don't know, but we expect it to be inevitable as the above and below reserves of silver dwindle and prices rocket. It could also be bullish for those American silver mining equities bought out by the government - depending on how generous the White House feels!
In conclusion, 1970 saw American crude oil production peak never to rise again. Thirty-five years later, oil demand continues to be satiated by other countries with larger and less mature fields.
In 1997, American silver production appeared to have peaked for all time. Do we expect silver demand to still be satisfied thirty-five years from now? The answer we think is an emphatic "No!"
Roland Watson writes the investment newsletter The New Era Investor that can be purchased for an annual subscription of $99. To view a sample copy of the newsletter, please go to www.newerainvestor.com and click on the "View Sample Issue Here."
He invites comments and questions at: email@example.com.