What’s Pushing the Silver Market?

Dear Reader,

Today, I'm excited to bring you a brief but important announcement.  Starting next week, we will be introducing an entirely new format to Casey Daily Dispatch.  You'll still receive insightful commentary from all of our editors on topics ranging from global economics and politics to the resource and energy markets, as well as links to the news and opinions that we feel deserves your time and attention. However, the new format will be more organized and focused. I'll refrain from providing too many more details here, as later this week we'll be sending you an official run-down of the new format. The most important change is that each day of the week will cover a particular topic with its own editor.

Personally, I'm looking forward the new format. If I've learned anything from economics, it's that the division of labor is a good idea. And to use some more econ-nerd jargon, even I must admit that every writer reaches diminishing marginal returns at some point when trying to pen a different economic missive five days a week. With each editor focusing on a single topic, each issue of the new format should be fresher.  Naturally, five minds editing the Daily Dispatch will produce a better publication than one alone.

To get ready for the new format, we'll be taking a brief respite from the Daily Dispatch by taking the remainder of this week off. I know, it will be hard to live without my regular musings on country music versus rap or the economic implications of bagel shops, but don't despair; I'm sure I'll be occasionally popping my head back up in future editions of the all-new Daily Dispatch format.

Next, Louis James will discuss the three primary forces pushing the silver market. Then, Chris Wood will give us an update on 3D printing with a couple of really interesting examples such as the 3D chocolate printer and the Stradivarius violin replica.


Silver: Investment Demand Is Just Part of the Picture

By Louis James

In a new report dedicated to a review of current silver demand trends, Thomson Reuters GFMS provides observations and suggests forecasts for the silver market. We find it particularly useful to look at the demand side to see how investor action can influence future share prices.

The Buyers

The report divides major silver market participants into three groups: institutional; retail investors; and high-net-worth investors (having at least US$1 million in liquid assets). Each group has its own motives for investing in silver, and the impact of each class has been changing.

Hedge funds and asset managers represent the institutional investors. They have been one of the key drivers behind the rise in silver prices in recent years, in particular until early 2011. They generated large inflows – which changed to massive outflows in 2008 – when funds were liquidated to raise cash. We observed a similar type of activity this September.

In late 2009, when the global economy showed weak signs of recovery, institutional investors returned to silver as an industrial metal that has an appeal in times when things get back on track. The sentiment did not last for long, and in 2010 and early 2011, investments in silver were again inspired by the metal's safe-haven status.

Overall, unlike in the gold market, where institutional investors are represented by conservative pension funds and buy gold for long-term holding, hedge funds and asset managers that participate in silver market aim at short-term gains. That is what we saw in April and May this year. When silver peaked, institutional investors took profits and left the market.

Individual retail investors focus on physical metal as well as ETF shares. Silver-backed ETFs have grown at an amazing rate since 2006. By the end of 2010, they had accumulated around 600 million ounces (Moz) of silver. In late April 2011, ETF holdings reached a record peak of 621 Moz, though by end-October total holdings declined by 44 Moz to 577 Moz.

India and China dominate physical bar and coin retail sales. In the Western world, US and Germany are the most active countries. Quoting the report:

While western retail markets have enjoyed successive gains, Indian demand has been far more volatile, with record net demand during 2008 giving way to heavy disinvestment in 2009; key to these movements have been consumer price expectations. In contrast, the Chinese investment market has realized year-on-year growth since it was liberalized in 2009, with both physical demand and futures turnover on the Shanghai Gold Exchange having achieved robust growth.

High-net-worth (HNW) investors increased silver purchases, too. They usually trade through OTC and are interested in ETFs. Their motive is mostly "wealth preservation (through asset diversification), while some HNW participants have been attracted by silver's upside price potential."

These are the forces driving the demand for silver from the investment side. They are increasingly interested in the metal. Let's see how important that interest is.

Demand Structure

The demand structure for silver is changing. As you can see in the chart below, investment demand as a portion of total demand has been growing considerably in the past two years and reached 26.4% of the total demand (279 Moz) last year. For comparison, the average share of investment demand in 2001-2008 was about 7%.

(Click on image to enlarge)

Though industrial application still dominates the demand structure accounting for almost half of the total (46% in 2010), investment demand grew quickly and became the second most important component, while traditional jewelry and silverware and photography usage have been declining (see the chart below). The investment market has become more influential on the metal's price as a result.

(Click on image to enlarge)

Conclusion: Positive, But…

Looking forward, there are a number of factors that are likely to support silver demand and eventually, its price.

The most important one is a bearish economic outlook. As global economic trouble boosts the price of gold, a significant portion of retail investors, especially in India and China, can be priced out of the gold market and turn to silver. It is expected that Indian physical investment demand will reach 45 Moz (+55% from the previous year) in 2012.

A bearish economic outlook, however, is also the major reason why it's possible we won't see a safe-haven rush into silver by investors. The metal continues to be perceived as an industrial one: in 2010, its correlation with copper was higher than with gold (0.64 vs. 0.58). This is not a huge difference, but it's important. A case can be made that due to the variety of demands for silver, its price will depend on more than investment (safe-haven) demand.

[What's the best way to start investing in silver? Our free report provides answers to many common questions, including whether new rounds, bars, or "junk silver" are best for maximizing profits. Get your copy now.]


3D Printing Update

By the Casey Research Technology Team

You know something is really beginning to catch on when nut jobs appear on the Internet claiming that it's all faked. Such was the case with 3D printing this summer. Someone was watching a demo video of a 3D printer producing a working adjustable wrench and noted some differences between the original model and the 3D-produced replica. Presto! Accusations that 3D printing is a hoax spread across the blogosphere.

The tale went so viral that the old, reliable myth-buster Snopes felt compelled to step in and affirm that the wrench was indeed produced by the printer.

Whew. Are we ever relieved that the 3D companies in our Casey Extraordinary Technology portfolio haven't been pulling the wool over their thousands of customers' eyes.

But seriously, this is a game-changing technology. That's why we love it, and that's why we invest our personal money in it. [Ed. note: In case you missed it previously, our introductory article on the technology from a couple months ago titled A Manufacturing Revolution is a good overview.]Not only is 3D printing the real deal, but new applications keep popping up so fast, it's impossible to track them all. But we think you'll find it entertaining if we bring you just a few of the apps that have come to our attention lately.

How about chocolate, for instance? Yep, researchers at the University of Exeter in England have designed a machine that prints out everyone's favorite treat. It's only a prototype at the moment – with chocolate, it's tricky maintaining control of key parameters, like temperature – but retailers are already knocking on Exeter's door.

The day is likely to come when you go to the candy store with a digital file and have the printer produce your comfort food in any custom shape or size you specify, while you wait.

(Click on image to enlarge)

Photo: University of Exeter

And the Exeter team wants to take the concept further, creating a chocolate-oriented website community where users can share designs, ideas, experiences, and technical info, or just bond in a virtual social network.

Then there are printed blood vessels… okay, they're not here yet. But the BioRap team at Germany's Fraunhofer Institute is working on them. It's obviously not a simple matter to make something that's strong yet flexible and has an interior surface that doesn't promote clotting. However, the researchers are working to demonstrate that it's possible if you mate 3D printing technology with a multiphoton polymerization process developed by polymer science. First, the team prints the vessels using special inks that can be bonded using UV radiation. Then, in their words, "Brief but intensive laser impulses impact the material and stimulate the molecules in a very small focus point so that crosslinking of the molecules occurs." Whatever that means, it allows the materials to become more elastic, creating the final structures.

(Click on image to enlarge)

Photo: Fraunhofer IGB

The Fraunhofer project has been under way only since 2009, so it's still in the early stages of development. Still, printed blood vessels may be just a few years off.

3D printing is so new and as yet so barely visible that no one has really addressed the host of legal issues it's going to raise. Take this little baby here:

(Click on image to enlarge)

Photo: KingLudd via Thingiverse

This – posted on a site called Thingiverse – is a blueprint for the lower receiver of an AR-15 assault rifle. And sales of these weapons are controlled by law.

Thingiverse explains: "The Lower Receiver is the frame that holds together all the other pieces of the firearm. In the States, all the other pieces can be purchased without a permit – over the counter or through the post. The Lower Receiver is the only part which requires a background check or any other kind of paperwork before purchase.

"Typically this part is made of aluminium. A rifle with a Lower Receiver made of plastic can be perfectly functional."

So, is printing one in your home a legal act? What about other forms of regulated weaponry? We'll have to wait and see…

Finally, on a gentler note (pun intended), 3D printers have been used to fabricate a variety of musical instruments. The latest and arguably greatest is a violin created in September from industrial polymers by the German firm EOS. These people didn't fool around. For their model, they went top of the line, choosing a Stradivarius.

(Click on image to enlarge)

Photo: EOS

Certain parts – such as the strings, fine tuner, and pegbox – were not printed. The rest of the components were printed in pieces, then the instrument was assembled by a professional violin maker.

How does the plastic Strad perform? Pretty well, we think, although we're far from having a first-rate musical ear… so judge for yourself.


Additional Links and Reads

MF Global Ties Awkward for Obama Campaign (Washington Post)

This article exposes Obama's ties to MF Global, including $108,650 in campaign contributions as well as $500,000 raised by John Corzine. Also, guess where Obama had his first New York reelection fundraiser? Corzine's home on Fifth Avenue. The Washington Post points out another move showing Corzine's close ties to the administration:

MF Global recently made a bond sale with an unusual clause, saying the interest rate on the bonds would rise 1 percent if Corzine ended up being appointed to a post in the Obama administration. There has been speculation that he could be in line for Treasury secretary if the president is reelected.

Later in the article, the piece goes a bit too far in concocting a conspiracy theory involving high frequency trading. The article implies that high-frequency traders have given Obama money to keep their scrutinized shops open. In my opinion, that's a stretch. There's no reason to imply conspiracies elsewhere when a clear scandal already exists front and center.

Goodbye, Golden Years (New York Times)

Harvard economics professor Edward Glaeser details why there is a greater number of older Americans in the workforce. With growing uncertainty about retirement, more Americans are remaining in the workforce. However, Glaeser points out that this isn't the only reason for the greater numbers of American over 65 in the workforce. For example, he shows that this trend has been increasing for some time.

The trend started before the current downturn: the number of Americans over 65 in the labor force increased from 10.8 percent in 1985 to 12.1 percent in 1995 to 15.1 percent in 2005 to 17.4 percent in 2010. Until 2001, most workers age 65 and older had part-time jobs; since 2001, full-time work has been far more common.

Beyond the financial crisis, there are other reasons for this trend, including better health and less physically demanding jobs in the modern workforce. It's much easier to keep working into your early 70s at an office job than at a factory or coal mine.

The Broken Window Fallacy (YouTube)

Here's a great video with economics professor Art Carden explaining the broken window fallacy. In short, Carden explains why wars, disasters, and destruction don't produce economic prosperity as some like to believe.

That's it for today. Thank you for reading Casey Daily Dispatch. We hope our US subscribers have a happy Thanksgiving, and we'll be back next Monday with our new format.

Vedran Vuk
Casey Daily Dispatch Editor

Nov 21, 2011