(yearly average prices based on London PM Fix)
By the beginning of 1981 the silver market was starting to adjust after the traumatic events of 1980. Industrial silver demand was declining, both because of the worldwide recession that had set in, and in reaction to high silver prices. Investment demand for silver also fell sharply. Investors were aware of the reduced fabrication demand for silver, and of the amount of silver backed up at refineries Other investors had lost money in 1979-1980, and were wary of returning to the market. Still others were distracted from silver by more attractive financial markets.
Supply also fell, as the surge of old scrap and coin melt subsided. Total supply dropped 101.1 million ounces from 1980′s level to 483.5 million ounces. The worldwide recession persisted until late 1982, continuing to restrain fabrication demand and discourage investment absorption. Silver mine production, meanwhile, had begun to rise, as some mines developed in reaction to the higher prices since 1979 came onstream. Much mine output of silver remained profitable even as silver prices subsided to around $8.00 in the early 1980s, so that expanding existing operations and developing new mines remained an attractive proposition for many miners. Secondary recovery of silver, meanwhile, continued to decline.
Silver prices reached a cyclical nadir of $4.98 in June 1982, 10% of the $48 peak just 30 months earlier. June 1982 also proved to be the trough of the recession in the United States. During 1982 serious problems erupted in the international debt market, in particular relating to the debt repayment problems of certain countries in Eastern Europe and Latin America.
In late 1982 investor interest in silver was rekindled by several forces, all of which emerged at roughly the same time. The international financial market panic led some investors to turn to silver. Others were attracted by what they saw as unsustainably low prices. Investment demand also was encouraged by a rapid easing of credit market conditions by monetary authorities in most industrialized nations; this easing led to an immediate revival of inflation fears. As a result of all of these forces coming to bear at once, investment demand picked up during the second half of 1982 and the first quarter of 1983. This influx of investor buying helped take silver prices from the June 1982 low of $4.98 to a peak of $14.72 in March 1983.
In March 1983, several trends came into play reversing the rise in silver prices. First, the price had nearly tripled in nine months. Such a fast ascent led to profit-taking by investors; it also constricted industrial use. On the supply side, secondary recovery of silver from scrap and coinage increased in response to the higher prices. OPEC lowered its official benchmark oil price, for the first time in the cartel’s history. The sudden decline in petroleum prices quickly reduced inflation expectations. Silver prices had averaged $13.96 in February 1983. In March they averaged $10.62.
Prices recovered slightly during the summer months, but from 1983 until 1986 the trend in prices was downward. This downward trend served an important purpose in the physical market, in that it discouraged new developments of primary silver mines, except where high ore grades or other factors made for extremely efficient plants. It also served to reduce secondary recovery of silver. On the demand side of the market, relatively low silver prices removed the incentives to using less silver or substituting away from silver in products.
Total fabrication demand fell sharply at the beginning of the 1980s, in response to higher silver prices, and worldwide recession. Longer term demographic and technological trends had been pointing to a decline in use, which the price rise and recession accelerated.
For example, silver use in sterlingware in the United States actually had peaked in the early 1970s, and was clearly going through a secular loss of markets due to changing demographics and consumer tastes. By 1979 U.S. sterlingware use of silver had fallen 55% from its 1973 peak of 29.3 million ounces. The decline that followed 1979 was a continuation of this longer term trend, exacerbated by the rise in silver prices and the economic recession.
Other industries, including the important photographic and electronics uses for silver, were able to reduce their per-unit silver requirements in some instances, and in other cases to substitute other materials for silver. As silver prices subsided later in the 1980s, some of these trends reversed. In the color film photographic market, for example, competition for higher film speeds led to an increase in per-unit silver use, to levels higher than those seen in the late 1970s.
Fabrication demand, including coinage, reached a low of 363.1 million ounces in 1981, the lowest level since 1960. During the early 1980s, fabrication demand remained weak, but in 1984 it began rising once more, stimulated by low silver prices and strong growth in industrial activity.
Silver supply followed a more erratic pattern during the 1980s, which partly reflected the high degree of price responsiveness of secondary recovery. Total supply fell 101.1 million ounces from 1980 to 1981. This decline was entirely a function of the scaling back of secondary recovery, after the rush of material in late 1979 and 1980. Total supply continued to slump in 1982, falling to 455.1 million ounces. While this was happening, in late 1982, silver prices staged a rally from $4.98 to nearly $15.00. This surge in prices brought out significant quantities of scrap in 1983, which boosted total supply to 531.1 million ounces. As prices decreased from early 1983 into 1986, total supply once more fell back, to 449.7 million ounces in 1986. Mine production was restricted by the low prices at this time, with silver reaching a low for this period of $4.85 in May 1986. Secondary recovery also was constricted by these low prices. Since 1986 total supply rose once again, reaching 514.0 million ounces in 1990.
Since 1979 there was a surplus of total silver supply over fabrication demand every year. On a cumulative basis, this surplus totaled 927 million ounces from 1979 through 1990.
It appears that most of this surplus was bought by bona fide investors, individuals who have accumulated these silver positions in the expectation of being able to liquidate them at some later date at a profit. Minor surpluses and deficits can be accounted for by changes in reported market inventories and investor coin purchases. Most of the silver coins produced in this decade were bullion coins, designed for investors and collectors and not intended by their mints for use as circulating currencies. Silver coinage since 1979 totaled 241.6 million ounces.
Accounting for these factors, it still seems that investors acquired around a billion ounces of silver since the late 1970s, one quarter of this in coins. The period of heaviest silver purchases occurred in 1980 and 1981. Simple logic bears this out: Strong investment demand was keeping prices high at this time. As investor buying waned later in the decade, prices slipped down. The weighted average acquisition cost of the silver added to investor inventories during this past past decade was $11.25 per ounce.