Silver is a white, lustrous metallic element that conducts heat and electricity better than any other metal. In ancient times, many silver deposits were on or near the earth’s surface. Before 2,500 BC, silver mines were worked in Asia Minor. Around 700 BC, ancient Greeks stamped a turtle on their first silver coins. Silver assumed a key role in the US monetary system in 1792 when Congress based the currency on the silver dollar, but then discontinued the use of silver in coinage in 1965. Today Mexico is the only country that uses silver in its circulating coinage.

Silver is the most malleable and ductile of all metals, with the exception of gold. Silver melts at about 962 degrees Celsius and boils at about 2212 degrees Celsius. Silver is not very chemically active, although tarnishing occurs when sulfur and sulfides attack silver, forming silver sulfide on the surface of the metal. Because silver is too soft in its pure form, a hardening agent, usually copper, is mixed into the silver. Copper is usually used as the hardening agent because it does not discolor the silver. The term “sterling silver” means silver that contains at least 925 parts of silver per thousand (92.5%) to 75 parts of copper (7.5%).

Silver is usually found combined with other elements in minerals and ores. In the US, silver is mined in conjunction with lead, copper, and zinc. Most of the world’s mined silver comes from Mexico, the US, and Peru. Nevada, Idaho, Alaska, and Arizona are the leading silver-producing states. Industrially, silver is used for jewelry, photography, electrical appliances, glass, and as an antibacterial agent for the health industry.

Silver futures and options are traded on the Comex division of the New York Mercantile Exchange, the Chicago Board of Trade (CBOT), and the London Metal Exchange (LME). Silver futures are traded on the Tokyo Commodity Exchange (TOCOM). The Comex silver futures contract calls for the delivery of 5,000 troy ounces of silver (0.999 fineness) and is priced in terms of dollars and cents per troy ounce.

Prices – Comex silver futures prices showed some strength early in 2003 on the Iraq war but then fell into a trading range through summer. Silver then began a fairly steady bull market in July, rallying to finally post a 3-year high of .98 by the end of December. Silver futures closed 2003 at .95, up 22% from .89 in 2002. Although silver futures closed 2003 at a 3-year high, the market was still well below the 15-year high of .26 posted in February 1998. The highest month-end price ever reached for cash silver was per troy ounce back in January 1980. Bullish factors for silver in the latter half of 2003 centered on the weak dollar and the rebound in the US economy, which boosted industrial use of silver.

Supply – World production of silver in 2001, the latest full reporting year, rose +2.2% to 18.700 million metric tons from 18.300 million metric tons in 2000. There are many producing nations for silver, but the largest are Mexico (with 14.8% of world production in 2001), Peru (12.6%), Australia (11.2%), China (9.6%), and the US (9.3%). US production of refined silver in 2003 was on track to fall to 4,900 metric tons, down from 5,441 metric tons in 2002.

Demand – US consumption of silver in 2001 fell 6.8% to 187.4 million troy ounces from 201.1 million in 2000. The largest demand for silver usage by far comes from photographic materials with 54.4% of total usage, followed by electrical contacts and conductors (15.7%), brazing allows and solders (4.5%), catalysts (3.3%), batteries (2.8%), jewelry (2.6%), sterling ware (2.5%), silver plate (2.1%), and mirrors (1.3%). The world’s largest consuming nation of silver for industrial purposes is the US with 20.2% of world consumption, followed by India and Japan (both at 14.7%), and Italy (6.5%).

Trade – US exports of silver in 2001 rose to 707,000 troy ounces from 279,000 in 2000, but the 2000 and 2001 levels were sharply lower than the levels seen in the previous several years (e.g., 15.455 million troy ounces in 1999, 72.479 million troy ounces in 1998, and 96.039 million troy ounces in 1997). The largest destination for US silver exports is the UK with 615,000 troy ounces of exports in 2001. US imports of silver ore and concentrates were almost solely from Canada and rose sharply to 7.55 million troy ounces in 2001 from 1.420 million in 2000. US imports of silver bullion fell to 2.935 million troy ounces in 2001 from 3.810 million in 2000. The bulk of those imports came from Canada (1.370 million troy ounces) and Mexico (1.280 million).

Until prices exploded higher in late-2003, it was hard to find anything positive to say about silver. The main change has been the consolidation that has taken place in the gold and copper industries. As much as 75% of silver's production comes from gold, copper, lead, and zinc mining which is why changes in these other industries have a large impact on the price of silver. On the demand side, silver (like most commodities) is benefitting from stronger world growth (especially Asia) and rising inflation.

Fundamental data is hard to come by for the silver market, but on November 8, 2004, GFMS Ltd. said that they expect total fabrication demand to be down 2% in 2004 and world mine production to be up 1%. On April 28, 2005, GFMS, Ltd. said that they expect silver prices to average $6.79 in 2005.

A surprising development in the digital boom is the fact that many shutterbugs are taking their prized digital snapshots to processing shops to have them reproduced on glossy, high-quality photography paper, which is loaded with silver...

J.P. Morgan forecasts an average silver price of $7.10 an ounce in 2005, noting that "the price rally which started in 2003 was a justified price correction that more accurately reflects silver's fundamental market balance."

Barron's. May 9, 2005.

But the primary reason we're doing it is the increase in demand for industrial metals, particularly from Asia. We don't own gold. We own silver, because 40% to 45% of its application is industrial. And we have a small bit of palladium in the package because it is used in catalytic converters." - Steve Leuthold, chairman of money management at Weeden & Co.

Barron's. February 9, 2004.