Silver: The dynamics of demand and supply

What is Supply and Demand?

Supply and Demand is known as the market equalizer. It can take any product or service and create a fair market price for any item. In theory this is how the free market should really operate, without interference from manipulators. Supply and demand is more of an economic price determent than anything. It takes a market item (product) and finds the equilibrium price using demand for a product and quantity supplied by producers and creates a bisecting line that allows market makers to find the optimal production rate and price.

There are 4 variants we can derive at from the use of the Supply and Demand Model:

1. Demand Increases and Supply remains constant = Higher Prices

2. Demand Decreases and Supply remains constant = Lower Prices

3. Supply Increases and Demand remains constant = Lower Prices

4. Supply Decreases and Demand remains the constant = Higher Prices

As you can see there are really only 2 variables that determine the price of items; Supply and Demand. If Supply increases and Demand remains constant then prices will come down. This is the basic model of price equilibrium using the supply and demand model. Eventually the market will settle on a price for a particular item using this model as long as there is no manipulation of either Supply or Demand.

Supply and Demand - Silver Market

Silver has been a means of trade long before the Roman Empire and will continue to be a form of money till the day we find an item that can match its value and use. When it comes to Supply and Demand in the silver markets we must look at the broader picture of things. We will have to go far beyond our thinking of just the people around us purchasing and selling their jewelry at your local jeweler. We have to look at the entire world far beyond the boarder of the U.S. There are people purchasing jewelry in Asia, India and every other country. Not only does silver have an aesthetic value but silver also has a commercial use. Silver is used in the circuitry of everything from cell phones to satellites that hoover the earth.

Once we look outside of the consumption of silver then we must look at the metal in another light. Silver is a store of wealth for many people. The great thing about silver is that it is a natural earth metal so humans cannot simply create it in a lab. With that in mind we look know that miners make up the supply side and consumers will make up the buyers side. If production increases and consumers want less silver, then prices will fall until consumer feel silver is at a good value. Conversely if production falls and consumers demand remain the same price of silver will increase.

Supplying Silver

When we talk about the supply side of silver we have to look at a few components. There are a few “Suppliers” that make up the supply side of the market: Miners, Government Sales, Scrap Silver and a few other sources. In 2010 the total supply was 1,056.8 Troy ounces. Most of the supply is created by miners which make up 70% of the total silver market. Supply has increased minimally year over year since 2002 which means there really isn’t much increase in selling overall. Here is a chart of the Supply for the 10 years in Troy Ounces:

2001 – 877

2002 – 868.3

2003 – 881

2004 – 879.7

2005 – 929.5

2006 – 923.5

2007 – 907

2008 – 904.5

2009 – 922.2

2010 – 1056.8

Source: SilverInstitute.com

Demand in Silver

Demand takes a form of its own and here we will take a look at some of the areas of consumption in silver that help drive the price of silver to different levels. One thing to keep in mind when it comes to silver is that Demand = Supply. Whatever silver is mined throughout the year is eventually used to calculate demand. You may be asking how that is possible and the answer is simple; the Silver must go somewhere.

1 2

Tags: price of silver, Silver, silver analysis, silver futures, silver futures prices, silver news, silver price, silver price 2012, silver price forecast, silver prices, silver spot, spot silver

Posted by Silver Guru on Jan 31 2012. Filed under Silver Analysis. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry