THE SILVER BOOM: WHILE JEWELERS BENEFIT, SUPPLIERS WORRY

Silver was once called “the restless metal” because of its price volatility. It deserves that name again, thanks to its recent performance in both market pricing and jewelry sales.

After years of stability, the metal’s price rose from $4.21 an ounce in July 1997 to a decade high of $7.28 in February. Since then, it has fluctuated between $5 and $6. Some analysts, though, say it could go as high as $8 within the year.

Meanwhile, U.S. silver jewelry sales are surging, up 15% in 1997 to $2.4 billion. Indeed, say analysts, it’s so popular that new categories, especially silver wedding rings and bridal jewelry, have appeared, while men’s silver jewelry enjoys renewed interest.

Investors and price. Much of the metal’s recent price rise is due to investors, led by Warren E. Buffet. Buffet’s holding company, Berkshire Hathaway Inc., bought 130 million ounces – 20% of the world’s annual output – between July 1997 and February 1998. Investors’ buying is driven by the possibility of a future worldwide shortage. And indeed, the annual global demand for silver (in photography, jewelry/silverware, and industrial uses) has far outpaced supply since 1990.

In 1997, for example, world demand totaled 863.4 million ounces (up 6% from 1996), while supply from mines, government sectors, and recycling came to only 665.4 million ounces. In addition, 1997’s robust silver demand led to “substantial” reduction in existing bullion stocks, according to the Silver Institute, the worldwide association of mines, refiners, fabricators, bullion banks, and manufacturers based in Washington, D.C.

TOP 10 SILVER PRODUCING NATIONS Ounces Produced (in millions)

1997 1996
1997 1996
Mexico 86.2 81.3
Peru 66.8 63.3
U.S. 53.3 50.5
CIS* 45.5 45.7
Canada 39.0 39.9
China 37.9 32.2
Australia 35.6 32.8
Chile 35.1 36.8
Poland 33.8 30.6
Bolivia 12.4 12.4
*Commonwealth of Independent States (the former Soviet Union)
Source: The Silver Institute’s World Silver Survey 1998

That gap isn’t as critical as it looks. “The supply problem is a little more severe, but we’re not running out,” says Walter Frankland, executive director of the Silver Users Association, a Washington organization whose members make, sell, and distribute products with silver. “There’s some tightness in the market, but not a serious shortage,” agrees Paul Bateman, director of the Silver Institute.

Their reason for confidence: The annual shortfall is filled in by large investors and other holders who “disinvest” themselves of silver when the price inches up. In 1996, this secondary source alone accounted for 148.5 million ounces. Moreover, the strong demand and rising price have encouraged new mine production. The 1997 total of 512.6 million ounces – from primary silver mines and as byproducts from base metal and gold mining – was the second highest ever, and 90 million more new ounces (on top of 1997’s figure) are expected by the year 2002. Additionally, some analysts think the gap between production and demand could shrink dramatically in a few years as digital photography reduces the use of photographic film, which eats up a third of all silver annually.

Hunt redux? Still, silver’s renewed price volatility makes those in the industry nervous. It brings back memories of 1980, when Texas oil billionaires Nelson and William Hunt tried to corner the world’s silver supply. Prices soared, but the market collapsed just as quickly, costing investors billions.

In addition, price fluctuation “makes it difficult for those in mining to make production plans for the future, disrupts buying of raw materials, and raises costs for producers who generally lease the silver they use,” says Frankland. The lease cost was a half percent on the price per ounce last year, up to 14% early this year, and has fluctuated between 4% and 7% since spring.

Industry observers expect some continued price fluctuation in coming months. Indeed, Jeff Christian, managing director of the CPM Group, the leading precious metals commodities research firm, tells JCK he expects silver to go to $8 an ounce within the year, propelled by renewed purchases by other big investors.

Others in the industry, though, doubt that. Michael Brown, president of Sunstone Inc., a leading silver jewelry manufacturer, anticipates the price settling between $4.50 and $5.50. “But I don’t expect it to go $6 or higher,” he says. “That’s finished [and was due] to a temporary short supply” created by Buffet and other investors.

Silver’s price

THE RESTLESS METAL: PRODUCING NATIONS Ounces Produced (in millions per troy ounce)

Year High Low Average
1980 $48.00 $10.80 $20.63
1981 16.45 7.95 10.52
1982 11.21 4.89 7.95
1983 14.75 8.34 11.44
1984 10.04 6.24 8.14
1985 6.74 5.57 6.14
1986 6.20 4.87 5.47
1987 10.20 5.36 7.01
1988 7.99 6.01 6.54
1989 6.17 5.02 5.50
1990 5.39 3.93 4.82
1991 4.53 3.58 4.05
1992 4.31 3.63 3.94
1993 5.37 3.54 4.30
1994 5.75 4.62 5.27
1995 6.01 4.36 5.19
1996 5.79 4.67 5.19
1997 6.21 5.47 4.88
4/98 7.31 5.47 6.25
Source: The Silver Users Association

American suppliers and retailers of silver jewelry – unlike more price-sensitive jewelry markets like India – aren’t bothered by the silver price zigzags and say fluctuations haven’t hurt either trade or consumer sales. Many silver users built the 1980s’ high prices into their margins – and did not make adjustments when prices fell.

More important, unlike gold or platinum jewelry, whose more expensive metals are a big part of production, silver is only 10% to 20% of total costs, “so if the price of silver changes a dollar, that’s not a big impact on fabrication costs,” notes Linda Meehan, director of the Silver Trust International (STI) in New York, the marketing arm of the silver industry. Indeed, agrees James Marquart, president of the Manufacturing Jewelers & Silversmiths of America in Providence, R.I., there are bigger factors affecting silver jewelry costs than the metal’s price, including expenses of labor, overhead, design, and craftsmanship.

In fact, the metal’s price rise barely affected jewelry pricing. Some manufacturers absorbed all or some of the temporary increase. Others put a small surcharge on their prices early this year, though most took it off again as the metal fell.

Meanwhile, imports (80% of all U.S. silver jewelry) remain strong. Though Thai silver exports to the United States dipped in 1997 (because of domestic economic problems as well as silver’s price), Italian exports increased.

The effect on retailers also has been minimal. Tiffany & Co., a leading retailer of fine silver jewelry and giftware, has seen “only modest increases on some items” from its suppliers and itself has only “modestly adjusted some prices selectively,” says Michael Kowalski, president of the company.

In fact, adds Michael Brown of Sunstone – whose own business with jewelers is “great and growing” – the extensive publicity about commodity investors and silver’s rising price benefits jewelers because it “increases the value of silver jewelry in the eyes of the public.”

White metal boom

When jewelry retailers think about silver today, they think about rising sales, not its commodity price. Though not a big part of the domestic jewelry business – estimates put it at 7% to 10% of annual sales – sterling silver jewelry is hot. In the past five years, it has posted annual double-digit sales increases, according to STI. In 1997, more than 60 million pieces were sold, with sales of $2.5 billion, or 15% over the 1996 figure. Tiffany, for example, did an “exceptionally strong silver business last year,” a trend continuing into 1998, says Kowalski. A big factor, he says: strong consumer interest in “white metals,” like silver, platinum, white gold, and stainless steel.

Supporting those data is Jewelers of America’s 1997 Business Survey, which found two out of five jewelers had a 37% increase in silver jewelry sales. That was better than all other categories (except diamond jewelry), thanks largely to silver jewelry’s “rise in popularity among younger, trendier shoppers.” Silver jewelry’s “expanding assortment of designs” and “favorable price points” are factors, too, says STI’s Meehan. Nine of 10 purchases are under $70, and the average price per item is $40.

Overall, high-end designer silver jewelry and items targeted at the teen market fare better than the middle sector. In fact, some of the largest U.S. jewelry retail chains, as well as leading mass merchandisers, are devoting more sales space to silver this year. (Silver’s price is still low enough for jewelers to get a good markup.)

“What was once considered in the industry as a cyclical fad has become a long-lasting classic with enormous profitability, growth, and universal appeal to both men and women of all ages and lifestyles,” says STI’s Meehan.

Worldwide demand for silver jewelry is even stronger, having risen 21% between 1992 and 1997 to 282 million ounces.

JEWELRY & SILVERWARE FABRICATION (millions of ounces used)

1990 1991 1992 1993 1994 1995 1996 1997
Total annual demand (world) 184.2 189.5 209.9 257.1 223.0 230.2 266.1 280.2
Total annual demand (U.S.) 9.8 9.7 10.9 11.3 12.0 12.5 12.4 12.5
Source: The Silver Institute’s World Silver Survey 1998

SILVER’S GLOBAL SUPPLY & DEMAND (millions of ounces used)

1990 1991 1992 1993 1994 1995 1996 1997
Annual demand 716.7 714.7 730.0 780.9 773.2 774.2 826.2 863.4
Annual supply* 648.8 642.7 623.8 603.6 594.7 632.6 639.6 665.1
Annual deficit** 67.9 72.0 106.2 177.3 178.5 141.6 186.6 198.3
* Primarily from mine production and byproduct and recycling of scrap
** Primarily disinvestment by investors, banks, official sources, and others holding silver