Metals shortages have a silver lining for investors

published 24 August 2007

First published 13/6/07

I have been reading two interesting publications this week. The first comes from Capital Economics and is called Global Inflation Watch. This is interesting mainly because of the title who'd have thought even five years ago, when as far as most commentators were concerned rising prices were a thing of the past, that any research groups would ever bother to devote an entire 40-page report to worrying about the subject.

The second is the New Scientist, which pretty much sums up the reason why the price of almost everything is on the up with its headline: World Stripped Bare.

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The basic premise here is that we are using up the world's resources, and its minerals in particular, at a most alarming rate. If the world keeps consuming metals at its current rate we have a mere 45 years of gold left, 46 years of zinc, 29 years of silver and 59 years of uranium.

If the rest of the world catches up with America and starts consuming these minerals with the same enthusiasm, things look worse: there is only 19 years' worth of uranium, less than 10 of silver, 36 of gold and 34 of zinc.

Silver price: why this metal's looking attractive

The first thing these figures make me want to do is rush out and buy silver. The price of the metal has risen threefold since I first started writing about it here, having been told in 2001 that Bill Gates and Warren Buffett were pouring money into silver miners. It has already risen another 6% this year, but as these figures make clear the supply-and-demand situation is so tight that it is still worth owning.

Silver has a long history as a monetary metal and as a safe haven in difficult times so, given the inflationary environment around the world, it makes sense to hold it along with gold as a way of protecting your capital.

However, there is a lot more to the story than this. Unlike gold, silver is indispensable to a huge number of industrial processes. It has the highest thermal conductivity of all metals. It is very strong but also malleable and it can put up with extreme temperatures with no change in its properties.

It also has disinfectant attributes. Only last year there was talk of making NHS patients wear pyjamas with silver streaks running through them to try and stave off the MRSA super bug. Silver has always been considered to be good for health: rich babies aren't said to have been born with silver spoons in their mouths for nothing.

Add all this to the fact that silver looks very pretty (despite my passion for investing in gold, I really only wear silver) and you've got the perfect metal.

It is used in computer keyboards, in mobile phones, washing machines, batteries, TVs, cameras, photography, medical devices and a large number of the other things you own. Look round you: every gadget you see will have a tiny bit of silver knocking about in it somewhere. Industrial demand for silver is forecast to rise at some 6% this year.

Silver price: supply shortages

Herein lies the problem and the opportunity. Like most perfect things, silver is in short supply.

Until recently this hasn't been much of a problem as inventories have been high and government stockpiles have been there for the taking. No more. Most official stockpiles are all but gone certainly sales from them have fallen off fast and estimates suggest total stocks of refined silver are about 300m ounces, less than a seventh of what they were only a decade or so ago.

It is possible to recycle some silver, but most is lost for ever after use. To me this says that the silver price is going to keep rising for a while yet and that buying into it, probably via the iShares Silver exchange traded fund (SLV), is a good idea. Silver currently trades at about $14 per ounce. The real bulls think it will hit $20 by the end of the year.

Metals investment: others to watch

However, there are other metals that are in even scarcer supply. There is uranium, for starters. I am slowly coming round to the idea that at some point in the future wind and wave power may be of some use to us, but in the shorter term nuclear power looks like it is winning the battle. Bad news then that there may be only 19 years of uranium left.

Earlier this year I mentioned thorium. This relatively unknown heavy metal can be used to produce nuclear power in much the same way as uranium with the happy difference that its waste is much less radio-active, making it both easier and safer to dispose of. It is also much more plentiful than uranium and has a half-life of only 500 years rather than tens of thousands.

In Norway, Bergen Energy has already applied to build a thorium-based power plant. In February, I suggested buying shares in US-listed company Thorium Power, which is testing thorium in Russia and hopes to be using it commercially in the next three to four years. Those willing to take even more of a gamble might also look to the tiny UK-listed All Star Minerals, which has registered to explore for thorium in Sweden.

Finally note that a great number of other metals you have never really heard of are also in increasingly short supply. We've got practically no rhodium, which is vital for diesel catalytic converters, very little indium, used in flat-screen TVs, and only about 10 years of tantalum which you can find in all mobile phones. Supply is also tight for ruthenium used in computers, and molybdenum, a component in high-strength erosion-resistant steel.

You can get exposure to these metals through most of the big miners. Xstrata (XTA), which I hold, has a good position in the minor metals markets.

First published in The Sunday Times 10/6/07

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.