The Bullish Case for Silver

Some investors think silver has lost its luster. The precious metal currently is priced around $29 an ounce, flat from where it was to start the year and down about 20% from peak levels in the spring.

What’s more, silver is off about 50% from a peak of $48.70 or in April 2011. Ouch.

How to Buy Silver for Just $4 an Ounce

But there’s a convergence of trends going on right now that hint at a reasonably bullish market in silver on the horizon. Thanks to the unique characteristics of this metal, demand-side pressures and overall market trends, it could pay off to dabble in silver stocks or funds.

It’s a risky play, no doubt. All commodity-based investments tend to be volatile. But here are a few reasons you might want to consider delving into silver:

Real, Practical Demand

Silver, unlike gold, has real-world uses. It’s one of the most conductive metals out there and a key part of many electronics and batteries. It remains in high demand for film photography applications, even in a digital age. Silver even has antibacterial qualities, making it an important element of surgical tools and other medical devices.

The biggest growth area is, of course, in tech. For instance, roughly 6 cents of silver is used in each cell phone, according to industry reports. That doesn’t sound like a lot, but there were almost 6 billion mobile subscribers around the globe in 2011. For those of you bad at math, that equals $360 million of silver in those devices.

And that’s only accounting the active smartphones out there. There is a lot of silver in old cell phones, photography chemicals or medical devices that already has been taken out of the market. Yes, there is a push to recycle electronics and reclaim costly elements like silver within them — but in cases when silver is used in very small portions, it isn’t cost-effective or even practical to recover the silver.

That means some silver isn’t just purchased but truly “consumed,” taken out of circulation entirely and impacting supply. That is a vastly different dynamic than a precious metal like gold.

An Inverse Play on Base Metals

I recently interviewed Randy Smallwood, the CEO of metals powerhouse Silver Wheaton (NYSE:SLW). He shared a fascinating tidbit about silver production and its relationship with base metal mines.

Smallwood told me that a relatively small portion of silver actually comes from dedicated silver mining operations, and roughly 60% comes from base metal mines. In other words, when copper or lead mines are operating, they also tend to produce small portions of silver and deliver it to market — even though that’s not their primary focus.

“The supply side has this natural restriction because copper mines don’t change their production when silver prices go up,” Smallwood said. “They’re driven by copper prices. The lead-zinc mines don’t change their production plans or rates because of silver prices. Again, they are driven by lead prices or zinc prices.”

So what happens when base metals are in a period of soft demand, as they are now, and miners curtail their production of copper and lead? Silver production naturally suffers as a result — and that hurts global silver supply.

It’s a fascinating dynamic many investors aren’t aware of, and certainly worth noting.