March/April 1989
Falling market prices may have dampened enthusiasm for the noble metals this past February; however, virtually all roundtable speakers saw new market opportunities for gold, silver, and the platinum-based metals.
By Robert J. Garino
Robert J. Garino is director of commodities for the Institute of Scrap Recycling Industries, Washington, D.C.
The Precious Metals Roundtable opened in New York City far less subdued than the markets themselves. Sponsored in February by the Institute of Scrap Recycling Industries, this year's speakers looked at the precious metals industry from two aspects--as an industrial metal and as an investment medium.
Outlook for Gold
Heiner Lichtenberger, general manager, Handy & Harman, East Providence, Rhode Island, presented the industrial outlook for gold. Lichtenberger stated that worldwide industrial consumption of gold dropped by about 5 percent in 1987. Jewelry was the mainstay of fabricated production, accounting for over 70 percent of the total. Electronics was the next largest industrial usage, followed by dentistry, which he said has shown continuous decreases in consumption.
Looking closer at jewelry, the karat jewelry arena was the most significant in gold usage, stated Lichtenberger. In 1987, a total of 1, 138 metric (mt) were consumed in developed countries and new gold accounted for 872 of those tons. The European continent is the greatest producer of karat jewelry, having produced 355 mt in 1987, down slightly from prior years.
Lichtenberger remarked that gold remains the metal of choice for the electronics industry because of its excellent electrical characteristics, stability, and reliability. When the price of gold was rising rapidly a decade ago, many attempts at replacing gold in electronics were made. But according to Lichtenberger, most of these reductions or substitutions have already occurred and gold now appears to be a stable part of this industry.
To meet gold demand in 1987, the total supply of gold to the private sector of the noncommunist world was 2,008 mt, as mine production reached 1,373 mt--the highest production ever recorded, according to Lichtenberger. Old gold scrap amounted to 402 mt in 1987, down by 17 percent from 1986. Lichtenberger did not offer a price forecast but noted that the price of gold in U.S. dollars per troy ounce (t.o.) has steadily risen through the mid-1980s (although this is not true for the price of gold in Japanese yen per gram). He concluded that a strong U.S. dollar, slightly rising interest rates, and a strong stock market have continued to take their toll on the current prices of gold.
Platinum: Supply, Demand, and Outlook
Highlighting 1988 as a most eventful year for platinum, Neil A.P Carson, U.S. marketing manager, Johnson Matthey, Malvern, Pennsylvania, noted that this industry remains relatively small compared with gold and silver. Looking first at prices, Carson said platinum entered 1988 at around $500 per t.o. and, on the back of bearish sentiments for gold, fell towards $440 per t.o. in February--where it briefly reached parity with gold for the first time since late 1985. Higher demand boosted the price from $440 per t.o. to a peak of $655 per t.o. on June 1 while gold remained in the $430- to $450-per-t.o. range. Platinum moved higher until the December 1988 announcement by Ford that it had developed an auto catalyst that did not require platinum. The market fell nearly $ 100 per t.o. in a week. Carson's talk, however, was not about platinum prices, but rather pointed out that the kind of panic sparked by the Ford announcement was a complete overreaction.
Reviewing industrial demand for platinum, Carson listed auto catalysts, jewelry, and small investment demand as responsible for 75 percent of total Western world demand. According to Carson, all three of these areas have shown substantial increases in demand in 1988 and this has boosted overall Western world consumption.
Carson pointed out that the supply of platinum is very heavily concentrated in South Africa and Russia, with a contribution from Canada. The boom in demand has stimulated a great deal of interest in the opening of new mining ventures. However, he noted, existing capacity is stretched to its limits and new ventures take between three and five years to properly develop. Thus, he said, demand has now outpaced supply for four consecutive years--the largest deficit being in 1988 with a projected shortfall of 465,000 t.o. This means that metal has been progressively squeezed out of stocks and consumed; and, noted Carson, the increased supply outlook does not look set to redress this imbalance for several years to come.
Carson's personal opinion was that under this scenario, the price should remain above the $550-per-t.o. level. He saw platinum demand at an all-time high and, although he believes the price will probably continue to be fairly volatile, he predicted a general firming in the near term.
Processing Silver Scrap
Mark Degnan, national sales manager, PGP Industries, Coalfield, Tennessee, provided a recap of changes in scrap film processing over the past decade. Along with changes in recycling technology, he also reviewed changes in films currently found in the marketplace. According to Degnan, in the past there were eight basic categories of film types. These films were easily recognizable, and easily evaluated by the broker and processor for purposes of estimating the number of troy ounces of silver per hundred pounds of material.
The two main changes in the past 10 years are the additions of new films and the reduction of the silver coatings on polyester-based films. Emphasizing this point, Degnan observed that films that historically would yield 24 t.o. per hundred pounds now may yield only 17 t.o. per 100 pounds. This, he said, has made it extremely difficult to grade this type of material.
Paper-Based Products and New Recycling Technologies
The fastest growing area in film recovery relates to the widespread use of paper-based products. These silver-containing products have always been difficult to evaluate due to the large difference in silver percentages, not only from product to product but from manufacturer to manufacturer. Studies and tests on this type of material now being done by PGP suggest that a new bacteria method of recovery is undergoing research. The bacteria acts to remove the silver, leaving the paper as a separate item to be marketed. Just five years ago, according to Degnan, the U.S. was looking at a market of around 16 million pounds of paper-based products being generated annually; today that figure is closer to 24 million pounds. Degnan hinted that new technologies may help significantly transform this particular segment of the industry in the years ahead.
Silver in Industry--Performance vs. Cost
Richard P. Brakenwagen, vice president, Engelhard Corporation, Mansfield, Massachusetts, concentrated his remarks on silver for industrial applications.
According to Brakenwagen, silver in transfers of electrical energy, as in contact and contact materials, has been utilized since the late 1800s, mainly because of its low resistivity. At the same time, Brakenwagen emphasized that manufacturers of products in which silver or silver alloys play an important functional role consider the use of this commodity strictly from a performance/cost ratio.
Brakenwagen noted that during this century silver cost has remained relatively low, with the exception of the Hunt incident in late 1979-early 1980. Subsequent to the run of silver to over $50.00 per t.o., major industrial manufacturers have taken a closer look at the use of silver in their applications for possible reduction of silver content. Nevertheless, Brakenwagen believes that silver and silver-bearing alloys remain cost effective while providing the performance necessary as against other technologies.
Brakenwagen concluded his talk by reminding the audience that his company's area of interest is in the sale of fabricated products that use silver and silver alloy. Brakenwagen reiterated that the application of silver in the industrial area is fully related to its performance in a given application.
Coinage and Precious Metals
Coinage, as an investment medium, was thoroughly analyzed by Alvaro Meneses-Diaz, vice president, government relations, MTB Banking Corporation, New York City. Meneses-Diaz's review and analysis looked at gold bullion coins, silver coins, and platinum bullion coins.
In recent years, stated Meneses-Diaz, gold bullion coins have achieved great importance and popularity, especially since the introduction of the Krugerrand in 1967, which had an easy-to-understand weight of exactly one troy ounce of fine gold, a very low premium and legal tender status. Today, the investor has the choice of a variety of bullion coins. All of them have a pure content of one troy ounce of gold. Although the assay may not be exactly the same, they are legal tender and have a low premium.
Also according to Meneses-Diaz, silver coins have experienced a renaissance. In fact, he remarked that coin issues have recuperated to 9.2 percent and 9.3 percent of silver production in '86 and '87 from the low levels during the first half of the present decade. Bullion silver coins have the same advantages as gold coins, observed Meneses-Diaz, with the additional plus that they are accessible to modest investors and savers who, for price reasons, do not have access to gold.
Platinum bars are of a standard .9995 fineness and exist in a variety of sizes and weights, although they are not as diverse as gold and silver bars, according to Meneses-Diaz. While the Japanese market has already realized that platinum is as good a long-term investment as gold is in America, and in the Western world in general, platinum bullion is considered more as a short-term speculative investment. Meneses-Diaz believes that this attitude is erroneous and platinum should be explored and considered by the precious metals investors as a suitable complement to other precious-metals-related investments.
He cited volatility in platinum prices and fear of loss of liquidity as reasons for this attitude, but the investor should keep in mind that platinum futures, which secure liquidity, are already more than 30 years old. In addition, continued Meneses-Diaz, investors interested in platinum legal tender coins (as opposed to bullion coins) have a number of platinum coin issues with seminumismatic characteristics to choose from.
Silver Outlook for 1989
Bernard Savaiko, senior analyst, Paine Webber Inc., New York City, emphasized investment demand for silver, which he termed the driving force behind silver's price direction.
Savaiko noted that, while total industrial demand is huge, it is more or less matched by new mine production. It is his view that investor demand was the deciding factor responsible for the absorption of excess supplies in times of slowing industrial usage, providing the market with much needed supply in times of production shortfalls. Since there isn't a shortfall of newly mined silver relative to industrial demand (as was the case back in the 1960s and 1970s, according to Savaiko), shifts in investor stocks usually dwarf changes in both industrial consumption and new production. Furthermore, he said, it is the reaction of investors to perceived changes in these supply/demand factors that causes such volatility in the silver price.
In order to project what silver demand is likely to be in 1989, Savaiko considered the factors that do influence investors. According to him, the primary motive for investor buying is fear of accelerating inflation. The scenario Savaiko envisioned was not as rosy as the one that he suggested at this same roundtable in December 1986. He believes that as long as the economy remains resilient, and interest rates remain high, spot silver should trade no higher than $6.30-$6.50 per t.o. On the downside, the market is likely to encounter strong demand toward $5.50-$5.60. Chances are the market won't go below $5.00 unless the U.S. enters a recession, stated Savaiko. If that occurs, the worst-case scenario would be $4.50-$4.80 and that would prove temporary. Next year, a rally back to $7.00$8.00 is likely; but anything above that would probably require a financial disaster, concluded Savaiko. •