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The Bullion Report

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February 2, 2011 in 'The Bullion Report'

Precious Metals and IndustryPrecious Metals and Industry

The world is allegedly lurching towards recovery, and the fear-based demand for precious metals might ebb. This might shake some investors loose. However, there is another side to the demand portion of precious metals that can fuel potential support for longs and that is the industrial and commercial demand.

2-2-11 monthly gc

Past performance is not indicative of future results.

***chart courtesy Gecko Software

 

2-2-11 monthly sv

Past performance is not indicative of future results.

***chart courtesy Gecko Software

 

The global financial issues that started with the housing meltdown were most likely the biggest catalyst for fears that have brought renewed interest to bullion and precious metals investment. It is easy to forget that there are tangible consumption arenas for gold and silver, not just in bullion and jewelry sales.

 

For gold, the single most important industrial demand application has come with the rise of technology. Gold is an excellent conductor of electricity and since it doesn’t tarnish, it is a desirable metal for many electronic components. Things like cell phones and computers make use of gold electroplated contacts. The more elaborate, complex or expensive, the more likely it is that the device contains at least some gold. Medicine and dentistry also carry demands for gold. Again, resistance to corrosion is a big reason why gold makes an appearance in these fields. Additionally, gold has a characteristic referred to as “bio-compatibility” which basically means that the immune response to it in a human body is limited or null. This opens up several avenues for gold in health applications including those for arthritis and cancer treatments. The World Gold Council (WGC) also has research supporting gold demand in the fields of nanotechnology, space, engineering, and architecture.

 

In their research paper on the future of gold and nanotechnology, the WGC highlights the potential for gold nanoparticles in vaccines, cancer therapies, antimicrobial applications, and pollution control.

 

Silver also enjoys widespread industrial and commercial uses. The Silver Institute has a long list that includes batteries, mirrors, catalysts, and solar energy. Photography used to be the big demand sector, but obviously digital photography has helped pare that back for the last decade. However, there are still film demands for silver, especially for x-rays. Like gold, silver finds its home in many modern electronics and is used in coatings for DVDs and CDs. Circuit boards and televisions are also home to silver.

 

Solar energy is an interesting part of silver demand. Silver paste is common in solar cells. Alternative fuel demand is rising, and there is a push to produce something to replace fossil fuels in electricity production. Consumers are savvy to the other choices like wind and solar power. Geo-politics can help push this demand, especially considering the fragile environment around some of the centers for fossil fuel production. Speaking of the environment, silver is also used in water purification.

 

What About the Higher Prices?

 

Higher prices for gold and silver will no doubt affect their use in certain industries. However, there is a reason that each metal is selected to be included in certain products. Either their reliability and conductivity have made them the go-to metal for certain components or there is a way to apply them and recover the costs in the end product price. While the fresh highs in both markets might slow expansion into other fields, it is unlikely that manufacturers will find substitute metals (like the swap of some platinum use to palladium.) Again, the key here would be a resumption of economic growth or at least a return of some stability. If manufacturers can rely on a resurgence of consumer demand, then it is possible for them to return to a purchase and application of metals regardless of higher prices in the last decade. Don’t forget that this isn’t isolated to the Western World’s recovery. The old argument for demand out of India and from China’s growing middle class hasn’t gone away. It just appears to be lying dormant until the economic situation turns around.

 

Summary

 

It is most likely in modern electronics and device applications that the investment world should put their attention if recovery is indeed underway. The widespread availability of these devices and equipment (compared to a decade ago) seems to provide the best catalyst for increasing demand for this sector. Cell phones and computers are also being upgraded at a pace that would have been unthinkable before. It seems like there are bigger, better, and badder versions coming out all the time. The tech savvy generation might have been swayed to keep their old phones and devices during troubled financial times but that might come to an end as the economy improves. If the average consumer sees a return of part or all of their disposable income, there is a potential for upgrades. This means that manufacturers will have to step things up if there is a true recovery. The latest employment report will be a good indicator of how things may develop. Although jobs data is a lagging indicator, there is a certain amount of consumer faith that is placed in these numbers. If it looks like times are getting better, then it becomes easier to shell out for replacement toys.

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.