Market economics dictate that commodity prices should rise when demand exceeds supply – and precious metals are no different.

When production of physical gold and silver declines, the value of available stockpiles increases, providing savvy investors with a chance to boost returns if they buy at the right time.

Many industry experts believe silver is about to experience such a shortage, which could spell good news for anyone who purchased the precious metal when prices plummeted over 30 per cent last year.

So why are market commentators suggesting a drop in silver supplies is on the horizon? This article will outline a number of potential reasons for why now may be a good time to consider investing in the commodity.

Mine closures

When the value of precious metals drops, the knock-on effect is that mining becomes less cost-effective – and in some cases uneconomical. If this occurs, companies may close down mines or stop production of the affected metals until operations become profitable again.

The effect on silver supply can be particularly damaging, as it is often produced as a by-product from other base metals. As such, supply or cost problems in other commodities could also impact silver.

Growing industrial demand

Silver is an extremely versatile metal that is used for a range of industrial purposes, and this list of applications is growing each year.

Electronics, automobiles, medical equipment, batteries and chemicals are just some of the areas where silver purchases are rising. In fact, data from the Silver Institute shows 54 per cent of all demand is for industrial means.

Investor interest

Industry is not the only sector where interest has peaked; investors are quickly beginning to notice buying silver offers lucrative opportunities.

Historically, the gold/silver ratio has stood at 1:16, yet in the current market this has ballooned to 1:60. In other words, silver is considerably undervalued in the eyes of experts.

Investors who purchase silver now could reap the returns if the ratio corrects itself in the near future.

Stockpiling

With industrial and investor demand on the increase, it’s no surprise that many organisations and individuals may decide to start stockpiling the precious metal while prices are low.

The Daily Reckoning contributor Byron King last year alleged that a famous German automobile maker is hoarding massive amounts of physical silver at a vault in Zurich, Switzerland.  He claimed the brand was buying up large quantities of the metal when it became available in case a future supply shortage hampered manufacturing.

Vaulting services provide excellent security for individuals and organisations looking to guarantee the safety of their precious metal investments.

Non-recovered silver

Much of the silver used in industrial applications is lost to the supply chain, largely because it is uneconomical to recover or there simply aren’t programs in place to do so.

For example, retrieving silver from nanotechnology is not cost-effective for such small traces, while solar panels and other similar products may be in use for decades before being disposed of.

In many cases, consumer goods such as TVs, mobile phones and electronics end up in landfills with no effort made to recover the silver they contain.