One Reason to Be Bullish on Silver Prices
So far, 2016 has been good for silver prices. The gray precious metal is up more than 10%, while other assets are generating losses. Don’t be shocked if there are more gains ahead.
This may be a bold claim—and there are not many who are saying this—but I say silver prices are severely undervalued. The basic fundamentals of supply and demand are screaming that much higher prices could be ahead.
I have talked about the demand for the gray precious metal in these pages before. (You can read more here: “Precious Metals: 1 Big Reason Why Silver Prices Are Poised to Skyrocket.”)
Here, I will shed some light on the supply side and, more specifically, silver mine production.
You see, this is basic economics in silver production: as prices decline, producers have less incentive to produce. This is exactly what we see currently. We now have more data on what’s happening in the silver market and, well, it’s eye-opening to say the least.
Consider this: in the entire year of 2015, silver mine production in Canada plunged more than 23%! Mines in Canada produced 379,478 kilograms of silver in 2015. In 2014, they produced 493,087 kilograms of silver. (Source: “Production of Canada’s Leading Minerals,” Natural Resources Canada, last accessed February 23, 2016.)
In the U.S., silver mine output declined by seven percent. Mind you, it wasn’t small silver producers that cut back on production. The U.S. Geological Survey reports the Lucky Friday Mine (the fourth-biggest silver-producing mine in the U.S.) and the Bingham Canyon Mine in Utah (the fifth-biggest) produced less silver in 2015. (Source: “Silver,” U.S. Geological Survey, last accessed February 23, 2016.)
If you look at silver production in Australia and Chile, it declined as well.
Keep in mind that Australia, Chile, and the U.S. are among the top 10 silver-producing countries in the world.
Silver Prices Outlook for 2016
From experience, I know investors tend to completely overlook opportunities at times. Currently, I see silver as one of those opportunities. I see a massive disparity between fundamentals and silver prices; the precious metal’s prices are suppressed, though fundamentals suggest they should be soaring higher.
Here’s what I know: fundamentals matter and this disparity can’t last forever. Give it some time and you shall see.
By the way, I stick to my previous stance: I will not be shocked if we see silver prices soar 42% in 2016. With silver prices up 10% year-to-date, we have 32% to go.
For now, I am keeping a close eye on a few silver miners that haven’t cut back on silver production and are reducing their production costs. They’re not the exchange-traded funds (ETFs) that track the performance of a number of silver mining companies or those that hold silver bullion.
Dear reader, know that not all miners are going to perform as great as those that have become leaner as silver prices have declined from their highs. Silver investors have to be very selective. As for bullion ETFs, they simple won’t generate the same returns as miners will when silver prices soar.