A Rational Look at Silver

Rational Look at SilverAs silver prices started to decline last year, silver mining companies halted projects where costs were too high in relation to the new reality of silver prices.

According to a report produced for the Silver Institute and created by Thomson Reuters GFMS, in 2013, the silver supply fell to 985.1 million ounces, down from 1,005.3 million ounces a year earlier—a two-percent drop in production. (Source: The Silver Institute web site, last accessed October 1, 2014.)

But demand for silver was increasing over the same period.

While silver prices were declining (from the same report), demand for silver in 2013 increased 13% to 1,081 million ounces, compared to 954 million ounces in 2012. Demand for silver coins and bars jumped 76% in 2013 over 2012! As silver prices fell, investors bought more silver.

The chart below compares gold bullion prices (golden line) and silver prices (grey line) over the last year.

Gold - Spot Price Chart

Chart courtesy of www.StockCharts.com

Looking at this chart, you will make one key observation: while gold bullion prices still remain above their December 2013 lows, silver prices have broken below their 2013 lows and are down more than 10% year-to-date.

Looking at this, I ask: has anything changed for silver? The only change is that the media is telling us the economy is doing better; hence, investors are not buying into the precious metal sector. But the reality of the situation is that the supply of silver in the market is declining, while demand is rising by the double-digits.

Pessimism towards the “poor man’s gold” has gone too far. In fact, I’m expecting silver to provide investors with a better return than gold bullion over the next 24 months.

If gold bullion prices were to return to their high of $1,900 an ounce, the gain from today’s gold bullion prices would be 60%. If silver were to return to its high of $50.00 an ounce (achieved in 2011)—the gains from silver’s current trading level would be 194%.

The more the precious metal mining sector is shunned by investors, the greater the opportunity. The shares of well-known silver miners are selling for deep discounts. I don’t believe these prices will stay low for much longer.