Anemic Silver Supply Bullish for Silver Prices
Silver prices are flat so far, but don’t be surprised if the gray precious metal starts to move to the upside and provide big returns for silver investors in 2016.
You absolutely cannot ignore the demand and supply sides of the silver market. They are completely distorted, suggesting silver prices are severely undervalued.
Not too long ago, I wrote about the demand for the gray precious metal despite silver prices trading at their multiyear lows (see “Silver Prices: 1 Big Reason to Be Bullish on Silver Prices”). Here, I will focus on the supply side.
When you can’t figure something out, go back to the basics. Basic economics says that when prices decline for a commodity, it becomes less profitable, or even completely unfeasible, for producers to continue producing that commodity at the same rate. Instead, producers react by cutting back production.
Major Regions Reporting Decline in Silver Production
We see it happening in silver and much faster than we even anticipated. Lower silver prices are causing mine production to plunge. Mind you, we don’t really see any other reason behind this.
Take the U.S., for example. In the first 10 months of 2015, mines in the U.S. produced 903,000 kilograms of silver. In the same period a year ago, this figure was 965,000 kilograms. This represents a decline of close to 6.5% year-over-year. (Source: “Mineral Industry Surveys,” U.S. Geological Survey web site, last accessed January 13, 2016.)
Canada is witnessing an outright plunge, too. Mines in Canada produced 318,884 kilograms of silver between January and October of 2015. In the same period a year ago, Canadian silver mine production was 413,364 kilograms of the precious metal. This equates to a decline in production of roughly 23%. (Source: “Production of Canada’s Leading Minerals,” Natural Resources Canada web site, last accessed January 13, 2016.)
Australia, the fourth-biggest silver producer in the world, is showing significant constraints in production, as well. We don’t have the 2015 figures just yet, but looking at the 2014 silver production figures, we can get some idea of where the trend is headed. Consider this: in 2014, silver-lead-zinc mining sales and services declined by 8.8% in Australia. (Source: “Mining Operations Australia,” Australian Bureau of Statistics, June 29, 2015.)
Here’s what you should know: Investors, at times, can be really irrational. We have seen this over and over again. They ignore something for a very long time or take it to new heights without paying much attention to fundamentals or without following common sense.
The dotcom bubble is one of the best examples. Investors completely forgot that a company must at least earn revenue to have some sort of valuation; instead of weighing companies based on revenue streams, they bought anything and everything that had the word “Internet” in it. We saw what happened just a few years later.
In 2009, investors bought into stocks; the fundamentals made sense then. In the last couple of years, though, fundamentals haven’t really been of utmost concern to investors. However, since the beginning of 2016, we are seeing stocks fall because fundamentals are starting to come back into play, particularly in the form of declining earnings and troubles in the global economy.
How Will This Impact Silver Prices?
Investors will start paying attention to fundamentals again once the stock market and other investment classes witness a sell-off. Silver—and precious metals, in general—will be at the top of investors’ lists then; they will be oversold. Also, know that the silver market isn’t that big. Even a little capital allocation to it, with supply plunging and demand soaring, could send silver prices skyrocketing for the next few years.
In the long-term, we could see silver prices go as high as $50.00 an ounce.