Here’s Where Silver Prices Could Be Going Next
Silver prices currently stand at a level where even the long-term silver bulls are shy of predicting their direction. The uncertainty around silver prices is significant and pessimism towards the gray precious metal is soaring.
With this in mind, I am asking one critical question: how low can silver prices actually go? (Hint: downside potential is very little.)
To find the answer to this question, it’s best to remember this little rule: when in doubt, go back to basic economics, starting with focusing on the silver production price. If the cost to produce is more than the spot/future silver price, it will be hard for companies to produce for the long-term. This phenomena torments the supply-and-demand picture.
Silver Prices Low, Production Price Very High
Paying attention to well-known silver mining companies such as Pan American Silver Corp. (NASDAQ:PAAS), Endeavour Silver Corp. (NYSE:EXK), and First Majestic Silver Corp. (NYSE:AG), we see that production costs are high.
For Pan American Silver, in 2014, its all-in sustaining cost to produce an ounce of silver was $17.88. (Source: “Pan American Silver Announces its Unaudited Fourth Quarter and Full Year 2014 Financial Results,” Pan American Silver, February 18, 2015.) With silver prices sitting around $14.50, the company’s cost to produce silver is 18% higher than the spot price.
For Endeavour Silver, the all-in sustaining cost per ounce in 2014 was $16.79. (Source: “Endeavour Silver Reports 2014 Financial Results,” Endeavour Silver Corp., March 5, 2015.) With silver prices around $14.50, EXK’s production cost is 15% higher.
Finally, First Majestic Silver reported producing an ounce of silver at an all-in sustaining cost of $14.43 per ounce in 2014. (Source: “First Majestic Announces Financial Results for Q4 and Year End 2014,” First Majestic Silver Corp., February 23, 2015.) While First Majestic Silver’s production cost came in lower than the $14.50 spot price, the difference is nominal.
It must be noted that the costs to produce for 2015 are not yet available, but looking at quarterly figures, silver mining companies aren’t reducing their costs as fast as silver prices are declining. It may not look like it now, but this will cause a major problem down the road that will only be great for the silver bulls. Those who say silver prices could drop to $10.00 an ounce should think again.
Silver Prices: Long-Term Technical Analysis
From a technical perspective, silver prices appear to be sitting at an interesting level. Please see the 20-year monthly silver price chart below.
Chart courtesy of www.StockCharts.com
Notice the blue line in the chart above? It’s the 200-month moving average for silver prices. Over the past few months, silver prices have been resilient around this moving average. In technical analysis terminology, there’s solid support presence at this level.
Silver Prices Forecast: Good, If Already You Own It
Silver prices don’t look very attractive to many, but in the long-term, the gray precious metal is going to surprise.
You only really have to question what is happening in the silver market to see this. The supply side is simply crushed as mining companies struggle to reduce production costs. If the silver prices continue their decline, how long will these mining companies be able to remain in business?
On top of this concern, demand for silver continues to be solid. Not too long ago, I wrote about how demand for the precious metal is surging and how new buyers are stepping into the market. (You can read more here.)
Just a few more years down the road, I will not be surprised to see silver bears calling the gray precious metal a great opportunity. Sadly, by that time, it will be too late to take advantage of this opportunity as the returns will be too small to be worth your while.