This is your monthly GoldSilver Pros premium subscriber digest for December 2018. We have already discussed the palladium, platinum, and gold precious metals in the monthly Broadcast for members. If you have not already visited the broadcast, take a listen here:
For the monthly digest, the focus will be on the silver market, and in particular the shiny metal itself.
We will start with the double bottom in the silver price over the last few months, occurring first in September and again in November. The first bottom often strikes fear in traders wary of a larger drop in the price; however, the double bottom is often a very bullish technical indicator.
The price tested the $14 dollar mark and went no further, bottoming out at $13.97 on November 13th. The price has since rebounded solidly into the $14.40 range and has been up long enough to confirm the upside momentum. Even in the very unlikely event that silver tests the $14 level again in the near future, the price should fall no lower than that unless something unexpectedly shifts the fundamentals for silver.
Speaking of fundamentals, two very real reasons exist to expect the price of silver to actually rise in 2019 – average mining cost and the recent supply deficit.
Average silver mining costs edged down slightly in 2017 to US $10.54. Silver production during 2017 rose 9% while CAPEX costs to produce the metal rose 10%. However the $10.54 price takes into account other products mined with the silver, as only 30% of world production comes from primary silver mines. All of the rest of silver comes as a byproduct of other primary metals mines such as zinc, gold, copper, and lead.
If we deduct the price credits that the other mined metals provide, then the true cost of pulling silver out of the ground gets potentially much more expensive when the near term market demands increase. When silver is the secondary mine product and the primary mined metal demand is not simultaneously increasing, then the silver price must rise substantially to entice the producer to increase the overall mine production to pay for the costs of mining the primary metal whose price has not changed. Ramping up additional mine production also takes a great deal of time and costs upfront money for producers to do it, so the benefits have to outweigh the short term costs.
Also note that despite the overall mining cost of silver being roughly $3.50 below the market price at time of this writing, about 4% of silver miners have higher costs of mining than the $14.40 market price we have now. The percentage of silver miners who will not make profits mining goes up for every increment that the market price falls below the current level.
This pricing dynamic matters when silver is in a supply deficit and the industry needs more physical supply than is available.
As you can see in the chart above, the yearly demand for silver has exceeded the mine supply for most of the last 10 years. The difference has to come from above ground supplies of silver, for which the amount available is shown in the chart below.
Those above ground stocks would supply around 33 months of current demand levels, which is pretty healthy from an historic perspective.
Silver demand has also been healthy recently because the inflation-adjusted price of silver has it costing right around the 1970 level as shown in the chart below. Current prices have actually fallen quite a bit since this chart was produced in April of this year, meaning silver is actually trading slightly below it’s price 48 years ago, inflation adjusted.
Given the staggering demand increase in ounces of silver between 1970 and now for global industry such as solar panels, electronics including mobile phones, and wide-spread use in medicine because of silver’s anti-microbial properties, the fact that silver is trading at an historic low price provides a strong floor in the price and an outstanding opportunity for silver investors. It is not likely that silver prices will ever be as low as they are now as any additional demand forces will significantly increase the price of silver in order to entice miners to produce more of it.
What will happen when the demand characteristics for silver change substantially, as in people start demanding silver for investment and monetary purposes to substitute for weakening paper fiat currencies such as the Dollar, Euro, or Pound?
Given the recent tremors occurring in the stock and bond markets, it makes sense for investors to start looking at real, physical alternatives to place their investment dollars for both investment and safe haven purposes. Right now, silver is probably the biggest bargain investment I can find in any open market.
Here is the last 9 years of demand for silver and what it is being used for.
Coins and bars are primarily for investment demand short and long term, where jewelry is used both for ornamentation in the West and also serves as wealth preservation in the East. The dynamic in investment demand for silver changed in the West this year, however. The US Mint ran out of silver for minting American Silver Eagles back in September and did not expect to produce any more for the year.
Many silver market observers have told me that this is because the supplies of silver in the open markets is dwindling as investment demand comes back into the metal in 2018. I have also been told by several market participants that larger orders of both gold and silver are becoming harder to fill, such as that purchased by institutions and wealthy investors. This may be an early sign of a supply squeeze in the larger quantities of silver that may trickle down eventually to the more casual silver buyer. And that is why the US Mint had to shut down their Silver Eagle program early this year – they were having trouble sourcing silver in sufficient quantities to meet expected demand for the rest of the year.
Also note in the futures markets, speculators have become net short on silver this year starting back in August. The speculators are almost always wrong in the precious metals markets, and the commercials end up benefiting by taking the opposite position which is long. This is a very bullish indicator for near term silver prices.
And lastly, I haven’t even mentioned the gold to silver ratio which has historically predicted a price reversal trend between gold and silver when it reaches above 80, which it has been at most of 2018.
The last time the price ratio was so far in gold’s favor, silver spiked to over $20 per ounce in 2016. We see the same trend setting up here at the end of 2018. The peak in the gold/silver price ratio tends to precede the silver price spike by a few months, so expect for a sharp price reversal in silver in the first half of the coming year.
I said at the beginning of 2018 that it would be the year that the fundamentals line up for silver and it may be the year of silver. I was right on the first part, and we just have to wait a little longer for the buyers to respond to these signals and bid up the price for silver.
The initial move will be short term in bringing silver’s price more in equilibrium with both the gold price ratio and what the inflation adjusted prices for silver will be. The longer term outlook is one where silver spikes much higher and establishes a new platform in price due to safe haven demand as investors move out of paper speculative bets, like bonds and stocks, and into the precious metals.
The astute investor will choose to purchase the physical silver commodity instead of the ETF paper investments. The ETF’s have less than 1% silver available to back the open positions in the fund, and most of that will go to the first redemption requests of the larger fund holders and not to the individual investors.
When this dynamic happens, the ETF fund price will collapse as there will be no actual physical silver as collateral backing up the contracts, and the only investors who will capitalize on the price movement will be the ones with the metal in their hands. So, I don’t recommend buying ETF contracts in the precious metals as they don’t offer true exposure to the safe haven properties that the metals provide.
Thank you for reading this December 2018 edition of the GoldSilver Pros Monthly Subscriber Digest.