By John Manfreda
Editor's Note: On January 23rd, we started painting a picture for you regarding the current troubled gold and silver mining industry and the opportunity it presents to you.
That first alert in this five-part series was painted with a broad brushstroke. The subsequent alerts have dealt with the finer details of supply and demand for both gold and silver. Today's final alert in the series, looks at silver supply.
-- Rich Checkan
Unlike the case with gold, where we see significant pressures coming from both the demand-side and the supply-side of the equation, silver's story is one of all demand...all the time.
But, those pressures are strong enough to absorb increasing production. And, we see those pressures growing further based upon how people view gold and silver.
I'll cover more on that in a second. First, let's look at silver supply.
Silver Production Set to Increase 4.8% in 2014
Worldwide production of silver is growing, and it has been in recent years. But, that has very little to do with the price of silver.
You see, silver supply is inelastic.
There are virtually no pure silver mines in the world. Rather, silver is produced as a by-product of mining something else – lead, zinc, gold, and most notably, copper. In fact, 80% of silver production in the United States is attributable to copper mining.
If you want to produce more silver, you can't just go out and do so. Instead, you better hope copper demand increases so the copper mines are inclined to ramp up production and produce more silver as a result.
Well, that's what's been happening.
Yet, the increases in silver production to date (and projected) have been modest, and some mines remain marginally or negatively profitable at current silver price levels.
In order to satisfy increasing demand (see my article, Four TOP Reasons that Silver Prices are Slated to Soar), mining companies either have to expand existing mines or dig new ones.
And they are not about to do either.
The low price of silver is the deterrent to such expansion. The mines simply cannot afford to increase their operations. In fact, the mines are doing just the opposite; cutting back or closing.
In their latest reports, Silver Standard posted quarterly losses of $14.3 million and Hecla posted a net loss of $8.6 million. These losses are due almost exclusively to production. That is, the cost of mining silver is less than the price of silver.
During the third quarter of 2013, silver mining costs averaged $21.39 per ounce. That's above the price silver was then currently selling for - $20.25 per ounce.
The story of silver producer First Majestic Silver's actions in 2013 is an illustrative one.
First Majestic decided to suspend the sale of 700,000 ounces of silver in the second quarter because of low silver prices. As a result, the company's net income fell by 99% to a mere $200,000 in the second quarter of the year.
However, First Majestic's silver production and silver equivalent production soared by 44% and 55%, respectively, during the second quarter.
First Majestic Silver's CEO Keith Neumeyer explained:
"Management decided to suspend a portion of silver sales to await a rebound in prices. While the suspension had a negative impact on this quarter's revenue and earnings, we are confident that the silver price will revert back to the mean in the near future. In the meantime, regular sales are not taking place in order to allow silver inventories to return to normal levels."
Tony Davis, owner of Atlanta Gold & Coin Buyers, states in an article published in The Paramus Post: "[I]t's highly unlikely that current prices will remain below the cost of production."
The Recent Utah Disaster
Rio Tinto's Kennecott mine in Utah is the 2nd largest silver mine in the U.S. and the world's largest copper mine. It suffered a massive landslide which will likely shut down production at the mine for years. Upwards of 1 billion tons of dirt and ore collapsed into the basin. Sixteen percent of the U.S. annual silver production just vanished.
But, once prices rise and mines reopen, won't prices go back down in the face of the new supply?
We don't think so.
First, there is the enormous and growing industrial demand for silver. Second, investors are disenchanted with the dollar and seek the safety of precious metals that we discovered long ago.
There are two additional little known reasons prices will stay high.
• Millions of dollars of silver have been subject to 'short sale.' This means investors have bought silver to be delivered on a future date at prices they believe will be higher on that date. That silver must be delivered eventually, causing a demand on the short dates for some time to come.
• Then there are the millions of dollars of silver 'loaned' by central banks to keep the silver supply up. That silver must be brought back when the loan expires, usually when the supply increases, putting demand pressure on the market as soon as prices rise and productions starts anew.
Most bank analysts see average silver prices rising next year, with a range of $19 to $23.
Bank of America Merrill Lynch: Silver is seen averaging $23.13 in 2014, with a first-quarter average of $20 an ounce giving way to $25 by the third and fourth quarters.
CIBC: Silver prices could trade to $19 by the end of 2014, as growth from catalytic and electronics demand supports the metal.
Citi: Looking for silver to average $20.30 an ounce in 2014. The bank cited mine supply issues and mixed fabrication demand.
Commerzbank: Silver prices should average $21.50 in 2014, as global economic recovery increases use.
Standard Chartered: Looks for silver to average $23 in 2016, with prices mostly range-bound.
UBS: The Swiss bank lowered their 2014 silver-price forecast by 18% to $20.50 an ounce.
Will a 4.8% increase in production push prices lower?
We don't believe so.
Thus far, increased investor demand has been enough to keep supply increases in check. As more silver is made available, investors have swooped in and snatched up the metal.
At a minimum, we expect that trend to continue based upon uncertainty with regards to the U.S. dollar, the U.S. "recovery," and the geopolitical situation as a result of Russia's actions in Eastern Europe.
Realistically, we see investor demand for silver to escalate further.
Substitution Buying
Make no mistake. When it comes to precious metals, gold is your leader. The rest of the precious metals tend to move only when gold has first established the direction...up or down.
But, once gold has begun its move, the rest of the precious metals – silver, platinum, and palladium – invariably follow suit.
At some point, gold's lofty price point will cause would-be investors to scratch their heads and reconsider purchasing. (Editor's Note: Knowing the lofty price is more a factor of mismanaged fiat currency as opposed to a sudden jump in rarity, we don't suffer from this sticker shock phenomenon.)
At that point, we see an undeniable trend toward silver purchases. Investors want to own precious metals. Gold is the first thought. The price scares them. They buy silver instead as a lower-cost proxy for gold.
This is what we call substitution buying, and, believe me, it is coming.
What does this all mean?
Unlike gold, silver production is on the rise. But, that increase is slight, and investors have shown their appetites are more than strong enough to absorb current supply increases.
Further, as gold's price increases – currently up over 15% since January 1st – more and more investors will choose silver over gold. We've seen this many times in the past. We do not expect this time it will be any different.
Put it all together, and we see opportunity in silver, gold, and platinum and palladium as well.
What should you do now?
A primary strategy is to take possession of silver for the long term in the form of silver coins or ASI's convenient 90% silver $100 face value bags.
For those with a minimum of $10,000 with $5,000 increments to invest, consider ASI's Perth Mint Certificate. You may be familiar with Gold You Can Fold. This is a similar silver program. The program under which the Perth Mint provides guaranteed backing of your silver by the government of Western Australia and insurance from Lloyds of London. You receive a certificate you can negotiate anywhere in the world when it's time to liquidate.
If you are planning to dollar cost average into silver and take advantage of the skittish price changes, consider ASI Precious Metals Direct.
ASIPMD allows you to contribute a designated amount to be automatically withdrawn monthly from your bank to purchase 1,000 ounce silver bars, in whole or fractions of an ounce. In addition, ASIPMD will also allow you to purchase a variety of silver products and store them in several locations around the world including New York City, Salt Lake City, London, Singapore, Hong Kong, Melbourne and Zurich, making ASIPMD a great way to internationalize your portfolio.
All it takes to implement any of these strategies is ten minutes of your time.
For coins, 90% silver, the Perth Mint Certificate Program and any physical metals, just call your ASI Preferred Client Relations representative at 877-340-0790 and talk through your options.
For ASIPMD, visit the website at www.asipmdirect.com and open an online account in your name, a joint name, trust, corporate or UTMA account for a child.
A meagerly growing silver supply is little cause for concern in the face of significantly growing demand. Silver deficits now run between 50-100 million ounces per year. The only way to bring the supply and demand for silver into balance is higher prices. This is where the dynamics of the silver market become very exciting for investors. Call 877-340-0790 to get started.
Don't delay. Your Preferred Client Relations representative will listen to your goals, explain your alternatives and guide you toward a decision that protects your portfolio across assets, across countries, across currencies.
Given the following...
1. Strong and strengthening demand
2. Severely stressed supply
3. Unprecedented monetary expansion
4. Artificially low interest rates
5. Prices for gold and silver at or below all-in costs of production
... we hope we were able to help you recognize now is a prudent time to acquire both gold and silver for wealth insurance and profit.
In case you missed them, here are the links to the first four articles in this series:
Part I - Inside the Troubled Mining Industry
Part II - Gold Outlook 2014 - 'Mining' Profits from the Demand for Gold
Bloomberg Video Report - What's happening to all the gold?
Part III - The Supply Crisis in Gold. Where Has All the Bullion Gone?
Part IV – Four TOP Reasons that Silver Prices are Slated to Soar
Keep What's Yours! We're here to help.