In the last two months, all of us were shocked by the stock market crash - but that was not the only blockbuster story to come out of Wall Street. The price of oil also crashed, and so did interest rates. Will the next banner headline be about silver?
You wouldn’t think so by looking at the price - after all, it’s essentially in the same trading range it has been in for years. But this number doesn’t tell the whole story. Important developments in this industry are rapidly unfolding and could easily change this into a brand-new ball game.
To summarize those, new supplies of silver are declining sharply, and if this trend continues it could have a major impact on the price.
Unlike Other Metals
All metals are mined, but silver is different. Surprisingly, most of this metal is not extracted by silver mining companies - rather, it’s produced as a byproduct of mining for other metals, particularly copper, lead, and zinc. Companies that mine gold usually produce some silver, too.
More than two-thirds of all the silver produced every year is a byproduct of those metals. That’s important, because if the companies mining copper, lead and, zinc stop or even slow their activities, the supply of silver will be impacted - significantly.
Some industry observers believe this is already starting to happen. With the global economy shutting down, mining companies around the world have curtailed some of their activities. According to the website silverseek.com, as of March 27 (the latest figures available), at least 36.7 million ounces per month are now offline. To put this in a clearer perspective, 51% of the world’s silver production has come to a halt.
With silver prices trading in the $15/ounce range, many large silver mines are either unprofitable or only marginally profitable. At these prices, even mines with large and/or high-grade deposits are having a hard time making profit and others simply are unable to. What will these companies do if silver continues to trade in its current range?
The CEO of First Majestic Silver believes he knows. They “will refuse to sell their metal at (these) prices because it would be selling at a loss,” he said
According to Silverseek, if enough companies begin stockpiling a portion of their output until prices increase, the amount of metal that reaches the market could drop significantly.
Canada, Bolivia, Argentina, Chile, and Peru are among the growing number of countries that have significantly decreased their mining activities.
Because of these developments, Keith Neumeyer, the founder of First Majestic Silver and currently the Chairman and CEO of First Mining Gold, is not optimistic that conditions will get back to normal any time soon. In fact, he says “The supply of physical silver is about to get worse.”
Neumeyer’s comment was right on, because soon after he voiced this opinion Mexico’s Ministry of Health issued an order suspending non-essential activities because of the spread of the coronavirus - mining among them. Companies have complied, and the only activity at mines now are for those dealing with maintenance.
How significant is Mexico’s decision to close all of its mines to the industry? This question was answered on the Mining Journal website. «The decision is expected to have a significant impact on the supply of silver at a time when demand for silver coins is high,» it reports.
On the list of the world’s 10 largest silver producers, Mexico is in first place by a wide margin. It produced more than 200 million ounces in 2019, up from 196.6 million ounces the year before; this comes to 23% of the world’s total output. Peru is a distant second, China a distant third, and Russia follows them. The US is in ninth place.
In 2018, Mexico and Peru accounted for a combined total of 342 million ounces of silver. Each month that mines in these two countries remain closed it takes more than 28 million ounces of silver out of the world’s total production.
According to Silverseek, additional countries may shut down their production and possibly for an extended period of time as the global contagion continues and ravages economies around the world.
It is interesting to note that while new supplies from silver mines around the world are declining, investors and speculators are buying a record amount of physical silver bullion coins such as Eagles and Maple Leafs. On a related note, some have suggested that large industrial users may begin stockpiling the metal; if this happens it would put still more pressure on supplies and be an additional bullish factor.
Ups And Downs
Demand for silver from industrial users will drop if the sharp recession economists anticipate materializes. However, according to Silverseek, the estimated drop in supply already exceeds the estimated fall in industrial demand. In other words, if these trends continue there will be a net increase in demand for the metal.
Can the industry make up for the drop in supply? If the shutdowns are brief, probably. But if they remain closed for several months that could be a very different situation. Industry experts say they expect significantly fewer silver ounces to reach the marketplace this year.
Of course, no one knows what will happen to the price of silver in the coming months. Even if the fundamentals remain bullish the price could nevertheless be dragged lower if the volatility on Wall Street continues. Moreover, if companies or people are pressured enough financially they could be forced to sell assets, including silver, no matter how good the prospects are and no matter what the price.
Over the years, on various occasions, silver (and gold) looked primed for a major breakout, but those proved to be false starts that disappointed backers. Now bulls are once again optimistic about the outlook. Whether they are right or not this time remains to be seen, but bulls are fastening their seat belts - just in case silver begins to shine.
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Sources: coinworld.com; geology.com; investopedia.com; silverseek.com; srsroccoreport.com;