Adam Hamilton dives deep into the fundamentals. In this thorough analysis, Adam breaks down what has been going on with silver mining, but more importantly, he explains what to look for as we wind down 2017…
When we use the term ‘precious metals,’ most people immediately think of gold. That makes sense, of course. Gold is the most famous and most widely held precious metal. But there are three others, namely palladium, platinum, and silver.
Silver in particular may be worth a closer look; we wrote to you several months ago that silver was very cheap on a relative basis, especially compared to gold. And so far this year silver has been a top-performing commodity.
So today I thought it appropriate to take some time and specifically explore silver:
The top 12 primary silver miners sold an additional 5.8 million oz of silver this quarter compared to Q1 2013 for a net loss of $78 million in revenue ($550 million – $472 million = $78 million)… whereas by-product revenue increased $105 million.
This resulted in the estimated break-even price for the top 12 primary silver miners of $19.78 or $4.27 lower than the average for full year 2013.
It is said that history doesn’t repeat itself, but in the case of silver, I don’t see how that can be avoided. In more ways than not, silver today reminds me of the time when it traded under $5 per ounce.
As was the case back then, the thought that it might eventually climb more than ten times in value was widely disbelieved and openly scoffed at. That’s because silver was the most undervalued asset in the world, both then and now. If you didn’t catch the first run, you’ve just been given a second chance.
And it is also interesting that silver is registering as the most undervalued investment asset precisely at the same time when there is more total investment net worth and buying power in the world than ever before. The assets in hedge funds alone are now at a record $2.7 trillion; 1 percent of which ($27 billion) is more than the value of all the silver bullion in the world (if it could be bought).
The 100 million oz of new silver available for investment annually would take only one-tenth of one percent ($2.7 billion) of hedge fund assets. Unless hedge funds have stopped looking for undervalued assets, I can’t help but feel that’s a set up akin to a lit match and a barrel of dynamite.
Silver dipped to $19.10/oz overnight and remains under pressure this morning . With the gold: silver ratio at just over 66 ($1,290/$19.38/oz), silver remains a compelling buy at these levels.
The stealth phenomenon that is silver stackers or long term store of value buyers of silver coins and bars continues and is seen in the record levels of demand for silver eagles from the U.S. Mint. The US Mint sold 13,879,000 ounces of me in Q1, 2014. This is just over 2% less than the 14,223,000 sold in the first quarter last year. March sales were the fourth-biggest month ever and the US Mint is now on pace to exceed 2013 totals.
Silver stackers remain the smart, informed buyers. They realize that silver is undervalued versus gold with the gold silver ratio at 66:1. This is particularly the case on a long term historical basis. The long term historical average, gold to silver ratio is 15:1.
Silver industrial and investment demand is increasing very significantly and meanwhile supply is falling. The fact that the huge majority of the investment public and financial services industry remains unaware of the fundamentals in silver means that the bull market in silver likely remains in its intermediate stage.
Fundamentals for gold and silver have become the incense of reality for Westerners. The primary focus is on how many tonnes of gold China has been importing for the past many years, the depletion of available stocks from the central bankers straw men, aka the LMBA
and COMEX, the number of coins sold by various governments to the public.
People are focusing on the price of PMs, treating gold and silver as vehicles for increasing in price relative to their cost of purchase. It is the reason for buying and holding gold and silver that matters. As a consequence, attention is paid to what people think should happen to the price of gold and silver, and not on the reality of what the artificially suppressed market is showing.
Know this: It does not matter what you pay/paid for owning physical gold and silver.
Price is temporary; physical is permanent.
Here is some very cogent rationale for owning gold and silver. None pertain to the ever-ending reasons that demonstrate great demand. Everyone has been hearing about them in a steady stream for the past year, and the impact on the market has been nil. Often in tandem with the latest news, like record coin sales from…[pick a mint or country], is the lament from PM holders on where the current price of gold is, at lows for the past two + years, making many question the validity of owning PMs.
For any self-doubters, especially those who paid for their PMs at 50% to 100% higher in the past year or two, by example, we still hold some gold purchased at $1800 the
ounce, some silver at $48 the ounce. That just happened to be where gold and silver were at the time. We were engaged on a consistent plan of purchasing, regardless of
price. There were specific reasons for wanting to own physical gold and silver, and none of those reasons have changed. In fact, they have increased.
It has been a difficult year for silver investors with the metal falling by 36% year-to-date. While the Federal Reserve balance sheet continues to expand, ‘taper’ discussions by the Federal Open Market Committee have weighed heavily on the price performance of all the precious metals this year. By our calculations, over the last five years silver has a beta to the gold price of 1.5. This implies that price changes in gold are magnified in silver. Combine this with an 80% correlation in the price action between gold and silver over the same time frame and it’s easy to see that where the price of gold goes, the price of silver goes faster. As we break down the fundamentals for silver, market developments this year give rise to a curious conundrum – how can the case for silver be stronger while the price continues to languish? We begin with investor sentiment.