Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to elaborate on silver and the best way to invest in it.
Introduction:
Silver is a metallic chemical element with the chemical symbol Ag, its atomic number is 47. Its symbol comes from the Latin word “Argentum”, from the Indo-European root arg- for “grey” or “shining.”
Silver is a soft, white, lustrous transition metal; it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal.
Due to its above mentioned physical and chemical properties, silver metal is used industrially in electrical contacts and conductors, in mirrors and in catalysis of chemical reactions.
Silver paste is used in 90 percent of all crystalline silicon photovoltaic cells, which are the most common types of solar cells. Silver is also used to generate electricity by reflecting and concentrating solar energy onto collector tubes containing salts which are used to run generators.
Silver compounds are used in photographic film and diluted silver nitrate solutions and other silver compounds are used as disinfectants and microbiocides.
For more than four thousand years, silver has been regarded as a form of money and store of value. A traditional way of investing in silver is by buying actual bullion bars. In some countries, like Switzerland, Luxembourg and Liechtenstein, bullion bars can be bought or sold over the counter at major banks. The flat, rectangular shape of silver bars makes them ideal for storage in a home safe, a safe deposit box at a bank, or placed in allocated (also known as non-fungible) or unallocated (fungible or pooled) storage with a bank or dealer. Silver is traded in the spot market with the currency code “XAG”. When settled in United States Dollars, the code is “XAGUSD”.
The Supply and Demand Picture:
At the end of World War II, total known stocks of silver amounted to ten billion ounces (with the US government holding 4 billion ounces of that total amount). Today, known stocks of silver have shrunk over 95 percent, to maybe a half a billion ounces. The nine and a half billion ounce draw down in total silver inventory, was the result of the persistent shortfall between supply and demand, which continues to this day.
Demand for silver is unprecedented, not just for precious metal investment, but in industry, particularly in technology. In smartphones alone, over US$1 billion worth of silver is utilized annually. Add a few extra billion dollars for all of the computers, tablets and televisions sold each year. Now think about all the other industries using silver (jewelry, dentistry, nanotechnology etc). It is in finite supply with ever increasing demand, in modern high tech applications as well as a source of wealth preservation.
Currently the break-even cost of producing silver is around USD 23.50 an ounce as can be seen from below table.
The all-in costs of production vary by miner, but clearly with silver at US$19.89 an ounce, cost is a major issue.
If the silver price remains close to or below production costs for a long period of time, it will cause great changes for the industry. In some places, silver production costs tripled in the last decade.
Costs are only seen going higher as these companies have been cutting costs to the bone as metal prices have declined. In order to stay in business, higher gold and silver prices are required to make gold and silver mining profitable.
What we will likely see is smaller miners slowing production or even going out of business. There may also be a lot of acquisition in this period while stock prices are depressed. Mergers cannot be ruled out either. If silver prices continue to fall the situation will be unsustainable. If production goes offline, demand would have to drop off for prices to remain depressed. In accordance with the information presented above we suggests that demand will only increase over the years, especially in technology.
On top of this it is worth mentioning that silver is the 14th most scarcest element in the earth crust and that 90% of all silver produced up to now has been used in industry and that only 10% is still available in the form of either jewelry or silver coins or bullions.
Silver Production:
Silver is most often found as a by product of lead-zinc mines and copper mines, it is also found in association with gold mining. Few mines around the world are primarily silver. Poly-metallic ore deposits account for more than two-thirds of the Global deposits of silver.
Mine Production:
Globally in 2012, silver mine production increased due to better recovery of silver ore in Peru and Indonesia. In addition, China, Kazakhstan and Mexico saw increases in mine production.
The chart below displays the producers of Silver in 2012, data from USGS indicate that the mine production in 2012, was 24,000 tons or (787,000,000 million troy ounces).
Mine production remains the largest component of silver supply, accounting for more than two-thirds of total production.
Silver Mine production is not the sole source; the others being scrap, disinvestment, government sales and producer hedging.
Globally, mined silver ore increased by four percent, (4%) year over year, from 757,000,000 Million Troy Ounces in 2011, to 787,000,000 Million Troy Ounces in 2012.
Old Scrap:
Scrap, or more properly “old scrap,” is the silver that returns to the market when recovered from manufactured goods.
Government Sales:
Disinvestment and government sales are similar in that both comprise the return to the market of old bars and coins by the private sector and governments.
Producers Hedging:
The final and minor component of the silver supply is producer hedging or the early sale of silver ore by mining companies of future production.
Below chart gives a breakdown of the supply of silver in 2010, 2011 and 2012, for which the total supply in 2012 was 1,048.30 million Troy ounces.
The total demand for silver was 1,048,300 Million Troy ounces, slightly higher than 2011’s total of 1,039.4 Million troy ounces.
Industrial demand for silver slid by a little more than 4%, year over year, to 465,900,00 Million Troy ounces (see chart below for comparisons).
Investing in Silver:
Investors can either buy silver outright through physically silver backed funds, or or they can purchase silver mining companies/ETFs or leverage ETF’s.
Some physically silver backed funds are:
- Central Fund of Canada (TSX: CEF.A), the closed-end holds approx. 77 million troy ounces of silver in its vaults in Canada.
- iShares Silver Trust (NYSE: SLV), the Trust is the largest silver ETF on the market with over 335 million troy ounces of silver in storage.
- ETFS Physical Silver (LSE: PHAG), the fund, which is backed by physical allocated silver held by HSBC Bank USA, seeks to offer investors a simple, cost-efficient and secure way to access the silver by providing a return equivalent to the movements in the silver spot price less the applicable management fee.
- ZKB Silver ETF (SIX: ZSIL), was launched by Zürcher Kantonalbank in May 2007 and invests exclusively in physical silver, for which, the A-Class shares can be redeemed in bars of approx 30kg each.
- Julius Baer Physical Silver Fund (SIX: JBSICA), the was launched by Swiss & Global Asset Management (formerly Julius Baer Asset Management) in January 2010. Shares in the fund can be redeemed for physical silver bars of approx. 30kg each.
- Sprott Physical Silver Trust (TSX: PHS.U), the trust has approx. 50 million troy ounces of silver.
Some Silver mining companies are:
- Silver Wheaton (TSX: SLW) is a Canadian silver mining company, the largest in the business of silver streaming. It produces over 26 million ounces and sells over 24 million ounces of silver mined by other companies as a by-product.
- First Majestic Silver Corp (TSX: FR) is a Canadian silver mining company that operates in Mexico. The Company has five producing mines under its control and is anticipated to produce between 12.3 to 13.0 million ounces of silver equivalents or 11.1 to 11.7 million ounces of pure silver in 2013.
- Pan American Silver Corporation (TSX: PAA) is a Canadian mining company, the company has mines and other projects in the USA, Mexico, Peru, Bolivia and Argentina, in 2012, the company produced 25.1 million ounces of Silver.
PGM Capital Comments:
The silver market is much smaller in value than the gold market. The London silver bullion market turns over 18 times less money than gold. With physical demand estimated at only US$15.2 billion per year, it is possible for a large trader or investor to influence the silver price either positively or negatively.
Gold to Silver ratio:
The Gold to Silver ratio indicates how many ounces of silver it takes to purchase one ounce of gold. Since 1687, the gold-to-silver ratio has ranged from 14.14 to 99.76 (see chart below). Over this period, the average gold-to-silver ratio was 27.28 and today (August 2, 2013) the gold-to-silver ratio is 65.82.
If silver were to rise to bring the gold-to-silver ratio back to its long-term average of 27.28, based on the closing price of Gold of US$ 1,313.50 per ounce, the silver price should have been on August 2nd 2013, US$ 48.14 an ounce.
Above long term Silver to Gold price ratio, clearly shows that the Silver to Gold ratio, is in a descending trend toward it base line and lows of 1920 and 1980 of approx. 16.
If the ratio were to return to the pre-1900 average of 16.13, the silver price would have been on Friday, August 2013 USD 81.43 an ounce.
With depleting Gold and Silver resources and central banks printing press in high gear, most analysts predict the price of Gold, measures in current US-Dollar to rise to about USD 5000.00 an oz by 2017. History has proven that the Silver to Gold ratio has always bottomed in the eye of the storm, which means that if history repeats itself we can see a Silver to Gold ratio of around 20 by 2017. If this happens we can expect the silver price to be north of USD 250.00 an ounce.
Conclusion:
The Dow, in particular, has been the biggest obstacle to a rise in precious metals, due to it sucking up most of the available value on global markets. However, it appears that this obstacle is now out of the way, with the Dow likely having peaked or to peak soon.
The gold silver ratio is also showing strong signs that silver and gold are about to spike significantly. Below, is a gold/silver ratio chart from stockcharts.com:
The ratio is currently retesting the area from which it broke down when it started the spectacular rally in 2010. If this area between 67 and 70 holds, then the ratio is likely to fall significantly. Note that this ratio falls significantly mostly when silver and gold are having a rally (with silver outpacing gold of course).
Below, is a silver chart from 2006 to 2013 (generated at fxstreet.com)
Silver is currently retesting its important breakout area of 2010 (similar to the gold/silver ratio). That breakout area of 2010 appears to be a critical area. If this area holds (which is very likely), then silver is likely to start a massive multi-month rally.
Remember that these are massive patterns, so much patience is needed.
Note:
It is very unlikely that both the Dow and gold & silver are going to make new significant all-time highs from here. We, therefore, have to decide whether it is equities that will continue a bull market from here, or gold & silver.
If you agree with the above it is advisable to add additionally, some leverage (2x-, 3x Bull ETF) Gold, Silver and miners ETF, to your portfolio.
Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Gold, Silver and other precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.
Yours Sincerely
Eric Panneflek