After remaining fairly steady over the course of the past two weeks, the silver price fell through its current floor at $14.80/oz on Monday, plunging some 30 cents lower to $14.55/oz during afternoon trading. This set a fresh 6-year low for spot silver, which has fallen for five consecutive weeks. The last time that spot silver was this low was in August 2009. The daily chart below shows the steep drop for silver futures (September contract) during the afternoon hours, which quickly drove current spot prices lower along with them.
What Is Causing Silver to Fall?
Although silver has tracked along with the other precious metals, tumbling lower during the current bear market for commodities in general, it has slightly different fundamental drivers than its cousin gold.
No Safe Haven Demand
Like gold, many investors balance their risk and diversify their portfolios by purchasing silver bullion. Because silver is far less expensive per ounce than gold, it is often chosen as a low-cost entry into tangible assets and physical precious metals. Sometimes, depending on the gold-to-silver ratio (a measure of how valuable one metal is relative to the other), investors may choose silver as an alternative to gold, or even convert some of their gold into silver.
With many of the worst downside risks for the global economy abating for the moment, it seems that many investors are waiting until the Federal Reserve makes a decision on raising interest rates before adding any more precious metals as a hedge.
Quite frankly, the free markets are a combination of fundamentals (supply and demand, or other quantifiable inputs and outputs) and human behavior. The latter is not always rational, nor can it be quantified, but the perception and sentiment of traders and investors is a key component of how markets function.
Sentiment regarding silver (and the precious metals on whole) has been extremely negative for the last 2 years. So long as the financial news media continues to tout the death of the gold (and thereby silver) as viable assets, you can only expect that market sentiment toward silver bullion will continue to sour until conditions prompt a new wave of bullish sentiment. Until then, the bears are in decisive control of price action.
What Might Lift Silver Prices?
Like any other cyclical process, bear markets do not last forever. At some point (though it is unclear when and for long), bear markets must give way to bull markets—in the same way that the bull market in silver from 2009-2012 gave way to today’s bear market. Here are a few of the factors that may help buoy the silver price going forward.
In spite of poor performance from the spot silver price, retail demand for silver has actually been fairly strong. (Recall the statement earlier about markets not always following fundamentals.) July sales of American Silver Eagle coins notched a 6-month high as the silver bullion coins were snapped up after a 3-week backlog from the U.S. Mint. Another sign of the strong demand has been the relatively modest amount of bullion being pulled out of silver ETFs: even as gold exchange-traded products see massive outflows of late, ETFs backed by physical silver only had minor withdrawals during July, and have still recorded net inflows of 1.36 million troy oz thus far in 2015.
For some time, miners have been warning that silver, found in relative abundance throughout human history, may begin to see supply shortages due to the realities of modern silver mining. There are hardly any stand-alone silver mines left in the world; that is, silver is scarcely the primary resource extracted in any mining operations. The vast majority of newly mined silver is recovered as a byproduct of other kinds of mining, as the metal is frequently found in small amounts in deposits of other kinds of ore, like copper or gold.
Further, as falling prices cause copper mines and gold mines to slow (or even shut down) their operations, the amount of silver recovered from these projects must consequently dwindle, as well. The world’s two largest silver producers, Mexico and Peru, have slowed their output of late. Together, the two Latin American countries account for a staggering 36% of global silver production.
Outlook for Silver
A rebound in the metal prices later this year would likely prompt mining companies to ramp up operations again, so this trend could certainly reverse direction given the right circumstances. Though silver is traditionally more volatile than the other precious metals due to its relatively low cost, don’t be surprised if silver runs ahead of its precious metal counterparts during the third quarter.