There’s little doubt that one of the main themes that have defined the financial markets throughout the 2015 calendar year has been the inability of crude oil prices to rebound. This development has widespread effects across other markets thanks to the central role that energy consumption has on modern economies.
Specifically, the woes for crude oil have had a strong impact on silver prices—not just because it is a commodity, but because silver is so closely tied to industrial activity.
As the Chinese economy remains mired in its slowest pace of growth in 25 years, the world’s top consumer of industrial metals (and the manufacturing center for the global economy) naturally requires less energy resources for its still-massive production capacity. The same is true, to a slightly lesser extent, for several of the leading emerging markets that were growing rapidly during post-financial crisis commodities boom, such as Russia, Brazil, and South Africa.
Ultimately, this story is the same to different degrees around the world. Sluggish economic activity only contributes more and more to cheaper oil prices. In regard to why this especially influences silver, there is also a key theme in the mining and resource extraction sector: some of the largest miners are not only involved in mining precious metals but also in the oil and natural gas businesses. For instance, Freeport-McMoRan (NYSE:FCX), which operates the world’s largest mine (the Grasberg Mine) in Indonesia where copper, gold, and silver are mined, is also a heavy hitter in the oil industry thanks to the merger of Freeport with McMoRan a few years ago. Hence, a contraction in Freeport’s oil business necessarily means the company may have less capital to allocate toward its mining operations.
Silver has a special role in the mining industry. There aren’t a great deal of mines that focus on silver as the primary resource anymore; it’s more cost-effective to mine silver by recovering it as a secondary byproduct of other forms of mining—for instance, with gold, copper, or zinc mining as the main objective. In fact, according to The Silver Institute, some 69% of silver output from mines comes as a secondary resource. That means that if other mining ventures decline in output or are shuttered altogether, the supply of newly-mined silver is impacted, as well.
In some smaller sense, oil prices and the U.S. dollar are inversely related. This is similarly true for the precious metals. Thus, as the deflationary pressure of plunging oil prices boosts the dollar, it also adversely affects silver.
According to a technical analysis from Forbes, silver may need to rally above $18/oz again—which is around its high for all of 2015—in order to break out of its sideways bearish channel. On the downside, however, silver very well could fall to as low as $10/oz before seeing strong technical support. The monthly price chart for silver over the past 30 years below clearly demonstrates this long-term trend.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.