silver nugget

Could Limited Supply Support Silver Prices?

January 6th, 2016 by

silver nuggetWhen we think about the dynamics and market forces that influence the price of silver, the situation is considerably different from gold. Although the two metals share some key similarities and therefore tend to move in the same direction, silver is influenced considerably by demand in industry. The industrial uses of silver also mean the supply of the metal progressively gets “used up”—unlike gold, which largely just changes hands.

Here are a few trends in silver that may place upward pressure on prices in 2016.

Trends in Silver Supply

Simply put, silver supply has been dwindling. This is especially true as purchases of silver bullion for investment—completely separate from the industrial applications that make up more than half of silver’s demand profile—have risen as the price of the metal has slipped over the last three years.

SONY DSCTaking a few examples, silver output from mines in the U.S. and Canada fell by 6.5% and 22%, respectively, during the first ten months of the year. This year-on-year drop was also seen in another major silver-producing country, Chile, where production fell by about 5% from the previous year. The prolonged trend of silver mining companies seeing dwindling production has also gotten worse.

Moreover, a closer look at the situation in the United States shows that the shortfall in silver supply from U.S. mines was accelerating in the last quarter of the year. In September alone, the year-on-year decline was more than 20%. By contrast, production followed an upward trend in the last several months of 2014.

Source: marketoracle.co.uk

Source: marketoracle.co.uk

Calling the Bottom

For many observers, the fall-off in silver supply and the pick-up in demand on the other side of the equation are pointing toward a potential trend reversal for silver prices in the relatively near future. Simply enough, it looks like silver supply is continually falling while industrial demand has grown—and is projected to rise over the next five years.

Silver price chart over the last year.

Silver price chart over the last year.

Because reasonable investors plan to hold onto their gold and silver for a number of years, one of the keys to their investment strategy is to buy low. While silver prices have been falling fairly consistently since the beginning of 2013, determining how far they will ultimately fall is a tricky endeavor. Spot silver has declined below 5-year lows and has at times threatened to break below 10-year lows.

The bullish case for a nearing trend reversal is even stronger when you consider the implications of this low price environment. Jason Hamlin of The Market Oracle recently offered the following analysis:

“The decline in silver supply is not going to be a short-term phenomenon. Not only is current production impacted as miners shut down operations, but future production is also impacted as exploration budgets are slashed. Even if the silver price were to double in 2016 and miners increased cash flows, it would still take a few years to increase exploration back to previous levels and have the type of production pipeline needed to sustain production levels. Anyway that you slice it, the industry is likely to face declining silver production for years to come.”

We would not be terribly surprised to see silver bounce back significantly in 2016 as these dynamics begin to take effect.

 

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.