Commodity Trade Mantra

Despite Irrational Selloff, Fundamentals Support Higher Silver Prices

Despite Irrational Selloff, Fundamentals Support Higher Silver Prices

Despite Irrational Selloff, Fundamentals Support Higher Silver Prices

Within the past month, silver has gone from being one of the best-performing assets in financial markets to giving away almost all of its gains this year, but one mining executive remains optimistic on the precious metal during this volatile period.

July Comex silver futures last traded at $16.265 an ounce, up only 3% from the low seen in December. Last month, silver hit a five-month high at $18.585 an ounce, a gain of almost 18% from last year’s lows.

In an interview with Kitco News, Randy Smallwood, chief executive officer of Wheaton Precious Metals, said that despite the selling pressure, he sees potential in the long term. The streaming company formally known as Silver Wheaton officially changed its name Wednesday. The company is expected to trade under the ticker WPM on the New York Stock Exchange and the Toronto Stock Exchange by May 16.

While the company has changed its name to reflect its more balanced precious-metals portfolio, Smallwood said that he would still prefer to be in the silver market. Although silver can outperform on the downside, it can also outperform on the upside, he said.

“I would rather have more silver exposure but there isn’t a lot of opportunities in silver. We are finding better opportunities in other precious metals,” he said.

The lack of growth in silver mining is one of the main reasons why Smallwood said he is bullish on silver.

“Every year we are seeing less and less production and more and more demand. Because of the fundamentals in the marketplace, the silver price should be much stronger than it is,” he said. “We think it is only a matter of time before the market focuses its attention back on these fundamentals.”

Smallwood’s comments come on the same day the Silver Institute published a report highlighting a drop in silver production in 2016, the first drop in 14 years. Smallwood said that this is only the start of what is going to be a growing trend.

“We think silver production is going to drop for the next four or five years at least,” he said. “There is just no investment going into developing new projects. There is not a lot of greenfield exploration happening and we don’t really see anything that will be the next major source for silver.”

While the selling previous in silver and gold appears to be irrational, Smallwood said that it isn’t surprising. He explained that the precious metals are reacting to continued strength in the U.S. dollar.

U.S. President Donald Trump continues to push his tax reform and deregulation policies, which is positive for the U.S. economy and the U.S. dollar; however, Smallwood said that he continues to doubt whether these proposals will actually result in legislation. Even if they are all passed by Congress, the lower revenues and increased spending will lead to higher debt loads.

“There is a large segment betting on a stronger U.S. dollar but ultimately I think that is misplaced faith,” he said. “We have seen a lot of U.S. dollar-friendly proposals, but we haven’t any real plans behind them.”

In the current environment, Smallwood said that he is expecting to see higher volatility in prices of precious metals, but markets will remain relatively range-bound until fundamentals come back into focus.

Earlier this week, Wheaton Precious Metals reported positive first-quarter earnings as a result of higher production of gold and stronger prices. The precious-metals streaming company reported first-quarter production of 6.5 million silver ounces, down 14% from 7.5 million in the year-ago period. However, gold output rose 37% to 84,900 ounces from 61,900 ounces. Average realized prices per ounce sold in the first quarter were $17.45 for silver and $1,208 for gold, representing year-on-year increases of 19% and 3%, respectively. – Neils Christensen

Mining CEO explains why Silver Prices could reach $136.67

His remarks started off like dozens of presentations that I had heard so many times before. . .

“Without silver,” began the speaker, “our entire society would go back to the Stone Age.”

The speaker was the CEO of one of the largest silver mining companies in the world, and he was a special keynote at the annual closed-door meeting of the Atlas 400.

CEOs of mining companies almost always start their presentations talking about how important their mineral is.

“If we didn’t have cobalt we would all be cave men again. . .” or “Without molybdenum our modern technology would cease to exist.”

It sounds impressive, but the same story applies to just about every industrial commodity in the world, from copper to lumber to recycled steel.

It’s hardly an original argument and doesn’t impress me enough to be bullish on their mineral.

The real investment thesis about silver is that it’s a precious metal that has industrial qualities and a long-standing tradition of value.

Like gold, silver was an ancient form of money. And for good reason.

Out of the 118 known elements that exist on the periodic table, gold and silver share certain chemical properties that made them ideal as a medium of exchange to our ancestors.

Gold and silver are solid at normal temperatures (as opposed to Helium). They’re not radioactive (like Plutonium).

They’re not explosive when they come into contact with water (like Cesium), nor do they rust when they get wet (like Iron).

Most importantly, gold and silver are rare enough to be valuable, but not so rare that it would be almost impossible to mine more.

Between the two, gold is obviously more rare… hence the higher price.

There’s an old estimate from the US Geological Survey from the late 1960s suggesting that the ratio of silver to gold in the earth’s crust is about 21:1.

(So assuming that’s true, the theoretical price ratio between the two should be around 21:1)

And in ancient times the price ratio between the two metals was frequently in the range of about 15:1, i.e. one ounce of gold was worth 15 ounces of silver.

Today the ratio is about 75, based on a gold price of about $1230 per ounce, and a silver price of $16.35.

This is fairly high even by modern standards as the long-term average over the past several decades is about 50.

This would suggest that silver should in increase in price relative to gold in order for the ratio to return to its historic average.

(A ratio of 50:1 would imply a silver price of $24.60 based on a gold price of $1230.)

Now, all of this is an argument that many of us have heard before.

But I did learn something over the weekend from the mining CEO; he told us that the current mining production ratio between the two metals is about 9:1.

This means that 9 ounces of silver are mined for every 1 ounce of gold that’s mined.

This is very interesting from a supply/demand perspective.

According to the Silver Institute, demand for silver hit an all-time high in 2016.

But the price of silver, at least relative to gold, is hovering near a multi-year low at 75:1. (Again, the historic average is around 50:1).

Moreover, even though the price is 75:1, the new supply of silver is only 9:1.

In theory if the new metal supply is 9:1, then the price should be 9:1 (which would be a silver price of $136.67).

Obviously that’s a purely academic postulate; reality rarely conforms to theory. And the mining CEO wasn’t projecting a $136+ silver price.

But it seemed clear to him that there’s an unsustainably wide gulf between the gold/silver price ratio versus the gold/silver supply ratio, especially when silver demand is at an all-time high.

Commodity prices tend to move dramatically when the market realizes there’s a serious supply/demand mismatch.

That seems to be the case with silver right now.

And while it would be silly to expect $100+ silver, there are certainly credible reasons why the ratio should close the gap and move MUCH lower. – Simon Black

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