It is surprising how much negativity there is towards silver prices these days. Don’t buy into this whatsoever. The grey precious metal could skyrocket to $50.00 an ounce by 2017.
Silver is hands down one of the best-performing assets so far this year, with silver prices up more than 40% year-to-date and more gains could be ahead.
To find where silver prices are headed, you must look at the fundamentals of the silver market. They are calling for much higher silver prices ahead. You also have to remember one of the first rules of Economics 101: when prices decline, producers pull back on production. Why? Because it may not be feasible to produce at a profit with profitability tumbling alongside prices.
Today, we are seeing a sharp decline in silver production. This shouldn’t be ignored.
It has been mentioned over and over again in these pages that supply is shrinking and demand is surging. Silver prices could be setting up to reward investors like never before.
Take a look at the table below. It shows year-over-year changes in silver production in Mexico for the first five months of each year, from January to May, 2010 to 2016. Keep in mind that Mexico is the biggest silver-producing country in the world.
|Year ( Jan–May)||Production in Kilograms||% YOY Change|
Data source: Servicio Geológico Mexicano, last accessed August 8, 2016
Saying the very least, the table above should excite the bulls and scare the bears.
Don’t for a second think Mexico is the only major silver-producing country reporting dismal figures, though. We see this phenomenon across the board.
Here’s what must be truly understood: between 2013 and 2015, silver producers went through a very rough period. Decline in silver prices forced them to cut exploration spending and halt projects. It just didn’t make sense for silver producers to continue at a loss.
For instance, if a miner was producing an ounce of the precious metal for $25.00 an ounce and silver prices fell to $15.00, it’s a very bad business decision to take out even an ounce. The miner would lose $10.00 for every ounce it takes out. This could run the company into the ground very quickly.
Going back to the table above, you see that with silver prices up more than 40% year-to-date, you would expect silver production to be increasing a little. This didn’t happen, though. I really question if this is because of all the exploration and project halts we have seen over the past few years and how long this trend could continue.
In the meantime, it shouldn’t be surprising to see skyrocketing silver prices. I reiterate: if supply goes down and we assume demand remains the same (it’s surging, by the way), it’s very possible silver prices could hit $50.00 an ounce sooner than later.
This is going to sound bold, but silver prices could hit $50.00 by 2017 if the disparity between supply and demand widens.
Keep a lookout for mining shares; they are going to be the biggest beneficiary of skyrocketing silver prices.
Courtesy: Moe Zulfiqar
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