This is Why NO $50 Silver

I would just add that suppose the high price resulted in an increase of 20% in production this year, an almost impossible growth rate considering the lead times in putting mines into production. That's about 160M ounces worldwide, or a bit less than $6billion. That's not enough for even 2 or 3 large institutions to put 1% of their portfolio into silver. I don't think production will drive prices anytime soon.

 

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Silver is a thin market. My crystal ball, (whihc broke some time ago), sees increased retail investor sales creating an ever larger overhang to the market. This overhang will affect physical buyers/sellers more than overall market pricing. What I mean by that is when something new comes along, or the market starts dropping, there will be a larger than average discount paid to physical sellers of silver. I could see silver dropping to $20, but buyers only paying $15 to physical sellers as there would be so many of them.

Btw Cloud, I never said 20% anywhere, I agree that is too large for a year, but not too large for a few years. Also, you supposing 2 or 3 large institutions investing in silver is a wild assumption, how about 2 or 3 institutions deinvesting in silver? This is a thin market, and non-traditional participants make me nervous as to its volatility with such large inventories being built up in non-traditional hands. Or do you think the new investors in silver will always be investors in silver from now on, when they haven't been for the last 100 years?

 

I just made up the 20% for illustration and did not mean to imply that it came from you. And I don't think institutions own silver in any quantity worth mentioning, so I don't expect a disinvestment by them. The point I am trying to make is that normal supply and demand doesn't always apply to commodities. Look at oil. The price has risen over the last few years from $30 to over $100 with virtually no increase in worldwide production. Creating new supplies of oil, or silver, just isn't as easy as opening new restaurants. I think you are correct that someday silver prices will nosedive and sellers will get less than spot. But take a look at this article. Apparently, JP Morgan is having trouble with their short position in silver, and opted for a cash settlement at $50!!! I don't know if the story is true or not, but if true, a major short squeeze may be in the cards.

http://www.examiner.com/finance-exa...n-ounce-while-oil-inches-towards-106-a-barrel

 

As of the end of the day, the margin requirements at the CME were increased. Looking forward to this, there was probably some holders who had to come up with extra cash, or sell a portion of their holdings. However , few times the business channels mentioned this, rather just that the PM retreated from the recent highs.

Jim
http://www.kitco.com/reports/KitcoNews20110324ASKN.html

 

That's good to know. It will probably prevent some speculation, but won't deter those who plan to take delivery.

 

$20 spot because you believe this represents the intrinsic value?

 

YES!! You get my point! I'm not talking about new exploration; I'm talking about our vast reserves that were too costly to produce at $2/Oz, but create windfall profits at $36/Oz!

You may argue that this amount represents a fraction of total production...and you would be correct. However, when supply and demand is balanced at a given price point, it doesn't take a huge shift in either vector to produce a shift in the curve...everything else being equal.

My concern is less with the added production coming online than with the stockpiling of reserves by investors. If you take investors out of the equation, silver demand is clearly falling while newly produced (not existing) supply is increasing...far in excess of industrial demand.

Once the investment dynamic changes...and it WILL!! (due to rising interest rates, most likely) ...the price of silver will correct quickly...(imho).

 

I don't think the reserves are "vast." And those marginal reserves that become economic at $36 will very quickly be shut down if the price starts to drop, and won't really add much to supply if investment demand continues to rise. Investment demand can increase by tens of millions of ounces annually more quickly that these marginal reserves can catch up. Keep in mind that even if these old deposits were previously permitted, they must still file for renewal and satisfy all EPA and other concerns before they are brought back online.

 

I would suggest that it doesn't take a lot of surplus supply to affect prices once demand is sated. Granted, that point may not be reached until folks stop thinking the world (or at least the dollar) is coming to and end.

If you follow the link in Post #1, you'll see that at least one (1) mine has met the challenges you state and is coming back on line. I've seen similar articles about operations around the world (without EPA concerns), but don't have them to post just now...(sorry).

If the run-up in silver was due solely to a weak dollar, the Silver/Gold ratio wouldn't be this low...especially given that gold is at an all time high! The Silver/Gold ratio has fallen below the 1998 and 1987 lows and is at its lowest point since 1983. Next target...1980!!



The only reasonable explaination is that silver is heading higher due to the August 2008 Chinese revocation of export rebates. The revocation was to protect chinese reserves as investor hoarding shrinks domestic supplies.

What concerns me is that many of these supply disruptions have nothing to do with the actual physical "above ground" supply of silver vs. marketplace demand; these restrictions can be laid aside with the stroke of a pen. It's all an illusion...as it was in 1980.

It's alright to have "some" of your investments in PMs...that's only prudent, but please don't go overboard. That's all I'm saying. Well...that and NO $50 SILVER!!! (we'll see)

 

Cloud - I disagree - I believe once marginal reserves are put into production - they'll remain in production as long as variable costs are covered. I saw this in the 70s in agriculture - where marginal land was put into production and it remained in production even though farming the marginal ground was not profitable because the cash flow provided was positive. The US Agricultural surplus grew but the ground remained in production. This was one of the driving forces behind creating the 1983 PIK and 1985 Farm Bills.

 

I agree, but (1) a lot of those reserves are already in production, and (2) companies are not going to spend the money to produce them unless/until they are convinced that silver prices will stay high for a reasonably long period of time. So the current price may already reflect most of the increase in production. I view it more similar to oil than to agriculture. The rise in oil prices from $30 to $100+ did not result in a significant increase in world production because of (1) the natural decline rate of existing reserves and (2) the multiyear commitment required to produce marginal reserves.

 

$20 is a fair estimation of the price of silver if tied back to its 1926 prices and indexed to inflation. I was surprised it was that high when I ran the numbers. I am not saying anything about its intrinsic value, just allowing for inflation on its price from 80 some years ago. Many commodities are much lower today taking inflation into account, but I wanted to start somewhere. The comparision was really showing that if the casual investors all want out, I think the "real" spot price, the local coin or jewelry store, will be much lower than the market price, just like 1980. Right now you have to pay a pretty hefty premium, that premium is not there even today when you sell, and will get much worst if the casual investors start selling. This is the inherent problem with the physical market, such a large buy/sell spread. You have to be VERY right in your PM purchase to come out ahead of these large buy/sell spreads.

 

I would say though that it is not the company making that decision, it would be the market. If stocks go up when companies announce new mine plans, (as they are right now), mine management is being pushed by market pressure to open up new mines. I do not think its as simple as the CEO making the decision right now.

Justafarmer is making a great point, that high prices NOW will most likely lead to low prices IN THE FUTURE. No, oil production is not going up immediately, but these prices WILL lead to more production long term to a point. Most commodities work that way, and the market has the attention span of a gnat, so they are pushing mining companies to aggressively expand to try to capture more of this higher priced PM market.

More money makes more gold/oil/food. Always has, not short term, but long term it will. We may not ever go back to $30 oil, but I will guarantee there will be more production of oil in the future at $100 than there would have been at $40 oil, just like there will be long term more silver production at $37 an ounce than there would have been at $15 an ounce.

 

We'll have to wait and see how it plays out. I think people will be surprised when supply does not appear as prices rise. Sometimes geology trumps text book economics. It's a blind spot for most of Wall St. since they are used to fairly rapid market adjustments to price increases, and can't get their minds around the exceptions that occur in the extraction industries. Perhaps the point they overlook is that existing reserves have a natural decline rate, and a large portion of "new" production each year merely goes to cover the decline. And the larger the amount produced, the faster the decline rate kicks in. So the treadmill speeds up every year.

 

Copper, Gold, HR Coil Steel, Cotton, Rice, Cotton, Lumber, Oil, Corn and etc. You can buy more of all of these now with an ounce of silver than you could 3 years ago. Some significantly more and during this time several of these commodities have had a fairly good run of their own. I somewhat agree with medoraman about $50.00 silver - absent of a significant bull run on commodities in general. I just don't think silver's economic value has much more room for increase.

 

I agree that the economic value of silver is probably lower than the current price. But the spring is wound pretty tight and bull markets often move higher and faster than anybody believes possible before they end.

 

Just to be on the record, I haven't said $50 is not possible for silver, anything is possible especially when human emotion is involved. My only posts here was to say the market is pushing for more production, so long term I believe more will come online. I hear what you are saying Cloud, but declining production can be overcome, especially since we are coming off a very long bear market in which very little exploration was done. The US gas market was in major decline until rising prices prompted the discovery of what may be the largest field in US history. My second concern is simply instead of excess demand from industry, (in which the metal is consumed), now the excess demand is from collectors and PM investors, sources that are not net consumers but really inventory. So, instead of silver being in a deficit situation it has been for years, we are actually in a surplus position, with PM investors and speculators taking larger and larger possession of excess inventory. In a few years these market participants will be holding an entire years' production in stock.

When, (not if, but I do not know when), these investors, (speculators), find a better investment, this inventory coming back onto the market will be a large overhang to overcome. Maybe prices then will be $100 and they depress them to $40, maybe prices will be $50 and they depress them to $20, I am not saying the price range, just that I can pretty clearly see this happening again just like in the early 80's, or just like farm markets in the late 70's/80's, just like housing markets still, etc.

 

From my elementary perspective the following idea is conflicting and hard for me to grasp.

"So, instead of silver being in a deficit situation it has been for years, we are actually in a surplus position, with PM investors and speculators taking larger and larger possession of excess inventory."


The only way I can reconcile medorman's above statement is draw the conclusion, which I believe, is that physical silver never was and currently is not in a deficit situation.

 

A few things to consider:

1) supply has largely grown because people have been melting down scrap due to the higher prices, but there's a limit to the number of old forks and chains that will be scrapped

2) most silver is not mined in a silver mine, but is an ancillary product of base metal mining, so few mines can actually ramp up silver production

3) silver is a monetary metal that has been dishoarded for the past few decades but is finding its investment and monetary market again

4) the entire silver market -- physical and mining combined -- is presently less than the market cap of Walmart

5) even if only the top 20% richest people in the world wanted to own silver, there's only enough physical silver in existence for each of them to have less than one ounce

6) even very ambitious mining projections will not double the world silver supply in the foreseeable future

7) the historic gold:silver ratio is 16:1; the current ratio is 38:1; even if gold does not go any higher, silver would have to climb to $87.50/oz just to reach the historic ratio

8) adjusted for inflation, silver would have to exceed $250/oz to match the 1980 peak

9) silver has tons of growing industrial uses including solar panels, electronics, and batteries; and the amount of silver in each product is small enough where the price doesn't matter, so the demand is inelastic -- if Apple needs more iPhones or Toyota more Priuses, they will buy silver at any price

10) we're going into a period of sovereign defaults and hyperinflation where silver will regain its monetary status

There are surely more, but that ought to be enough reasons to remain bullish on silver!

 

I agree. In a free market [and lets assume for a moment that the silver market still qualifies], supply and demand will always balance at whatever price is required. So technically, there can be no deficits as long as the price is free to rise. But in the case of silver, the price rise might dampen demand, but will not necessarily raise supply. Going from memory [a very dangerous thing], I believe that as the price of silver has risen from $5 to $35, the quantity mined has increased about 20%. So even if economic theory predicts huge supply increases from rising prices, in practice it sometimes doesn't work that way due to other constraints.