Silver in a bubble?

Wonderful quote, and the last few years the quote that haunts me more and more. Between this quote, and my readings on the Roman empire falling and parallels to our current state, I don't get a lot of restful sleep many nights.

 

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Possibly. Current production cost of silver is $7.51 an ounce according to the information published by the mining association. That's a lot of margin.

I know about demand and private ownership, coupled with internet and world wide markets. But at some point the $31 floor can fall out. There really isn't justification for holding the price, based on cost base.

How long it will last ? I have no idea. But I suspect that as long as governments are in financial crisis, people will want PMs as insurance against their curriencies. That should support the price, for a while, anyway.

gary

 

I don't think it's a useful number. You can take the income statement of any of the major silver producers and when you calculate the total cost per ounce it will almost always be greater than $20. The widespread use of "cash cost" ignores so many other costs of doing business that it is virtually useless. If the price of silver was, say, $10 per ounce, the quantity of silver produced would begin to decline as existing deposits were exhausted and no new mines were developed because they would not be profitable.

 

It's a bubble. Ignore all the propaganda put out by the bullion dealers and you see a commodity whose price has gotten well ahead of the others.

 

Just a stray thought here, but I wonder if the cost of production takes into account that most silver is mined as a byproduct. Primary silver mines are the minority. I wonder if the cost of production might be listed higher if the mines had to justify their costs to get the silver out of the ground instead of just coming across it while they go after other metals, as in the cost of production for silver might not be including all the other expenses that it takes to run a mine since that's a given anyway.

In any case, to me it appears that cost of production doesn't define the floor, but rather only would potentially raise the floor as it goes up. When I look at a silver chart as compared to a chart of the USD, the high for silver in April/May corresponds with the recent low in the USD. I often contend that silver's price is due to monetary policy more than anything else.

 

If you mean investors fears about monetary policy, then I would agree to an extent. To the extent silver is not being driven by industrial demand, (remember its a dual demand PM), I would say both investor fear of monetary policy, as well as lack of attractive investment options are what is driving it. If this statement were true, what would it mean? Well, to me it means that once investors either get "fear exhaustion" or other attractive investments open up, then if the deinvestment from investors is greater than increased industrial demand I could see price softness and decline.

Just postulating a scenario that is my downside scenario for silver. Am I acting on it? No. I am sitting tight on my silver, buying silver coins if I want the coin, but not actively buying or selling bullion.

Chris

 

I agree. The cost doesn't disappear just because the accounting systems of the major mining companies aren't robust enough to calculate the cost of byproducts, or if companies don't want to reveal their true costs in public disclosures.

 

It looks to me that the prices of gold and silver are right where they should be.

 

I would agree that the potential for deinvestment is greater than the potential for increase industrial demand (though total industrial still trumps total investment demand), but I put a very small likelihood on this scenario unless monetary policy reverses. I suppose it's a bit like the chicken and the egg. Does the price go up because money is devalued, or is it because people see it being devalued that they move to preserve their wealth and the price rises due to demand? It's probably a combination of both.

 

One suggestion sir if I could. I would not ignore or forget alternative investments. A lot or most people do not worry about strength of the dollar as much as investment yields. I think lack of good alternative investments is a major factor today in all commodity investments. I simply think some people are in commodities trying to drum up some investment yield. Get the commercial RE market heating up, equities, high yield bonds, or any number of other sectors start showing good returns and I think that could have an affect on all commodities, including PM.

Just a thought to think on.

Chris

 

Just to point out that because some people don't do it, doesn't mean it shouldn't be done. Investments are presently valued in dollars so it's very tough to judge the risk without knowing what is going to happen to the $. PMs are especially affected by this because they hold a role outside of pure commodities in that people buy them to hedge against currency debasement.

 

I have never, and would never, say this shouldn't be done. I hedge my currency risk inside my investment portfolio so do not need to do it separately, but of course it SHOULD be done. I was simply saying that to a lot of people their whole world is one currency and they do not actively mitigate this risk, but spend a ton of time worrying about relative returns within their currency. It simply appeared Inflexion was thinking a lot about this aspect and how it could affect PM prices, and not as much about what could happen if alternate investments started getting better returns. That's all. He, in my opinion, should consider both, since I believe both could affect PM prices positively or negatively.

 

That's what I believe had a lot to do with it over the past decade. However, stock prices are at about the same level as a dozen years ago while the businesses have continued to grow in many cases. So now many stocks seem to have enough value in them to offer as much or more upside as PMs over the next decade.

 

Fair points, and I do have alternative investments. I can't liquidate my retirement account so alas, the next best thing is a combination of inflation protected bonds, gold mining stocks, and a dash of emerging markets bear, as well as a portion sitting in cash so I can pull the trigger when something looks opportunistic. To be succint however, my interest in precious metals is not just for investment. If it were then I would not be so heavily weighted in them. The primary draw for me is the safety they provide, and any profitability is the cherry on top.

 

There is another reason for holding physical PMs. That would be they take your financial assets out of the system. The man can't take or tax your stuff if they don't know about it.

 

I just read the break even point was $7.50 in 1987 in an article about mining in Idaho. So break even must be at least double that in 2011.
I am happy with where the price is, I can still afford to go out and buy some silver dollars at a little over spot every now and again.
Might not be able to do that in 6 -12 months.

 

This is where I'm at too. It's conflicting. I'd much rather be stacking at $30/oz than $50, but it would be nice to sell a little and turn it into something else useful. I'm waiting for the price to break $70 before I think about selling any though since $75 is the next fibonacci resistance level after $50, and even then don't plan on selling much. If it doesn't get there then I'm just holding on to it.

In 2004 the price broke from $9 down to $5. Then in 2008 it dropped from $21 to $10. This year we went from $49 down to $26. If this trend continues by order of magnitude (133% increase each time, but each time coming 1 year sooner than the previous span took) the next blowoff top will be around $115, and if the timing increments continue decreasing as they have that would be slated for 2013. Today's chart looks enormous, but the chart that looked enormous in 2004 was dwarved by 2008, and now it's just a little blip on the radar. This doesn't mean the trend won't be broken, but it is still a current trend.

 

I understand what you are saying, but Silver here in Nevada is still very plentiful. The mines were open when silver was at $5. As price increased, more mines reopened. Profit statements by a commodities producer will always overinflate the cost of production for tax purposes. Beside the point. But silver is not scarce or ultra rare. Production costs have not driven the price to this point. Demand has. I believe the demand is currently caused because people are fearful in this depressed economy. They are seeking insurance against their currencies all across the globe. The large commodity traders cause the market violatility, because commissions are gained from sales and the big boys move from one item to another and squeeze profits from that. But, this is a bubble for silver. At some point, the price will become nearer the production costs as demand decreases. Ifr silver were to rise to say $80 on Friday, I think the amount of silver for sale would cause a HUGE drop shortly after. It must be noted that the market is driven not by the actual, physical silver, but contracts for it. The price is not affected by spoilage, weather, blight, etc. Silver does not have an expiration date or get used in huge quantities that destroy it. Silver mined today is likely to still be around in 100-200 years or even forever. It isn't produced for consumption. Although it was once used by the photography industry, that has diminished considerably due to digital photography. I just happen to feel that a very high percentage of silver produced today will still be around in 500 years. Add that to the silver produced last week and that produced next week, and there is an increased supply. At some point supply is going to be greater than demand. Then the bubble will pop.


Just sayin'


gary

 

The terms plentiful and scarce are relative. Silver is still a bit difficult to discover and put into production in commercial quantities at a reasonable cost per ounce. I don't think silver miners falsifiy their financial statements for tax purposes. If you don't believe the income statement, you can go to the cash flow statement and get the same results. I completely agree with you that the rising cost of production did not drive the price up. The point I was trying to make, perhaps not clearly, is that the rising cost of production has put a higher floor under the price than existed in the past. I don't agree that the silver produced today will be around in 500 years. The increasing use of silver in industrial applications will take care of that. Some will be recovered. Most won't. I agree that if silver suddenly spikes to $80 due to the actions of speculators, it will naturally crash afterward. And whiile I agree that someday the silver bubble will pop, first we have to have a silver bubble, and I don't see any evidence that this has happened yet. Anyway, that's my $0.02.

 

Well said. It's obvious to most that physical demand and mining costs are not driving 12 month swings of 240% of silver prices. I completely agree with you.