Silver in a bubble?

A recent Ted Butler article on SilverSeek (sorry link not handy, can get it later if needed) indicated that silver deposits were over 100 times richer at the Comstock Lode than anywhere being mined today. The days of easy silver mining are over. I won't disagree that the fear/greed factors are playing much more of a role in the current price than physical supply and demand. The way I see it, physical supply and demand won't matter much at all until there is a shortage. Prior to that, it's a non-factor, but after that it's the only factor. As soon as somebody says "I can't get any silver" the Pandora's box will have been opened. If that never happens then the paper price will always be running the show. The supply is in fact decreasing. Sure in the last few years mining output finally caught up and surpassed industrial demand, but they still had to pull from existing scrap to meet total demand. There is only 1/2 a year's worth of mining supply currently readily available as refined silver. Once that runs out it will be up to finding scrap, recycling, and trying to get investors to sell in order to meet the shortfall not met by mining output. Most investors aren't going to sell at today's prices.

 

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I read deep sea PM mining may be on the horizon.

 

That's all relative sir. I am sure the miners of the Comstock lode would not describe their jobs as easy. There may be less rich veins available, but we have modern machinery and techniques the old miners would have killed for.

"Less rich deposits" I would agree with, not "easy mining is over". Always remember with any extraction industry you COULD possibly be one major leap away from easy picking again. Look at what has happened with the natural gas industry the last few years. People were predicting outrageous price increases, and the need for vast imports of liquified natural gas needed for this country. Now we have more gas than we will use in a century due simply to a new extraction technique.

 

Watching the Discovery Channel's "Gold Rush" sure shows that. Drilling through the permafrost, giant earthmovers, shaker machines, etc. are a far cry from a pick and shovel with a little sluice box or gold pan.

 

What is interesting is that I believe magnesium is only mined from the ocean. So there is already precedent. Even with current technology they can mine gold from the ocean, its just a matter of cost. The price of gold is too low to run the operations. Just like everything in the world, though some keep trying to refute it, long term higher prices will cause people to find a way to increase production. Even though people have said our mines are deteriorating the silver institute sure is showing increased production the last decade.

Chris

Btw the ocean mining I am referring to is simply extraction from seawater. All ocean water has traces of gold and silver, and they have, on an experimental basis, extracted gold directly from ocean water.

 

It is interesting that the Silver Institute also reports that from 2001 through 2010, mine supply for silver increased 21% while the price went up 4.6 times. So even under the best of market circumstances, supply was only able to match demand at enormously higher prices -- and this is all that is needed for successful investing. Extraction industries eventually run into a wall where old production begins to decline at a rate that is faster than new production can be brought on line. Silver production started at a relatively low level due to the long bear market, but it is pretty easy to forecast that mine supply will level off and decline at some point unless the price continues to rise to make higher cost silver economical to bring to market.

 

We agree but I would simply point out it started the decade below cost of production most likely, so its only been a few years they were truly making profits. Couple this with time lag and I do not think you have yet to see the additional fields that can be brought into production at $30 or $40 silver that are being researched now.

My only point was that higher prices will bring more production online, so I do not think we will physically be short, just at what price. Some people who sell PM like to lead people to believe someday PM will be impossible to buy at any price, that somehow they will defy the laws of economics. I agree eventually this could happen, (you cannot buy dodo bird meat at any price), but I believe we are still a long way from that point.

 

I agree. Even high but level prices will eventually see production decline.

 

Epithermal deposition is the reason I say the easy mining is over. If I recall correctly, mining operations used to pass up mines slated to produce less than 5 million oz because it wasn't worth the effort. Now they are actively seeking mines with 1 million oz. They have to continue going deeper in the ground and spending more on energy to get less metal out of the ground. The thing about epithermal deposition is that silver's melting point placed it primarily at the surface of the Earth's crust when the planet was formed. All the big, easy to find deposits have already been found, unless as someone else stated they start looking underwater, but that's hardly easy. If anybody has seen Chris Martenson's recent presentation about oil, there is a very strong case for rising prices in that market as discoveries have dropped off significantly in the last 40 years. I would be interested to learn more about what you're talking about though with natural gas. I hadn't heard of that.

 

Oil fraccing and horizontal drilling. They found one of the largest fields ever, (now possible to extract) in LA and TX, but the boom is everywhere. There is major boom finds now in PA, NY, and other locations around the country. Probably the biggest boom in natural gas in 50 years. I am sure google with have 10,000 recent stories about it, the WSJ has had 10 at least in the last year.

 

I think we are a very long way from such extreme mining operations. Relatively speaking, silver is a very cheap PM as compared to gold, platinum or even palladium. The economies of mining a $32/oz item are completely different than one that is worth $1700/oz. In addition there is a huge amount of above ground silver sitting in people's homes that will get turned in for melt value if the price is right. It will take a long time to exhaust that supply which will hold prices down. However I don't see this happening anytime soon because the physical demand simply isn't there.

These wild swings in prices are coming from the paper market which isn't affected by production. This market would not be possible if it weren't for the lack of proper regulation. The point for the investor in silver is that until this is fixed, be very cautious.

 

I agree it won't happen soon, and will take a much higher price than any we've seen yet. But I have my doubts about the huge supply that people are supposed to be holding. There may be a lot of silver around, but we don't know yet how available it will be. A tremendous amount of silver was melted in the late 1970s and is already gone. I don't know what price it will take to get people to throw MS69 ASEs, Pandas, and their wives jewelry into the melting pot. $50 didn't do it so we'll have to wait and see.

 

To be fair it was $50 for like a second. I would have sold my junk silver for $50 but unfortunately it was sitting in a SDB a state away. Also, dealer bids never reflected $50 an ounce silve value, more like $35-40, so I think its simlpy unfair to say $50 would not have pulled more silver out of hiding.

 

You may be right, but I don't see $50 or even $75 resulting in the type of huge rush to melt that was seen in the 70s. It might even increase investor demand which would make less silver available to melt for industrial use. We'll have to wait and see how it plays out. The wildcard is the silver behind the ETFs. I suppose that if a real shortage developed, the regulators would change the rules and find a way to tap that supply.

 

This is an interesting phenomenon. It seemed to me that there were more people buying on the rise up to $50 than selling. Yes a few shrewd people saw it for what it was and capitalized, but they didn't equal the amount of newcomers joining the bandwagon. If silver breaks $50 with authority it will capture a lot of attention. I think there is more potential for new buyers to enter the market than for existing investors to sell out of it. I still have a very hard time convincing any of my friends and familiy to get in on this. They just don't care or don't want to believe that it could happen, but if they see it happening their thoughts on the matter will most likely change.

 

...and just to play devil's advocate, :devil:, don't you think that works in reverse and if the price goes down and stays dow for a while a lot of latecomers will be dumping their silver they bought, keeping the prices low?

I am just saying I think you are right and a lot of non-traditional silver buyers only bought because it was "hot". Everything "hot" cools off eventually, and at some point gets dumped.

 

No doubt some folks who bought at $45+ will be liquidating when they can break even and say farewell to this crazy market, providing a strong resistance level, but if it does hit $55 or $60 it will probably happen all over again. I'm not so sure people who bought high are willing to take the loss, or they probably would have done so already, but then everybody is different and sentiment is a tough thing to generalize.

 

You've got it! PMs are attracting more investors as the price rises. Perhaps this is partly due to the widespread use of technical analysis, or perhaps just human psychology. And because of this, I don't think anybody can forecase what will happen as prices rise.

 

Yes. I think that when the silver bull market ends [for whatever reason] it will stay down for perhaps a generation, just like the last time. Only this time I think it will base-out at around whatever the total cost of production is at that time.

 

I also agree, but I don't forsee that happening without a currency based on a metal standard first, and I don't think it will necessarily mean a drop in value but rather a plateau or stagnation after the revaluation. If it's solely a gold standard then I could see silver going either direction (as you said, to the cost of production), and that's probably the most likely case since silver is too rare and cheap to provide enough backing for the money supply.