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<p>[QUOTE=&quot;NorthKorea, post: 1295334, member: 29643&quot;]The problem with this is the applicability of the situation.</p><p><br /></p><p>If silver drops below $14/oz, it will likely fall all the way to $5 or so per ounce and linger there for several years. This is related to technical buying and miners protecting their interests.</p><p><br /></p><p>Basically, it costs a miner X dollars to pull silver out of the earth. To stabilize production profits, they will contract out sales three to five years at a time. If silver starts to breakdown (say a drop below $25 per ounce), the miners will start to buy back contracts at a discount.</p><p><br /></p><p>Here&#039;s an example:</p><p><br /></p><p>Miner A enters into a agreements to produce 20mm ounces of silver at $8 per ounce net ($32 sale price and $24 in fixed production costs). Miner A has excess potential capacity of 18mm ounces per year. 38mm ounces total.</p><p><br /></p><p>Miner B chooses to test the market and holds no contracts on sales. Miner B&#039;s current production costs are $25 per ounce, but the firm is able to participate in current market prices. Miner B has production capacity of 11mm ounces per year.</p><p><br /></p><p>Miner C is a bi-product producer, so their production costs are actually negative (the industrial metals extracted along with silver sell for more than the total costs of production). Miner C is able to sell silver at virtually any price above $14 per ounce. Market prices above this point are economically profitable for the firm. Miner C&#039;s viability as a firm is based upon sustained production of bi-production rather than silver itself. As such, contracts are connected to both base metals and silver. Currently, the contracted price of silver is $29, but includes a stipulation to purchase $7 of industrial metals per unit of silver sold. Miner C has production capacity of 14mm ounces per year, 8mm of which has been accounted for by the contracted model.</p><p><br /></p><p>Currently, the market dictates a price of $34 per ounce of silver. </p><p><br /></p><p>Let&#039;s assume silver price drops to $25.50 per ounce (25% drop):</p><p>Miner A has determined that $24+ is the minimal price that is necessary to remain profitable assuming current production. However, Miner A, like all corporations, has a goal of sustained profitability. This means that money must be spent toward development of new mines and geologists must be paid to survey potential mines. It has been determined by Miner A&#039;s analysts that with current market conditions, it will cost at least $27 per ounce to start production in a new mine. As such, a decision is made to cut production by ~32.5% to 26mm ounces per year.</p><p><br /></p><p>Miner B, due to their business model, must sell at a 50-cent profit, since production costs are fixed. That means that they&#039;ll continue to make 11mm ounces available to the marketplace.</p><p><br /></p><p>Miner C encounters a drop in industrial metal prices, which forces up their &quot;break-even&quot; price to $29 per ounce. As such, Miner C cuts net production (production in excess of contracts) to 0.</p><p><br /></p><p>At $25.50, silver production available to the marketplace is now 17mm ounces. This is down from 35mm ounces at $34.</p><p><br /></p><p>If the price drops below $25 per ounce, Miner B closes operations, which removes 11mm ounces from the marketplace. Also, Miner A will start to purchase silver on the open market, as it&#039;s cheaper than producing the metal themselves.</p><p><br /></p><p>This isn&#039;t an exact calculation, but the three models are representative of the main types of companies (large exploration, micro exploration, bi-production miner), and should explain why a drop in silver below $17 or so would precipitate a collapse of the market for the metal. Again, if silver breaches $17, there will be no speculators to drive the price back up.[/QUOTE]</p><p><br /></p>

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