Is Silver Price Coming Back?

Silver price has been 70% lower compared to the previous peek at about $48 in 2011.

downtrend

According to Lior Cohen from http://seekingalpha.com/ one of the main factors that keep silver investor hoping to see a major recovery is the expected changes in the production of silver in the coming years. Some analysts consider silver could make a comeback in the coming years on account of supply shortage – mostly due to cut down in production of other precious metals and base metals.

About 70% of physical comes as a byproduct of other mine productions:

  • 13% from gold
  • 38% from lead/zinc
  • 20% from copper.

Although silver production has gone up in recent years and could keep growing in the near term, it’s only a matter of time before production winds down and changes course. Some analyst expect production to fall this year.

With prices of gold and base metals falling to new low levels, miners are cutting down capital expenditure. Miners are likely to eventually reduce their output or at least not grow.

However, there are few consideration to take note:

  1. It could take years before companies will substantially cut down their productions. So far, many companies have been aiming towards conserving cash and cutting debt by reducing capital expenditure and selling assets.
  2. A drop in production doesn’t pressure prices up for a long time without s a strong demand for silver. For the past few years the growth in demand was mostly driven by investors via ETFs and bars and coins. And to a lesser extent by the higher consumption for industry usage mainly in China. Now, on both fronts demand isn’t expected to grow any faster (if at all for investment purposes). Thus, without a stronger demand for silver, a modest fall in supply in the coming years won’t be enough to drive up price of SLV. From here on end, we still have too many factors from the demand side that may offset slower growth or even fall in production. So it could take years before lower production will become an issue for the silver market to push prices to higher levels.
  3. The golden age of silver during 2008-2012 was also mainly due to gold. As of the past few years gold hasn’t gone anywhere but slowly down. So without the push from gold it will be hard for silver to make it on its own or reach new highs.

The silver market is at the cross roads. Even though production could start to slowdown in the coming years, the big issue for silver will remain what happens to its demand side – most notably will investors keep stocking up on this precious metal. The usage of silver for industrial purposes (e.g. solar panels) is an important factor that could keep the market tight. But without another panic a devaluation of the U.S. dollar, it will be hard for silver to recover. For now, the Fed remains on the fence of raising rates, which keeps SLV from resuming its descent.

Silver Malaysia eBookPractical Guide For Investing Silver In Malaysia is an eBook specifically written with a Malaysian’s context for silver investment. You will learn different strategies, practical tips and tricks for investing in silver. Click here to find out more.

7 Stages of Empire

India government attempted to slow down gold imports by implementing sharp tax increases. Silver – became the next target for investors. Silver imports increased drastically as there are no such import tariffs applied to silver.

The latest news from China has given silver yet another boost. Silver demand is both from the industrial and the precious metals investment sectors and China currently ranks as the world’s second largest silver consumer after the USA. China currently is the 3rd largest silver producer in the world. China is closely following Peru (world no.2 silver miner). If Chinese industrial growth is indeed beginning to recover, and with the better economic data coming out of the U.S. then silver’s industrial usage may be entering a good growth phase.

Chinese silver production and consumption have both been rising at an annual double digit percentage rate. There were fears that a Chinese slowdown would cut this rate of increase, so the news that the latest Chinese data was reporting stronger industrial growth, imports and investment gave a big boost to metal prices, with the volatile silver price perhaps moving most of all.

In last week article, I pointed that U.S. Mint sales for American Silver Eagle has been at record high level. This scenario suggests that investors’ interest in both East and West are going strong.

Silver Malaysia eBookPractical Guide For Investing Silver In Malaysia is an eBook specifically written with a Malaysian’s context for silver investment. You will learn different strategies, practical tips and tricks for investing in silver. Click here to find out more.

Gold Silver Ratio

Gold silver ratio is an important factor in precious metal investment but is often neglected by investors. Many investors focus intensively on precious metal prices fluctuation rather than the relativity factors. Professional precious metal investors could make money by mastering gold silver ratio alone.

Gold silver ratio is a value (number) by dividing gold price with silver price. Take example of today’s gold price ($1223.80) and silver price ($18.90).

Gold silver ratio = 1223.80 / 18.90 = 64.75

(For simplicity sake, we round it and use 65)

gold-silver-ratio-1-65Professional precious metal investors who focus on gold silver ratio never worry about price of gold and silver dropping or rising. For them, regardless of which direction price moving, they make money out of the market.

Precious metal investment is a long term investment, let’s look at the history of gold silver ratio as far as we could:

gold-silver-ratio-1968

Regardless in which investment market, it is impossible to catch the bottom to buy and sell at the top. Forget about gold silver ratio bottom at BELOW 20 and top at ABOVE 100. Let look at some more reasonable numbers: bottom at 40 and top and 80.

The method they use is simply swapping gold and silver at the correct ratio. When gold silver ratio is high, they convert their gold into silver and wait. When gold silver ratio is low, they convert back their silver into gold. So where is the money being made??

Theoretically, if you have 1 oz gold at the gold silver ratio of 80 (year 1994). You can exchange your 1 oz gold into 80 oz silver. By the the time gold silver ratio drop to 40 (year 1998), you can use your 80 oz silver to exchange for 2 oz gold (2 x 40 oz silver). Because you know how to make use of gold silver ratio, in this swapping process you made 1 oz of additional gold.

When you sell the additional 1 oz gold, that is your profit while you still hold another 1 oz gold as your initial capital. During this process, you pay little attention to and have little worry on the fluctuation of gold price and silver price. You only take the prices to divide them to get your target ratio.

In reality, you cannot simply take gold spot price and silver spot price to swap your gold and silver. Gold and silver prices are determined by spot price PLUS premium. Premium includes minting cost, packing cost, delivery cost, dealer’s profit margin, and depending on the type of gold or silver you are getting, the premium could vary in Malaysia market.

Enough of theory, let’s compare 2 items in the market. 1 oz Canadian Maple Leaf gold coin (from UOB) selling at RM4165 and 1 oz Canadian Maple Leaf silver coin (from BuySilverMalaysia.com) selling at RM85.

uob gold price bsm

The current gold silver ratio in the market is:

Gold silver ratio: RM4165 / RM85 = 49

The swapping process for gold and silver in the market always uses the selling price of the precious metals rather than the theoretical spot price. Hence, you use 1 oz gold to exchange 49 oz silver, OR use 49 oz silver to exchange for 1 oz gold.

Gold silver mining ratio has been around 1 to 9. Since 80% of the silver being mined is a by product for gold, silver is only produced when there is gold. In other words, when 1 oz gold is mined from the ground, there is ONLY another 9 oz silver being brought up together.

Whether you want to use gold silver ratio of 65 or 49, the ratio is still way too high from the actual mining ratio. In order for gold silver ratio to come down, there would be 2 possibilities:

  1. Gold price stagnant while silver price goes up significantly higher, OR
  2. Gold price appreciates at a slower pace than silver

Either way, it is going to make silver looks extremely cheap at current price.

Silver Malaysia eBookIn the eBook: Practical Guide For Investing Silver In Malaysia I discuss more strategies for investing silver in Malaysia. You’ll learn many other “practical issues” in silver investment and I will show you how to solve them – right from choosing your 1st oz silver to storing your 1,000 oz silver.