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.

American Silver Eagle Out of Stock Again?!

Last Wednesday (5th Nov 2014), the U.S. Mint announced they are temporarily out of stock for the world famous coin American Eagle. This is primarily due to low spot price for silver and tremendous demand for physical silver bullion.

american silver eagle 2014 out of stock

U.S. Mint said they will further announce when additional inventory will become available for sale, but did not provide specific details.

The similar out-of-stock incident also happened in year 2012 and 2014. (Click on the year link to the articles).

We know the price of silver has came down tremendously. But what good does it do if the producer is not selling any silver to the public? What is the point of low price if investors cannot get physical silver in their hands?

Paper silver might be an alternative for investors. However bear in mind that a big portion of silver demand came from industrial demand. Industrial means physical silver. You cannot give a stack of silver paper (contracts) to the manufacturers in China to produce iPhone 6 and solar panel!

The consecutive years of temporary out of stock from U.S. Mint basically is suggesting they are running their minting operation on a very thin level of available raw silver. They are unable to cope with a suddenly spike of demand, which happened in the last few weeks.

This is not the first time such happens. Does it mean they have not learn from the past years? Or does it means they are unable to secure larger amount of available physical silver for production?

Till date the sales for American Silver Eagle coin is as following:

sales

It feels really weird to me that silver – a limited precious metal on earth that have strong industrial application and investment demand is facing downtrend in price. Silver price movement is definitely not aligned with demand.

Again, silver is a finite resource on earth. One coin alone (American Silver Eagle) eats up average 40 million oz of silver each year in the past 4 years. When silver is used in industrial application, it is gone forever.

I’m wondering, how long more can the trend of low silver price yet strong demand continue?

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.

Paper Silver

If you are bothered by the troubles of investing in and keeping physical silver, the good news is there is paper silver that allows greater liquidity than holding the physical silver, and lesser maintenance for taking care of your physical silver such as storage and cleaning.

silver-etf-rise

Paper silver is more appropriately known as Silver ETF (Exchange Traded Fund). A silver exchange-traded fund invests primarily in raw silver assets. These assets are taken care by the fund manager. The silver ETF fund manager plays a similar role like unit trust fund manager (such as Public Mutual Fund). There are many silver ETFs in the international market. The physical silver held by these funds are more than 1/3 of the world’s total annual silver production. The largest silver ETF in the market is iShares Silver Trust, the 1st ever silver ETF was introduced in 2006.

The whole idea for the invention of silver ETF is to allow investors to invest in silver, conveniently.

Although silver ETF gives you high liquidity and little hassle, there is always some tricky parts. Theoretically, each share of the ETF should represent specific amount of physical silver in storage. Unfortunately not all silver ETF are backed by physical silver. When you invest in silver ETF, you are investing in the shares of the fund instead of the physical silver.

etf

Let me gives you another example using real estate in local context. In real estate industry, we have a similar concept being practiced known as REIT, Real Estate Investment Trust. Essentially, REIT is backed by physical properties. Take example of SUNREIT (Sunway REIT). SUNREIT owns properties such as Sunway Pyramid Shopping Mall, Sunway Medical Center, Sunway Resort Hotel & Spa, Sunway Tower, Menara Sunway, Sunway Hotel Seberang Jaya, etc. However when you invest in SUNREIT, you DO NOT own any of these properties, you owns the shares of SUNREIT.

sunway

Now, let’s get back to silver ETF, when you invest in ETF such as SLV, you owns the shares of SLV and you do not have direct claim on the psychical silver.

david-morgan

The first and most important fact to address is that the Silver ETF and all ETFs, to our knowledge, are cash settled. This simply means that the underlying asset may be there in various forms, but the investor in the fund can only accept cash as payment. –David Morgan, silver-investor.com

OK, great! What is the problem here?

If your intention of investing in silver is to quickly turn RM1.00 into RM1.10 and sell it to reap some profit, then go ahead invest in silver ETF. In fact, you can invest in any share available in the stock market because the fundamental of the asset does not matter in this situation. As long as you could speculate on the right share, you would be able to achieve such profit. Fundamentals is not something that concerns you.

However, if your intention is of investing in silver is because you understand the fundamental of silver, realized how undervalue silver is and aware of the potential of silver in the future, silver ETF is not for you.

Why? When you invest through silver ETF, every transaction is done through cash. Last month, during the sudden crash of silver price, investors are looking for PHYSICAL silver. Personally, I do not think last month shortage is a real reflection of the actual physical silver shortage problem. It is merely a scenario where physical market could not respond fast enough to the sudden demand. What worth mentioning is right after the crash, physical premium price shoot up noticeably.

The manufacturer, distributors and even your friendly dealers increased the premium because they wanted to slow down demand – simply because they do not have enough physical stock themselves. It is fair to say that when demand is up and there is no enough physical supply, premium will go up. In other words, the final purchase cost for physical silver is higher (or much higher) than the silver spot price.

silver bars

You see, when you invest in silver ETF, you are settling your transaction (buy / sell) through cash. You would not be able to get physical silver delivery. Which means even when there is a huge shortage of physical silver, you would not be able to take advantage of the silver you have invested.

For example, current silver spot price is $22, silver ETF price you have invested is $22 and physical silver price is $24 (where $2 is premium). When there is a shortage of physical silver, manufacturers, distributors and dealers would increase their premium say from $2 to $6. Now, spot price is still $22, silver ETF is still $22 but physical silver is $28. This might be an over-simplified example, but this is something identical to what happened last month during the suddenly physical silver shortage. The difference is, silver investors are expecting similar scenario at a much larger scale.

The real demand for silver is in the industrial demand. 2/3 of the annual silver production goes to industrial demand. You can’t give some silver ETF certificates to the industrial manufactures to produce TV, solar panel or water filter. They need physical silver for production.

To summarize this, if you do not like the trouble of investing in physical silver, the good news is there is silver ETF. Unfortunately the bad news is, there is no silver ETF in Malaysia. You need to buy the ETF in overseas, like buying an overseas share. The closest paper silver available in Malaysia is Maybank Silver Investment Account, it is not exactly a silver ETF but it is still one form of paper silver. You can find out more about my review on Maybank Silver Investment Account here.

Silver Malaysia eBookTo find out more about silver investment with Malaysian context, take a look at my eBook: Practical Guide For Investing Silver In Malaysia.