Last Friday, Bank of Japan decided to increase its QE (quantitative easing) program for another 10 trillion Yen – from 70 to 80 trillion Yen. The amount is slightly under $100 billion dollars per year.
Traditionally QE program has the effect of boosting precious metal (such as gold and silver) price. However, silver price further dropped to $15 mark last Friday. This is in line with the descending triangle pattern we saw early October.
This is a clear sign that market movement is no longer driven by fundamental. It is driven by sentimental. The market is looking for any reason to sell silver. Regardless good news or bad news. A bad news is a bad news, a good news is also a bad news.
The fundamental of silver is showing there is a large deficit in physical silver supply.
The annual production of physical silver is approximately 25,500 tonnes. To put this into perspective:
Silver had a physical supply deficit of 103 million oz in 2013. In layman term if your salary is RM3,000/month and you spend RM4,000/month, you have deficit of RM1,000.
In physical silver case, here is how the deficit happens:
At current silver price ($15 – $16), most of the primary silver producers are already selling silver at a loss. Simple due to it takes more to produce silver than it can be sold for. Imagine a product take RM100 to produce but can only be sold for RM80. How many manufacturer would want to continue producing?
The following are some of the primary silver producer and their cost for producing 1 oz of silver:
The number shows it simply doesn’t make sense for miners to continue producing physical silver.
Silver is not like trees that can be replanted back, or fishes that can be grown back. When 1 oz of silver is used up, it is gone forever. The total physical silver demand has been pretty constant for the past 10 years.
The demand for physical silver are not reducing for the past 10 years. The Silver Institute forecasts that silver demand will continue to rise over the next few years:
With the strong demand from both investment demand and industry demand, can silver price continue to stay below production cost?
In the short term, anything can happen. That includes silver price doing lower than $15. Silver price dropped below $9 during the 2008-2009 financial crisis but spike up to almost $50 in 2011. Silver is a long-term investment that definitely requires your patience.
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