Welcome to illuminati silver, we tell you the truth about silver.
Today is Sunday 27th March 2016 and we are asking the question is physical silver a cheap
purchase at $15 an oz, especially as it’s fallen from a high of $50 during the past
5 years.
Well firstly you should ask yourself what is your time horizon?
If you said just 12 months, we would say do not waste your time buying physical, but perhaps
paper trade it – because even if silver jumped $2 - $3 an oz you would still lose
money based on buying and selling spreads and premiums.
If you said 10+ years then our view would be somewhat different – and this is why:
Supply: The Silver Institute has quoted in its February
2016 report “Global mine supply production is projected to fall in 2016 by as much as
5% year-on-year…..
many analysts expect global silver mine production to fall through 2019 as primary silver production
from more mature operations begins to drop”.
OK that sounds promising – reduction in physical mine supply – but what about recycling
we hear you ask.
Well again according to the Silver Institute: “Scrap supply, which has been on the decline
for several years, should further weaken in 2016.
This outlook is based on additional losses in photographic scrap, a depleted pool of
near-market silverware, jewellery and coins, and slowed scrap flows from industrial sources.”
Now this sounds even more promising – and yet there is a third part to this supply equation:
It’s important to consider that the majority of silver that is mined comes as a by-product
of mining operations for other metals.
Approximately 55% of all silver produced comes from copper, lead, and zinc mining.
Another 13% comes as a by-product of gold mining, leaving less than a third being mined
in its own right.
So, much like gold miners, copper producers are struggling to cope with low spot prices.
One of the ways they are trying to survive is by cutting production.
Nine of the largest copper producers announced they would cut output by 200,000 metric tons
in the first quarter of 2016.
The contraction in the base metals mining industry may indeed contribute to supply tightness
in silver and if it continues may exceed the 5% mine production fall mentioned by the Institute.
Now we must not forget about above ground available stocks, about which opinion is divided,
but the consensus rests somewhere between 1 billion and 2 billion available ounces.
Now any deficit in mine supply of 50 million ounces or less, can easily be catered for
by this above ground stock, however, for such stocks to leave the hands of its owners then
the price will have to rise from current levels.
Nevertheless it is available, but once again it would not take many years of decreasing
supply to make an impact on these.
Now let us take a look at demand.
Demand: More than 50% of demand comes from industry.
In fact in 2015, according to the Silver Institute industrial fabrication demand accounted for
an estimated 54% of total physical silver demand.
Now here is the exciting part, it quotes “photovoltaics for solar energy is projected to rise in 2016
and surpass the 2011 peak of 75.8 million ounces”, primarily the result of solar panels
which could account for as much as 13% of total silver demand in 2016 compared with
1.4% in 2006.
Some more good news: “Silver demand from ethylene oxide producers is expected to jump
to over 10 million ounces this year – an increase of more than 25% compared with 2015”.
The bulk of this demand is expected to come from China (which is one reason why we frequently
state; watch what is happening in China).
Now if this is not enough good news for silver bulls, well even jewellery fabrication is
expected to increase by 5% in 2016 – with the envisaged fall in demand in China being
made up elsewhere.
It gets even better; Coin demand too is expected to be robust following a record 130 million
oz of demand in 2015.
Many analysts predict that with prices being as low as they are even this record may be
surpassed, especially as early signs show that both US and Canadian Mints are forecast
to run out of ‘blanks’ later this year should this trend continue.
For the record in 2015 coin demand made up an estimated 12% of total physical demand.
Finally Indian silver demand in 2016 is also expected to grow on the back of investor interest
and growth in jewellery, decorative items and silverware fabrication.
In 2015 it imported some 228 million oz of silver bullion; and similar if not greater
amounts are anticipated this year.
So all of this is expected to lead to a widening of the deficit between supply and demand which
should prove positive for prices.
Yes?
Well not quite, as the Silver Institute notes: “While such deficits do not necessarily
influence prices in the near term, multiple years of annual deficits can begin to apply
upward pressure to prices in subsequent periods.”
Ok then, that’s fair enough, however we hear you argue; Silver hasn’t been so cheap
relative to gold for more than seven years and with mine supplies forecast to contract
this year that may be a sign it’s ready to come out of the yellow metal’s shadow
and investors will sell their gold and buy silver thereby increasing its price.
Well theoretically yes but with the ratio standing around 80:1 according to Ned Naylor-Leyland,
Manager of Old Mutual’s Gold and Silver Fund in London, “The ratio can go higher
still, but at some point it will turn, and when it turns it tends to turn with real vigor,”
but he adds “I’m not moving yet.
When the trend change is clear, I’ll be ready to move money across from gold to silver.”
Capital Economics too have indicated that the GSR could fall back to 70:1 later this
year and towards 65:1 in 2017.
However, data compiled by Bloomberg shows that while investors have embarked on a gold
buying spree, increasing their holdings in exchange-traded funds by 18% this year, they
reduced their assets in silver products by 1.2% through February.
However this has reversed in March when ETFs backed by silver had their biggest inflows
over three days since 2013, rising 500 metric tons to the highest since September.
So all is looking good and hearty for silver.
Is there anything we’ve forgotten?
Oh yes Economic slowdown, Deflation and Negative Interest rates.
Please tune in to part 2 which will be published tomorrow.
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Disclaimer:
Illuminati Silver owners come from a background of Banking, International Wealth Management
and Economics.
Having now retired from these worlds we are not qualified to give investment advice.
Therefore, this and other productions must not be deemed to be giving such advice and
merely represent the personal views of its owners.