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Pricing Tsunami Approaches as Silver Rally Looms
Pricing Tsunami Approaches as Silver Rally Looms
Dear Gold Speculator,
This week, I’d like to take a look at silver. I’ve recently received many reader emails asking for my views on silver. Obviously, silver has done well in 2016. It rose from a low near $14 per ounce in January to over $20 per ounce during the summer (just after Brexit). Silver has currently settled at about $19 per ounce. Take a look at the one-year chart:
You should prepare for more upside with silver — both bullion and mining shares — because its price is ready to move again. Let’s discuss silver, applying lessons of basic supply and demand.
There’s “Not Enough Silver” to Go Around
Silver demand continues to surge. The U.S. Mint, for example, is continuously breaking all modern records for the number and volume of silver coins it mints and sells. Indeed, last year, the Mint ran out of silver for a time, and had to stop producing new coins. “There’s not enough silver,” said the Mint director. He should know, right?
It’s a similar silver story overseas, where investors who can buy metal are carting it away from supply points. A few years ago, for example, I visited a secure vault in Switzerland, in which an entire section, about 10,000 square feet, was stacked with silver bars and bags of silver “shot” (sort of like bee-bees; used in industrial applications). Much of the material was industrial stockpile, because German manufacturers – in this case, the silver owner was one of Germany’s largest automakers – simply can’t afford to run out of silver feedstock.
As demand increases, however, global output (aka “supply”) is falling due to mines closing. Not “silver mines,” mind you. It’s that much of the world’s silver comes as a byproduct of mining other commodities, like copper, lead and zinc. We’ve had a slew of those kinds of base metal mines shut down in the past three years. Now silver supply is thinning, and inventories are depleting.
It’s a global problem. In 2015, the global silver deficit — more demand than mine supply — was about 130 million ounces, made up by selling stockpiles and inventory. According to French bank Société Générale, silver supply in 2016 is likely to decrease another 9%. So the supply picture will tighten even more.
This is why I believe that silver is poised to rally. As the magnitude of the problem sinks in — limited supply and rising demand — I expect that more of the planet’s big-money players will rush into precious metals. It’ll make for a pricing tsunami, and here’s a chart to illustrate the point:
The world’s total investment holdings in silver are just over $50 billion in value, as compared to over $3 trillion of value in gold, as shown in the chart below. There’s 60-times more “value” tied up in gold, versus silver. Plus, over $2.5 trillion of that $3 trillion is controlled by private players like hedge funds, institutions and investor-backed entities like gold ETFs.
If even a small amount of that “gold” money decides to move to silver — let alone if “new” money comes into the market — that $50 billion of silver will simply vanish into the buying ether. Silver prices will skyrocket.
Consider also that higher prices will not bring out new supply — not in the short term. Sure, people will take silverware down to the local scrap dealer and sell it for cash. But that won’t make up for a massive deficit in overall global demand. The only way to make up the shortfall is with new mines, which require many years and large capital expense to initiate.
Thus, as we move ahead, I’m keeping a sharp eye on silver — the metal and miners. “There’s not enough,” as the director of the U.S. Mint noted. And it’s a problem that will not resolve quickly.
This Week’s Five Gold Nuggets
Last weekend, Jim Rickards sent me a note advising that Fed Gov. Lael Brainard would give a speech this week. He said that she would provide a hint into what the Fed is collectively thinking. Sure enough, on Monday, Gov. Brainard discussed interest rates and expressed an overall tone of caution. In short, she warned against the Fed moving too fast with rates. Click here to see why Brainard is concerned about the impact of global economic problems on the U.S. economy. Specifically, emerging markets — in particular China — are problematic. "Foreign consumption and investment are weak, while foreign demand for savings is high, along with an elevated demand for safe assets," Brainard said. Safe assets like gold, she didn’t say.
Further to the north, we also heard from Senior Deputy Gov. Carolyn Wilkins of the Bank of Canada — Canada’s Fed —this week. She warned, “We have to adapt to this new reality of lower potential growth.” She was referring to slower growth across Canada, from its manufacturing sectors to wildfire-scarred Alberta, where oil output plummeted over the summer. “Slower growth… and slower potential growth materially increase risks to financial stability,” Wilkins said. “In a lower-growth environment,” added Wilkins, “businesses invest less and therefore have lower financing needs.” This tends to exert a downward pull on rates. But in a comment that came like a breath of fresh Canadian air, she said people can’t rely on monetary policy to “solve everything.” Click here to see more.
Monty Guild, of Guild Investment Management, was recently interviewed by Kitco News. He discussed growing gold demand, which is an outgrowth of investors fleeing to quality assets in the face of deflation and currency depreciation. Guild also said that the Greek government recently ordered all its citizens to give a complete accounting of every asset they own, “even including the money in their wallet.” So watch for an “asset tax” in Greece, he warns, and then watch that idea go global. Click here to see why the bottom line is that Guild anticipates continued rising gold demand, with $1,900 gold and $25 silver in the medium term.
In a distinct effort to lead change across the gold industry, mining giant Barrick Gold announced this week that it’s partnering with tech giant Cisco to apply digital technology to the mining cycle, from geology to extraction, processing and production. Barrick’s first test site will be its massive Cortez Hills project in Nevada, which I discussed recently in my recommendation of NuLegacy Gold (NULGF: OTCBB). According to Barrick CEO John Thornton, harnessing digital technology “will unlock value across our business, helping us grow our free cash flow per share… We mean to create value and push the boundaries of our industry in entirely new ways.” Chairman John Chambers, of Barrick’s partner Cisco, noted that the world is in the midst of the greatest technology and business revolution ever. What’s coming “will dwarf the Information Era and the value of the internet to date. Any company that fails to reinvent itself by harnessing digital technology will soon be left behind.” There’s much more to know here. Click here for a longer explanation and a video that summarizes the project.
We know that China is a big gold producer and consumer. In fact, China is the world’s largest producer and consumer of yellow metal. Much of China’s domestic gold output is refined into what’s called “standard gold” by 35 refiners certified through the Shanghai Gold Exchange (SGE). With that kind of stamp of approval as to quality, the gold can be sold through SGE. Click here for more background and many fascinating photos of what comes out of those refineries.
Best wishes,
Byron W. King
Senior geologist, Rickards’ Gold Speculator