In the 1980’s; the price of silver crashed to an unprecedented level, bottoming below $5 per ounce (USD). In real dollars, this represented
a 600-year low, as shown in the historical chart below.
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(click to enlarge) There was no rational explanation for this dramatic collapse in the price of silver. Demand had not weakened. Supply had not dramatically increased. The
consequences of this collapse in price illustrate this point.
- The global silver mining industry was nearly wiped out
- The gold/silver price ratio spiked to a nearly unprecedented extreme
- Global silver inventories collapsed
Between 1990 – 2005 alone,
global silver inventories plummeted by 90%. The silver market was sent into a permanent supply deficit, from which the sector has never recovered.
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(click to enlarge) This is entirely unsustainable. Silver is a precious metal, with (still) strong investor demand. Silver is jewelry. Historically, silver has been used in many low-tech applications. Today, silver is virtually irreplaceable in numerous hi-tech applications including electronics, laptop computers and cellphones.
The silver market has now been in continuous supply deficit for
roughly 30 years, something never before seen in the history of commodity markets. Indeed, there is only one reason why the silver market has not already experienced a formal supply default: historic stockpiles.
Noted silver authority, Ted Butler, issued this
shocking report on the silver market in 2014:
From 1940 thru 2006, close to 9 billion ounces of silver were taken from existing inventories to supplement mine production, depleting those inventories to one billion ounces, a reduction of 90%. We have now been burning through the world’s stockpiles of silver for (at least) 78 years. That rate of depletion has accelerated dramatically in the past 30 years. The vast majority of all the silver ever mined in the history of this planet is gone – literally consumed.
Today, 4,000 years of silver stockpiles are now strewn across the world’s landfills, in minute amounts. That silver is
gone forever, unless and until the price of silver rises so dramatically that it becomes economical to attempt to recycle some of this silver.
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(click to enlarge) As already noted, the crashing of the silver market virtually obliterated the global silver mining industry, with more than 90% of the world’s silver mines bankrupted. Since that time, we have been obtaining more than 70% of the annual supply of silver as a byproduct of other mining, primarily lead/zinc mining, copper mining, and gold mining.
Byproduct production of silver cannot possibly meet long-term demand, as evidenced by the current 30-year supply deficit. The world needs more silver. That extra silver can only come from primary silver mines, and these additional primary silver mines will only come online at
much higher silver prices.
How much higher? No one can supply a precise answer to this question, but we have clues. The first clue is the silver/gold price ratio itself. Even at the current price for gold of $1,300+ (USD), global gold production is
now falling. At the current, low price for gold, the gold sector is not sustainable either.
This means that even if the price of silver rose enough to rebalance with gold (at 15:1), we have no reason to believe that this would be a high enough price to restore the global silver mining industry – and end the supply deficit. But even at a 15:1 ratio, this would put the price of silver well above $80/oz.
That would be the absolute minimum price just to eliminate the current, massive supply deficit in silver (eventually). To actually rebuild global stockpiles would require a substantially higher price, sustained for many years. With it taking up to a decade to put a new discovery into production, mere short-term spikes in the price are almost irrelevant – like the two-year spike from 2009 – 11.
There is a totally different way to approach a correct price for silver. What is silver actually
worth? We have thousands of years of history to guide us on that question. In a
2015 interview; precious metals analyst Rob Kirby answered this question in an innovative manner.
Silver is real money (not merely paper currency). Kirby observed that historically, the “average wage” for workers gravitated around 1 ounce of silver per week. Today, the average paper wage is approximately $50,000 per year. Divide that into a weekly amount, and we arrive at a fair price for silver, today: $1,000 per ounce.
A minimum price of $80/oz (USD). A fair market value of $1,000/oz. Any way we look at the current price of silver, it is not merely unsustainable, it is absurd. Semi-educated analysts dismiss silver today as “an industrial metal”. This is even more absurd.
In addition to being a precious metal for investment and jewelry, silver is incredibly valuable to industry. This makes silver
more “precious” than ever, not less so. The 15:1 gold/silver price ratio is not a ceiling for the price of silver, it is a floor.
How do investors take advantage of the greatest long-term investment opportunity in the history of commodity markets?
The obvious answer is “buy silver”. With global stockpiles nearly exhausted, (above ground) silver has not been this scarce on the planet in at least 500 years. However, as precious as this metal is, even more scarce are the companies that mine silver.
For investors, there are only a few dozen investment vehicles on the planet.
Of that number, several are large-cap producers with flat production and little long-term growth potential. Many more are exploration/development companies,
trying to advance projects to production. High risk in today’s silver market.
Then there is
First Majestic Silver Corp. (
TSX: FR,
NYSE: AG, FRA: FMV, Forum). With both a TSX and full NYSE listing, this is one of the world’s premier silver mining companies. A safe investment. But it’s much more than that.
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(click to enlarge) This is a Company that fully recognizes the value of silver, and its long-term potential. With that idea in mind, President and CEO Keith Neumeyer has deliberately positioned FR as perhaps the purest silver producer on the planet. This translates into
maximum leverage when the price of silver (inevitably) explodes higher.
Want more? As already noted, large-scale silver mining companies typically have flat production profiles. It’s difficult to even
maintainproduction (let alone increase it), given that silver is so grossly under-priced. However, First Majestic boasts a strong growth profile.
Several organic initiatives were already on track to boost total annual silver production by millions of ounces per year. Leading the way here is the new “roasting circuit” at FR’s La Encantada Mine.
The Company has already made substantial investments in making the La Encantada Mine complex both much more efficient and environmentally friendly, including a new, state-of-the-art “dry tailings” facility. This left the question: what to do with the large volumes of tailings that had already accumulated over many years of mining?
FR’s answer to this question was to
monetize these tailings, as it reprocessed them. A new roasting circuit was the answer: using high temperature to extract much of the significant quantities of silver contained in these older tailings.
It doesn’t sound sexy. But the bottom-line is that this one initiative will increase First Majestic’s annual silver production – at just this mine – by 1.5 million ounces per year. That’s only one of several current initiatives to boost production and efficiency.
FR has also been active on the acquisitions front. The Company’s latest addition is its largest yet: the world-famous San Dimas Silver Mine, currently operated by Primero Mining. Another casualty of the low silver price, Primero ran into financial difficulties, providing an enormous opportunity for First Majestic and its shareholders. Once folded into FR’s operations, San Dimas will
add roughly 10 million silver-equivalent ounces to annual production.
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(click to enlarge) Remarkably, despite the strong growth profile for this well-run silver company, FR’s share price has been punished. First Majestic is almost as undervalued versus other mining companies as the price of silver is versus the price of gold.
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(click to enlarge) Sometimes investing can be simple:
- Invest in the world’s most-undervalued commodity (silver)
- Use the investment vehicle that provides the greatest upside leverage (silver miners)
- Buy shares in arguably the world’s best silver mining company, at a rock-bottom price (First Majestic)
Investors can simply wait for the formal inventory default that now appears inevitable in the silver market. Those investors who do so will miss out on the massive, overnight re-pricing of silver assets that will result. The time to be positioned in the silver market is
today.