Average cost of production
It is a difficult task to estimate average cost of production with any precision since silver is typically mined as a sub-product alongside industrial metals mining operations such as copper. Additionally, this task is complicated by various geographic locations and different properties of
mines in question. However, an all-in sustaining mining cost average (including exploration and sustaining capital) for top 10 primary silver miners was estimated at $16,10, well above prevailing market prices right now.
Deficit in physical and decreasing mine supplyGiven the depressed prices of past few years, it is somewhat counter-intuitive that silver is in fact in physical deficit. Amazing but true – according to 2018 Sprott report - in 2017 the market was in deficit of around 810 tonnes – a fifth straight year of deficit readings. At the same time, mine supply has fallen for two straight years, more specifically by 4% in 2017. In fact, supply has peaked in 2014 at 1,01bln. ounces and has been in a declining trend since.
Increase in industrial adaptation and fabrication demandThere has been a steady rise in silver use within the industrial space – silver consumed for industrial applications returned to growth in 2017, the first increase in demand since 2013. After a modest 1% decline in 2016, demand for fresh silver rebounded almost 4% last year to an estimated 599.0 Moz (18,632 t). Increases in silver demand from the electrical, photovoltaic, brazing alloys and solders, and the other industrial sector amounted to 26.7 Moz (832 t), which comfortably offset the 4.5 Moz (141 t) decline in photographic and EO demand. Silver is also a key component in auto manufacturing and is increasingly used in internal combustion engine vehicles, autonomous and electric vehicles that are creating new applications for silver, driving future demand.
Monetary propertiesSilver is often referred to as ‘poor man’s gold’ – while this description is somewhat degrading, it is true that silver’s properties as a store of value are rooted in history. It is difficult to imagine gold prices rallying and silver prices not following suit. As paper money loses its purchasing power and there is less silver mined, its monetary value is set to increase. Should we see a recession on US (our base case scenario) and consequent money-printing/QE-type programmes, all real asset classes should benefit and silver is no exception.
Value relative to goldOne important gauge of silver’s relative value is its price relation to gold – at current price levels, silver is not only historically cheap against major paper currencies but also against gold - an asset typically used as a store of value for millennia. In December 2018, the price of silver measured in gold terms was at its lowest since 1993 when XAUXAG ratio rallied as high as 86.56. Over this 25-year period, such extremes have often coincided with major bottoms in silver prices.
Speculative positioningCME CFTC data shows that speculators remain at historical positioning levels in silver futures contracts. While positioning is not net short, given the physical deficit and reduced supply, even marginal net long positioning is arguably positive for spot prices going forward. Net spec positioning in silver is rarely seen in negative area (or net short) – there have been only a handful of such instances over the past 20 years so positioning close to neutrality can be viewed as a contrarian indicator.
TechnicalsFrom a technical point of view after peaking at around $50/oz in 2011, silver has been in a 7-year slump. After an initial sharp drop, prices have been largely consolidating since 2014 within a relatively large $14-$22 range. A break above $15 from current levels is necessary to stabilize prices and avoid a new low. More importantly, a weekly close above $16.5 will likely accelerate the upward move, targeting at least the top of the range at $22/oz.