Silver prices will bounce back
Silver’s gains over the summer proved to be a flash in the pan. In July, silver was trading at above USD$ 21/oz. and close to the yearly high of USD$ 22.73/oz. In October the price of silver has dropped below USD$ 17/oz., hitting a bottom of USD$ 16.86/oz on October 3. The weakness in price of silver should come as no surprise, given the current strength of the US Dollar even if silver’s rally during the first months of 2014 (the longest such rally in decades and matched by an equally sustained gold rally) had raised investors’ optimism. The summer months are usually uneventful, one might even suggest ‘quiet’, for the entire commodities sector and investors wait for September when market prices generally recover. Unfortunately, this yea, the price of silver has moved in the very opposite direction in a rollercoaster ride that saw it rise in February, drop in May, rising again during the summer and then hitting the record lows of the past two weeks. The increase in the price of silver in February or the summer should is not surprising. February saw the first major escalation of the crisis between Ukraine and Russia, while the summer months witnessed a significant escalation of tensions – after the downing of Malaysian Airlines 017 in eastern Ukraine by a Bok missile fired accidentally by pro-Russian rebels – along with the rise of the Islamic State (ISIS) in Iraq and Syria. Such a geopolitical scenario, therefore, prompted investors to shift their interest toward safe haven assets like silver and gold rather than the equity markets. The big question, of course, is what will happen now? The international crises, if anything, have intensified on all fronts and a new international war is brewing in the Middle East as several NATO allies have started to deploy aircraft to try and stop the ISIS advance in Syria and Iraq. Moreover, the silver price trend in the short term will also depend of what direction gold takes. Nevertheless, there is reason for optimism and even for a ‘silver lining’. Silver prices have hovered around the USD$ 17/oz. mark for the past week.
The Fed and several other economic regulators have expressed concerns over the strength of the US Dollar, which has gained some 4% against ten rivals from the Euro to the Japanese Yen and Chinese Yuan since the start of the year. The problem is that a high US Dollar hurts US exports and recent economic data suggests that domestic economic growth rates are still not at the levels warranting the raising of US interest rates while promoting imports. Moreover, the high US Dollar also boosts energy costs in the European Union, where even Germany has started to experience lower growth. All this suggests some form of intervention to promote growth and to stop the Dollar’s rise, which should help stabilize or even boost the price of precious metals to the levels seen earlier in the year. This is very important for silver, even more than gold, because at USD$ 17/oz or below, the price falls below the average cost of production, becoming unsustainable for many producers, which may be forced to close down their mines. Neither the finest silver grades nor the presence of copper as a by-product can help the smaller mines to hedge against such high costs. The priority for silver producers is to reduce production costs. Paradoxically, as many silver mine close or – even more so – reduce production rates or suspending operations, as in the case of US Silver, the price of silver will naturally increase due to the fact that demand conditions remain in place even as supply drops.
The mines at greatest risk of suspending operations, meanwhile, are usually the smallest in size and most specialized in silver because most silver is extracted as a by-product from the mining of gold, copper, zinc and lead. The latter four metals would continue to be produced, even if their prices were to have dropped to absolute misery. Therefore, while there are never certainties, and far less in the volatility of the markets, it is more likely that the price of silver in the medium term will increase than continue to drop. In other words, silver may have already reached the bottom and started to re-surface. There has been a drop in supply with no corresponding drop of demand and the room for solid gains n the event of a rise are rather appealing. It is also unthinkable that silver will continue to be produced and sold by the companies, I know, to $ 12 an ounce. On the contrary, it is not unthinkable that the price of silver, in the future, may regain all the ground lost after the highs of the recent past.