Silver Supply Glut Weighs on Silver Price – Time for Some Contrary Thinking?

April 29, 2014

proof-silver-eagleAnyone who has purchased silver in the past three years is now holding a losing position.

The price of silver soared from its low of around $10 during the height of the financial crisis to almost $50 per ounce in May 2011.  Since that time silver has had intermittent rebounds but the price trend remains in a distinct downward channel.  Is it time to double down or wait until silver breaks out of its current downtrend?

Contrarian minded thinkers may do well to keep in mind that the in and out speculators in silver are long gone and that there is still a steady worldwide demand for silver by both industrial users, jewelry makers, and investors.  Although it is easier psychologically to buy anything when the price is sharply increasing, that is not the road to big gains.  Most investors will admit that their biggest winners came from buying something when every "logical instinct" was telling them to sell.

kitco.com

kitco.com

Barron's added some anxiety for silver bulls this week with commentary about the apparent supply glut in silver production that could keep a lid on silver prices.

Prices are sliding toward 10-month lows, as supplies of the metal are set to outpace demand for the sixth straight year.

For investors, that means betting on lower prices or picking another metal entirely. "Silver has the worst story of all the metals," says Adam Klopfenstein, a senior market strategist with Archer Financial Services, citing the bountiful supplies and silver's tendency to move in tandem with gold.

ON TOP OF THE POTENTIAL for higher interest rates, the silver market has been inundated with supplies of the metal. HSBC expects a 3.4% increase in the silver supply to 1.09 billion troy ounces in 2014, while demand will remain nearly unchanged at some 938 million ounces. Part of what's fuelling that growth is that prices remain above the cost of production. On Friday, silver for June delivery settled near flat at $19.718 a troy ounce on the Comex division of the New York Mercantile Exchange. Prices are down 10.6% off their Feb. 24 high of $22.051 an ounce.

The all-in cost of production for silver falls somewhere between $15 and $17 a troy ounce, making the metal highly profitable when the price hovers around $20 an ounce or above, according to Howard Wen, a precious-metals analyst with HSBC. This creates an incentive for producers to continue ramping up silver output, even while prices slip to much lower levels than a year earlier, he says.

In all probability, the so called over supply in silver has already been priced into the market and silver looks like it's making a triple bottom in the $20 area.

1 year silver

Over supply situations can quickly turn to a shortage when investors recognize that the current price of silver is at bargain levels.  Meanwhile, purchases of U.S. Mint silver bullion coins continue at very strong levels with March sales up by 43% from the previous month.  Investors eager to scoop up silver at bargain prices bought an all time record amount of almost 42 million ounces of American Eagle silver bullion coins in 2013 and this year could see another record based on year to date sales.

Precious metal investing should not be a short term trade but rather a long term wealth preservation strategy.  A quick glance at any long term debt chart shows that the false prosperity of asset appreciation that occurred since the U.S. went off the gold standard was built on the shifting sands of credit creation and liquidity.  How long the Fed can keep the Frankenstein credit machine going is anyone's guess but parabolic increases of debt (or anything else for that matter) become mathematically impossible to continue at some point.

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