This silver price is a market of extremes. Since the last Silver Summit, the price has fallen by nearly 50%, to the lowest levels since 2010. But take a longer-term view and we find from its 2008 lows, the silver price is still higher by 250%.
As the price of silver did to the upside in 2009-2011, the downside since has been equally extreme in emotions, now a fear-dominated sentiment. The price reflecting this negative state with a sell-off low during the Summer, trading below $20/ounce.
With the silver and gold markets having found an extreme selling capitulation in early Summer, prices have been able to consolidate higher over the past months, recovering some of its large losses. Unlike with the Gold ETF holdings, Silver ETF investments remained firm with strong investment demand following silver to its lows.
The biggest force on the price came from speculators, banks which continue to show large concentrated short positions, in strong control and weighing on the paper silver price. The paper silver market price continues to be a game which will last until trust and confidence is lost in the exchanges which fix the price with paper claims and not physical backing.
The negative consequences of these low silver prices on the silver mine supply side will grow the longer the silver price remains around these levels. It is already showing its impact. Mexico, the largest silver producing nation, had a reported 10% drop for the first part of 2013. All-in production costs for many miners have grown over the years to place many mines in unprofitable or breakeven positions with a $20 silver price. Just like with gold, current prices are not conducive to future mine supply growth and will be a growing silver price positive the longer we remain at these levels.
Silver miners have responded to this challenge with strong cost cutting measures, cash conservation programs, reducing, cancelling exploration programs, etc. The weakest silver companies are being exposed, their share prices tumbling while the strong cash-flow generating miners are well positioned to weather the storm. They will also be more agile and attractive investments on the next move higher and able to stand out better with fewer companies left to compete for incoming capital.
Many silver exploration or junior miners remain vulnerable to massive dilutive financings to just provide sufficient cash to keep the lights on for a while longer. Some are acquisition target by their strong peers which can now capitalize from these depressed asset values. A silver price closer to and above $30 will help alleviate a lot of these pressures for juniors/exploration stocks and begin to reverse their fortunes, while a sustained $20 silver price will feed the ongoing exploration and capital drought. There are some incredible opportunities to invest at dimes on the dollar but the silver investor must time it well and be very selective.
So what will re-ignite the silver bull? Will we see $50 again? Just like with the gold market, the current prices are working through these negative market factors which could continue for many months. The reversal will come once fear has exhausted itself and fundamentals re-exert themselves. The price of silver is in a long-term secular bull market working through an aggressive consolidation phase.
With the Wall Street crowd being FED confidence through record highs in stock prices, FED by the cheap monetary and printing programs. Real Estate is also a conduit of the FED’s new money pumping adventures. Yet with ongoing quantitative easing programs pumping fresh dollars into the system, the US Economy still has not shown enough the necessary “escape velocity” the FED wishes to see to give them the ability to taper, or taper significantly.
I do not see how the FED is able to taper much at all. They are in too deep at this point. The consequences of tapering significantly would draw in greater deflationary forces, the underlying threat of all this debt. But with the main objective to prevent deflation, I see no other alternative than for the FED to monetize (print) more and more DEBT, rolling over trillions on its balance sheet and adding trillions more. Monetizing more and more of our debt threatening the value of US Dollars.
Trillions of US Dollars in debt, growing -- and significantly higher applying unfunded obligations into the true national deficit. The ability to finance such large debt obligations ultimately places the US Dollar at great risk. With a global shift away from trading in US Dollars to excess Dollars in reserves, it is a matter of time before the US Dollar crisis will hit.
That will send a flood of dollars into silver and gold, seeking refuge from a decline in value. The alternative currencies, such as the Euro, have demonstrated their weakness/vulnerability and alternative paper currencies are not viable replacements for the US Dollar. Therefore gold and silver will be the principal benefactors of this capital seeking money of trust, money of integrity.
So for the time being, it will be a challenge of perception as to what the FED will do next with its money printing along with other global central banks. If we do not get a taper in late October which I do not believe we will (the following FOMC meeting is just before Christmas) then expect silver to end the remaining months of 2013 in the mid to upper $20’s. A taper could keep silver around $20 for a while longer.
The state of the silver market is not very bullish from a short-term perspective but remaining focused on the long-term drivers, the return of silver and gold as money. I expect 2014 and into 2015 to be increasingly more favorable to silver with greater risks to the upside than the downside, as the market remains today. I believe silver investors who can take advantage of the price decline in silver will be rewarded in the years ahead as we retest former record highs. Those fully invested will have to patiently wait out another silver bull-market extreme.
Peter Spina, President of SilverSeek.com