The folks at FreeGold (FOFOA) believe that when gold revalues to $45,000,
silver would fall down to $1.85. They stated this in their recent
article, FOFOA: Silver Dollar. Actually, FOFOA’s original
calculation was done back in 2001, when they saw gold revaluing to $10,000
and silver down to a measly $.50. At the time FOFOA wrote that
forecast, the price of gold was $261 and silver $4.37.
These would be impressive figures, if they made any sense.
Unfortunately, the folks at FOFOA do what I call as “Forecast in a
vacuum.” Basically, they arrive at their philosophy and metal
price figures without considering outside influences. When I say
vacuum, I am referring to the vacuum used in science class when all air was
removed.
FOFOA is guilty of this in spades when it comes to their understanding of
silver. Why? Because FOFOA and its hardcore followers look at the
precious metals through gold-colored glasses. Here is one of their
excerpts from 2001:
When the coming paper illusion price of gold is destroyed, sending its
trading price way up and way down, several times, before
shutdown,,,,,,,,,,,,,, the thinner paper markets of lesser metals will be
absolutely devastated. Yes we will see $50.00 silver in our time,,,,,, $50.00
for a hundred ounce bar,,,,, that is! No less a relative price decline
for the other metals is in store. Even if these actual dollar numbers
prove incorrect,,,,,, relative inflation adjusted prices will show the exact
same ratios to gold. The gain will truly be in gold!
Again, the folks at FOFOA believe the future value of gold is heading to
the moon, while silver gets flushed down the toilet. Now, I am not
going to get into all the details why I disagree with FreeGold’s position on
silver, however I am going to go over a few items in their article.
Here is item number 1:
What would happen in this Freegold scenario is that the price of silver
would decline to a level that constrained silver mining at the margin. Now
there are two kinds of silver mine production. There is primary silver mine
production, and secondary or silver production as a byproduct of mining other
minerals. According to the Silver Institute website, 31% of global silver mining
supply comes from primary silver mines at an average cost of $7.74 an ounce.
So if the price drops below that number, then we lose the primary silver
mines, but we still have the 69% of silver-as-a-byproduct mines, which brings
us back down to production levels we saw when silver actually was less
than $7.74 an ounce, which was as recently as 2005. And don’t forget that it
got as low as $8.88 in 2008.
From here on out I am going to refer to FOFOA as just FOA. The folks
at FOA believe the price of silver will fall even during a hyperinflation as
demand for industrial silver declines. Thus, the falling price will
kill supply at the margin…. which are the primary silver miners. Here
is where FOA starts to cherry pick data.
FOA states that the primary silver miners average cost per ounce is $7.74
according to the Silver Institute (data provided by Thomson Reuters GFMS
World Silver Surveys). First of all, the $7.74 is a “Cash
Cost” and not reflective of all actual costs. To arrive at a
cash cost, the company excludes many costs and deducts by-product
credits. This deludes the unsophisticated precious metals investor into
believing it only costs $7.74 an ounce to produce silver. Most primary
silver mining companies need their by-product revenue to fortify their
balance sheet.
Secondly, the $7.74 cash cost figure is based on 75% of the
primary silver miners. It says so in the 2015 World Silver
Survey. The sample size GFMS uses to get their cash cost was 207
million oz (Moz), while total primary silver production was 270 Moz.
Basically, GFMS calculated that $7.74 using the largest producers and top
performing miners.
Regardless, cash costs do not represent that profitability of a
company. As I mentioned above, the miners deduct their by-product metal
sales. The FOA actually links one of my articles discussing cash costs
back in 2011. Since then, my work has become more detailed into
calculating the “Estimated Breakeven” for the primary silver miners.
FOA provides the example of Hecla’s low cash cost to justify their $2.75
price for silver after the big gold reset:
Hecla Mining Company, who claimed its “cash cost” for silver as a
byproduct was only $1.15 per ounce in 2011, actually had a “complete cost per
ounce” of $23.88! … Wow! At a $1.15 per ounce, $2.75 would be a 139%
profit margin!
Hecla has one of the lowest cash costs, because they have one of the
highest by-product metal sales. Hecla’s 2014 full year revenue
by-product metal sales were a whopping 65% ($325.4 million) of their total
$500.7 million in revenue. By Hecla deducting their by-product
revenue, they were able to state an ultra-low cash cost of $4.81.
However, my estimated breakeven for Hecla in 2014 was $18.87.
Cash cost accounting is not a GAAP – Generally Accepted Accounting
Principle and even in the mining companies financial reports they state the
following:
“cash costs per ounce of silver”, which are used by the
Company to manage and evaluate operating performance at each of the Company’s
mines and are widely reported in the mining industry as benchmarks
for performance, but do not have standardized meaning.
So, if a company has the same cost structure as Hecla, but a much lower
by-product metal revenue, their cash cost would be higher because their
deductions would be lower. For example, if the company only had 80%
silver revenue and 20% by-product metal sales, their cash cost would be
significantly higher as their deduction was much lower. Again, this has
nothing to do with the profitability of the company.
Here is item number 2:
But if the author was right about the “break-even area” for silver, then
how on earth did mines produce 20,000 tonnes of silver (and scrap refiners
another 6,300 tonnes) in 2005, when the price of silver ranged from $6.39 to
$9.23 per ounce? And how did we ever survive 2003, when the price ranged from
$4.37 to $5.96?
FOA statement here shows their ignorance here when they fail to factor in
the price of oil and its relationship to the silver price. I discuss
how the rise in the price of oil impacted the price of silver in my upcoming THE
SILVER CHART REPORT. Here is Chart #24:
I gather the folks at FOA believe the primary silver miners extract silver
ore without the use of energy. The price of a barrel of oil
skyrocketed from $25 in 2002, to over $110 in 2011. Did this not impact
the cost to mine silver? Are they kidding here? Again,
FOA is guilty of FORECASTING IN A VACUUM.
I would imagine FOA would say something like, “Well, if the price of oil
falls back to $50 like it did in 2005, then the price of silver should
decline to $7.32, its average price for the year. That might make sense
if we continue to analyze the silver market they way the folks at FOA,
however things have changed considerably in the primary silver mining
industry over the past decade.
This is also shown in detail in several charts in THE SILVER
MARKET REPORT. I gather the top primary silver
mining industry’s 40% decline in average yield since 2005, may have slipped
past the supposed critical thinking of the folks at FOA
Which means, the mining companies have to either add new mines to makeup for
the decline in production or process a great deal more ore to produce the
same amount of silver. This costs energy… which costs a lot of FIAT
DOLLARS.
Here is item number 3:
But if you throw in a little economic deflation, what FOA called “our
economic function” which will decrease the industrial demand for silver until
much of the global malinvestment is cleared away, along with a little price
overshoot to the downside and a sprinkling of all that supply overhang
competing with the miners and scrap refiners, I think $2.75 might
even be a little conservative. ;D
I don’t think silver will stay that low forever. As I said at the top of
the post, it’s an exceptional metal with many great industrial uses. So,
like America, where “a few solid economic ideals still exist and await the
opportunity to rise like phoenixes from the ashes of a fiery transition,”
I think silver has some fantastic industrial uses and will rise like a
phoenix (more or less) after spending some time at around $2.75 per ounce (in
constant dollars of course.
FOA believes the United States will rise like a phoenix from the ashes of
a fiery transition, and consumption of industrial silver will increase
putting value back into the low $2.75 price. As we can see, FOA only
values silver as it pertains to its degree of consumption as an industrial
metal.
This goes against 2,000+ years of gold and silver’s STORE OF VALUE
properties. FOA believes gold will revalue higher as it will back all
this worthless fiat money, but they fail to realize ENERGY IS THE KEY, not silly
fiat money. What happens to the global financial and economic
system when the peak of unconventional oil production begins in earnest?
Does FOA make any forecasts to what happens to the value of the $105
trillion in global conventional assets under management when world oil
production plummets? How do they see the U.S. rising from the ashes
when we finally witness the collapse of the highly-leveraged shale oil and
gas industry? How does the U.S. run on 70% or half of the energy it’s
used to?
The reason silver will increase in value in the future has nothing
to do with industrial demand but rather investors moving out of
increasingly worthless paper assets and into physical ones to protect wealth.
Silver is just as good as a store of wealth as is gold. It just has
less stored Economic Energy than gold.
Of course FOA will label me as a silver bug, but they fail to realize I am
a STORE OF WEALTH advocate, who believes silver is the better value going
forward. This is due to a great deal less above ground silver in the
world for acquiring as a store of value compared to gold.
While I base the value of silver currently on the price of oil,
this will become less of a guideline in the future due to the implosion of
the highly-leveraged Treasury-Bond-Retirement-Insurance Fund Market.
The world perceives there is a store of wealth in these supposed paper
assets. Unfortunately, they are (as I stated many times) nothing more
than ENERGY IOU’s. Energy must be burned to give them value. And
not only the same amount of energy next year, but even more or the whole
house of cards comes crashing down.
The Fed & Central Banks Prop Up The High Oil Price
Without the Fed and Central Banks propping up the economic and financial
markets since 2008, the world would not be able to afford high-priced
unconventional oil such as oil sands and shale oil. Without
this extra oil supply, the Fed and Central Banks would not have been able to
paper over the system.
Furthermore, the trillions in monetary liquidity on top of zero interest
rates actually pulled future oil production forward. This is why the
world has experienced an eleven year global conventional oil production
plateau. Basically, money printing and debt allowed us to steal oil
from the future. This will come back to bite us hard when the U.S.
Dollar finally collapses. Why? Because the decline in world oil
production will be more severe when it finally arrives.
This will cause havoc to the majority of paper assets. This scenario
is not found anywhere in the FOA playbook. Which is way they just look
at the value of silver by how much is consumed by industry.
Lastly, I actually believe silver will outperform gold in percentage terms
in the future due to it being more rare and more affordable. I
explain this in my upcoming THE SILVER CHART REPORT.
There are 48 charts in the report. Some of these charts are from my
work over the past six years, all updated and including new ones never seen
before. There isn’t a single publication on the internet that covers
the silver industry and market to the degree covered in THE SILVER
CHART REPORT.
