Even though interest in precious metals has fallen over the past few
years, investment demand is still the largest growth sector in the silver
market. Yes, it may be hard to believe, but physical silver investment
has grown the most since the 2008 financial crisis compared to the other
sectors. And while industrial users consume the highest amount of
silver in the overall market annually, its total demand has fallen over the
past decade.
Furthermore, a new study shows that global PV solar demand will decline by
40% over the next five years. But, I will get to that later in the
article. However, I wanted to focus on physical silver investment
demand because the alternative media community seems to have this idea that
SILVER IS DEAD… IT’S NOT. While it’s true that investment
demand has declined significantly from the peak a few years back, it is still
much higher than what it was before the 2008 financial crisis.
Interestingly, silver coin bar and coin demand seem to spike the most when
prices are falling rather than when they are rising. This was true in
2015 when total global silver coin and bar demand hit a record high of 292
million oz (Moz) as the silver price fell to a low of $15.68 versus 161 Moz
in 2012 when the average price was $31.15:
Now, according to the Silver
Institute’s Interim Report, total coin and bar demand will
fall to 125 Moz in 2018, down from 142 Moz during the prior year. So,
even though physical silver investment demand is down more than half of what
it was at its peak in 2015, it is significantly higher than what it was in
2007, before all hell broke loose in the financial system and economy.
Looking at the data from prior World Silver Surveys (found at the Silver
Institute), coin and bar demand ranged from 50-60 Moz during 2000-2007.
However, things got really interesting in the silver market when the priced
jumped to $20 in 2008 on the back of a disintegrating banking and housing
market. Silver coin and bar demand more than tripled in 2008 to 192
Moz.
But, in 2017 and 2018, the ongoing low prices saw global silver coin and
bar demand fall to lower levels as investors focused on the more
volatile broader markets, Bitcoin and the Cryptos. Nonetheless, I
believe life will return back into the precious metals in 2019 as FEAR ENTERS
into the market.
As I mentioned, physical silver investment demand is the largest growth
sector in the entire market if we use the 2008 financial crisis as a
guideline. If we compare global silver coin and bar demand it
has increased 123% from 56 Moz in 2007 to 125 Moz forecasted this year
(Thomson Reuters GFMS Team). Now, the only other sector that has shown
an overall increase in the same period is silver jewelry demand which grew 8%
versus an 11% decline in Industrial usage followed by a drop of 8% in
the silverware sector:
Analysts who continue to brag about rising industrial silver demand don’t
seem to pay attention to the figures. Industrial silver demand
peaked in 2011 at 661 Moz and is forecasted to fall another 2% this year to
585 Moz down from 596 Moz in 2017. I have stated over
and over again, that industrial silver demand is not the primary driver of
price. Why? In 2012, when the silver price was higher at $31
industrial silver demand was less at 600 Moz compared to 634 Moz in 2019 when
the price was only $20.
That being said, silver industrial demand is likely to continue
contracting as oil production peaks and declines. Even if we disregard
falling oil supply and its impact on the overall market, a new study titled The Role Of Silver In The Green Revolution (for
the Silver Institute), states that silver demand in the PV Solar Industry is
forecasted to decline by 40% by 2024:
Not only is PV Solar silver demand to fall considerably this year compared
to the nearly 90 Moz in 2017, but the CRU Report also forecasts that it will
continue to decline to approximately 50 Moz by 2024. I gather we can
now dismiss all the supposed notions of massive increases of Solar PV silver
consumption in China and throughout the world. Actually, I
believe Solar PV installations will begin to decline considerably as the
market realizes it’s too expensive and its very low EROI – Energy Returned On
Investment will not provide the Green Energy future as planned.
One more thing, the more PV Solar Plants that are added to the grid, the more
balancing power that needs to be added to offset the huge drop-off at night
when the sun isn’t shining. Very few people realize the huge problems associated
with adding Solar to the Electric Grid.
In my ongoing research, I have found out that supply and demand forces are
not good primary indicators of the silver price. Part of the reason
that supply and demand fundamentals play less of a role with silver has to do
with the 2.5+ billion oz of custodian silver metal stored in vaults across
the world. Moreover, as I stated, the highest physical silver coin and
bar demand of 292 Moz in 2015 was due to 50% REDUCED PRICE SALE compared to
2012. So, there are very complicated factors driving the silver market.
My newest analysis of the Day Trading Markets has brought a new
understanding of what GUIDES THE MARKET PRICE of stocks, commodities, metals,
etc. However, the COST OF PRODUCTION is the overriding factor
that provides a FLOOR in the price of most things. I am not
saying this is 100%, but production costs are the leading indicators of price
when all things are equal. And by that I mean, when the market is
balanced, the cost of production is the normally the floor price upon which
supply and demand forces react.
Let me give you an example. If we look at the financial statements
of most companies, they are all making a small percentage of profits once we
account for ALL COSTS. So, if a company like Caterpillar is
manufacturing and selling Earth Moving Machines for the market and they are
making about a 5% profit (give or take), then the total cost of that machine
they sell becomes the 95% of the market price. It’s really
that simple.
Now, of course, Caterpillar isn’t going to manufacture and sell ten times
more machines in a given year than the market demands as that could depress
prices. Furthermore, their financial constraints (small annual profits)
KEEPS them from manufacturing too many machines because they just don’t have
the extra money or available low-cost credit to do so. So, the market
is kind of self-regulating when we consider supply and demand forces.
Once we understand this self-regulating market, the most
significant factor that is impacting market prices… is the TOTAL COST OF
PRODUCTION. Please know that I am talking about a “Typical
balanced market,” not some poor slob on the desert who would exchange his
gold watch for a gallon of water. That is not a typical market.
According to my analysis, the main driver of the silver price, OVER A LONG
PERIOD OF TIME, has been the oil price:
As we can see, the silver price has trended nicely along with the
oil price since 1900. Silver spiked higher in the 1970s versus
oil because there was much higher “consumer price inflation” while the 2000s
experienced a great deal more “asset price inflation” (stocks, bonds, and
real estate). Also, physical silver demand had more of an impact on
silver price in the 1970s while the paper markets have been the leading
driver for at least the past two decades.
Thus, when the oil price shot up from $19 in 2000 to $110 in 2011, this
had a tremendous impact on the cost to produce silver. Here is a chart
of I have posted before on my estimated Pan American Silver mining production
cost (one of the largest primary silver producers in the world) versus the
market price:
Here we can see that for the most part, Pan American’s total
mining costs were slightly below or above the market price.
Only during the highly speculative silver years of 2011 and 2012 did Pan
American Silver enjoy much higher profits. In my most recent update,
Pan American Silver’s AISC – All-In Sustaining Cost in Q3 2018 was $13.73,
not much lower than the current market price of $14.15.
So, with all the global supply and demand forces over the past century, I
find it quite amazing that the silver price has trended up and down with the
oil price. Why? Because the oil price is the main driver of the
economy and it sets the INFLATION RATE and PRODUCTION COSTS of most
things. I don’t care if the market or individuals create the
demand for silver and the miners produce the supply… they cannot determine
the PRODUCTION COST… that is based on the thermodynamics of a highly complex
system.
Yes, it is true that if no one on the planet wanted silver, then common
sense would dictate that its value would be ZERO. However, if people
desire goods and services, they are going to have to pay the price to cover
the COST OF PRODUCTION. It is that simple.
I will be writing more articles and publishing new videos on what is and
what will be the NEW DRIVER of the silver price in the future. I get a
lot of questions from people who ask me that if I believe the oil price will
fall, then how can I see much higher silver prices in the future. WELL,
THERE LIES THE TRILLION DOLLAR QUESTION.
But, to put it quite simply, the massive $247 trillion in global
debt has provided a temporary illusion of high STOCK, BOND, and REAL ESTATE
asset prices. Basically, the debt has blown up these asset
values. However, GOLD & SILVER are not being propped up by debt.
When the debt implodes, most asset prices are going to deflate into the
cesspool. And with falling U.S. and global oil production, it will make
a bad situation worse. Growing global oil production has allowed the
debt to increase, but this will head the other way when the oil supply turns
south.
When investors watch as their assets continue to go from BAD, to WORSE to
AWFUL, they will move into gold and silver to protect wealth. This will
be the time when precious metals SUPPLY & DEMAND forces finally kick in a
big way.
Lastly, the next market phase we will enter into is WEALTH
PRESERVATION. So, when the investors become reacquainted with precious
metals during this phase, we will no longer have to worry about whether or
not SILVER IS DEAD.
Check back for new articles and updates at the SRSrocco Report.
