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Peak Silver?

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Published : January 31st, 2013
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Read the Tuesday Afternoon Wrap-Up for 1/29/13 and the Wednesday Morning Commentary for 1/30/13

I spent a decade as an Energy analyst; or, more specifically, oilfield equipment, services, and drilling.  Thus, I was exposed to a tremendous amount of research on “peak oil;” which – shale oil notwithstanding – is yet to be proven either way.  Unfortunately, “peak” commodity studies cannot possibly incorporate ALL moving parts; nor foresee unexpected changes in demand, population, and technology trends.

That said, such studies can be extremely valuable – pointing out key hurdles to future production growth, and/or production cost.  That is, not only is “peak oil” a valid research topic, but “peak cheap oil.”

Heck, from the time I commenced my Energy career on the buy side in January 1996, until I left Salomon Smith Barney as a sell-side analyst in February 2005; the marginal cost of oil production stair-stepped higher; from levels to NEVER again be seen.  For nearly the entire duration of my 1996-2005 energy career, WTI Crude traded between $10/bbl and $35/bbl; not exceeding that high until late 2004; as compared to today’s recessionary price of nearly $100/bbl – and the 2008 peak of $150/bbl.  Thus, if anyone tells you “peak cheap oil” is not real, they are delusional.

Oh, by the way; when I left Salomon in February 2005, the Wall Street consensus for the “long-term” (3-5 years) oil price was… drum roll please… $18/bbl.  Why so low, you might ask?  TAR SANDS – which were hailed as a “sure thing” to swamp the market…

The reason I bring up “peak oil” is because “peak silver” is starting to be seriously debated; kicked off by the U.S. Geological Service’s ADMISSION (in the late 2000s) that silver is likely to be the first extinct element on the periodic table…

Silver will be the first element in the periodic table to become extinct

Sadly, my analyst skills have been dulled by a dumbed-down world in which little attention is paid to fact, correlation, and causation.  I appreciate the opportunity to perform research for this blog; but “precious” little quality PM research is both available and worth reading.

Thus, I was thrilled to come across Steve St. Angelo late last year; who writes under the moniker “SRSRocco,” published on the excellent Silver Doctorswebsite.  He has very strong opinions about “peak oil” and “peak silver” (he believes in both); particularly what he views as wild assumptions about the ballyhooed shale oil boom.

Regarding the latter, it’s all about depletion and marginal production cost; of which fracking is terribly handicapped in both categories – per his calculation of EROI, or “Energy Returned on Investment” (the amount of energy required to produce an incremental barrel)…

N. Dakota Bakken Oil Boom Will End in a Bust, Just like ’49 Gold Rush

Mining, too, suffers from a dramatically declining EROI; indicating a significant increase in energy costs over time…

Peak Silver Revisited: Impacts of a Global Depression, Declining Ore Grades & a Falling EROI – Steve St. Angelo

Moreover, ore grades have plummeted; as the “low hanging fruit” has all been mined…

To wit; during the 1840s U.S. “gold rushes,” metal was typically visible (as in Placerformations).  Conversely, today’s mining operations target microscopic ore; as the “visible gold” was long-ago mined.  Thus, costly “open-pit” mines are the norm for both gold and silver; which are dramatically less efficient…

Care of the aforementioned issues, GLOBAL silver production has just marginally increased throughout the 12-year silver bull market – while prices have soared from $4/oz to a peak of $50/oz.  Astonishingly, GLOBAL silver production grew at just a 2.4% annual rate from 2000 through 2011 (the last year data is available); compared to a MASSIVE 19.5% CAGR for the silver price itself…

Consequently, the historic silver/gold production ratio– as in, centuries-old – has declined from 16:1 to nearly 9:1; with no signs of stabilizing.  A MAJOR reason for this plunge is that roughly 70% of silver production is by-product from base metal mines (principally lead/zinc); compared to gold, of which just 20% of production is by-product…

Throw in the fact that nearly all incremental production is CONSUMED by industry…

…and it’s no surprise that GLOBAL inventories are nearly exhausted

Most credible silver analysts believe there is somewhere between 1.0 and 1.5 billion investable silver ounces above ground – that is, in bar or coin form; which, at today’s prices, is worth a measly $30-$45 billion.  And by the way, nearly all of that supply is sitting in private vaults – NEVER to see the light of day.

Thus, when the U.S. Mint RUNS OUT of supply – for the third time in four years…

US Mint Out Of Silver Coins – Suspends Sales

…and “ADMIRAL SPROTT” tells you silver sales are surging

Eric Sprott: Why Are Investors Buying 50 Times More Physical Silver Than Gold?

…to the point they are nearly surpassing those of gold, by dollars spent

…think LONG and HARD about where silver’s absolute price will go; let alone, the gold/silver ratio (given its centuries-old average is 16:1)…

Is “PEAK SILVER” here?  I don’t know, but Steve St. Angelo certainly believes so; particularly if the global economy is headed for a major recession…

Irrespective, I believe silver is the MOST UNDERVALUED ASSET of ALL TIME; and have ZERO doubt that whether “PEAK SILVER”: has been passed, “peak cheap silver” certainly has…

BREAK EVEN COST FOR SILVER RISES TOWARDS $30 AS COEUR, HECLA & SILVER STANDARD SHOW NET INCOME LOSSES

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Andrew Hoffman was a buy-side and sell-side analyst in the United States (including six years as an II-ranked oilfield service analyst at Salomon Smith Barney), but since 2002 his focus has been entirely in the metals markets, principally gold and silver. He recently worked as a consultant to junior mining companies, head of Corporate Development, and VP of Investor Relations for different mining ventures, and is now the Director of Marketing for Miles Franklin, a U.S.-based bullion dealer.
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#1 rule on silver production and new supply: base metal demand. When demand for copper, zinc, lead, etc drops, so does silver production. Very little silver demand is filled by predominantly silver mines.

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#1 rule on silver production and new supply: base metal demand. When demand for copper, zinc, lead, etc drops, so does silver production. Very little silver demand is filled by predominantly silver mines.  Read more
overtheedge - 1/31/2013 at 7:17 PM GMT
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