Silver's Fundamentals Are Still Very Strong
Silver production is going to fall for the first time in 12 years. This is happening at the same time that the metal's industrial use is expanding. Mining is set to resume once more.
Solar has the potential to turn into a real, viable energy source for the world. If we get further breakthroughs (increased efficiency with lower costs), silver will outperform.
The markets are extremely volatile at the moment (especially the bond markets). It's a good play to be invested in silver or gold presently for insurance.
I don't believe the CPI figures coming out of the US. Other research shows that actual inflation in the US is far higher.
Long-term investors in silver have really had a tough time since 2011. The white metal almost reached $50 an ounce back in April 2011, but since then, has come all the way back down to $16 an ounce. Nevertheless, the iShares Silver Trust ETF (NYSEARCA:SLV) has started 2015 very well, as the ETF is up 2.66% year-to-date. Furthermore, the miners have outperformed, with the Market Vectors Gold Miners ETF (NYSEARCA:GDX) up almost 4% year-to-date. I would urge long-term investors in the metal not to throw in the towel at this juncture. Ignore the bears and the noise that silver is heading for sub-$10 prices. Silver's fundamentals, in my opinion, still illustrate that higher prices are ahead of us. Let's take a look at them.
Firstly, global silver production is predicted to fall in 2015 due to declining investment in mining. Falling silver prices, combined with less production from older mines are the underlying reasons why this one will be the first in 12 years to buck the trend of rising silver production. Many silver mining companies have been slashing costs in order to remain competitive, and exploration budgets have definitely been affected, which is why 2015 will be a down year for production. However, a supply shortfall can't continue, as hedge funds, industrial applications and emerging economies (through jewelry) have all been increasing their exposure to silver recently. So why are they getting in early?
Well, firstly, silver is mainly produced (70% of all silver) when other metals are being mined (gold, copper, etc.). Concerns are also growing about the copper market. Citi came out recently and stated that there will be deficits in the copper market in 2016. This is important for silver. Deficits across the whole commodity space will encourage mining, because prices will rise due to supply constraints. We may be close to a bottom in this current commodity cycle.
Secondly silver's industrial use is growing, which is bullish for the white metal. Thomson Reuters has stated that industrial applications will account for 57% of the total usage in 2015 (compared to 54% in 2013). However, there is one industry that has the potential to vastly increase the demand for silver, and that is the solar industry. Each photovoltaic solar panel contains approximately 20 grams of silver, and this industry is predicted to grow strongly from here. Just look at the stats. In China alone, the number of manufactured solar panels has doubled since 2003. Furthermore, the country is estimated to install an extra 17 gigawatts of solar power capacity in 2015 alone. To put that in perspective, one gigawatt has enough energy to power almost 1 million homes. The US is also making strides in this area. Solar employment in the US has almost doubled since 2011, as inward investment moved sharply higher primarily due to its investment tax credit, which is in operation until 2016. There are rumors also that Brooklyn, New York wants to build a solar micro grid in order to gain energy independence from the national grid.
The US has recently witnessed its shale fracking boom, which has totally revolutionized the oil industry. Well, we are heading the same way in solar. Irena (International Renewable Energy Agency) has gone on record stating that solar panels in general have dropped by 75% in price since 2009. This makes sense when you study the figures. Output is increasing at a far higher rate than investment dollars, which illustrate that costs are falling rapidly. I see further breakthroughs in solar technology (which will improve efficiencies and bring down costs), which is also bullish for silver and silver mining companies.
Finally, on the markets front, there are simply too many unstable events in the world right now, and history has taught us that instability and fear have been bullish for silver. Presently, we have a Chinese stock market up 30%+ in the last few months, the ECB printing trillions of euros plus giving extra funding to Greece, and we have a global bond market in trouble. Merrill Lynch stated recently that bonds have experienced six straight weeks of outflows - spiking yields in the process.
Furthermore, I believe the inflation figures in the US that are being reported are not correct. Take a look at the chart below, which shows consumer inflation in the US from methodology that was employed prior to 1980 (blue chart). Even if this research is 50% wrong, US inflation would still be far higher than it is today.
Courtesy of ShadowStats.com
Silver is a natural inflation hedge. Central banks have demonstrated that they won't allow deflation and will keep printing money in the process, if needs be. In the long run, this can only be bullish for silver. |
