A Fact Silver Bears Don’t Like Talking About

The past 6 years haven’t exactly been the easiest of times for silver investors. 

silver chart
chart courtesy of kitco.com

For those who were astute enough to notice the explosion in the the money supply following the housing crisis, buying precious metals seemed like a great investment. Yet prices have declined from a peak of $49 in 2011 to as low as $15.

chart courtesy of the St. Louis Fed

However fast forward a few years later and thanks to the work of GATA, Ted Butler, and others, we’ve learned that precious metals aren’t exactly functioning in a free market.

Which sounds like conspiracy theory to some in the mainstream.

At least until they’re reminded that we have public acknowledgment of manipulation in the LIBOR, energy, mortgage, and interest rate markets, amongst others. The last of which the Federal Reserve openly manipulates and just calls “policy.”

Also, keep in mind that last year we got public confirmation that precious metals have been manipulated as well when Deutsche Bank settled a case while releasing the trader chat transcriptsIncredibly, it’s actually harder to find a Wall Street market that isn’t manipulated than one that is.

Nonetheless this leaves a challenging investing market for precious metals. If the markets are manipulated with paper selling, is there further risk to the downside?

Anything can happen in short-term electronic trading. Although there’s a simple fact that should help precious metals owners sleep at night, that probably doesn’t get mentioned enough.

The metals are basically trading at what it costs to get them out of the ground.

A few months ago First Majestic Silver CEO Keith Neumeyer (one of the few mining CEOs to speak publicly about the price manipulation) gave an interview where he mentioned the cost of maintaining existing silver projects comes out to about $13-15 per ounce.

In other words, that’s the cost to dig metal out of the ground from projects that are already up and running. Which isn’t a lot of margin with the price of silver currently trading near $17.

Keith also mentioned the cost of exploring and developing new mines is closer to $20. Meaning that right now, projects which would be worthwhile with higher silver prices are not being explored. The result is less supply going forward than there would normally be.

So while there are forces at play keeping the price lower than it would trade in a freely trading market, this has also created a situation where the investment case for silver has never been stronger.

Of course this is all at the same time when there’s turmoil in the Saudi Arabia Kingdom, the word “PetroYuan” is rapidly being introduced into cultural lexicon, and U.S. political tensions continue to rise with North Korea, China, and Russia.

In fact none other than Janet Yellen even mentioned that “the probability that short-term interest rates may need to be reduced to their effective lower bound at some point is uncomfortably high, even in the absence of a major financial and economic crisis.”

All while silver is basically trading at the cost it takes to get it out of the ground.

So how much lower can the price really go?

Are people and companies still going to allocate capital to dig for silver just to sell it for less than it costs?

Frustrating as the wait for accurate pricing may be, these conditions just further reinforce the strength of the investment case for silver going forward.

How long will it take for the rest of the world realize what silver investors have so astutely noticed? That part is still unknown.

Yet for those with awareness and understanding of this simple lower bound, the reward for your patience has never been greater.

 

-Chris Marcus

November 7, 2017

 

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