Silver: Triple Bottom Or Lower Lows?

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 |  Includes: AGQ, SIVR, SLV, USLV, ZSL
by: Prudent Finances

Summary

Silver has given up almost all of its gains this year.

Mining supply continues to increase.

Silver is lower than its production cost.

By Ivan Y.

Silver (NYSEARCA:SLV) bottomed twice in 2013: once at the end of June and again in December. I prefer to look at end-of-day spot prices so the exact dates would be June 27 ($18.40) and December 3 ($19.11). After rallying nearly 10% in the first two months of this year, silver has given up almost all of those gains for the year in the past few weeks and is currently holding above the two bottoms in 2013. It is currently up 2% for the year as I write this. The question now is whether silver is at or near a triple bottom or whether silver drops to lower lows. An argument can be made for both cases.

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The Case for Lower Lows: Supply Continues to Increase

The problem with silver right now is that mining supply continues to increase despite depressed prices. For example, First Majestic (NYSE:AG) announced this week that they achieved record quarterly production in Q1. In general, mining supply continues to increase because of the investments made by mining companies into developing and expanding mines in the past several years when silver was much higher. It was only 14 months ago that silver was trading over $30. And it was only 3 years ago that silver traded over $45. The investments have already been made and silver miners can't take back the money they have already spent in developing or expanding these mines. So they have a choice now: Do they stop production, put the mines under care and maintenance, and wait for higher silver prices? Or do they continue producing at a loss or with minimal profits? In most cases, it's better just to keep producing and hope for higher prices rather than pay the expense of shutting down production and restarting it later. It could take a prolonged period of depressed prices for silver before we see significant production shutdowns. That helps the price of silver in the future, but offers no help now.

The Case for a Triple Bottom: Price is Lower than Production Cost

How long can a situation endure in which a commodity sells at a price lower than its production cost? That is the current situation with silver right now. Estimates of all-in production costs at primary silver mines range from $20-22 per ounce, but silver's market price is slightly below that. On average, silver mining is an unprofitable business. The only people in the industry making money are the management teams and employees who continue to collect their salaries and stock options, as well as the financiers who collect fees and warrants on the financing deals. From a fundamental view, the fact that silver is below its production cost is the best case that can be made for a triple bottom. From a technical view, I like to look at the RSI, which is currently about 41. Ideally, you would like it to be 30, but one bad day in silver and the RSI would likely drop to that level.

Final Thoughts

I am long-term bullish on silver, but for the short-term, I am price agnostic and will stay away from making any price predictions. However, one thing investors should note is that as long as silver stays above roughly $17.50, it is still in a long-term uptrend going back 13-14 years. $17.50 would also be a lower low, so even if lower lows are made later this month or in the summer, the long-term technical picture for silver could still remain positive.

Disclosure: I am long SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.