- Silver has dropped in 14 of the last 20 years in June.
- Silver experienced record demand in 2013.
- Silver cannot drop to zero, but the miners could.
By Ivan Y.
After a strong beginning to the year, silver (NYSEARCA:SLV) has now dropped to below $19 and is down 3.1% for the year. Unfortunately, the pain is probably not over for silver bulls due to the fact that June is historically the worst month of the year for silver. In the last 20 years, spot silver has dropped in 14 of those years in the month of June, and it has fallen by more than 10% three times. If you remember last year, silver began June over $22 and ended the month at $19.56 per ounce. If it were to drop another 10% this year, it would take the price to a shade below $17. I'm not predicting that, but the $17 level could be seen as a worst-case scenario.
Bad News / Good News
The bad news for silver right now is the negative momentum as well as its seasonal pattern of poor price performance during the summer. The old adage of sell in May and go away certainly applies for silver. Actually, more accurately, it's more like sell in April instead of May.
But is there any good news for silver bulls? In short, the answer is yes. For one thing, silver is experiencing record demand. According to Thomson Reuters GFMS and The Silver Institute, total silver demand increased by 13% from 954 million ounces in 2012 to a record high of 1.08 billion ounces in 2013. This beat the previous high recorded in 2008. Here is a link to a chart produced by The Silver Institute that details total supply and demand for the last ten years.
Another tidbit of good news, which I have mentioned several times before, is that silver is below the total production costs of primary silver miners. Primary silver mines supply about 30% of the world's mine supply, while the remaining 70% of silver is produced as a by-product of other metals. With silver below its production cost, at least 30% of the world's supply could be in jeopardy if primary silver mines get suspended due to non-profitability. Is $19 silver low enough to convince the management of primary silver mine operators like First Majestic Silver Corp. (NYSE:AG), Silver Standard Resources (NASDAQ:SSRI), and Pan American Silver Corp. (NASDAQ:PAAS) to suspend operations? Probably not, but a drop to the $17 worst-case scenario which I suggested above could be a different story.
Have No Fear
I continue to believe that if you have a long-term horizon and if you are unleveraged that you should not fear a drop to the $17 level if that happens. In the long term, a silver price in the teens is not sustainable if you consider the global supply and demand situation. There is safety in silver in the long term. The same, however, cannot be said for the silver producers (NYSEARCA:SIL). While silver will always retain some sort of value, whether it is the CD$5 face value of a 1 oz. Canadian Silver Maple Leaf coin or $20 or $30, silver producers can drop all the way to zero. Think about this scenario. Let's say silver drops below $15 and stays there for the next ten years before it recovers and eventually doubles above $30. If you are invested in silver via silver coins and bars, silver certificates, or SLV, you can still recover your investment and even make a large profit a decade from now. But what do you think will happen if you are invested in, for example, AG, SSRI, and PAAS during those same 10 years? The miners would likely go bust during that time, and you would not recover your investment even though silver, under the hypothesized scenario, would be significantly higher a decade from now.
The point is that time works against the investors of silver miners, but it doesn't for the unleveraged SLV or silver coins/bars investor. Yes, there are annual fees for SLV and there are optional insurance fees for coin and bar holders, but those costs are small and won't destroy your investment over a ten-year period. However, if you are invested in silver producers, you could be right about the upward directional movement of silver, but still lose money if it takes too long to happen.
Disclosure: I am long SLV. I currently have no position in any silver mining stocks. 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.