Watch Out for the Silver Bubble

 |  Includes: PAAS, SIL, SLV
by: Colin Peterson

I get an alarming number of questions and comments about precious metals, especially silver. I can remember the same level of interest in oil in 2008, or real estate in 2006. [Of course, no one is interested in oil now, because it is not "going up".]

You hear a lot about the demand picture for silver (specifically investment demand), but one thing you don't hear very much about is the supply of silver. How much is available, and at what price?

Silver is a commodity. Like any commodity, producers interpret a rising price as a signal to increase production.

I took a look at a number of investor presentations from silver mining companies. Here is one from Pan American Silver (NASDAQ:PAAS).

The massive margin between the spot price and the cash mining cost is going to cause a huge increase in supply over the next few years. Pan American Silver projects that it can raise production from ~20 million ounces to 45 million by 2014. (In the entire year 2010, the U.S. Mint minted and sold under 40 million ounces of silver.)

It remains to be seen what will happen to demand for silver, but we know that supply is going to increase substantially.