Precious metal investors must be ecstatic that the 2015 has come to an end. Precious metals finished at multi-year lows of around $14 for silver and $1,100 for gold. Fundamentally, there seems to be no excuse for prices to be at these levels. For the majority of 2015, both gold and silver traded below actual production cost of the metals which some estimate is around $1,100 for gold and $18 for silver. Now we must ask ourselves: what will 2016 bring? Will fundamentals even matter in the New Year, when they have seemed mute for many months now? Let's look at what could change in the New Year.
Gold & Silver Supply to Decline
Gold & Silver production had experienced sharp declines across the globe in 2015, and 2016 is expected further this trend. In 2015 alone, silver production fell 4.6% in Chile, 6.5% in the United States, and a whopping 20% in Canada. Since more than half of the silver mined comes as a byproduct of base metal mining, silver supply will become even tighter as base metals continue to free fall. With economists lowering forecasts for global and U.S. growth, it seems only logical that base metals will continue to fall in price as demand declines. Lousy home data in the U.S will also put pressure on copper prices, one of the most important base metals and gauges of economic activity. This will put further pressure on base metal miners and cause miners that were on the verge of halting or scaling back production to actually do so. It should also come as no surprise to see some smaller players in the industry experience financial distress and go bankrupt. Raising capital in a falling price environment, especially for smaller players, will be a daunting and extremely hard task. It is already expected that some of the largest copper producers will cut production by 200,000 metric tons. Such large production cuts will significantly hurt silver supply.
Expected Increase in Silver Coin Demand
Demand for government minted silver coins such as the American Silver Eagle and Canadian Silver Maple Leaf are expected to rise to all-time highs in 2016. More investors than ever before are expected to take advantage of the multi-year low prices of the precious metals. This will allow them to take comfort in buying high quality government minted products and expose themselves to the upside potential silver has to offer. Additionally, investors will be looking to diversify their portfolios if the equity markets show further weakness and global markets start to lose their footing. Furthermore, 2016 marks the 30th anniversary of the American Silver Eagle, which has coin collectors and investors going crazy as the U.S. Mint sold over 2.7 million of these silver bullion coins on the first day of sales. If demand for the 2016 Silver Eagles continue at this pace, this year will be record breaking. Such immense demand will only pressure physical silver markets further and put upward pressure on silver prices.
Will India Continue to Buy Silver?
India has become a major purchaser of silver in recent years as many import tariffs have been put on gold in an effort to curb demand by the Indian central bank. It is quite possible that Indian demand for silver could surpass 9,000 tons, which is almost 1/3rd of the annual mine supply globally this past year. Moreover, Indian citizens could further fuel the silver frenzy if India's economic growth picks up and results in more discretionary income for its citizens. Indian citizens tend to invest any extra money they have in hard assets such as silver and gold.
Very Few People Are Actually Buying Physical Silver
It is estimated that approximately only 1-2% of the global population invests in physical gold and it is likely that number is even smaller for silver investors. With that being said, not many people are investing in physical silver on a global scale. One has to consider the outcome if even another 1% of the global population was to buy physical silver. That would be roughly 70,000,000 additional buyers of silver. At a small investment of one ounce each, additional demand of 70,000,000 ounces would arise. It could be quite feasible to see such increase in demand if the global population becomes more concerned with the tremendous debt that countries around the globe have incurred and as financial markets deleveraged.
Silver recycling to be tepid
When silver prices are low, recycling tends to decline. If prices of silver continue to stay at such low levels in 2016, it is probable that less silver will be recycled. This will only exacerbate the supply deficits that are expected for 2016. However, if prices of silver significantly rise, old silver could come out of the woodwork and help alleviate some supply issues that might occur.
2016 should be a very interesting year for silver, as many market analysts predict this as the bottom. Silver is unpredictable like any other investment, and the best a prudent investor can do is look at the facts and make a wise decision.
*These are solely the opinions of Bullion Shark, LLC and are not intended to be used as investment advice. Please consult a financial adviser before investing.*
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.