The Fundamentals Of Silver Can't Be Better

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Includes: AGQ, DBS, DSLV, DULL, PSLV, SHNY, SIVR, SLV, SLVO, USLV, USV, ZSL
by: Katchum
Summary

Coin & bars demand has fallen off a cliff, but premiums are rising.

Fabrication demand is up with electric vehicle and photovoltaics demand leading the market.

Mine supply enters secular downtrend with 30% of the primary miners being underwater.

Silver reserves will be depleted in less than 20 years.

The silver price has dropped through resistance since June 2018. Is it the right time to buy silver now? This article will give a fundamental analysis on silver to help investors to choose whether or not they want to enter this depressed market.

The silver institute has published a 2018 report on the silver market which can be found here. This report should help investors to form their decision about silver.

Silver demand and supply are shown in the table below.

Silver Demand

Physical silver demand can be divided up into the following sectors: jewelry, coin & bars, silverware and industrial fabrication.

When we look at coin & bars demand, 2017 has been a very bad year (25% decrease year over year) and this negative trend has continued into 2018. This can be evidenced from the lower U.S. mint sales, both in gold and silver American Eagle coins (see figure below from the U.S. mint). Though, the good thing is that it can't get worse than this as the coins & bars demand is at rock bottom now. This is only a U.S. phenomenon, as Chinese and Indian demand is pretty robust. We might be seeing an end to this slump in demand as silver premiums have been moving up lately, which I mentioned in this article.

Silverware and jewelry demand were flat from last year, but the most interesting development is that fabrication demand was actually up, although not by a lot (5% year over year). This trend is likely to continue upwards due to 2 technologies: electric vehicles and photovoltaics.

Electric vehicle ((NYSE:EV)) demand will only go up, especially in China and India. The following chart shows how EV demand will double in 10 years. As electric vehicles need batteries (silver-zinc batteries) and circuit boards (silver paint) to operate, silver will be used to build these products.

Electric vehicle demand goes hand in hand with photovoltaic demand (see figure below) because electric vehicles need to be powered via electricity. Solar panels will be in great demand to accommodate the charging of electric vehicles.

When you add photovoltaic and EV demand together, we arrive at 150 million ounces in demand, which is exactly the amount of coin & bars demand. So the trend that we are seeing in the last few years is that investment demand is slowly being replaced by fabrication demand.

Another thing to notice is that photographic demand (see chart below), which was the culprit of stagnant fabrication demand over the last years, has finally found a bottom. So this negative factor is already behind us.

Silver Supply

Physical silver supply can be divided into following sectors: mine production and scrap.

As the silver price went down, scrap supply has been going down too. So as long as the silver price stays at this level, we won't be seeing any scrap supply coming up. The following chart shows how the scrap supply is correlated to the silver price.

Mine production is the other factor contributing to supply and it is entering a secular decline (see chart below from Statista). Since 2014, global silver mine production has been falling from 26,800 to 25,000 metric tonnes. I can tell you that this trend will continue when the silver price stays at this level. Many silver miners have difficulty keeping their production levels up and the higher ore grades have pretty much been mined out at this stage.

We are also not finding new discoveries anymore. The USGS reports global silver reserves each year and we saw a large decline in silver reserves in 2017 (see chart below created from the USGS report). With silver prices at $14/ounce, I believe many of those reserves are not mineable at this stage, so they should be written off from these statistics.

When we extrapolate the silver mine production, I predict that silver will be depleted within 20 years from now (if the silver price stays at $14/ounce). This is because there is no exploration company out there that will even think about drilling for silver at these prices. When we look at the co-product Total Cash Cost + Capex numbers (see figure below), we see that at the current $13-14/ounce level, almost 30% of all primary silver miners are underwater. When the price goes just 1 dollar lower, 70% of the primary industry would be out of the money, let alone be drilling for new silver resources.

To conclude, I think $14/ounce silver is a very good entry point and I invite everyone to consider buying some silver as the probability of a nice return is very high.

Disclosure: I am/we are long PSLV.

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.