The price of silver has shown volatility for much of 2020 due to the COVID-19 pandemic.
Market uncertainty has largely benefited the precious metal and by mid-year it had added more than 50% to its value since January. Along with this turmoil, increased interest in physical silver and exchange-traded funds has pushed the white metal to prices not seen since 2007.
Silver is now around US$30 an ounce, and for investors looking for an edge, it is becoming increasingly important to understand how the price got to that level and where it might go in the event. of reversal.
With that in mind, Investing News Network spoke with experts to assess the intrinsic value of silver and how low its price might drop before it becomes unprofitable to produce. Read on to find out what they said.
Lowest Silver Price: Historical Activity Review
Historically, silver has held above US$5 since October 2001 and above US$10 since 2008.
Silver price chart via Kitco.
During this 20-year period, the white metal had two bull runs. The first, which ran from 2001 to 2011, saw the metal soar over 900%, from US$4.60 in January 2001 to US$47.93 in April 2011. Lasting 113 months, it marked the longest bull run in silver’s history.
Although economic uncertainty was a driver of this price rise, the proliferation of solar panels and photovoltaic (PV) in the early 2000s also contributed to the rise of the white metal.
The technology used in solar panels has been around since the 1970s, but the growth seen in the 2000s was propelled by government incentives, pointed out Philip Newman, director of Metals Focus.
“It’s because of environmental legislation that suddenly favored green technologies. And really, PV has suddenly become commercially viable,” he said.
Today, photovoltaic manufacturing space consumes 100 million ounces of silver per year and is a key end use for the metal – even though silver’s value as currency and industrial metal has long been established. , growth in other end-use segments maintains the intrinsic value of the metal and helps avoid a price drop.
Newman also noted that ahead of this year’s upheaval, many countries were planning to integrate new solar capacity through new installations. Although these projects have been delayed, they are not cancelled.
The desire of individuals to install solar power is also a driver, according to money analyst David Morgan.
“There is a movement out of the cities and into the country in the United States and elsewhere – to become more independent or more self-sufficient,” he explained. “And a good percentage of those people don’t necessarily want to be off-grid, but they are considering installing solar in the building or adding solar to existing building.”
Lowest money price: demand for 5G technology
The implementation of 5G technology is another end use that will increase the demand for silver. It’s hard to estimate how much metal it will consume, but Morgan gave a rough estimate.
“5G is going to take, theoretically, 80 million ounces of silver,” he said. “Now that’s not entirely true because not everyone will get a 5G phone. Some of the money in the phones will be recycled. But that’s increased demand.
The sale of 5G-enabled devices is just one of the ways the technology could lead to increased money consumption. Seen as the evolution of communication, 5G is poised to usher in an era of seamless connectivity – an era that Newman says will lead to the introduction of more devices and apps.
“By that I mean the ability for others to develop applications, which can now work given this much greater bandwidth for transporting information,” he said. “But in terms of consumer devices, whatever they are, you also have a pretty positive result (in terms of the price of money).”
Lowest Silver Price: Peak Production?
Moving away from demand, the amount of silver available also contributes to price action. Total annual production is expected to increase 11% year-over-year in 2021, which translates to 68 million ounces.
Silver mine production is accounted for from 2011 to 2019 through the Silver Institute.
Metals Focus expects annual production to reach 912 million ounces in 2023, a record high. But Adam Webb, the company’s director of mining supply, was hesitant to use the term “silver spike” because it’s possible new projects will come online, especially in a higher price environment.
Morgan agreed that it is premature to say the silver peak has been reached. “I’m aware of probably two or three projects that are in the billion-ounce category,” he said. “So I don’t think we’ve hit peak production yet…I’m aware of a couple of mega fields that will grow significantly for a few years.”
Morgan also expects to see increased M&A activity in the space over the next few years.
“Absolutely. The big boys will have to capture deposits, there aren’t that many,” Morgan said. “You know, silver is very scarce, so you’ll see mergers and acquisitions or joint ventures.”
In 2019, global silver demand increased slightly, reaching 991.8 million ounces. Mining supply came in at 836.5 million ounces, indicating a widening gap that could provide price support.
The recycling sector is also a secondary source of money. In 2019, that flow was 169 million ounces, but the recycling space is unlikely to keep pace with white metal demand.
Lowest Silver Price: Mine Supply and Production Costs
Looking further into the supply of white metal, another key aspect in understanding how low the price of silver could go is the cost of production.
It is important to note that the cost of producing silver varies depending on the company and the project. This is because the majority of silver production is a by-product of other mining operations. In fact, only 30% of total annual production comes from primary silver producers.
“So 71%, to be precise, in 2019 came as metal by-products from copper, lead, zinc and gold mining, mostly,” Webb explained. “These operations that produce silver as a by-product, the economics of these operations means that even if the price of silver goes down, they will still produce it because their profitability is based on the raw material that they produce.”
Secondary silver producers are driven by the price of their commodity, Webb noted. Silver market volatility is not a motivating factor behind their silver production.
For the 30% of primary silver miners, the price of the white metal dictates whether they make a profit or have to go into maintenance. Of course, the cost of transportation, labor, company overhead, and other project-related expenses are also factors that miners need to consider.
“Generally speaking, when looking at cost, you tend to look at the 90th percentile. If the price of silver is above this 90 percentile, it would incentivize high cost trades to connect. If the price falls below that 90 percentile, it usually means some mines will close,” Webb said.
In the first quarter of 2020, the “90th percentile was around US$19,” the mining supply manager added. He also noted, “At current prices, nothing is going to close, the price would likely have to drop below around $19 an ounce for production to halt.”
Generally speaking, Morgan thinks the silver should fall below the mid-to-teens before the mines close. “Somewhere in the ballpark between US$15 and US$17 is the bare minimum,” he said.
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Securities Disclosure: I, Georgia Williams, have no direct investment interests in any of the companies mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or completeness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the views of Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.