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Peak silver or just hype?

07 May 2021

Today we pick up where we left off last week. Let’s finish our deep dive into silver. 

But before I do, it would be remiss of me to not talk about what gold did overnight…

The yellow metal jumped almost US$30 (AU$38) per ounce while we were sleeping, pushing through the psychologically important level of US$1,800. Thus, the shiny stuff started its Australian trading day around US$1,814 (AU$2,332).

Does this mean the next leg up is here?

Long time gold investors know one rally doth not make a trend. I would anticipate some oscillation around this morning’s price. A less market-y way of putting it would be, expect some up and down action, but the long term fundamentals look good.

Speaking of long term fundamentals, did you catch the RIU Resources Round-Up this week?

ABC Refinery’s Global General Manager Nick Frappell opened the resources forum with a 400 oz gold bar next to him on stage…

That’s a lazy AU$944,000 brick laying around in the open!

Apparently, Nick’s speech was quite something. So much so that someone came up to Nick shortly after and said ‘That was the greatest presentation on gold I have ever seen’.

That’s one heck of a compliment.

What did Nick say to earn such an honour? Well, hold tight. We’ll have a copy of his presentation to share next week.

Keep your eyes on your inbox for that. Now, let’s get down to business.

Man’s ‘first’ money

When it comes to investing, many people often forget about the ‘other’ precious metal. As a former analyst I was guilty of that too.

How does silver fall off the radar for so many people? Silver spends a long time doing nothing…then out of nowhere it shoots higher…only to fall back and settle into a predictable trading range once more.

In comparison, the price of gold makes for sexy headlines and juicy content.

There’s almost always something happening in the gold market to chew on. Same goes with platinum and palladium. These are two unique metals that also come with a four figure per ounce price tag. Their small market and industrial use make them a curiosity to investors.

Whereas silver gets almost no love outside dedicated ‘stacking’ forums.

Yet it’s an extraordinary metal and its utility makes silver highly sought after.

It was man’s ‘first’ money after all. One ounce will cost you less than a crisp $50 note. Its low entry price makes it good starting place for people new to bullion. Silver can be a long term store of wealth. It’s pretty. And as I wrote last week, good old ‘Ag’ is incredibly useful.

Silver is a superior electrical conductor and more ductile (can be drawn out into a thin line) than copper.

In fact, without silver our tech heavy future couldn’t happen. Keep that in the back of your mind. Because these properties are behind silver’s future demand…and something that may see the price move higher in the long run.

The question is, just how secure is the supply?  

Have we reached peak silver?

After reading about 15 different research papers on silver in the past seven days, I’ve come to two conclusions: I need a hobby outside of work and that my initial hypothesis was wrong.

I track the mining industry closely, and a common theme from many of the pure silver miners is that ore grades are falling. Yet the take away from all those papers says there’s no apocalyptic scenario or ‘peak silver’ moment around the corner. Similarly, there’s no significant reduction in probable resources.

Rather, proven reserves (the most confident assessment of what’s in the ground) for silver only miners, have fallen. However, their probable reserves (the second most confident assessment) remain steady.  

That’s important. That tells us that miners are learning more about their deposits as they mine them.

What is noteworthy though, is that while pure silver mines are seeing their ore grades falling, it’s not necessarily the earth is yielding fewer precious metals.

Miners have a habit of mining the low-grade stuff while prices are high, and the high grade ore when the prices are low. This is smart. It’s a way of maximising the lesser quality rocks when the market is willing to pay you more. 

Take heed though if you have a thing for investing in pure silver stocks. Mining the lower quality Ag for these guys could ever-so-slightly increase the all in sustaining cost (AISC).

More to the point, declining grades is impacting pure silver miners, but not miners where silver is mined as a by-product of another commodity.

Source: Metals Focus; World Silver Survey

While 26.7% of all silver mined comes from pure silver miners, almost three quarters of mined silver comes from polymetallic deposits like gold, lead, zinc, and copper.

On a global scale at least, silver as a by-product is a reliable source with no major changes to either costs or grade. Which is good. Because we are going to need lots of silver in the years ahead…

The future can’t happen without it

In spite of the investment interest in silver in the past year, industrial demand will gobble up ever increasing amounts of Ag.

Already more than 50% of silver supply is consumed by industrial use. Solar panels for example, need a whopping 105 million ounces of silver per annum.

Though it’s not the known uses of silver you should be watching, rather it’s the unknown future use that could drive silver higher.  The rapid changes in technology could put pressure on supplies – and ideally – nudge the metal’s price upwards.  

As I mentioned earlier, silver is a superior electrical conductor to copper. Yet we use copper in almost all of our electricals because it’s much cheaper. We tolerate a slightly reduced electrical signal speed for the cheaper product.

This is a luxury we may not have in the years to come.  

Our tech heavy future will need to transfer information faster than we currently do today. In some industries, silver is being used as a coating for copper cables. Doing this speeds up the signal and reduces voltage drop.

Driverless cars and electrical infrastructure are just two of the sources needing data transferred in nanoseconds (which is one billionth of a second).

Silver has moved from being our first money to a critical element we simply can’t do without.

Until next time,
Shae Russell,
Group Communications Manager, Pallion