The gold-silver association stinks, to be sure, and it’s mostly rooted in flawed reasoning, but silver has been tossed into the same speculative lump gold’s usually found in. Ergo, whichever direction gold moves, silver’s going along for the ride.The scary part: If steady and even modestly increasing demand can’t spur silver prices in an upward direction but instead lets it slip 58% from its 2011 peak, what happens if demand actually dries up?
And make no mistake — very little of the silver we consume every year is for speculative purposes like ETF holdings or bar-hoarding. A tad more than 44% of 2012’s silver consumption (of 1,048 million ounces) was used for purely industrial purposes, while only about 23% of that consumption could be considered for purely-speculative intents. Only 17% of it gets turned into jewelry.
Meanwhile, nearly half of the gold we dig up every year becomes earrings and necklaces, with another 40% of our gold supply being converted to bars and coins, or purchased by ETFs and central banks. Only about one-tenth of our annual gold production is for industrial purposes.
Yet, silver prices remain more subject to the market’s whims than gold prices are. Scary.
Silver in 2014
Inasmuch as gold is apt to continue hitting a headwind in 2014, so is silver. And yes, that includes the iShares Silver Trust.
And with silver now trading at only $20.36 an ounce, miners like the aforementioned Hecla Mining and most of the other silver miners held in Global X Silver Miners ETF are facing a tough choice: Continue to operate at a loss, or shutter mines until conditions (i.e. prices) improve. See, though they fell a bit last quarter, the average miner’s “all in” cash cost to dig up an ounce of silver was $20.08 per ounce. That leaves little room for a profit margin, and for some miners, it leaves none.
With all of that being said, there is one bright spot for the commodity heading into 2014. As of the latest data, the gold/silver price ratio now stands at a 61.9 versus the modern-era average ratio value of around 55.0. This just means that silver is undervalued relative to gold, implying silver is due to “catch up” to the norm. It’s a dubious bullish argument though, as gold could just as easily lose value – and silver could completely fail to budge — if the ratio truly is due to return to the mean.
Bottom line: The technical chart of silver says the metal will do well to move above a swath of resistance around $26.40 per ounce, while a break under the floor near $18.90 could completely pull the rug out from underneath the commodity.
Bluntly, it’s not worth the risk.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.