Two huge, overlooked drains on global silver supplies

Precious metals markets got dealt a technical blow after gold and silver sold off on Thursday. Stronger-than-expected economic reports boosted the U.S. Dollar Index, which in turn gave futures traders all the rationale they needed to pound longs with sell orders. 

Silver traded down to a slight new 2021 low. Unless prices recover quickly here and carve out a double bottom, stop-loss selling could send spot silver toward lower-range support levels from last year. 

Meanwhile, gold is faring relatively better with prices still holding well within this year’s trading range. The gold to silver ratio has risen from a low of just under 64:1 in February to 77:1 as of Thursday’s close. Put another way, silver is now very cheap versus gold.

The question facing metals investors is whether these price drawdowns represent a change in the long-term fundamentals from bullish to bearish. The answer depends on whether physical supply is set to grow faster than demand. 

The head of First Majestic Silver, one of the world’s leading primary silver producers, sees mining output on a declining trajectory and demand on a rising trajectory. 

First Majestic CEO Keith Neumeyer gave a presentation this week to the Denver Gold Group. Here is an excerpt from his talk:

Keith Neumeyer: So silver production's been in decline really since 2016. And we're consuming a billion ounces a year and then we're mining less and less every year. The ratio has now fallen to seven to one. So, for everyone ounce of gold being mined worldwide, we're only mining even ounces of silver, which is a pretty shocking stat. Considering we're trading at over 70 to one. You want to explain that to me, feel free.

I look at silver as a very strategic metal. In the last few years, we've seen two industries come up, the electric car industries consuming just shy of a hundred million ounces of silver. Just to give you some stats. There's 1.4 billion fuel combustion cars sitting on the surface of the earth right now. There's 90 million cars produced every year of which 5 million cars last year were electric.

Now with governments around the world, wanting to remove fuel combustion cars from our streets, by some say, 2030 others say 2040. That's a lot of cars to replace. Electric cars obviously need to be produced at a much faster rate than they currently are in order to meet these government demands. At a hundred million ounces of silver in one industry growing quite dramatically over the next couple of decades, that's going to take a lot of silver.

Solar panels, also around a hundred million ounces of silver a year. And of course, this industry continues to grow. In recent years, we now have two industries that are consuming over 20% of the world production of silver. And that's why above ground supplies are diminishing so quickly because of the deficits just continually occur every year and have occurred every year for the last decade. And it's something that the investment community is not picking up on.

Another important driver of gold and silver demand will come from the bullion market. Investors who buy physical coins, bars, and rounds can certainly influence the supply and demand dynamics. 

Bullion buying surged last year amid the pandemic, driving premiums higher and ultimately spot prices as well. Investment demand has since cooled off to some degree. But it could surge at any time if another fear-driven event catalyzes safe-haven buying. 

A number of political threats now loom. Congress and the White House are moving to raise taxes on corporations and investors to help pay for their $3.5 trillion spending wish list. The Biden administration also plans on beefing up the IRS by doubling its enforcement budget and hiring thousands of new agents to sift through Americans’ personal finances. 

As if that weren’t enough cause for concern, the Treasury Department is seeking the power to identify and analyze every transaction over $600 that goes through an individual’s bank account.  And Congressional Democrats are pushing to begin breaking the promise of tax-deferred retirement accounts by capping the dollar amount that IRA balances can grow to – and reducing options of IRA owners to hold assets that are not managed by Wall Street.

All these threats to wealth accumulation and financial privacy point up the advantages of holding physical precious metals outside of the banking system. Smart investors both large and small are taking the opportunity brought by recent market weakness to do just that. 

Australia’s Perth Mint just reported a record financial year with over $26 billion in transactions. The Perth Mint is known for its one-ounce gold Kangaroo and silver Kangaroo coins. They tend to be available for slightly less than other government-minted coins, making them an excellent value. The Perth Mint also recently released its 2022 “Year of the Tiger” coins, available from Money Metals Exchange in both gold and silver.

Meanwhile, the U.S. Mint is getting hit with heavy demand for its new “Type 2” gold and silver Eagles. These coins represent the first updated design of the iconic American Eagle since the series was launched in 1986. They now feature a close-up of a majestic bald eagle on the coin's reverse side.

Which coin or round designs are most aesthetically pleasing is ultimately a matter of personal opinion. The important thing from an investment standpoint isn’t the design on the product. It’s what’s inside that counts. 

In a bull market for precious metals, the most important factors driving your total returns are the number of ounces you own and the price you paid for them. It’s really that simple. 

So, when opportunities exist to buy on the cheap, make sure you’re taking full advantage of them by sticking with low-premium bullion products offered by a reputable dealer.