Silver has been rallying off the charts, fueled in part by some of the same issues behind the gold rally: very low interest rates, easy money and fear of inflation.
But, here are three things to consider before jumping into the pool.
- Silver cost of production is really low. How low? Brian Hicks, U.S. Global Investors Co-Manager, Natural Resources provided the following cash cost per once of silver on a few companies they follow:
Pan American Silver — $5.90/oz (net of by-product credits)
Silver Wheaton —company typically buys silver production streams at $3.90 per ounce.
Coeur D’Alene Mines — reported cash costs of $4.87 per ounce
Hecla Mining — after netting out its lead production, actually reported negative cash costs of -$1.92/oz for the first 9 months of the year
With the price of silver at over $27 per ounce — the highest in 3 decades — I expect silver miners would be thinking about nothing but ramping up production. Or at the very least, might be considering that it’s time to hedge. I know if I were on a metals desk, I would be certainly be marketing the concept that forward sales or options at these prices might be worth a look potentially, putting downward pressure on prices.
But, that only covers about 40 percent of the mined silver market. David Wilson, Director of Research at Societe Generale in London says about 60 percent of silver production is a byproduct of other mine production including zinc and copper. And while global demand for these metals is on the rise, mining operations are generally stretched and he does not expect they will be able to increase production to accommodate increased demand.
- Central banks do not hoard silver. That’s right—central bankers don’t buy silver, they buy gold. And pretty sure there aren’t any central bankers lying in bed thinking …where can I find a vault big enough to hoard the silver equivalent of $1 billion in gold bars — taking one very long-term buyer out of this market.
- Volatility. Silver is a smaller and more volatile market than gold—it goes up fast and could come down faster. I know of no silver volatility index (and the trading desk at Soc-Gen didn’t either) so, it’s hard to quantify. But, take my word, it moves.
None of which stopped investors from piling into silver today. Called a “poor man’s gold” by many, it is a cheaper alternative to gold for investors looking to get long hard assets—the iShare Silver Trust almost traded more than double its 3-month average daily volume today.
Momentum is still to the upside, but most of the investors and money managers I have been speaking to suggest a more cautionary long-term view.
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