Is the Terminal Meltdown of Silver Underway?

In a difficult operating environment where silver appears caught in an intractable slump high cost producers such as Endeavour Silver Corp. (TSX:EDR)(NYSE:EXK) appear unattractive investments.

| More on:
The Motley Fool

A bearish brew of a strong U.S. dollar, higher interest rates and firmer economic growth are all creating formidable headwinds for precious metals. Even fears of an emerging market crisis and Trump’s inflammatory rhetoric regarding trade have all failed to breathe life into gold and silver.

While gold recently recovered to be trading at over the psychologically important US$1,200 per ounce mark, silver remains stuck below US$15 an ounce and plumbing prices not seen since the massive commodities slump of early 2016. This has led to claims by some analysts that it offers a stellar investment opportunity because it will rally substantially. It is difficult to perceive any positive catalysts for silver that will act as a powerful tailwind for the precious metal, however.

Now what?

Among the most significant problems facing silver is that the traditional relationship with gold appears to be breaking down. This is because unlike gold, it possesses considerable utility that sees it consumed in a wide range of industrial applications because of its conductive properties. These include the fabrication of electrical and electronic components, photography and solar cells.

Nonetheless, industrial demand for silver has not risen as strongly as predicted and in fact between 2013 and 2017 demand was 1% lower. This was primarily because of declining consumption in electrical and electronic processes, which had fallen by a notable 9% over that period and a whopping 12% reduction of its use in photography. Even the rapid growth in demand for its employment in the fabrication of photovoltaic cells failed to make up for this drop. There are signs that industrial consumption of silver could fall further as manufacturers seek lower cost substitutes.

There has also been a sharp downturn in demand for silver bullion for investment purposed with the consumption of silver in coins and bars plunging by 37% between 2013 and 2017. This can be attributed to a range of factors; key being a saturated retail investment market in silver bullion and the massive surge in the popularity of Bitcoin as well as other cryptocurrencies. It is speculated that the rapid growth of digital currencies has attracted large volumes of investable funds, which would traditionally have been directed to alternate assets like silver.

Meanwhile, as demand has declined supply has grown to cause the physical supply deficit that existed over the last four years become increasingly smaller. For 2017, it was roughly a fifth of what it had been in 2013 and there are signs that it will continue to diminish. This is because production is growing at decent clip as miners move to ramp up output despite weaker prices. By 2017, silver production from mining was more than 3% greater than what it had been in 2013 and there is every sign that it will keep growing.

Despite weaker silver, primary silver miners are focused on boosting production. The world’s fourth largest silver miner, Endeavour Silver Corp. (TSX: EDR)(NYSE: EXK) has forecast that 2018 silver output will rise by a whopping 20% compared to 2017, whereas the third-biggest Pan American Silver Corp. has forecast a more moderate increase of around 6%.

It should be noted that primary silver miners are only responsible for around a third of the global annual supply of the white metal, the majority is produced as a by-product from mining other metals such as copper, lead and gold. Higher base metals along with gold rallying above US$1,200 an ounce have all triggered a sharp uptick in activity among miners, which means that silver production will grow at a brisk pace further expanding supply. 

So what?

Based on traditional fundamentals, it is difficult to see any positive catalysts that will drive silver higher. The precious metal is caught in an intractable slump with little to no upside for the foreseeable future. This makes primary silver miners, which are exceedingly reliant upon extracting silver to drive profitability and have high operating costs such as Endeavour Silver, which reported second quarter 2018 all-in sustaining costs (AISCs) of US$17.28 per ounce, unattractive investments.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Metals and Mining Stocks

Agricultural harvesting at the last light of day, aerial view.
Dividend Stocks

Potash Power Play: Why This Overlooked Commodity Could Be Canada’s Trump Card

Canada’s potash dominance gives Nutrien a strategic edge as trade tensions rise, making this overlooked commodity worth watching closely.

Read more »

running robot changes direction
Stocks for Beginners

Canada Doubles Steel and Aluminum Tariffs to 50%: What it Means for Algoma Steel Investors

Higher tariffs can help a Canadian steelmaker win orders, but they don’t guarantee profits, and Algoma still needs to prove…

Read more »

heavy construction machines needed for infrastructure buildout
Metals and Mining Stocks

Why Algoma Steel Could Be Canada’s Best Tariff-Retaliation Play

Canada’s escalating tariff battle with the United States could give Algoma Steel’s growing focus on domestic plate demand an important…

Read more »

gold prices rise and fall
Metals and Mining Stocks

Down 1% After Earnings, Is Franco-Nevada a Good Stock to Buy Now?

Franco-Nevada stock could be a good long-term hedge for fiat currency and inflation, especially when the stock pulls back meaningfully…

Read more »

panning for gold uncovers nuggets and flakes
Metals and Mining Stocks

Down 5% After Earnings, Is Barrick Gold a Good Stock to Buy Now?

Barrick Gold stock slid after record Q2 production and a $4 billion Newmont deal. Here's whether the pullback is a…

Read more »

bank of canada governor tiff macklem
Metals and Mining Stocks

1 Stock That Could Surge as Canada Launches Tariff Retaliation

Tariffs could tilt more Canadian steel orders toward Algoma, but only if its turnaround and new furnaces deliver in time.

Read more »

investor looks at volatility chart
Stocks for Beginners

The Best Undervalued Stocks I’d Buy Right Now

Two profitable Canadian royalty stocks have slipped into “oversold” territory (RSI below 30), potentially creating a rare clearance moment near…

Read more »

todder holds a gold bar
Metals and Mining Stocks

1 Canadian Stock I’d Buy as Trade Tensions Heat Up Again

As trade tensions between Canada and the U.S. heat up again, this Canadian royalty giant could offer investors the stability…

Read more »