Apparently, the production cost of silver is $21.40
Silver at current levels of $ 21.25 / ounce seems cheapcompared with $1,345 an ounce for gold. YTD gold has (+) 12% while silver (+) 7.5%. Silver price follows the gold price typically. When Gold falls sharply or rises sharply, it goes further than gold, indicating higher volatility but always moves with it. Given the $21.40 production cost of silver, ETF and silver coin demand, during current year its prices could witness a rise. In market parlance, silver’s on the “verge of breaking out” with $22 and $25 seen as important levels. Market for silver is very small in comparison with gold.
Due to demand from end user industry such as solar panel, electronic appliances, mobiles as well as strong investment demand from China and India, silver gets different kind of support than gold. Since last six months with prices remaining below the production cost, silver mine production has been distributed too. There is also fear about supply crunch due to increasing physical demand and weak production. All these events give an indication about boom. During last year, investors withdrew only 1.3% from the silver ETF’s while 36% from the gold ETF. This event suggests that now silver is becoming gold of the poor. If we look from a different angle, during 2013 gold prices crashed by 28% due to 40% decline in physical holding of SPDR, the biggest global gold ETF contrary to its holding in the silver ETF increased by 0.5%.
Demand for silver coins also increasing rapidly apart from ETF. According to the report of the US Mint, during 2013, the sale of one ounce (31.10 grams) silver coins was recorded 42.7 million ounces, which was merely 9.9 million ounces during 2007. Of course, an ounce of gold costs more than 63 times that of silver.
If we broadly assess gold and silver, the prices of both precious metals have increased parallel to crude oil, food, petrol or average home prices as well as that of every essential commodity. Prices have dramatically increased for 100 years since 1913, the birth of the Federal Reserve – our inflation machine.
Worse, since Nixon abandoned the partial gold backing for the dollar in 1971, the inflation machine has accelerated. Let’s historically look at gold and silver prices. During 1913, the average annual price increase for gold was 4.32% at $20.64 while that of silver by 3.78% at $0.58. In 1971, when the US abandoned the gold standard (the practice of keeping gold reserve to print dollar), gold prices rose by 8.80% to at $40.80 while that of silver rose by 7% to be at $1.39. In 2001, the average percentage of both increased rapidly to be at 14.74% and 15.17% respectively. The historical price average during 2013 was recorded $1411 for gold and $23.79 for silver. During this period, the average prices of essential commodities also rose like gold and silver.
Our view is for the entire 2014. Silver will outperform other metals in 2014.
Source: Bloomberg and Reuters articles are sources
Disclaimer: As usual, no part of the article should be construed as investment advice. Exercise your due diligence. Midnight breakfast will not be responsible for any kind of loss incurred by anyone from trading using the views given above.