Silver frequently disappoints investors, but according to Kaylie Pferten, there might be potential for more gains now
Silver seems to be unstoppable. Not even fifty dollars an ounce. The price of silver is at its highest point ever, £50 per ounce. It never succeeded in surpassing that level, which it first attained in 1980 and then again in 2011. It is difficult to imagine a price in any market that is as much of a psychological barrier as £50 silver. Silver managed to sail through it this week, though.
Because they occasionally appear in the silver markets, we may even be facing a shortage of supply. The recent price spike has increased investor demand, which has resulted in a shortage in London, where supply was already limited. The cost of leasing the metal has increased by as much as 30% in the last few days.
From the usual three US cents to 20 cents, bid-offer spreads have increased. Usually, there is a 30 cent/oz difference between the London spot price and the Comex future price. All of a sudden, silver has gone into backwardation, with the spot price now exceeding the future price at £3/oz. During the explosive growth of silver in 1980, that also occurred. Coincidentally, if you factor in inflation, the £50 silver price comes to about £200 per ounce. In case you wanted a glimpse of what is feasible.
Traders are now transporting 1,000 oz bars from Comex vaults in New York to London due to the backwardation. Remember that silver is heavier than gold, and the price difference justifies the shipping expenses. Flying is not cheap.
Since the market has been in deficit for five years, demand has outpaced supply, which is why there is such a shortage of silver. Around 150 million ounces are lost each year, and London's stock has decreased by a third since 2021. A peak of 900 million ounces of silver were produced annually from mines worldwide in 2016. Since then, it has been between 830 and 860 tons.
An increase in silver demand.
In terms of demand, solar panels have been the main factor. The annual demand for silver in photovoltaic cells was continuously less than 100 million ounces until 2021. It's nearly 250 million ounces now. It is unlikely that this appetite will wane given how electrifying the world is.
It's noteworthy that exchange-traded fund demand is still lower than it was in 2021. To put it another way, investors have not yet made their commitment. More investment demand is possible, which would further push prices upward.
Even though I am hesitant to accuse others of manipulation, I have never been able to fully explain the ridiculous levels of paper silver, which add even more potential for price increases. If paper contract holders want physical delivery, however, there could be a shortage because there are roughly 360 paper contracts for every physical contract. The price of silver reached £50 in 2011. It also took place in 1980.
Keep in mind that silver typically moves more and later in bull markets. We are currently witnessing that. Gold is generally accepted to be in innings six of nine, but silver may not even be in innings three, according to a recent poll I conducted on X. I attributed that to silver bugs' overconfidence. Ever since 2022, the market has been growing. Just silently. However, in a bull market, you can't be overly optimistic. It's the ability to recognize when it's over.
According to chartists, the cup-and-handle pattern is considered to be very bullish. For more than 50 years, Silver has located one. Generally, you would set a goal that matched the cup's height: the distance between the cup's bottom (£4) and rim (£46). That means that £96 is our target price. Who knows how much the miners would have to pay for that.
Don't use silver excessively.
However, keep in mind that this is silver. It will let you down if it can. For twenty years, I have covered this market. It is marked by years of waiting, years of losses, and bear markets, interspersed with sporadic bursts of optimism. We are currently experiencing one such spike.
Everyone says that this time is different. I have no doubts about the bull market's durability. Nevertheless, it remains silver. Don't overdo it. The benefits of owning silver are numerous. Know why you own it, though, and don't do it for the wrong reasons.
Gold and silver are not interchangeable. Indeed, it was once a monetary metal, but its primary function was as a medium of exchange rather than a store of wealth, much like gold's primary function was to store wealth rather than act as a medium of exchange. Gold is still used by individuals, organizations, and central banks as a means of storing wealth today. They don't make use of silver. Although there are ETFs and some of us own silver coins and bars, silver is not nearly as significant as gold in this regard. Silver has long since ceased to be used as a medium of exchange.
There are still many applications for silver, which is a stunning, alluring, and magical metal. The production of more computers, smartphones, batteries, medical equipment, and, of course, solar panelsthe source of demand that is expanding the fastestwill only raise the demand for silver. For the past five years, the market has been in deficit, which has led to a shortage of above-ground stock, primarily from recycling.
There is always a chance of a massive short squeeze as dealers rush to get physical metal to fulfill paper contracts, given the remarkable paper-to-physical ratio of 361 contracts for every physical ounce of silver. This appears to be happening right now, but it happens occasionally. It is not, however, a permanent situation.
The ratio of gold to silver.
In the past, the historical monetary ratio between gold and silver has always been approximately 15, with the former being 15 times more abundant than the latter. Many have argued that we will eventually return to that ratio as a result of this. Silver would be worth £266 per ounce if gold stayed at about £4,000. However, since silver's value as money is declining, that ratio is not returning. Don't let your illusions fool you. We only have a chance of ever hitting a ratio of 15 during a spike, like the one that occurred in 1980, but things will soon fall back to normal. At the moment, the ratio is 80.
No other metal exhibits the same price action as silver. When the Hunt brothers attempted to control the market in the 1970s, it veered around £5/oz before exploding to £50. Following its demise, it wandered around the £5 mark for the next twenty-five years. Things became more active after 2004. When it debuted to £50/oz once more in 2011, there were significant ups and downs. Then it went down once more. For another ten years, it fluctuated between £15 and £30, but silver has been steadily rising since the US froze Russian dollar assets, mostly thanks to the gold market's bull market.
That's a big line in the sand for silver at £50. This might or might not be a real breakout. However, we are currently at £52. Overhead resistance is absent. We typically see price action that includes a slight rally, a pullback to the breakout level, a retest, and then a run to new highs. Our journey towards those cup-and-handle highs begins at that point. I don't think it's impossible to make £100 silver. But when we get up, I'll be getting lighter.
Sierra Madre Gold and Silver is my favorite silver play, my biggest silver position, and one that I have previously covered (Canadian Venture Exchange: SM). Some readers of BFIA and Flying Frisby got into this one a few years ago for less than 30 cents. It now occupies a magnificent position at C£1.45. It has the potential to rise. If silver reaches £100, this stock might drop to £10.
Where can I buy silver right now?
This Canadian-listed company, which has a market value of C£270 million, purchased the La Fortuna producing mine in Mexico from First Majestic (NYSE: AG), a major player in the silver mining industry. During the downturn, First Majestic had placed it under care and maintenance.
The partnership with Sierra Madre was formed because, although the asset's quality was undeniable, it was thought to be too small for a company the size of First Majestics to bring back into production. When Sierra Madre put it back into production, it took several years and met most of its goals ahead of schedule, but the price per ounce was more than expected at £30/oz.
After January 2025, full-scale commercial production started. At the moment, 700,000 ounces are produced annually. Also, there are a number of possible catalysts for the stock. First, by replacing rented equipment with its own, the group will increase efficiency and turnover, lowering production costs from £30/oz to roughly £21 over the next two years.
Additionally, the company processes 300350 tonnes of rock every day. By the second quarter of next year, processing will increase to 750800 tonnes thanks to recent investments in the company and upgraded equipment. That is, production will double. The miner hopes to double that amount once more by the end of 2027. Recall that this business consistently meets its goals, which is uncommon in the industry.
It is estimated that the La Fortuna mine will last for at least 15 years. However, exploration is where the majority of this stock's potential lies. More than a million ounces of silver were produced annually by the numerous former producing mines on the property, the majority of which closed in the early 20th century. Mineralized veins spanning 60 kilometers have been found through geologic mapping. Additionally, the group has several historical resource reports, one of which states that 200 million ounces were planned for the 1990s but never came to pass because of the bear market. In other words, there's a lot of metal there.
"This is the reason we purchased the property," CEO Alex Langer informs me. Perhaps "the largest undeveloped silver district in Mexico" is what it is. Next year, exploration will begin. At one of the properties, First Majestic planned to build a mill that could process 3,000 tonnes of rock every day. Since it has a large stake in Sierra Madre (38 percent), it can relax and let Sierra Madre handle the work, so why didn't it investigate the property itself?
Growing what was a development playnow a junior producerinto a mid-tier silver producer is the aim. Silver is rising at the same time as the expansion plans. This seems to be the ideal time in the cycle.
The company's profits double if it produces silver at £30 and its price increases from £40 to £50. If the price of silver increases to £60 and production costs drop to £20, they will double once more. Profits will double again if production doubles. This bet becomes asymmetric if the price of silver reaches £100 and this company makes a significant discovery that makes it a district-scale producer.
Those who invested 30 or 50 US cents in Flying Frisby and BFIA might be tempted to profit. But there's every reason to keep holding. Although the price of silver ultimately determines whether this miner succeeds or fails, there is still a great deal of room for expansion even if silver simply remains stagnant.
The Secret History of Gold: Money, Myth, Politics, and Power, written by Kaylie Pferten, is available at all reputable bookstores. He is the author of the investment newsletter The Flying Frisby, which can be found at theflyingfrisby.com.
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