Silver Notches Best Month Since 1979 / Commodities / Gold & Silver 2020
Silver prices continue togain this week, rising off the biggest monthly rally since 1979, amid a slew offactors that are pushing precious metals higher.
As of this writing,silver was nudging $27 an ounce, adding more momentum to its steep climb above$20, which began around the third week of July.
Silver last month gainedan astonishing 35%, as investors sought shelter from pandemic turmoil and lowor negative interest rates, while industrial demand for the metal recovered insome parts of the world. Its July performance, seen in the hockey stick-shapedgraph below, makes silver the darling of the commodities complex.
The story behind itssuccess - we were among the first topredict the potential for a silver breakout approaching that of 2011- is one of two demands, reflecting silver’s role as both a monetary and anindustrial metal. There is also a supply narrative to silver’s rise, withrespect to Covid-related output reductions at silver mines in Peru and Mexico,from which 40% of the world’s silver is produced.
Most of the investmentdemand is flowing into silver ETFs. As of June 30, global ETF holdings hit anew record of 945 million ounces, roughly 14 months of mine supply, accordingto The Silver Institute. ETF growth in the first half of 197Moz easily beat thehighest annual inflow of 149Moz set in 2009.
Silver bullion coin salesjumped an estimated 60%, year on year.
By far the largest silverETF is iShares Silver Trust (SLV). SLV owns nearly half of all the silvercontrolled by the world’s silver funds.
“SLV is getting 10 timesmore demand for silver than is available, in a normal year,” says Eric Sprott,the billionaire resource investor and self-proclaimed silver bug.
The amount of silverbeing demanded by silver ETFs (a silver ETF is backed by physical silver), isfar larger than the physical silver market, which is actually quite small. Thedisconnect is driving silver prices higher.
Silver’s industrial usesinclude solar panels, electronics and the automotive industry. The solar powerindustry currently accounts for 13% of silver’s industrial demand. More andmore silver will be demanded for its use in solar photovoltaic cells, ascountries move further towards adopting renewable energy sources. Around 20grams of silver are required to build a solar panel.
According to a recentreport by CRU Consulting, the amount of electricity generated by solar power isexpected to increase by 1,053 terawatt hours (TWh) by 2025, which is nearlydouble what was produced in 2019.
All of that solar will bea major boon for silver.
CRU expects PVmanufacturers to consume 888 million ounces of silver between now and 2030.That’s 51.5 million oz more than the combined output from all the world’ssilver mines in 2019.
5G technology is set tobecome another big new driver of silver demand.
According to the SilverInstitute, The electronic components that enable 5G technology will relystrongly on silver to make the global 5G platform perform seamlessly. In afuture 5G connected world, silver will be a necessary component in almost allaspects of this technology, resulting in yet another end-use for silver in analready vast and versatile demand portfolio.
Among the 5G componentsrequiring silver, are semiconductor chips, cabling, microelectromechanicalsystems (MEMS), and Internet of things (IoT)-enabled devices.
The Silver Instituteexpects silver demanded by 5G to more than double, from its current ~7.5million ounces, to around 16Moz by 2025 and as much as 23Moz by 2030, whichwould represent a 206% increase from current levels.
Although weak consumerconfidence because of the pandemic has crimped demand for some of silver’s enduses, including autos and consumer electronics, governments’ recently announced infrastructureinvestment programs are expected to lift silver industrial demand.
On the supply side, amonga second wave of covid-19 shutdowns (the first wave was in March) are some ofthe biggest producing silver mines in the world. Peru, where at least 1,000mineworkers have tested positive for the virus, is considered most at risk ofoutput disruptions, especially considering most of the mines are undergroundwhere social distancing is difficult.
In early July, miningcompanies in Peru were forced to keep operations suspended, and halt new ones,as the number of coronavirus cases topped 300,000. (it now has 439,890 cases, according toWorldometer) Among the companies affected are Trevali and its Santandersilver mine, Hochschild Mining’s Inmaculada, and Fortuna Silver Mines’Caylloma.
Investment projects suchas Anglo American's $5 billion Quellaveco, Minsur's $1.6 billion Mina Justa andChinalco's $1.5 billion Toromocho expansion have been delayed by severalmonths.
In Mexico, the world’slargest silver producer, a surge of covid-19 cases in March led to thesuspension of non-essential services. Among the companies forced to temporarilyhalt their operations, were Newmont Mining Argonaut Gold, Pan American Silver, SierraMetals, Excellon Resources and Alamos Gold.
The Silver Institute is predictinga 13% decline in silverproduction from Latin America this year - equivalent to 67million fewer ounces - with global supply set to fall 7.2%. All told, thesilver market will be in deficit for the first time in five years, according toSI.
The gold-silver ratio is the amount of silverone can buy with an ounce of gold. Simply divide the current gold price by theprice of silver.
When gold is over-valuedcompared to silver, investors take advantage of the arbitrage opportunity, byselling some of their gold holdings to buy silver. The opposite occurs whensilver is over-valued compared to gold.
We have seen thegold-silver ratio decline from a multi-decade high of 127:1 in March, to thecurrent 75:1, meaning it takes 75 oz of silver to buy 1 oz of gold. This isstill high by historical standards, meaning silver remains undervalued comparedto gold, and will likely move higher, towards the average historical ratio of55:1.
$2,000 gold at 55:1implies a silver price of $54.54. Silver hit a record $50 an ounce in April,2011. We believe silver will re-test $50 in the not too distant future.
We have the same bullishindicators for silver as for gold, in terms of safe-haven demand incitinginvestors to park their money in silver bullion, silver ETFs or silver miningstocks, and the fact that silver is not subject to inflation like papercurrencies.
Its hundreds ofindustrial applications make silver very responsive to the condition of theglobal economy. Improved economic conditions resulting from countriessuccessfully reopening from coronavirus lockdowns, will be great for silverexplorers, and their investors, who know the best leverage against risingmetals prices is to own an early-stage junior with a sizeable and scalabledeposit in a mining-friendly jurisdiction.
Silver supply issensitive to mine production cuts - as we have seen recently withcoronavirus-related stoppages. However, silver is also vulnerable to supplyslippage, more so than gold, because there are relatively few pure-play silvermines.
Only around 30% of annualsupply comes from primary silver mines. Over two-thirds is sourced frompolymetallic ore deposits, including lead/zinc operations and coppermines.
To gain maximum exposureto silver’s bull market, we suggest investing in exploration companiestargeting silver; this minimizes the risk of other co-product metals dilutingthe deposit and dragging down its value.
Our two picks are SilverDollar Resources and Mountain Boy Minerals.
Silver DollarResources (CSE:SLV) has a tightly held share structure that includes ownership byacclaimed resource investor Eric Sprott. SLV has started field work at one oftwo prospects in the famous Red Lake District of northwestern Ontario, where anumber of gold juniors including 2019 belle of the ball Great Bear Resources(TSX-V:GBR), are proving up gold ounces in a new “Red Lake 2.0” areaplay.
Silver Dollar is alsopoised to activate a letter of intent (LOI) with First Majestic Silver Corp.(TSX:FR) for the La Joyasilver-copper-gold property in Mexico.
Under the LOI, SilverDollar would acquire up to a 100% interest in First Majestic’s La Joya SilverProject, located in the State of Durango in the Mexican Silver Belt.
A 2013 resource estimateoutlined 159.7 million inferred silver-equivalent ounces at a 30 grams pertonne cut-off. Doubling the cut-off grade to 60 g/t yields a more conservative92.9 million AgEQ ozs.
To acquire an 80% interest in La Joya, Silver Dollar will payFirst Majestic $1.3 million in cash over four years, issue 19.9% of its shares,incur $1 million in exploration expenditures within five years, and grant FR a2% NSR royalty. If Silver Dollar spends the million dollars within three years,First Majestic will waive nearly half, or $600,000, of the cash optionpayments.
SLV can earn theremaining 20% by issuing First Majestic additional shares equal to SilverDollar’s then-outstanding common shares, within five years.
According to SilverDollar, the exploration potential at La Joya is considered excellent, giventhat it hosts the La Joya mineralized trend as well as the Santo Nino andColoradito deposits. The Ag-Cu-Au property consists of 15 mineral concessions totaling4,646 hectares.
Mountain Boy Minerals(TSX-V:MTB) is active in northwestern British Columbia’s Golden Triangle, inmy opinion, one of the best jurisdictions for base and precious metalsexploration, for companies like MTB that are close to power, highway and portfacilities.
Mountain Boy hasassembled a large land position centered around its flagship American Creekproject and zeroed in on three targets for its summer drill program.Work this year on the other projects - BA, Surprise Creek and Southmore - isintended to set them up for larger programs next year, perhaps funded by jointventure partners.
In 2006, Mountain Boyconducted a 19-hole drill campaign around the old Mountain Boy silver mine thatlies at the center of American Creek. A small underground drill was used. Theaverage hole length was 47 meters – barely scratching the surface. The focal pointwas the aptly named High Grade Vein, which was the heart of the historicmining. Six holes in that vein intercepted more than a kilogram of silver overat least a meter, with the highlight being hole 2006-10 which hit 5,258g/t over 5.18 meters. (5 kg is 160 troy ounces)
CEO Lawrence Roulston andhis team are going for high-grade in the Golden Triangle Although it’s stillearly for Mountain Boy, a discovery hole on any of these targets could lightAmerican Creek up like a Christmas tree. We expect a slow ramp-up in the firstphase and growing interest once the drills start turning in late summer tofall.
By Richard (Rick) Mills
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