Supply Crunch Coming as Silver Miners Scale Back / Commodities / Gold & Silver 2019
Through the first half of 2019, silver significantlyunderperformed gold. Put another way, gold gained relative to silver –culminating in the gold:silver ratio registering a 27-year high of 95:1.
That market signal was received by the mining industry. Sincethere are few primary silver producers, and those that do mine silver alsotypically mine gold and some base metals, precious metals miners had anincentive to invest more into gold production and less into silver.
Precious metals analyst Adam Hamilton wrote in a recentcommentary, “As silver wasted away in recent years, its bombed-out pricesheavily impaired silver mines’ ability to generate operating cash flows andprofits. The silver miners were forced to adapt and shifted their focus andcapital into adding gold production rather than boosting silver output.”
Hamilton notes that the top 17 components of the GlobalX SilverMiners ETF (SIL) produced a total of 72.2 million ounces of silver lastquarter, amounting to a 4.4% year over year decline. At the sametime, their total gold output increased by 11.9%.
What this suggests is that the silver market is beingunder-supplied. In fact, the Silver Institute recorded a 2.4% global silversupply shrinkage in 2018.
And things certainly aren’t looking up this year.
Silver’s mining supply problem could be a super-bullish driverof higher prices. Higher prices will eventually incentivize increasedproduction from the mining industry. But it will take much higher pricessustained for some time in order to move the needle of mining production in anysignificant way.
Silver Mining ETF Sham: These Stocks Are Primarily in OtherMetals
As silver miners have become less silver-centric, their stockscan be expected to show less correlation to the silverprice. In fact, some stocks that have “silver” in their name derive alarge majority of their business outside of the white metal.
Consider Pan American Silver (PAAS), a $3.6 billion company thatmakes up a 5.4% weighting in the Silver Miners ETF (SIL).
While PanAmerican is indeed a producer of silver, its business comes mainly from othermetals. According to BMO estimates, only 33% of Pan American Silver’s revenuein 2019 will come from silver production.
SIL’s third-largest holding is Korea Zinc. It is base metalssmelter, not a silver miner. It processes some silver, but that particularaspect of its business amounts to just 17% of annual revenue.
Rare is the “silver” company that actually derives most of itsrevenue from silver. Since silver deposits tend to accumulate around othermetals, valuable byproducts will be extracted during the mining process. Mostsilver is produced as a byproduct of mining for base metals, so primary silvermines are few and far between.
One exception is First Majestic Silver (AG). It is the purestmajor producer, with 62% of its revenue attributable to its namesake metal.
Of course, you will never find a purer silver play than actual.999 pure silver bullion products.
The further your silver-related investments get from theunderlying metal, the more they will be driven by other factors you may notnecessarily understand or believe in.
When silver starts becoming a hot commodity again, Wall Streetwill surely supply a bevy of new “silver” equities and exchange-tradedderivative products – most of which will serve to divert casual investors awayfrom investing in silver itself.
Physical Silver Outperforms Corporate Silver
Silver bullion investors have tended to fare better than silverstock investors in recent years. Since its inception in 2010, the Silver MinersETF has underperformed the silver price by a net 25%. See the chart below… 
Despite an impressive spike in 2016, silver equities havelanguished before and since versus silver itself.
Silver companies – especially those that actually derive thebulk of their business from silver – could certainly see the value of theirshares multiplied during the next big precious metals run-up. But investing or speculatingin mining companies is inherently riskier the owning the metal itself.
Silver is plenty capable of delivering eye-popping gains far inexcess of gold’s when market conditions are favorable for the white metal.Silver’s volatility is more than some investors can stomach – in which case gold may bemore suitable in a more conservative portfolio.
Silver, however, currently offers the more compelling supplystory – combined with a heavily discounted relative valuation.
Stefan Gleason isPresident of Money Metals Exchange, the national precious metals company named 2015"Dealer of the Year" in the United States by an independent globalratings group. A graduate of the University of Florida, Gleason is a seasonedbusiness leader, investor, political strategist, and grassroots activist.Gleason has frequently appeared on national television networks such as CNN, FoxNews,and CNBC, and his writings have appeared in hundreds of publications such asthe Wall Street Journal, Detroit News, Washington Times, and National Review.
© 2019 Stefan Gleason - All Rights Reserved
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