For all the talk of how bad investors are at timing, here comes a reminder that it is just an average.
A whole bunch of people get it right all the time. They are just drowned out in aggregate.
Silver had a rough year for prices, but a record-breaking year for sales, especially for small investors.
Just last week, sales data for the U.S. American eagle silver bullion coins was released by the U.S. Mint, and it was pretty amazing.
2014 sales reached 44,006,000 ounces. The last quarter of the year was particularly frenzied, with December sales up 104% year-on-year.
This is a 1.3 million ounce increase from 2013, and an over 10 million ounce increase compared to 2012.
Go back to 2008, when the world economy was still in the process of blowing up and uncertainty was rampant, and there would be a 24 million ounce increase.
In other words, 124% more coins were sold last year than at the depths of the Great Recession.
Buying the Dip
It is a little too soon to tell, but early signs point to the trend continuing through 2015. Last Monday was the first day orders for the 2015 coins could be placed.
A whopping 2,958,000 coins were sold. Rationing was in place from the very start to keep the coins from selling out, as they have in the past.
To put that in perspective, all of January 2014 saw 4,775,000 silver coins sold. After a single day, 60% of last January’s sales total was matched.
A lot of the buying can undoubtedly be attributed to the dip in silver prices we’ve seen.
Since the April 2011 high near $49 per ounce, silver has seen a rocky decline in value down as low as about $15.75 per ounce just last month.
Buying a dip like this for an essential, and often irreplaceable, industrial and investment commodity makes perfect sense without diving into the nitty-gritty.
However, that would put silver in a different position than the closest alternative: gold.
Gold prices have been slumping over the same time period, but gold coins aren’t following the same trend.
Unlike silver, with record-breaking sales year after year, gold coin sales are in a five-year slump.
1,435,000 U.S. gold eagle coins were sold in 2009. Every year since has seen a drop, with 2014 seeing a mere 524,500 sold. That is a steep 63% drop.
That means that silver sales, in dollars, beat gold by nearly 60% last year. In 2009, 20 silver coins sold for every gold coin. Now that is up to 84 silver coins for every gold one.
The proportions of this are all wrong for the common and misguided view that silver is just a poor man’s gold, especially considering how the two precious metals have tracked so closely together for so long across many metrics.
There is definitely something else going on here. History will be the judge, but there are two strong candidates — that aren’t mutually exclusive — that explain this situation.
The Mines
First up is the problem miners face in this low-price environment.
This is simple Econ 101, and I’m still amazed at how many people who are otherwise financially literate haven’t even considered this.
Silver prices are unsustainable. As in, cannot-make-a-profit-must-shutter-the-mine unsustainable.
This isn’t just a debt management and liquidity issue like we’re seeing with shale oil companies.
They will have to stay liquid or go bust in an environment with a glut of competing sellers who find a Pyrrhic victory advantageous.
There is no glut in silver though. In fact, projected shortfalls of supply in this decade were common projections even with silver at its peak price.
At this point silver miners have cut out the fat. Further job cuts or production tweaks aren’t going to boost efficiency without reducing output.
With demand projected to steadily creep up, this becomes a simple scales of economy issue.
Until an equilibrium between all-in costs to extract silver at a level where world demand is fulfilled and the market price is met, it is only a matter of when — not if — prices rise.
The Markets
Next are all the problems baked into the market and economy.
The U.S. is posting good economic indicators, but the trend is not pretty:
A large swath of major economies are drifting towards deflation.
Currency debasement continues, with no effect for the dollar and Swiss franc due to the perception of them as the safest haven available.
Share prices are divorced from economic reality thanks to higher multiples and buybacks.
In spite of massive intervention, central banks cannot hit their targets. Traders bet on consistently delayed movement towards reasonable interest rates and policies, and central banks have to fall in line or be considered directly responsible for market drops.
We’re fast approaching a full decade of tepid growth and it is becoming increasingly obvious that the economic rudder is jammed and a rocky shoreline is dead ahead.
Physical gold is expensive, but silver bullion is easy to buy in smaller units and hold without worrying about market outflows indiscriminately affecting products like precious metal ETFs alongside stocks.
The combination of these factors makes silver’s allure and upside blatantly obvious. Smart investors are seeing it.
They are educating themselves with the best resources available, and acting on it in greater numbers than anytime in the past.
For the sake of financial security and avoiding the crippling losses suffered less than a decade ago, I hope the trend continues.
