Slowly, silently, now the moon
Walks the night in her silver shoon;
This way, and that, she peers, and sees
Silver fruit upon silver trees
— Walter de la Mare
It appears that silver has emerged from her two-year slumber and is poised for a breakout, and you better believe we’re snatching silver fruit from those silver trees.
What does silver have going for it right now?
Record demand, promising international industrial output, and the Fed’s reluctant tapering of their quantitative easing program will all work in unison to push silver to new yearly highs.
According to some analysts, this could usher in a new bull market we haven’t seen since the 1970s.
So today, let’s break down each of these reasons and get a better picture of the silver market heading into the last months of 2013…
We Demand Silver!
The sheer demand for physical silver is astounding…
- Sales of silver coins from the U.S. and Canadian Mints continue to break all-time records
- 3,625,000 American Silver Eagles sold last month, the second best August in history and over 26% higher than last year
- All told, this year the Mint has unloaded 33,075,000, already the fourth highest total ever — and we’re only a week into September!
- If things continue at this pace, the Mint will hit 50 million sales and blow 2011’s previous record of 39,868,500 out of the water.
- Silver shines even brighter when you compare it to gold: Silver Eagles are outselling Gold Eagles 100 to 1!
- Sales of Canadian Silver Maples are on track to hit the 24 million mark, which would surpass its 2011 all-time high of 23.1 million.
And American and Canadians aren’t the only ones buying up physical silver in record numbers…
India is importing silver at a breakneck pace. In April and May alone, India imported as much silver as the U.S. and Canada produce annually. If they continue their silver streak, they’ll break their 2008 record for silver imports.
Getting High on No Supply
Low silver prices that began after the 2011 highs have really constrained supply. Many of the largest miners have had to suspend operations, since it simply wasn’t profitable for them to mine at such depressed prices. Only a handful of silver miners around the globe can profitably mine with prices under $20.
Mexico, the largest silver-producing nation in the world, has seen a massive reduction in silver production so far this year. They had forecasted growth, but could end up with a 10% drop in production.
And less worldwide supply should send prices higher.
“I think that the challenges we see with high cost producers out there right now are going to be supportive in terms of putting upward pressure on the commodity prices,” Silver Wheaton CEO Randy Smallwood told Forbes.
“So, whether these guys shut down or slow down their production levels, that pressure should help push precious metals prices back up to a sustainable level.”
The suspension of mining operations could have reverberations on supply for years to come. And if you look at some of the positive industrial news coming out of Europe and China, we’re going to need a lot more of the white metal…
Industrial Metal
While silver is well-know for its use in coins, silverware, and jewelry, these uses actually make up less than half of the real demand for the metal. The rest comes from the industrial sector, where silver is used in everything from electronics to chemical production to solar panels.
The return of manufacturing in Europe and China will boost demand for silver. From the Wall Street Journal:
China’s official manufacturing purchasing managers index rose to a 16-month high of 51 in August from 50.3 in July, while the competing HSBC China PMI rose to 50.1 in August from 47.7 the prior month. In both, a reading above 50 indicates expansion in manufacturing activity from the prior month.
Meanwhile, Markit’s Euro-zone PMI rose to 51.4 in August from 50.3 in July.
Those are hopeful numbers from two areas that have been sluggish over the past year.
If they continue to improve, it will really boost the industrial demand for silver.
“One of silver’s biggest components for use is industrials and we think that that’s really what has given silver a decent shovel off,” David Lennox, resources analyst at Fat Prophets told CNBC. “There is one good way to get yourself on the radar, and that’s to have a good price rally, all the speculators pick up on it and it then become self-feeding.”
Lennox is predicting silver may be as high as $35 by the end of the year.
Tales of the Taper
Now, I don’t know about you, but I am not ready to fall in line and cheer for the U.S. economic recovery.
There are just too many fundamentally flawed issues. The picture emerging from today’s employment data, for instance, was far less rosy than anticipated. The economy only added 169,000 jobs, an alarming amount of which were only part-time gigs.
And despite trumpeting a falling unemployment rate, the slight dip in unemployment was mostly due to Americans totally dropping out of the workforce. The labor force participation rate of 63.2% is the worst level in 35 years.
Those aren’t the kind of numbers the Fed can hang its hat on, if it really does plan on trimming back QE…
“When Ben Bernanke first raised the specter of tapering several months ago, the case was better for tapering than it is right now,” Mark Hamrick, Bankrate’s Washington bureau chief noted.
“With the three-month average for payrolls growth below 150,000, Bernanke is going to have to make a very forceful case that strength in the economy is acceptable to begin withdrawing stimulus.”
Even if Bernanke (or his successor) does decide to start tapering quantitative easing soon, I highly doubt this stock market will stand strong on its own after so many years of drinking the Fed’s spiked punch.
If the market begins to sputter, they’ll have to continue pumping money back into the system — and investors will once again flood back into precious metals.
As these events unfold, we’ll be bringing you each and every way to shake every last dollar from that silver tree.
