Since reaching an all-time high of nearly $49 per ounce in 2011, silver has been mired in a years-long bear market. Many nervous investors sold at the bottom. This unfortunate development doesn't mean there aren't still bargains to be had. At the same time, the fundamentals point to a potential resurgence for prices in the coming years.
The Strong Case for Silver Bullion
When we speak of the "fundamentals" behind an investment, we refer to the essential underlying factors that determine the shape of its market. These are not fleeting influences such as taste. They are also usually not brand new developments—although emerging trends do sometimes become fundamentals.
Supply and demand dynamics are fundamental drivers for virtually any asset or market. In the case of silver, demand has been fantastically high. Each year, it seems the sale of silver bullion coins as an investment has risen to new heights. Meanwhile, fresh supply has not been growing. The chart below speaks to this trend.
This is important even though it only demonstrates the situation in Mexico. Along with Peru as a perennial close second, Mexico is consistently the world's top producer of the argent metal. Latin America (and to a lesser extent Australia, Canada, China, and the U.S.) is the largest source of newly mined silver. Primary silver mines have been steadily dwindling in number. Instead, most of the fresh supply comes as a byproduct of secondary mines.
There's another noteworthy aspect of the supply fundamentals. Unlike gold, which is frequently melted down and recycled as scrap, the silver supply relies heavily on new sources. This is because so much of the metal (approximately half of annual production) is consumed for various industrial purposes. If prices remain low and miners scale back exploration further, we could the global supply shrink even more.
Another fundamental driver to keep in mind is the persistence of unbalanced trader behavior. For a variety of reasons that are in their interests, large institutions are able to unduly influence the silver market. The far lower price of silver relative to gold means JPMorgan and other banks can more easily control prices by selling huge quantities into rallies. Then they can also scoop back up giant stockpiles of the precious metal for a bargain. This is one of the reasons why the price of this "hated" asset remains suppressed.
This may make going long on silver seem like a futile proposition. However, it's only a matter of time before the fundamentals described above come to the fore. Are $50/oz silver prices in the medium-term a ridiculous notion? Hardly.
There are two advantages to the widespread bearish regard for silver as an investment. First, it means you can buy it at inexpensive prices and accumulate more of the metal. Second, this let's you play the market contrarian. People who go against the grain of the markets reap huge benefits if things indeed swing the other way.
In the meantime, patience is a virtue. Keep stacking at undervalued prices (i.e. "buy on the dips") and follow the fundamentals!
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.