Silver is an epithermal metal. This means it is found more frequently in the upper layers of the Earth’s crust than in deeper layers. There, it is not only more difficult to extract, which increases the costs of its production, but it is also found in much lower concentrations and quantities relative to the layers directly below the surface. Both effects are further likely to drive up the costs of producing an ounce of silver.
This finding has serious consequences for the future price of silver. Precisely because silver is an epithermal metal, it must be assumed that the large, easily accessible silver deposits have already been discovered and exploited in the past. This realization alone is a bitter truth with serious consequences for silver consumers.
A significant reason for the sharp rise in silver prices in recent months is the persistent deficit between supply and demand. Industrial demand for silver has continuously increased in recent years. Silver is indispensable for many modern technical applications, and there are few “green” technologies that can do without silver.
The Days of Cheap Silver Are Numbered
However, this steadily growing demand is met by mine silver production that has not grown significantly for years. Bringing a new mine into production takes seven to ten years. For larger projects, this period easily extends to 15 to 25 years. This means that a quick solution to the problem through massively increased mine production is unrealistic.
In other words: The silver shortage we are currently experiencing did not happen overnight, and it certainly will not disappear quickly. It is much more likely that the silver shortage will be our constant companion for the next ten to fifteen years. Against this backdrop, whether it is realistic to bet on silver prices falling again soon is something every investor must decide for themselves.
Another peculiarity of the silver market also argues against rapidly growing silver production that satisfies high industrial demand: For most mines, silver is nothing more than a byproduct. Only a quarter of the silver mined worldwide comes from genuine silver mines like First Majestic Silver or Endeavour Silver, and even these two designated silver mines currently generate more than 40% of their revenues from the sale of gold.
Those Who Mine Lead, Zinc, or Copper Are Not Interested in the Price of Silver
The price for an ounce of silver can rise as high as it wants. For all those mines and mining companies whose main product is gold or one of the base metals zinc, lead, or copper, the silver price will never play a decisive role. Of course, they will also be pleased about higher credits due to higher silver prices. However, these additional revenues will not have the slightest influence on production decisions.
What is solely decisive for these companies is the price of the main product. If, for example, a zinc-lead-silver concentrate is produced in a mine, the prices for lead and zinc are much more decisive than the silver price. If the silver price rises while the prices for zinc and lead simultaneously fall during an economic downturn, the mine’s production will be immediately scaled back to prevent costs from spiraling out of control. Thus, in a recession, it can very easily happen that silver production declines, even though demand for silver shows no comparable weakness.
Economists refer to this as inelastic demand. This means that even in an economic crisis, consumption does not significantly decrease, and companies that need silver cannot replace it with other cheaper alternatives. Industry finds itself in a very difficult situation here. It often doesn’t need much silver, but this silver is indispensable.
Equivalent Replacement for Silver Is Approximately 80 Times More Expensive
Technically, it is indeed possible to replace silver in many areas. However, for easily understandable reasons, industry will only take this step if there is absolutely no other option. The silver used in mobile phones, laptops, or screens, for example, could be replaced by copper or aluminum. The consequences, however, would be slower computers, duller colors, and blurry outlines, because silver conducts electricity and heat better than copper and aluminum do, even if both are significantly cheaper.
The crucial question for any company, however, is whether customers would be willing to accept such technically inferior devices. In most cases, this is unlikely to be the case, so it is to be expected that a technical alternative that relies on copper or aluminum instead of silver will fail to gain traction with customers in the market and thus fail. Therefore, industry will probably only forgo silver when there is no silver left at all.
Then the question might also arise whether there are more expensive alternatives to silver. Indeed, such alternatives exist with gold. However, currently, this option is far from interesting or viable for industry, as production costs would increase by a factor of 80 at this point. Thus, gold could only become a real competitor for silver when both prices have approximately converged.
However, we are still far from this state at present. Therefore, a short-term substitution of silver by other metals is not to be expected. In turn, this means that industrial demand for silver will remain high and very inelastic in the coming years. What this means for the price of silver should be obvious to most investors.
For silver companies, such as those we observe on Goldinvest.de, the outlook therefore remains very good, even though silver has already risen sharply in recent years. For example, a producer like Silvercorp Metals (WKN A0EAS0 / TSX SVM) directly benefits, having recently reported a strong increase in revenue.
And of course, the environment is currently extremely positive for an aspiring producer like Silver Tiger Metals (WKN A2P4YL / TSXV SLVR), after CEO Glenn Jessome’s company received the long-awaited open-pit mining permits for the El Tigre mine in Mexico in early November.
We will keep you updated and will, of course, continue to report on these and other promising silver companies!
