Silver investors will be disappointed with how the silver bullion price has performed over the past few years. It has underperformed many other major assets but is the lack of excitement in investments such as silver bullion bars, silver Britannia coins, and silver eagles making them undervalued? Silver bullion companies such as Auronum are offering sellers 5% above spot price for sellers of silver bullion coins, leading some investors to ask, what do they know that we don’t? A brief look at the silver mining industry could give some clues as to what is likely to happen in the silver spot market in the next few years.

Silver is a tiny market. At $20/oz the entire estimated annual silver supply is set to around $ 20 billion which is around the same size as the supermarket chain Tesco or one-tenth of the market cap of oil and gas giant Shell Plc. At today’s silver price, Starbucks is worth 5.5 times the annual silver mining production. Investors are questioning whether these valuations are likely to be sustained especially as we move into an ever-increasing technological society. The world cannot get by without silver, for example, solar panels which are considered at the forefront of renewable and sustainable energy supply need silver. A modern green efficient world cannot happen without the strategic precious metal, silver. 

The primary silver mining industry is also very small – this is the mining companies that have a mission to dig up silver as their main objective. Roughly 75% of the silver supply comes from non-silver mines such as copper, tin, lead, and gold where silver is a by-product. They are not looking for silver but around 3 out of every 4 ounces of silver that come to market come from a non-primary producer. When comparing the market cap of metal mining sectors, silver is less than a tenth of the size of the gold mining industry. In 2022, Apple had cash reserves of $180 billion so Apple could buy all of the primary silver producers more than eight times over with their cash in the bank which shows you just how small this sector is. And this small scale is really why the silver bullion market cannot sustain much more capital flows into the sector because if capital flows into the market the price can go ballistic. 

When you look at the overall cost of production and then look at the free cash flow of some of the major primary silver producers they are all mostly in the minus with only a few with a small amount of free cash flow per share. One of the largest miners, Coeur Mining is -$1.06 per share whilst Fresnillo, an FTSE 100 silver miner, is -$0.04 per share. This means that they either need to cut back on production or concentrate only on the highest concentrations of the silver deposits instead of getting all the silver in the mine which means all the silver that they are skipping whilst they are focusing on that core vein is very low grade and not worth going back to until you have a silver spot price that is priced in many multiples to what it is today. 

What we can conclude from this is that we must see a higher silver bullion price or leading primary silver producers must cut back on production which will reduce the supply of silver. The all-in-sustaining costs place a floor under the silver bullion investment as it cannot go down below that price floor and stay there which reduces the downside risk for silver bar and coin investors. The other factor that feeds into this price floor is the inflation levels that the world is seeing because silver mining is very energy intensive, making the cost of energy very important to a silver miner’s costs and by extension the silver bullion price. 

An excellent example of this was the silver price crash after the great recession of 2008 in which silver spot prices collapsed to below $10/oz but silver spot prices came back up to the cost of mining. At the same time, the demand for new cars and new houses fell and so the demand for the new supply of copper, zinc, lead, and tin also fell which led to the silver spot price spiking by several multiples. The outbreak of the pandemic in 2020 caused silver to fall well below the price of mining costs which have been rising due to inflation. At the time of writing the interest rate increases by central banks are causing demand for housing to fall, causing demand for primary metals that have mines that also contain silver is going to fall dramatically. This makes it likely that silver is following the kind of pattern that it tracked after 2008 in which silver prices were low, and demand for primary industrial metals is likely to continue to fall. It is very possible given the small market cap of the annual silver mining supply that silver will take out its previous record high and break $50/oz within the next few years. 

It is worth noting that when silver spot prices and the physical silver price often disperse when volatility is high. During the silver spot price crash in 2008, investors were still paying close to the silver price before the crash occurred to secure physical silver bars and coins. Further, when silver prices spike higher there is a rush of investors looking to sell at the same time which can cause the physical silver price to be much lower than the silver futures price as physical bar supply exceeds demand. Regardless of an investor’s perspective of the silver price movement, silver’s unique properties mean that the risk versus reward for allocating some of one’s investment portfolio into silver bullion is in the buyer’s favor.