Peak Silver & Continued Supply Deficits Warn Of Future Higher Prices

If the market has finally experienced a peak in world silver production, this warns of higher prices in the future.  In addition, the global silver market suffered another large net supply deficit in 2016.  These factors point to a big upcoming trend change in the future silver market.

The Silver Institute just published its 2016 Silver Interim Report.  This report is published by Thomson Reuters GFMS.  According to their forecast for 2016, global silver production will decline to 887 million oz (Moz), down from 893 Moz in 2015:

world-silver-production-2007-2016

While forecasted global silver production for 2016 is down only slightly versus last year, GFMS also stated this in their report:

  1. We estimate that mine supply peaked in 2015 and will trend lower in the foreseeable future.
  2. Declining total supply is expected to be a key driver of annual deficits in the silver market going forward.

I will get to the annual silver deficits in a minute, but let’s look at their world silver mine supply by region:

silver-mine-production-by-region

What is interesting here, is that GFMS forecasts the number one silver producer, Mexico, to be down in 2016 by more than 6 Moz.  Last year, I forecasted that global silver production would likely be lower in 2015.  I was going by data by the “World Metals Statistics.”  However, Mexico’s INEGI (government agency) considerably revised their figures higher for 2015.  While I have seen revisions take place, the revisions by Mexico’s INEGI for 2015 were quite substantial.

Regardless, GFMS does a pretty good job with the silver mine supply data.  The important take-away here is that the trend of global silver production will likely be lower going forward.

The Majority Of Global Silver Production Declines Will Come From By-Product Base Mining

The majority of silver production comes from the by-product of base metal mining.  According to GFMS 2016 Silver Interim Report, lead & zinc accounted for 34.4% of silver supply, while copper yielded 22.1%.  Thus, the mining of these three base metals supplied 56.5% of global silver production in 2016.  Primary silver production accounted for 30.4% and gold mining supplied 12.5%:

silver-mine-production-by-source-metal

As I have mentioned in prior articles, the decline in global oil production will impact base metal mining to a larger degree than primary silver production.  It takes a great deal of liquid fuels to produce the world’s base metals.

For example, the Chilean Copper Commission stated in a 2014 report, that the country consumed 535 million gallons of liquid fuel to produce 5.7 million tons of copper.  Thus Chile’s copper industry consumed 94 gallons of liquid fuel for each tonne of copper produced.

On the other hand, Pan American Silver burned 20.5 million gallons of liquid fuel to produce their 26.5 million oz of silver in 2015.  Which means, each ounce of silver production took 0.80 gallons of liquid fuel.  If we use Pan American Silver as a guide, then the 269 Moz of primary silver production in 2016 consumed 215 million gallons of liquid fuel.  However, I would imagine the global primary silver production average is much less, more like 0.50 gallon per ounce of silver.  So, we are talking about 135-150 million gallons of liquid fuel to produce all the primary silver in the world.

Now, the world produced a total of 18.4 million tons of copper in 2014.  Taking Chile’s average of 94 gallons per tonne of copper produced and providing a conservative estimate of say 75 gallons per tonne for entire globe, then the world consumed roughly 1.4 billion gallons of liquid fuels to produce its copper in 2014.  This is about ten times the amount of fuel it took to produce all the primary silver production.  Of course this is a simple estimate, but there you have it.

Once the world enters into the next financial collapse, U.S. and world oil production will plummet.  This will impact base metal mining a great deal more than primary silver production.  Which means, overall silver production will decline more rapidly due to more than half coming from zinc, lead and copper.

Global Annual Silver Deficits Continue For 13 Consecutive Years

Due to the huge increase in Global Silver ETF demand as well as a large Exchange Inventory build, the silver market will suffer a forecasted 185 Moz annual deficit in 2016.  If we look at the annual silver deficits since 2004, it equals a stunning 1.5 billion ounces:

global-silver-net-balance-2004-2016

GFMS calculates their “net balance” by subtracting physical demand from supply, then deducted or added changes in Silver ETF and Exchange inventories.  According to their data (as of Sept 2016), Silver ETF’s and Exchanges added 133.3 Moz of silver to their inventories.  Furthermore, total physical demand exceeded total supply by 52.2 Moz to arrive at the total 185.5 Moz (rounded to 185 Moz) net deficit.

These annual deficits have been supplemented by silver surpluses of the 1980’s and 1990’s.  However, annual deficits are forecasted to continue as mine supply continues to decline along with subdued scrap supply.

Why Do These Supply & Demand Factors Matter For the Future Price Of Silver?

Recently I have stated that new information on the Thermodynamic Oil Collapse, based on the Hills Group and Louis Arnoux’s work, suggests that supply and demand are not the real factor that determines price, rather it’s the cost of production.

However, gold and silver are different from most other metals, commodities and energy.  While silver is consumed more than gold, it still functions as “MONEY” or a “STORE OF VALUE.”  Thus, it should be valued differently than copper, wheat or oil.

I don’t look at global mine supply or the annual silver deficits as factors that will impact the market price of silver by certain degrees, rather I look at them as a TELLTALE sign that the overall trend is changing, and has been for nearly a decade.  It is the longer term fundamental trend change that interests me, not the year by year supply and demand factors on price.

Currently, the silver price is based on its cost of production (90-95%) plus some supply and demand factors.  While many believe the BIG BANKS can push the price of silver anywhere they see fit, this is pure nonsense.  If the Big banks pushed the price of silver 25-50% below its average primary silver cost of production, traders would come in by the droves.   While traders may be uninterested in long-term fundamentals, they aren’t stupid as it pertains to short-term market forces.

That being said, silver’s ultimate value is not based on its cost, it will be based on its STORE OF VALUE properties when the MOTHER OF ALL DEFLATIONS finally arrives.  I am talking about deflation of most paper assets (stocks & bonds) and real estate.

Because there is so little real physical silver out in the market, 3-4 billion oz, any significant amount of capital moving into it will push its value to seriously high levels.  This may seem a play on hype, especially for those who are a bit disillusioned by the price smash since the Trump President election.

Unfortunately, for those who continue BELLY-ACHING about low silver prices, there isn’t much I can say to change your opinion.  I have come to realize that a significant percentage of silver investors who continue to understand the long-term fundamentals, will never complain about lower prices.  They just suck it up and know that insane Central Bank policies won’t last forever.

Unfortunately, the precious metals community also has its group of individuals who will complain when the going gets rough.  This should be expected as this is the typical nature of a FICKLE public.  All slaps on the back when things are good and the first to bad mouth when things turn south.

I get a kick out of the BELLY-ACHERS who seem to forget that the Central Banks have embarked on the most insane monetary policy in history.  They have pushed debt and money supply to an exponential trend.  I find it simply amazing how a disgruntled silver investor points out how wrong the precious metals analysts were on the silver price since 2012, while totally dismissing massive Central Bank monetary invention.

Regardless, peak silver production on top of the continued annual deficits point to a trend that will reach an INFLECTION POINT in the future.  So, here is the BEEF.  If you think exponentially increasing debt and monetary liquidity will continue for the next 5-10 years, then maybe you should stay in Dollars, U.S. Treasuries, Stocks and Real Estate.  However, if you aren’t suffering from brain damage as many in the markets are today, you may want to consider staying put in the 2,000+ year monetary history and store of value of silver.

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45 Comments on "Peak Silver & Continued Supply Deficits Warn Of Future Higher Prices"

  1. Thanks Steve….that was a fun read!

  2. Yeah but who set’s the price? Not the markets. Not those who stack. Until those responsible walk the “Green Mile,” nothing will change.

    • vlad the impaler | November 28, 2016 at 12:15 pm | Reply

      Such information is irrelevant with regard to price action. Only when people realize that PMs are hardly available, prices can go up. Before that the billionaires have to secure their riches. Do you think that they will be surprised by price action and you know better than they?

  3. “Peak Silver & Continued Supply Deficits Warn Of Future Higher Prices”

    someday.

  4. This artificial low price must be Crushing to the mining companies…

  5. Instead of BELLY-ACHING about low silver prices, people should be on their knees giving thanks for the continued opportunity to buy silver so cheap.

    This will not last very long so keep on stacking.

    Buy for cash and stash.

    • actually, you probably already have more than you will ever be able to use.

      • We shall see about that when the $1.5Quadrillion worldwide derivatives market nukes out (at any given time). Try unwinding that pile of donkey dust, why don’t you. It will be interesting to see how the US taxpayer bails out the $303Trillion in oil derivatives, when everyone knows that the measley $20Trillion of gov debt is unpayable. Tick tock, tick tick, it’s just a matter of time.

        • ” It will be interesting to see how the US taxpayer bails out the $303Trillion”

          they won’t. the point isn’t to get any money. the point is transforming the citizens into serfs. “you owe us. you and your children. forever.”

    • Agreed sir and as the price per ounce goes down, the size of the bars I buy goes up. I like M. Maloney’s idea of buying income producing property with hard currency at a fraction of it’s dollar value at the appropriate time.

  6. Thank you Steve, It ist great that someone is compiling al this data into such an excellent article. There is a lot information inside which I have to think about more.

  7. Do you think Mexican and Canadian mining stocks will explode in share price or collapse over the next 5 to 10 years?

    • What do you get for your mining stocks when you sell them? Dollars. Do those dollars still have any value by then? I don’t know. Be careful with paper assets.

  8. The current paper bubble cannot be deflated. During the Lehman crash, everything went down so hard that it almost blew up the whole system. The crazies will ban cash, bail in your bank account after which they will give you a tax cut that’ll make your ears bleed. Until we start bartering with the neighbors and say bye bye to our Bolivars 2.0.

    Leave the big cities and buy stored energy. Like good quality working boots. Or silver.

    • DisappearingCulture | November 28, 2016 at 4:28 pm | Reply

      “The current paper bubble cannot be deflated”

      TPTB will do what they can to keep it from deflating……..but it may end up that way anyhow

    • Great Advice, to which i would like to add.

      Buy bicycles with extra tires, tubes & rims. For every power tool you own buy a substitute hand tool. For example. if you own a chainsaw, buy a buck saw &/or crosscut saw. Own a power drill buy a brace and bits. Log splitter, buy a splitting maul and wedges. And on and on.

      Don’t buy new if you have access to a good resale store, Salvation Army, Goodwill or Restore store. It may take a little longer, but all these things can be bought for very cheaply.

      They are all stores of energy and you will be thankful to have them when the time comes.

      • To that end Steve , look for and buy used how to do manuals on everything
        from cooking to fixing to building to gardening to jarring and storing and so on.
        If the internet gives out these will become valuable. Road maps aren’t such a bad idea either.

    • Hi “houtskool” et. al.

      Hey, great comment:

      “Leave the big cities and buy stored energy. Like good quality working boots.”

      I echo:
      Folks, buy 10 years of clothes, work boots, shoes, jeans, T-shirts, socks and undies. Buy 1000lbs. wheat in #10 cans per family member, 500 lbs. noodles and pasta, 200 lbs. beans. Non-GMO seeds in #10 cans. Wool Army blankets.

      Set aside $10,000 in 1s, 5s, 10s and 20s. Plus coins. Save every pre-1982 penny you can get your hands on. Nickels are great too.

      As far as silver goes, concentrate on Mercury dimes first. They look old and cool. People will take them in exchange for food, fuel and whatever else, plus they are a small denomination.

      Follow Steve’s advise. Let’s get prepped!

  9. Steve,

    As I understand from the Hills Group report. 75% of all oil has been extracted. The last 25% will be costly. The world seems focused on growth, sustainability, election, etc. No one is focused on developing alternative energy system except perhaps a few like Louis. Will other energy sources be forthcoming? Or is the world going to waste the last of the current energy with nothing to show for it? What about the less energy dense natural gas that pipeline wars in the middle east are about.? It seems we will not be driving on liquid fuels but there are those optimists again who think electric cars for all and gas heat the our homes and we will be OK.

  10. SRS Rocco,
    The push toward a cashless (virtual) digital currency raises some questions for me. How long will people be driving to the ATM? Once cashless, probably not much longer…more driving to barter. Once digital currency is pervasive, how many years can they run the centralized computers administering the digital currency system? Once there is no affordable fuel, people will no longer be driving to the grocery stores, shopping, and vacations so the only use of the digital currency will be to pay debt once there is no fuel to go spend it. The Hills Group report v2 indicates an ERoEI of 10.08 for year 2010, and 6.89 for year 2030 which is defined as the “dead state”. From their data I extrapolate an ERoEI of 7.99 for 2020. Looking at 2030 not much difference ERoEI 7.99 vs 6.89. Therefore, essentially by 2020 we are entering the “dead state”. The game is essentially up, yes?
    Am I on track to define a three year plan to define what can be prepared/accomplished with fuel over the next three years by year 2020? Or is this an overreaction? Also, from Graph #31, Oil Production Costs will exceed $200/bbl by 2020. Non-affordability will be much lower than the Oil Production Costs, so I would expect production to be tailing off with non-affordability accelerating the available supply. Your thoughts? Thanks!

    • Johny Comelately | November 29, 2016 at 2:55 pm | Reply

      I think non-affordability is at the center of the thermodynamic collapse model. Oil should be above $200/barrel to be profitable, but we can only afford $40/barrel. More and more oil fields become unprofitable and shut down. Less oil = less economic output = less people can afford more oil. No one is buying bonds anymore and yields are creeping up. People can’t afford the cost of higher debt burden because of lack of surplus energy to create the demand. So debt can’t fuel affordability anymore either. Who thought we could kick a can forever?

      We are left with the last option. Hyperinflation, QE & Helicopter money. People are confused. Some say there will be inflation, some say deflation and some say both. But they don’t really understand why. I understand that the things that people can afford today because of debt leverage (housing, consumer goods) will deflate as cost (interest) goes up. Things people can afford today without debt leverage (food, necessities) will skyrocket in nominal dollars. Gold and silver will outperform nominal dollar savings because of the bond and dollar collapse.

  11. I personally think silver will have more investment value than gold so I tend to stay away from chasing gold right now. When the gold to silver ratio gets near its historic norm sure I might trade some silver for some gold just to have a more diversified stack.

    Overall though all I see is more gold being added to global inventories and more silver just being consumed. The rarity if silver I think will cause it’s value to surpass gold.

  12. Last sentence, I meant non-affordability accelerating the lack of available supply.

  13. I’ve said this before but physical gold and silver are a hedge against currency. So what the hell does it matter how much currency you buy with it. You hold gold and silver for a currency crisis like Venezuela, Zimbabwe or Wiemar Germany. When in such cases gold and silver become money. If you are holding it to make currency you are better off learning how to trade futures. Believe me, if you know what your doing you make a lot more money than holding physical gold and silver because you make currency on the up and the down.
    If your holding physical to make currency you are in the wrong game.

  14. Spencer Watkins | November 28, 2016 at 8:31 pm | Reply

    The chronically “low” price just gives us more time to stack….

    Shuddup…. don’t look a gift horse in the mouth.

  15. So, when are all the Muslims going to start buying gold (+ Silver). I heard that their ban on owning it for an investment was recently lifted.

  16. Great job, Steve. Thanks for all the hard work, I don’t know how you do it. I look forward to sending a donation on payday.

    Please keep it up.

  17. “Recently I have stated that new information on the Thermodynamic Oil Collapse, based on the Hills Group and Louis Arnoux’s work, suggests that supply and demand are not the real factor that determines price, rather it’s the cost of production.”

    >Therefore as the oil gets harder to extract the price will go up.

    > You will say but EROI goes down and so what is the point of burning a barrel of oil to get a barrel out of the ground and so since its unobtainable it will be $0.

    > But in this scenario why wouldnt the price remain high but the production decrease toward nothing?

    > it makes no sense that the price would drop so low when there is massive scarcity and everyone will want oil. there will be huge demand. people would pay anything. If it costs $200 for a company to get a barrel of oil out of the ground they are not going to sell it for $20.

    >right now supply outstrips demand due to massive credit extended to the oil industry. When the credit collapses and production decreases I dont see how the price does not go up.

    > please connect the dots for me. what am I missing.

    • “what am I missing.”

      you’re not missing anything. he’s simply filtering his view of the situation to arrive at a pre-decided conclusion.

  18. Tick tock, tick tock,
    It’s only a matter of time,
    Before we get zapped
    By the Derivatives Schock!

    A hundred trillion here,
    And a hundred trillion there,
    But $1.5 Quadrillion
    Will really leave you bare.

  19. Steve,

    You compare fuel costs of production of copper vs. silver, but you state tons of copper per gallons fuel (94) and ounces of silver per gallons (.8) By my math, if silver uses .8 gallons per oz, copper uses about .003 gallons PER OZ. So silver uses over 250X the fuel to mine than copper?? I am not sure what I’m getting at… Silver mining would appear to use far more energy than copper. But right now silver only trades for about 80X copper’s price per pound, not 250X, so even using fuel as a comparative pricing guide, silver at $16.50 is about 3X undervalued compared to copper.

  20. Well i agree that it should turn out the way those analysts have been predicting for years but so far i just didn’t happened. Why, because central banks have the power to do what they want. Forever? No not forever and they know it. That’s why they will go cashless before the SHTF so Bankruns can be avoided. Even Jim Rickards is painting picture telling that Gold confiscation is a possible scenario. Whatever is going to happen. One thing is quite clear. The Elite and the Banking cabal is not going to quietly step down admitting that they have lost their war against real money as loosing that war would take away them from power. They will not allow that to happen, rather would they comence WW3. Sounds bad but these guys are bad as we all know.

  21. What am I missing? With 3+ billion ounces of silver in ETFs and billions more above ground
    own by individuals, ” How is there a deficit?” All the Silver Institute shows is production less consumed
    silver as a shortage but in real terms there is no shortage. Am I correct or as usual am I the class clown?

    • “What am I missing?”

      you’re not missing anything. for now, it’s all just hype. people thought they were going to buy a big-shot position in the apocalypse aftermath, and now it’s all racing away from them and their infestment is going south. that’s all.

    • SilverBullRider | November 29, 2016 at 5:36 pm | Reply

      You’re missing that most ETF silver is not really there. SLV is a fractional reserve silver price exposure mechanism. If everyone who owns SLV wanted physical silver, it will not be delivered. The fund would close and you’d (may) be paid off in cash at yesterday’s price. Same with COMEX. Total paper silver “ownership” is roughly 250 oz PAPER to every real 1 physical oz. 250 to 1 !!! It is their method of keeping spot price under their control. It’s totally removed from any kind of supply-demand price discovery right now. When the price creeps up, people will want delivery and the bogus “markets” will be replaced with a real market price. There are only about 1-1.5 Billion oz of investment silver available in the entire world. Not 3 Billion oz.

  22. The dollar should have collapsed years ago. Its not worth anything and is merely usery. People are brainwashed and blackmailed and bribed to stay in the system. The perception of wealth is maintained by an ever increasing monetary base of facke money and ever falling interest rates.
    Mind control by the media including broadcasting and restricting information and with holding knowledge keeps everyone under a spell. The spell will continue after things fall apart, which could be happening right now. They can BAIL OUT BANKS WITH IOUS and invest in shares likewise and pay peoples mortgages in distress. the population will not be aware as long as the spell is continued and anything to the contrary is called FAKE NEWS, by the eminators of lies. What they call ‘fake news’ is reality. We have satanists running the world as has been exposed by Julien Assange and now it looks like they’ve got him. What hope is there?

    • Escape the brainwashing and turn off theTV

    • “The dollar should have collapsed years ago.”

      indeed, it should have. it’s astounding. but as long as people live by the dollar and feed their life’s work into it, it will continue. that is what is astounding – that people continue to feed their life’s work into it. the instant they stop, the dollar will disappear as if it had never been. because, you see, it was never money to begin with.

  23. I don’t think we are at peak silver, investment demand went crazy, it takes time for so much speculation to unwind. I just think we hit a top, coin/bar demand went from 50 mil to about 300 mil in 8 years, now that silver is sitting around wondering what next, while coin/bar demand finally came down a bit in 2016. I’m still buying dips myself.

  24. If the dollar is collapsing,what will people use every day to replace it. You simply can’t give everyone
    digital money. Very few people own silver and gold. Would things in the USA be like Venezuela? Their
    Bolivar has collapsed, yet they are eating every day. What are the using? Is it a devalued currency
    that now takes 10 times as much to do what a Bolivar did 18 months ago. All this writing of a collapse
    is hard to understand. 99% of the people in the USA would be in panic, rioting. Has anyone a better
    terminology than collapse. Is devaluation a better term?

    • ” You simply can’t give everyone digital money.”

      they will never give us money, digital or otherwise. what they will give us is debt. that’s what the united states federal reserve dollar is – debt.

      and they will hand that out by the trainload, by the super-freighter load. whether you want it or not.

  25. A put on silver seems to be a less risky than one on gold right now since silver’s demand cannot be filled by paper as gold is. We are in times where markets no longer make sense going by the present fundamentals and yet if they did the system would implode so the game must go on. The biggest game today is instilling confidence that economic factors are in recovery mode to eventual prosperity for all. To do this gold must be brought down and beaten to a pulp on a floor where it has long to recover before it disrupts the fiat playground again. A rising U.S. Dollar is the one to do this just as it did between 1980-1985 when it reached an all time high of 1.64. The U.S. Dollar has gold on the ropes and if it reaches an all time high it will knock it out for some time. Yeah sounds crazy and far fetched but these are the times we live in.

  26. “supply and demand are not the real factor that determines price, rather it’s the cost of production.”

    If there is no demand there is no price. The market equilibrium and the resulting price are always a function of both supply and demand – where the two curves intersect. If one of them is missing there is no price, that is how the model goes. You may not like the model, but it is pretty sound in this regard. Perhaps you are searching for an alternative model?

    “total physical demand exceeded total supply”

    In all likelihood you are referring here to extraction and consumption, not supply and demand. Perhaps is this confusion the root of your issues with the supply-demand model. Once you establish the difference between supply and extraction and demand and consumption these issues will certainly become clearer.

    Regards.

    • Louis,

      The notion of supply and demand as a market force is highly overrated. As I have pointed out, along with the Hills Group ETP oil model, the cost of production has been the leading driver in the price of metals, commodities and energy.

      In a prior article I provided data showing that the cost of production of the top two gold miners (Newmont & Barrick) increased 470% from 2000-2012, while the gold price increased 498%. So, the COST OF PRODUCTION was the leading driver of price, not supply and demand forces.

      While it is true if there is no demand, there is no price, but this is just an esoteric statement. For example, the price of wheat also is driven by its cost of production. I would imagine the world will not one day stop eating wheat so the price will plummet.

      Thus, except for a small percentage of items, most commodities, energy and metals are based on the their cost of production rather than supply and demand. Supply and demand moves up or down slightly the price on the average annual PRODUCTION COST TREND LINE.

      Which means, economics has been a completely worthless in determining price.

      steve

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