Again, I agree, warmcamp. The notion that the market could be held at a point far from the market equilibrium point for very long is absurd. Yes, hypothetically someone could sell massive amounts and temporarily move the price from the equilibrium point, but for how long could they hold it there? Maybe hours, maybe even a few days, but surely not for weeks, months, or years.
Back around 1980 silver investors bought large amounts of silver. Over the next 20 years, as financial markets rose, they slowly sold it off to invest in other things, ultimately pushing the cost below the cost of mining. As mines closed and did not re-open, mine production dropped below consumption, putting silver into deficit mode for a long time. Once all the silver was used up, prices began to rise and prices went from $3.5 where all miners lost money, to $40 where they were all making it.
Not surprisingly, new mines opened, and old ones re-opened, and silver went back into surplus, where more silver was being mined than was being consumed. That's not a problem, so long as silver investors continue to buy up and hold the excess. They did, for awhile, but then silver started falling, and the stock market started rising, and real estate started rising again. Like the 80's, money began to move from silver to other investments, and silver is now priced down around the cost of production again.
This was not as bad as 1980, though, and investors don't have nearly the volume of silver to part with. I would guess that within a year or so silver will gradually move back up above the cost of production. I expect prices in the 16-23 range for another year, and then perhaps 18-25 again.
One of the problems with silver is that much/most silver is produced as a byproduct of base metal mining operations, such as lead, zinc, and copper. It's easy to forget that when you are looking a fairly pure silver plays like PAAS, HL, SSRI, etc. Coppers and lead prices are flat, while zinc is rising. As a result, base metal mining operations will continue, and will continue to produce silver. The only mines which it would make sense to shut down due to falling silver prices are pure silver or older, high cost primary silver mines. That's why when silver falls, it tends to stay low for a prolonged time.
PAAS does have a few high-cost silver mines, but if when a mine gets shut down, it rarely ever opens again, and when it does, there is a high cost involved. Thus, PAAS would only close them if they conclude that silver is likely to remain low for an extended time, say, ten years or more. If they see much chance of silver returning to, say, $25, again in the next few years, it would be better for them to just keep it open and ride it out.
The core problem is that silver mine output crossed over from shortage to surplus a few years ago. So long as investors continue to buy up that surplus, there is no problem. If, however, silver investors stop acquiring ever more silver, then the surplus production forces prices down. With the stock market strong for the last year, investors have been putting more money in the market, and less into metals.
Well said, warmcamp. I'm still watching silver, but sitting on the sidelines, as I have been for quite some time. In the decline, it's worth pointing out that, had PAAS done what a few stockholders wanted them to do, and held their cash in physical silver, it would have dramatically increased their leverage. Leverage can be a good thing in rising markets, but the reverse is true in falling markets. SSRI did buy some physical silver. Once they were higher than PAAS, but now their silver holding has hurt them, and now they are barely half the value.
It's also worth pointing out that management was wise is trying to hedge silver, but the shareholders who made them take off their hedge are now paying the price for it. Had the hedge still been in place, the stock price would be higher today.
PAAS is a well run company. If i do decide to get back into silver, they would be at the top of my list. It's actually tempting now. I expected silver to be range-bound between 18 and 25 for the year, and now it's slightly below the bottom of that range. Could silver go lower, but I don't see it going much lower, at least not this year. I'd probably adjust my range to 16.5-23 for the year ahead.
SIlver and gold will have another day in the sun. I just don't see the economic situation that will cause it happening for quite a few years yet. The monetary system will eventually have issues, but the can can be kicked down the road for quite some time yet.