Sunday, 19 April 2020

Remarkable silver miner resilience

Silver investors haven't recovered from the plunge of the white metal after the Corona pandemic caused a global crash of financial markets. In this perspective silver miners have proved remarkably resilient.

The sell-off of all precious metals shortly after the crash of stock markets is not uncommon. It also happened during the 2008 financial crisis. The main cause is selling assets in order to cover losses on derivatives. Whenever distressed assets cannot be sold at any price, selling gold or silver is about the only way to quickly raise cash in case of margin calls.

Gold to silver ratio

Whereas all precious metals suffered a sell-off after mid March, the loss for silver was quite a lot more than that of gold. Despite the gold to silver ratio which already was historically high prior to the Corona crisis, it further shot up to about 130. The recovery of the silver price got stuck, giving rise to a permanent impairment as illustrated by the gold to silver ratio graph.

Gold to silver ratio over the last 3 months. (click to enlarge)
Prior to the Corona crisis, the 50 dma and 200 dma were almost coinciding, illustrating that the oscillation band from 85 to 90 had been prevalent for several months. Prices started diverging early March with gold strengthening till March 9, while silver was unable to catch up.
During the plunge, gold slid from $1679.8 on March 9 to $1471.4 on March 19 (both on a COMEX close base);  this is a 12.4% correction. Silver peaked at $18.6 on Feb 24 and plunged to $11.94 on March 18; this is a 35.8% slide. That discrepancy caused the Au:Ag ratio to peak at 130 on Mar 18.
On the flip side, gold made a new 7 year high at $1726.6 at last Tuesday close, whereas silver didn't make it above $15.7. Since end March the gold to silver ratio gets stuck in a narrow band around 110. The silver price over the past months is shown in next graph.

Silver comex close over last three months. (click to enlarge)

Resilient silver miners

One could reasonably presume that silver miners have been suffering much more than gold miners, given the disproportional slide of the metal followed by an only partial recovery. When having a look at the 3 months price history of the Global X Silver Miners ETF, SIL, it is obvious that miners recovered well from the price shock:

Global X Silver Miners ETF, SIL over three months, click to enlarge
With the last prices back near the 200 dma and above the 50 dma, it's hard to make a case for a permanent impairment the way it was observed for silver.

SIL to Silver ratio

Combining both, now the SIL/Silver ratio is shown for the same last three months. It proves exceptionally volatile.

SIL to silver ratio over the last three months. (click to enlarge)
The expected slide of the ratio till March 18 as silver plunged below $12/Oz is followed by a steep recovery, including an overshoot above the prior historic average. Earlier this year the 50 dma is steadily above the 200 dma illustrating a long term gentle uptrend. Despite still lagging gold, silver had been in an uptrend until less than two months ago and silver miners have responded favorably.

Early April both silver and SIL seem prone to a new downtrend. This supresses the 'overshoot'. But the metal only briefly dips below $14 and then resumes its uptrend. Miners again prove quite resilient... and how about the long term ?

Goldminer Pulse list based and capitalization weighed gold and silver miners indices.

Gold miners index (black) and silver miners index (blue), 19 nov 2010 = 1000

The graph with both indices and a third 'equal initial weight' graph in red shows the silver miners index steadily above that of gold miners. Nevertheless silver quoted at $27.07 with gold at $1342.5 on Nov 19, 2010 at the start of coverage. Silver miners outperforming their gold peers apparently is nothing new. Gold miners have slid almost 50% over the long haul, despite the yellow metal adding over 25%. Silver miners eventually cut their loss to about 15%, despite the metal sliding 44% !

Silver miners resilience may not be systematic, but it proves to prevail over the long term and has been confirming after the mid March Corona crash.

* * *

Discussion

Explanations always are cumbersome. They can be true and reliable and possibly valuable as an investment guideline, partly true and plausible but somewhat tricky and only indicative on the short run or even plausible but not yet proven false.

Mine production
A substantial fraction of the global silver productions doesn't come from silver mines but rather is a side product of copper mining and of zinc and lead mining. One consequence is that the production volume fluctuates due to exogenous factors. High prices of said non-ferrous metals may result in silver production cranking up, but the reverse also is true. Lately copper prices are slumping with a very partial recovery after the Corona crash to about $2.33/lb. During 2018 the copper price was steadily above $3/Oz. Current copper prices make some mining marginal and certainly puts investment projects in new developments on hold. A similar story for zinc which used to be very cheap but recovered in price in 2018, briefly breaking above $1.50/lb. Lately the price has been slumping again with zinc now down to $0.875/lb. You need a very high grade ore at surface to make mining profitable. Secondary silver production used to account for about 70% of global mine production. It is questionable whether that still is the case.

Whenever a non-ferrous metal mine has a substantial secondary silver production, it may be considered a silver mine. Production volume of zinc and lead still are far higher, but the revenue of the silver exceeds that of zinc and lead. In a recent interview Keith Neumeyer of Majestic Silver admitted that three zinc/lead/silver concentrate mines had been put on care and maintenance since production was no longer profitable and a fourth one was to close soon. Apparently also the 'silver mines' with a high zinc and/or lead volume as secondary production are to close. This contributes to the silver mine production volume leveling off and ultimately declining. Rick Rule nicely explains this as 'low prices are the cure for low prices'.

The supply destruction was ongoing prior to the Corona crash, but it will certainly accelerate, given that several Latin American countries have halted mine production after the lock down to end the Corona pandemic.

Demand issues
Speculators have been singling out the the temporary demand destruction due to the lock down of certain industries, mainly in Asia but they failed to realize that the production volume had been weakening slowly but steadily. The surge in investor demand has caused a scramble for pure silver by the mints that are still operational (few have closed due to the lock-down). Coin dealers demand premiums over 40% above spot and even need to restrict the sales volume at that price level.

Scare still is the main drive for the surge in investor demand. However the monetary and fiscal stimulus is adding demand for emptying stockpiles of goods. Unlike in 2008-09, it may eventually give rise to rising inflation which would make investor demand pick up and become more sustainable given that negative real interest rates are likely to prevail for years to come.

As soon as (Asian) industrial demand picks up again, warehouse supply of silver may deplete rapidly, since restarting mining - after legal prohibitions have been lifted - may take time to be fully operational. These conditions may provide the ingredients for a price surge the like of 2009-2011.


Where is the profitable silver production?
Some silver mines have a gold secondary production and may be considered gold mines whenever the gold to silver ratio rises above certain level, making the secondary gold production more valuable than that of silver. At the bankable feasibility study this may have been completely different, but parameters change over time and that goes beyond the discrepancy in price evolution. Think of a higher gold grade at depth within epitaxial veins where the silver content also peaks.

Several silver miners also have been diversifying into gold production over the past five years. Even a streamer like 'Silver Wheaton' changed its name to 'Wheaton Precious Metals', indicative for the ongoing diversification trend.

Silver miners have proven far more adaptive than gold miners are. At the current $15.2/oz, silver quotes at less than a third of its 2011 spring peak just below $50/Oz. Yet silver miners have been able to cope. I cannot imagine that many gold miners would survive if the yellow metal were to plunge to a third of its 2011 peak and hold there ... which also implies that this won't ever happen.


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