Don’t Expect Silver to Rally Any Time Soon

The poor outlook for silver makes First Majestic Silver Corp. (TSX:FR)(NYSE:AG) an unattractive investment.

| More on:

In recent years, silver has ended up being a very disappointing investment. After hitting a high of US$48.70 during the last great precious metals bull market in 2011, the white metal has declined significantly in value to be trading below US$15.50 per ounce, which is close to its lowest price since April 2016.

Despite growing optimism regarding silver, there are signs that it will remain caught in a protracted slump for some time to come. This is bad news for primary silver miners like First Majestic Silver Corp. (TSX:FR)(NYSE:AG) and Pan American Silver Corp. (TSX:PAAS)(NASDAQ:PAAS). 

Now what?

While silver is classed as a precious metal and historically has had a closely correlated relationship with gold, it has failed to keep pace with its more valuable cousin. Over the last year, the yellow metal has only lost 1.5%, whereas silver has plunged by almost 7%. The reasons for this are quite simple; silver, because of its conductive properties, is as a much an industrial metal like copper as it is a precious metal. That means there are differing and contradictory drivers of its value.

Deteriorating industrial demand is a major headwind for silver, and that is being exacerbated by the threat of a global trade war, which could cause global manufacturing activity to decline sharply. While silver has experienced a physical supply deficit since 2013, the shortfall has been declining to be less than a fifth of what it was back then.

According to some industry analysts, a surplus could emerge in 2018, which would place even greater pressure on silver prices.

This is because industrial consumption of silver has been steadily deteriorating since 2008 to now be 7% lower. Much of that can be attributed to the marked decline in the use of silver in photography, which, by 2017, was less than half of what it had been 10 years earlier.

Demand for silver for use in the fabrication of the photovoltaic cells that make up solar arrays has failed to materialize as predicted. Analysts had forecast that the push to increase the volume of electricity generated from renewable sources across the world would trigger a massive surge in the use of solar power. While global installed solar capacity has expanded nearly fourfold over the last five years, the explosion in the consumption of silver in solar applications has failed to occur.

In fact, demand for silver for use in photovoltaic cells has risen by only 24% since 2011, which is significantly less than the four- to five-times increase some pundits were predicting. The white metal’s use in electrical and electronic applications, despite optimistic predictions, has also fallen to be almost 17% lower for that period. Both of these events can be attributed to technological advances and manufacturers moving to use cheaper silver substitutes. 

It isn’t only weaker demand that is weighing on silver; supply has also grown significantly.

Between 2008 and 2017, mine production expanded by 24%, and this was despite the price of silver averaging just over US$17 per ounce in 2016 and 2017. This debunks claims by silver bulls that because of lower prices, which they claim are close to or below the marginal cost of production, the tempo of mining activity will decrease, causing supply to diminish.

This is because the real cost of mining silver is far lower than many assume. In the case of primary silver miners First Majestic and Pan American, they reported first-quarter 2018 cash costs of US$7.83 and US$1.18 per ounce sold, respectively. That means with silver trading around US$15.50 an ounce, they aren’t going to turn off the lights and shutter their operations any time soon.

For base metal miners, which, according to the Silver Institute, are responsible for 59% of all silver production, costs can be even lower. This is because silver is merely a by-product of their mining activities, where they are focused on producing metals such as copper, lead, and zinc. In an environment where those metals are soaring in value, there is an incredible incentive for them to ramp up production, thereby leading to higher silver production. 

So what?

The outlook for silver is less than optimistic, despite gold continuing to hold its own. That makes silver miners, especially those with high operating costs, like First Majestic, which reported first-quarter all-in sustaining costs of US$16.01 per ounce produced, unattractive investments.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Metals and Mining Stocks

Concept of multiple streams of income
Stocks for Beginners

Lock Up This 9.2% Dividend Yield From a Top Royalty Stock

Royalty stocks have a strong advantage when it comes to creating passive income for investors. But this one has the…

Read more »

Safety helmets and gloves hang from a rack on a mining site.
Metals and Mining Stocks

Is First Quantum Minerals Stock a Good Buy Right Now?

First Quantum is a TSX stock that trades 61% below all-time highs. However, the mining stock still trades at a…

Read more »

nugget gold
Metals and Mining Stocks

The Best Gold Stock to Invest $1,000 in Right Now

Here are two of the best Canadian gold stocks that can yield some eye-popping returns in the long run.

Read more »

nugget gold
Stocks for Beginners

The Ultimate Mining Stock to Buy With $1,000 Right Now

This mining stock just saw a drop, but don't let that keep you from diving in. This miner is due…

Read more »

A plant grows from coins.
Metals and Mining Stocks

Canadian Mining Stocks: Buy, Sell, or Hold?

Explore 2025’s top Canadian mining stocks – gold, uranium, and base metals offer big potential in a dynamic, commodity-driven market.

Read more »

farmer holds box of leafy greens
Metals and Mining Stocks

3 Reasons to Buy Nutrien Stock Like There’s No Tomorrow

Nutrien stock has lost 34% of its value just this year alone and looks incredibly cheap today. Yet, secular trends…

Read more »

Canada national flag waving in wind on clear day
Tech Stocks

Trump Trade: Canadian Stocks to Watch

With Trump returning to the presidency, there are some sectors that could boom in Canada, and others to watch. But…

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Metals and Mining Stocks

Invest $7,000 in This Dividend Stock for $672 in Passive Income

High yield can be an essential requirement when you need to start even a modestly sized passive income with a…

Read more »