After Hitting a Multi-Year Low Is it Time to Buy Silver?

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

| More on:

Around three weeks ago, silver slipped to a multi-year low, trading at just over US$14 an ounce — its lowest price since January 2016. In recent days, the white metal has recovered, gaining 3% to trade at just over US$14.50 per ounce. Some analysts claim that now is the time to buy silver.

Nonetheless, those assertions appear premature, especially for a precious metal that has shown itself to be extremely volatile and appears to have disconnected from its underlying fundamentals. This is bad news for primary silver miners — particularly high-cost operators like First Majestic Silver (TSX:FR)(NYSE:AG). 

Now what?

Silver, unlike gold, possesses considerable utility, being heavily utilized in a range of manufacturing applications.

As a result, industrial demand is responsible for almost 59% of all silver consumed, whereas gold only accounts for just over 7%. This means that the price of silver, despite being a precious metal, is dictated by the health of the economy and other factors that affect industrial consumption. It is also this which is responsible for silver’s growing disconnect from gold.

A key factor weighing on silver at this time are growing fears of a full-blown trade war emerging, which would sharply impact global economic growth. According to the World Bank, President Trump’s trade policies have the potential to trigger a 2008-style global financial crisis, which could cause global manufacturing activity to grind to a halt. Even if that were not to occur, many economists believe that it will shave up to 1% off global GDP growth.

The nation that will be the worst affected is China, which is Trump’s principal target. Essentially, the president has threatened to place tariffs on virtually all U.S. imports from the East Asian nation. That has the potential to spark a major downturn in manufacturing activity in China, which is known as the world’s workshop.

The two industries that consume the most silver and form an integral part of China’s manufacturing sector are electrical and electronic as well as solar panel fabrication. If there was a sharp decline in demand for silver from those industries, it would have a calamitous impact on the white metal.

It wasn’t so long ago that the fabrication of photovoltaic cells, which are the key component in solar panels, was touted to become one of the largest consumers of silver globally. This hasn’t occurred, and the fabrication of photovoltaics cells has slowed and could fall further because of Trump’s tariffs. The consumption of silver in the manufacturer of solar panels has only managed to offset the significant decline in the metals use in photography over the last 10 years. 

There is also every indication that global silver supplies will continue to expand, despite weaker prices.

You see, all-in sustaining costs (AISCs) for many primary silver miners such as First Majestic may be high, but the true measure of the costs associated with the production from existing operations are their cash costs.

In the case of First Majestic, it reported cash costs of US$7.59 per ounce of silver produced, which was 3% lower than the previous quarter. It is also 48% lower than silver’s spot price, which means that even if prices remain weak, First Majestic won’t shutter any of its mines or reduce production any time soon. Another example of this is the fourth-largest primary silver miner globally, Endeavour Silver (TSX:EDR)(NYSE:EXK). For the second quarter, it reported AISCs of US$17.28 per silver ounce produced, but cash costs of US$7.61. That means Endeavour also won’t shutter existing operations even if silver prices remain low.

So what?

It is difficult to see any upside for silver over the remainder of 2018 and into 2019. Growing pressures on precious metals, including a firmer U.S. dollar coupled with concerns of a trade war emerging, will weigh on its outlook for some time to come. This means that it will remain stagnant and that most primary silver miners are 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 »