AG - Could the Silver Price Really Hit US$130 per Ounce?

Silver has made significant gains in the past, but has not risen past US$20 per ounce since 2016. 

Nonetheless, well-known figure Keith Neumeyer, CEO of First Majestic Silver (TSX:FR,NYSE:AG), believes the white metal could reach into the triple digits, an idea he reiterated in an interview at the top of 2020.

Neumeyer has voiced this opinion many times, giving the US$130 number in a November 2017 interview with Palisade Radio and again in March 2018 with Kitco. In the past, he’s been even more bold, suggesting the white metal could reach US$1,000.

In order to better understand where Neumeyer’s opinion comes from, it’s important to take a look at the factors that affect the metal’s movements, where prices have been in the past and where other industry insiders believe silver could be headed. First, let’s dive a little deeper into Neumeyer’s prediction that the white metal can break the seemingly distant US$130 level.

Silver in the future: Why US$130?

There’s a significant length for the silver price to go before it reaches the success Neumeyer has boldly predicted. In fact, in order for the precious metal to jump to US$130, its price would have to increase by close to eight times its current value.

Neumeyer sees US$130 silver in the cards in part because he believes the current market compares to the year 2000, when investors were sailing high on the dot-com bubble and the mining sector was down. The First Majestic Silver CEO thinks it’s only a matter of time before the market corrects, like it did in 2001 and 2002, and mining sees a big rebound in pricing. It was during this time that Neumeyer himself invested heavily in mining stocks and came out on top.

“I’ve been calling for triple digit silver for a few years now and I’m more enthused now,” said Neumeyer at an event in January of this year. “But I’m cautiously enthused because, you know, I thought it would have happened sooner than it currently is happening.”

The silver CEO’s enthusiasm is based on the fact that governments in the western world continue to print money and take on massive debt loads. “I think the central banks around the world have put themselves into a corner. I think interest rates are either going to stay stable or go lower, and the governments are just going to keep printing money and deficit spending.” This scenario is “very supportive for gold, and of course that will drag silver along,” he said.

Neumeyer emphasized that he trusts in silver’s supply and demand fundamentals to move the markets. “The headlines stuff that we read every day, whether it’s Trump or China … those will move markets for sure, but it doesn’t move supply and demand.” He pointed out that today’s booming solar panel and electric car markets are two huge drivers of silver consumption, “so the supply/demand fundamentals for the metal today are even more dramatic” than in years past.

More controversially, Neumeyer believes the white metal will become uncoupled from gold, and should be seen as a strategic metal due to its necessity in many everyday appliances, from computers to electronics to solar panels. He has also stated that silver production has gone down in recent years, meaning that contrary to popular belief, the metal is actually a rare commodity.

According to Neumeyer, “We’re consuming, as a human race, over 1 billion ounces of silver annually, and miners are only producing about 800 million ounces a year, and that’s been dropping for three consecutive years.” He has also pointed to declining grades, making the case for a deficit.

Silver in the future: What factors affect its movements

In order to glean a better understanding of the precious metal’s chances of trading around the US$130 range, it’s important to examine the factors that can push it to that level or pull it further away.

The strength of the US dollar, US Federal Reserve interest rate changes and quantitative easing by central banks are all factors that will continue to affect the precious metal, as well as geopolitical issues and elements of supply and demand. Although Neumeyer believes that the tie that binds silver to gold needs to be broken, the reality is that most of the same factors that shape the price of gold also move silver.

For that reason, it’s helpful to look at gold price drivers when trying to understand silver’s price action in the last year. Silver is, of course, the more volatile of the two precious metals, but nevertheless it often trades in relative tandem with gold.

For gold, and by extension silver, a key price driver lately hasn’t been so much supply and demand, but uncertainty. The past 12 months have been filled with major geopolitical events such as the tensions between the US and other countries such as North Korea, China and Iran. Those tensions and other developments, such as the huge economic impact of the coronavirus pandemic, have been major sources of concern for investors in the precious metals market.

Precious metals investors have also been closely following the Fed’s interest rate plans. Rate cuts are generally positive for physical silver and gold bullion prices, because when rates are lower it is more profitable to invest in precious metals rather than in products that can accrue interest.

The Fed recently dropped interest rates to zero, a move that has positively affected both metals. Further rate cuts remain front and center in many investors’ minds — and for good reason. The Fed continues to have a dovish tone for the remainder of the year. Market participants should also pay attention to what central banks do going forward, as it could have a large impact on the white metal.

With the US currency being less strong than in previous years, both gold and silver have begun steady inclines, with the white metal gaining — and maintaining — a trading price that is over US$17.

Silver’s close ties to gold’s safe haven status will be beneficial in the long term, and there is also a strong case to made for silver’s industrial growth potential. “Maybe countries will be looking at how do they kickstart their economies, and maybe that’ll be growth in infrastructure spending,” Philip Newman of Metals Focus said in an interview with Investing News Network. “I think that could benefit silver.”

In the long term, Metals Focus sees the silver price hitting a high of US$19 before the end of 2020. “But bear in mind, of course, the market is very small — it doesn’t take much money coming in to have those more pronounced moves in silver,” said Newman.

The latest World Silver Survey, published by the Silver Institute and Metals Focus, indicates that in 2019 the silver market experienced an overall global silver supply increase despite a 1 percent decrease in mine production. In 2020, mine production is expected to fall 5 percent to 797 million ounces, while overall global silver supply is projected to drop by 4 percent to 978 million ounces. That would be the lowest level in global silver supply since 2009.

On the silver demand side, the electric vehicle and photovoltaic markets contributed greatly to increased silver consumption in 2019. “Photovoltaic demand registered an impressive 7 percent increase in offtake, rising to its second highest annual level,” as per the report.

Last year, investor demand for silver recorded its highest increase since 2015, rising 12 percent to hit 186.1 million ounces. Holdings in exchange-traded products experienced their largest annual growth since 2010, up 13 percent to 728.9 million ounces.

For 2020, physical silver investment, such as silver bullion coins and silver bars, could see a third year of growth, rising 16 percent to 215 million ounces. “Silver physical investment is forecast to extend its gains this year, with a projected 16 percent rise to a five year high as investors rotate out of equities in search of safe haven vehicles,” notes the report.

Silver in the future: Historical prices

While the CEO of First Majestic Silver is one of just a few saying that silver is poised to reach a triple digit price, there is support for Neumeyer’s belief that the metal is undervalued and that “ideal conditions are present for silver prices to rise.”

These conditions include low interest rates, overvalued markets and a monetary system overcome with indebtedness. And many are on board with Neumeyer in the idea that mining has entered a bull market.

So, if the silver price does rise, how high will it go? Let’s look at silver’s recent history. The highest price for silver was just under US$50 in the 1970s; it came close to that level again in 2011 when it hit US$35.12, more than double the 2009 average silver price of US$14.67.  The commodity price uptick came on the back of very strong silver investment demand.

However, the price of silver has trended much lower lately. In 2020, US$18.60 was the highest level silver had reached as of June 16.

Silver in the future: Other opinions

Many market watchers do believe that the price of silver is ripe for a rally, and First Majestic’s Neumeyer is not alone in looking forward to a strong increase.

Speaking to a digital audience at the online MoneyShow in June of this year, David Smith of the Morgan Report argued that growing demand and declining supply will lead to significant price growth.

“Grades have been dropping for the last 10 years,” said Smith. “They have dropped over 50 percent in terms of the amount of grams per tonne that you get from ore, versus the amount that you have to dig out of the ground, and this is impacting just about every silver mine out there.”

He pointed out that because silver is a by-product of base metals output and some gold production, silver supply can’t be easily ramped up to meet rising demand. That supply/demand imbalance should eventually lead to elevated prices.

“I believe that between US$26 to US$49 silver we’re going to see what I call volcanic tremors — there will be a lot of massive back and forth of people (buying and) unloading their silver,” Smith said. “When it gets above US$50, we will see a quick run to US$65. Once that happens this will be a powerful classic eruption. It will be the highest in nominal terms that silver has ever traded, on its way to what I believe will be a three digit price figure over the next few years.”

Smith is projecting that gold could reach US$10,000 per ounce by the end of the bull market. At a gold/silver ratio of between 60:1 and 40:1, silver would be valued at US$166 to US$250.

Will the price of silver really reach US$130? What do you think? Does the idea make you more likely to invest in silver or silver mining stocks? Tell us your predictions in the comments.

This is an updated version of an article originally published by the Investing News Network in 2016.

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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.