What Does Falling Silver Mine Output Mean for Investors?

Silver mine production fell by about 2 percent in 2016 and could decline even more this year. Here's what investors need to know.

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Silver demand is on the rise. The white metal thrives during times of economic and political uncertainty, and recent global events have made it an appealing safe haven for many investors.

At the same time, silver mine supply is trending downward. According to a report from Capital Economics, silver mine production declined by an estimated 2 percent in 2016, and output is expected to continue to fall this year.

“We estimate that silver mine supply could fall by 4 percent in 2017,” Simona Gambarini, a commodities economist at the firm, said via email.

Capital Economics is not the only firm predicting a fall in silver mine supply. CPM Group expects silver mine output to fall in 2016 for the first time since 2011, while HSBC (NYSE:HSBC) analysts are calling for silver mine supply to fall to 872 million ounces this year from 887 million ounces in 2016.

According to Capital Economics, silver mine supply dropped in 2016 in large part due to production cuts from major diversified miners like BHP Billiton (NYSE:BHP,LSE:BLT,ASX:BHP), Nyrstar (EBR:NYR) and Glencore (LSE:GLEN), all of which produce silver as a by-product.

This year, it’s possible that silver by-product production will increase at base metals mines — many have announced plans to restart some of their idled operations in the next few months.

But that output won’t be enough to stop silver mine supply from falling this year. “There is a risk that some production might come back on stream owing to higher zinc and lead prices,” said Gambarini. “[But] since it will take some time for producers to ramp up output, we think that this is likely to become an issue only in 2018.”

For investors, of course, the key question is whether this year’s projected decline in silver mine output will push the metal’s price up.

According to Gambarini, that won’t necessarily be the case. “The upshot is that the recent fall in silver mine supply might prove temporary. Nevertheless, we think that demand fundamentals will be more important in determining the direction of prices over the next few years,” she says in the report.

Overall, Capital Economics sees the silver price remaining fairly steady over the next few years. Its silver price forecast is $14.50 per ounce by the end of 2017 and $17.50 by the end of 2018. As of 5:00 p.m. EST on February 22 the white metal was sitting at $17.92. 

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

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Comments
  • “Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.” is nice, but who knows if her husband own stocks. If would be better if she (and others) stated that no one she know or is related to, to the best of their knowledge…”

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