Silver Miners Are Forecasting Higher Silver Prices

Friday, July 29, 2016

silver coins

Silver has been one of the best-performing assets in the world this year, up 45% since its low of $13.85 in January.

Back in October of last year, we made the case for the pending silver bottom that occurred in December based on a series of technical indicators relating to the relationship between silver miners and the price of their primary product - silver bullion. For reference, that article can be found archived here:

We should expect there to be some observable relationship between silver miners and silver. After all, the miners derive the bulk of their profits from sales of this metal. And since their input costs (energy, labor, exploration expenses) do not fluctuate to the same degree as their output prices, silver miners have profits that are indeed leveraged to the price of the underlying precious metal.

We can observe this leverage effect with a quick comparison between the price of silver, and Silver Wheaton (SLW), one of the strongest "blue chip" silver-streaming companies in the world. Below we show the relationship between these two investments in the sector, with silver on top and SLW below, since the beginning of 2016:

Note that each dollar increase in the price of silver has translated to over $3 in price appreciation for SLW. (Of course, this leverage effect can work in reverse, which is why silver mining companies can go bankrupt during a silver bear market, while the price of silver can never go to zero.)

The silver miners tend to lead the price of the metal at critical junctures, as investors bid up or sell off these companies' shares in anticipating of rising or falling silver bullion prices. Having navigated the bottom in silver and now in the beginning stages of a new bull market, let us look at some likely targets for the price of the metal later this year.

What Are Silver Mining Companies Now Forecasting?

Silver Wheaton (SLW)

We continue with an analysis of the relationships between key silver mining companies and the price of the underlying metal. We will take an around-the world perspective by looking at three key silver mining investments, and compare the price level these companies are trading at with the price of silver bullion.

We show the silver company on top, and spot silver on bottom, over the same timescale.

We begin again with Silver Wheaton (SLW) and silver:

With over 47 million ounces of silver produced in 2015 at a cash cost of near $4.50 per ounce, SLW is the premier silver streaming company in the world.

Note the current price of SLW is above $27 per share. The last three times in which SLW traded at this level were in August 2013, February 2014, and July 2014, respectively. These levels are highlighted by the horizontal green band above.

We have drawn red vertical bands downward to the corresponding price of silver at those junctures. Note that silver prices reached above $25.00 in August 2013, above $22.00 in February 2014, and above $21.50 in July 2014. This range -- $21.50 - $25.00 -- is shown by the second green band to highlight the price level that SLW is forecasting for the price of silver.

In sum, based on an analysis of the price data of SLW compared to silver, we can see that this primary silver-streaming company is now factoring in a $21.50 - $25.00 target for spot bullion.

Pan American Silver (PAAS)

Having produced over 25 million ounces of silver in 2015 at a cash cost of nearly $8.00 per ounce, Pan American Silver is one of the largest actual silver mining companies in existence.

PAAS is now trading just below $19 per share. The last time PAAS traded at this valuation was in October 2012 (first green band), when silver prices ranged from $33 - $36 per ounce (red band).

In sum, PAAS is trading at a level indicative of $33 - $36 per ounce for spot silver.

Global X Silver Miners ETF (SIL)

The SIL ETF contains a basket of over 25 individual silver miners, including SLW and PAAS referenced above. It thus gives us an overall average of what the entire sector is expecting as far as silver producers are concerned.

SIL is currently trading just below $50/share. The last time it traded at this level was in August 2013 (green band).

The price of silver when SIL last traded at this level averaged between $24-25 per ounce.

In sum, the SIL ETF basket of miners are currently factoring in $24-25 spot silver.

Takeaway On Silver Prices

Silver miners are now factoring in sales prices for silver of between $21.50 and $36.00, depending on which miner we are analyzing. When we perform this analysis on a wide basket of producing companies, we find a high confluence of targets in the $24.00 - $25.00 spot price level.

The major point is that the primary surge higher off the December 2015 bottom has further to go for silver.

Nearly all major silver miners are pricing in higher spot silver prices for their revenue streams. Although we are now directly within the weakest season for the precious metals (summer), the silver miners are predicting another advance in prices either late this summer or into the fall.



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Christopher Aaron

Christopher Aaron began his career as an intelligence analyst for the CIA and Department of Defense. He served two tours to Afghanistan and Iraq between 2006 - 2009, conducting pattern-of-life mapping for military leaders.

Mapping shares similarities with technical analysis of the financial markets because both involve the interpretation of repeating patterns found in human nature. He is the founder of iGold Advisor, providing research on the precious metals, and iGlobal Analytics, featuring technical analysis of the global capital markets.

Christopher speaks regularly on the cyclical patterns found within the financial markets and on international policy. He has been featured in the New York Times and NPR news amongst other publications.