Commodities and Precious Metals
Recently, I discussed how the next economic cycle is now starting. A feature of this new cycle is the remarkable need in the world for base metal and for precious metals.
I discussed how the ‘doom and gloom’ crowd was urging people to buy precious metals to save themselves from the impending collapse. Ironically they are correct in their assertion to buy precious metals, but for the wrong reason.
Demand for Base Metals
Examine the current price of copper. Down a bit from its dizzying heights, but still many times greater than its value before 2008. This much higher price is because the world is demanding much more copper and existing stockpiles are clearly not sufficient. This is in spite of the economic meltdown that started in 2007 and which is still in evidence.
The economic meltdown should also have melted away the demand, but it didn’t because new demand for supply is coming from new areas – namely China. The balance of demand and supply is showing a greater demand for copper, than the supply appears to be capable of supplying.
Existing mines are not producing sufficient supply to meet demand and supply is actually dropping as mines become played out. New discoveries take decades to come into production, so the supply side of the equation is a large factor.
The Green Movement
Ironically, it is the worldwide green movement – the transition to a friendlier natural environment – that is a major factor in all of this. Bringing new deposits of any metal, into production now, is a daunting effort. Because of so many new regulations, and safeguards, and objections from environmentalists, bringing any mine into production, faces a long time frame and many obstacles. These difficulties make the financing aspect of it much more difficult, and costs escalate continually. The effect is a serious pinching of future supply.
The other effect is that as costs rise, the price to buy copper also rises. No-one will produce copper in order to lose money.
As China continues its relentless march towards modernization, the demand for copper continues to grow. So it also is in India. As the US continues its climb out of the doldrums, all of its aging infrastructure needs updating and replacing, as does so many parts of the world that industrialized in the early years of the last century. Demand looks to continue to grow.
So if DEMAND is growing, and SUPPLY is shrinking, it seems obvious that investors should look for the currently depressed shares of junior mining companies. The deposits discovered by these companies over the last decade will suddenly become of interest and the investment should prove valuable.
The Prediction of the Stock Market
People say that the market is always correct. While I disagree with the generality of that statement, the market is certainly saying that demand for copper will remain high, as the price of the commodity remains at dizzying highs.
The market is similarly indicating that demand for silver and demand for gold will remain high and will grow, with the price of these commodities growing accordingly.
Demand for Silver
An identical scenario is in evidence for silver. A few years ago, when camera film was being replaced by digital film, the common view was that demand for silver would drop, as would the price.
Demand for Silver is Growing – Dramatically Growing
In fact, the opposite happened. Silver has proven to be invaluable and we can’t get enough of it. Silver is now in high demand:
- for the technology industry where it is almost universally used;
- for medical purposes where its properties and antibacterial values have become widely recognized;
- for the electrical industry where new grids to carry power are springing up everywhere; and
- in many other places where uses for silver are increasing..
The Supply and Demand Equation for Silver
Similar to my comments about copper, mines producing silver are shrinking in supplying the metal, and new sources are tough to bring on stream.
In a similar situation to copper, one of the ironies of the ecological movement and the Green Movement, is that it is now very difficult to bring a new silver mine on stream. The hurtle of regulatory issues and local population issues, makes bringing new sources to the supply side of the equation, a very difficult and long term proposition. It is also now VERY EXPENSIVE. The cost of new mines dwarfs the cost of bring a mine on stream 20 years ago.
Projection on the Price of Silver
The price of silver in the days of Bunker Hunt in the 1980’s was $4.00, rising to the very low teens when ‘Bunky” tried to corner the market.
In the madness of the 2000’s, it reached a high of almost $50, then fell. But it didn’t fall that far. It is now a bit over $30, and showing strength.
Here again, demand is outweighing supply, and shortage gap is growing.
The price of silver inevitably will rise.
Readers will note that I am a director of a silver explorer in Mexico, Argentum Silver Corp (ASL).
Our funds have a number of investments in silver explorers/producers in the junior sector.
Next: Commentary on Supply and Demand for Gold
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
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