Peak Silver

Imagine the world without the production of silver. The end of the extraction of the white metal. The termination of all silver mines. Sounds depressing, right? It would not be a world without the chemical element with the symbol Ag, as fortunately a lot of bullion is held as investments coins, bars or jewelry. But still, it is hard to imagine the world without silver mining. Such gloomy visions are connected with the idea of peak silver.

What does it mean? Well, the peak is the point of greatest development, value, or intensity. Think about orgasm as the peak of sexual pleasure. Going back to more mundane things, peak silver is the maximum rate of global silver extraction. It is the point in time when the peak of bullion’s production is reached, after which it is expected to enter a terminal decline. Has silver production peaked? Has the mining of silver reached its maximum level, now approaching zero? Let’s analyze the chart below.

Chart 1: Mining production (red line, right axis, in million ounces), total supply (green line, right axis, in million ounces), and price of silver (blue line, left axis, annual average, in $) from 2007 to 2016.

Peak Silver: mining production and silver price. Peak silver

What can we see? There was a peak in 2015. And what we can’t see in the chart above is that there were also peaks in 1990 and 2001. However, the mining production did not enter a terminal decline after them, but continued the upward move. Hence, the fears – or actually the silver bulls’ hopes – of peak silver seem to be exaggerated. Many analysts forget that the most important resource in the world is not oil, copper, or even silver – it is the human mind and its creativity. Even if mining decreases, technological progress should increase our ability to explore previously unfeasible ores.

Another issue that many analysts don’t understand is the supply of silver. We cannot equal the annual mining of the white metal with silver’s supply. And we mean here something more than taking recycling into account. The key thing is that annual mining production is a tiny fraction of the total silver stock. Global silver holdings are smaller than total gold stocks, but in November 2017 the London Bullion Market cleared more than 240 million ounces of silver, i.e. more than one fourth of the annual mining. It implies that a lot silver comes to the market as a disposal of silver holdings than from the mines.

What does it mean for investors? Don’t listen to the so-called experts who have been calling for peak silver for years. Even if it occurs – which is unlikely, especially in the long run – it will not necessarily lead to a rise in the price of silver. The reason is that there are important silver holdings in the world. Not as large as in the case of gold, but silver is still not like other industrial metals. Remember also that silver is mainly produced as a byproduct through the mining of other commodities – it means that the annual silver mine supply is mostly determined by the production of other metals. Thus, the notion of a production peak in silver is far from being simple, or even somewhat irrelevant. Don’t forget about it when investing in precious metals. Making choices based on misunderstandings and fallacious concepts is not the best way to reap profits.