Resource World Magazine

42 www.resourceworld.com J U N E / J U L Y 2 0 1 6 I f we look at stock charts of silver pro- ducers and companies with advanced development-staged silver projects you will undoubtedly notice a common theme: their value has steadily increased since the beginning of 2016. Take for example, First Majestic Silver [FR-TSX] – up 60%; Fortuna Silver Mines [FVI-TSX] – up 60%; and MAG Silver [MAG-TSX] – up 40%, all since the start of 2016. What has changed? Yes, silver is up 20% year-to-date and silver companies are highly leveraged, but if we look at the silver price exactly one year ago, it was trading very close to the same price. At that time, the share prices of the aforementioned com- panies were flat or trending down. "Silver is arguably the most schizo- phrenic metal out there," commented Dr. Peter Megaw, Chief Exploration Officer of MAG Silver. "About half of its demand is monetary and the other half is industrial. So when one extreme or the other kicks in, silver has a tendency to take off." "I think what's driving it now is interna- tional uncertainty and a run to safe haven investing," said Dr. Megaw. "I believe it is a fair argument to make that monetary or safe haven demand is likely to be more aggres- sive to the upside then industrial demand, but industrial demand will always buffer the price from going too low." According to Bank of America Merrill Lynch Analysts, who have upped their long term forecast for silver "the funda- mentals are now the strongest in years." They base their forecast on declining mine output and rising industrial demand. So it appears that both halves of the silver demand psyche, monetary and industrial, are currently pulling in the same direction. According to statistics from Thomson Reuters GFMS Annual Silver Survey (2016), global silver mine production has increased for a 13th consecutive year to a record high of 27,579 tons (886.7 million ounces). What's interesting is that physical demand has outpaced production consis- tently since 2013. In fact, statistics indicate there has been a physical silver deficit since 2013. Last year the silver deficit (difference between total supply and physical demand) was negative 4,038 tons, (129.8 million ounces). When changes in Exchange Traded Products (ETPs) and Exchange Inventories (EI) were factored in the net balance was still in deficit by 3,498 tons (112.5 million ounces). The net balance of the silver supply and demand equation (the difference between total supply and physical demand includ- ing ETPs and EIs) has been in deficit for the last decade, yet the silver price has varied from an average of US $11.55/oz in 2006 and US $35.12/oz in 2011 and back down to an average of US $15.97 in 2015. The GFMS report states that last year silver prices were dragged lower by inves- tor expectations for an interest rate hike in the US and a weakening Chinese economy. These two factors negatively impacted sil- ver because of its dual nature as a financial asset and an industrial commodity. According to GFMS, investors took last year's silver price declines as an opportu- nity for bargain hunting in the physical market. The acceleration of physical pur- chases (292.3 million ounces of coins and bars) created a subsequent shortage of national mint coins globally. In the first quarter of 2016, GFMS believes that safe haven demand was the primary driver on top of already strong fundamentals. As always, geopolitical events will play a big part in whether or not metals benefit from safe-haven buying. On top of that, silver has a very active Over-the-Counter (OTC) market. This can have a significant impact on the price of the commodity due to market depth. The Thompson-Reuters World Silver Survey esti- mates that the total volume of silver traded on the OTC markets in 2015 was in the order of 81.7 billion ounces, with a value of US $1.3 trillion; this is equivalent to over 90 times annual mine production. This is a significant factor when you consider that the actual amount of silver available for physical trade in above ground inventories is much lower that what has actually been produced. This is a result of many decades' industrial consumption. Some of that comes back as scrap but most remains tied up. Taken together, all of these factors pull at the silver price in different directions at different times and make the commod- ity "schizophrenic," as Dr. Megaw so aptly stated. From his perspective, MAG Silver is clearly benefiting from silver's upward trend because the silver grades at its Juanicipio Project in Mexico are so high. High enough that when it goes into pro- duction, the market can go up and down and there will still be plenty of margin and plenty of room for comfort. "I think we are seeing a renaissance of interest in the commodities market espe- cially the precious metals, but my crystal ball is no better than anyone else's." stated Dr. Megaw. n SilvER Silver regains luster in eyes of investors by Thomas Schuster

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