silver investing - floor?

[LH]

http://www.bullionvault.com/silver-price-chart.do

Basically, silver was worth 5 dollars from 1994 to 2003.

Currently circa 30 dollars ounce.

Silver has use in industry, jewelry.

Silver has commodity investing use as well.

My simplistic view is that the silver jump from 5 dollars to 10,20,30,40, back to 30 currently, is likely due to the commodity investing use (maybe there was a huge jump in silver demand in industry accounting for some of that, I dunno).

So where is the floor, if commodity demand falls to the floor, is the floor is 5 dollars, where it would be supported by jewelry and industrial demand again (barring bigger supply, which may be the cause, maybe it falls to 2.5 with greater supply, or maybe, there is other demand kicking in, I have not looked into it much at all, hence this post)

Basically, while rough, admittedly. This is the exact same way I go about looking at the stock market, or any investment. I expectationally, do not expect the US stock market to fall to zero (though it could). I pick some sort of level as reasonable, say a 50 percent decline, and some level as disaster say 90 percent.

My negative silver gestalt currently, as it will not drop to zero, is it could drop to near 5, and stay there quite some time, as silver is not productive in an of itself, but does have uses.

Likewise, the US stock market could pull a japan, redo a 2008, or do a 1973, or a 1929, etc. etc. Or do a 1981 on the upside for 15 years.

So my rough estimate:

1) US stock market drop by 50 percent for 10years+, reasonable.
2) Silver drop from 30 to 5, for ten years+, more reasonable/possible than 1.

for those who have put some thought into it, does that sound reasonable?

[Dinero]

I guess $5 is as reasonable a floor as any, based on past pricing, but who knows?

If you buy US "junk" silver (pre-1965 dimes, quarters, half dollars, or 40% half dollars) the floor is the face value of the coin. Same thing with "junk" Canadian silver. Canada also has some high face-value commemoratives ($5, and $10). Germany still honors the Deutsche mark (at about two Deutsche marks per Euro) and there are 5 and 10 Deutsche mark silver coins around.

[Grt2bOutdoors]

The floor is $1. One US Silver Dollar - legal tender value is one dollar.

[hazlitt777]

Do you own any silver?

[ResNullius]

Remember the Hunt brothers?

[Grt2bOutdoors]

Remember the Hunt brothers?

Yep, they cornered the silver market, Bunker Hunt drove the price to $50 an ounce. People were hawking their silverware, cashing in on the mania - until the SEC and CFTC got involved - that was the proverbial end of the Hunt brothers. They should have just stuck to their knitting - Oil! Greed will do you in everytime .

[Abe]

Remember the Hunt brothers?

Yep, they cornered the silver market, Bunker Hunt drove the price to $50 an ounce. People were hawking their silverware, cashing in on the mania - until the SEC and CFTC got involved - that was the proverbial end of the Hunt brothers. They should have just stuck to their knitting - Oil! Greed will do you in everytime .

Actually, Bunker Hunt was not quite successful in cornering the silver market.

Nelson Bunker Hunt (born February 22, 1926) is best known as a former billionaire whose fortune collapsed after he and his brother William Herbert Hunt tried but failed to corner the world market in silver

[Default User BR]

The floor is $1. One US Silver Dollar - legal tender value is one dollar.

By that reasoning, the floor for copper+nickel is also $1, as there are clad dollars as well. The problem is that you can't (legally) convert an ingot of silver directly to coins.


Brian

[Peter Foley]

I have no idea what the floor is for silver. That said, I think using a past price is fraught with problems. While there are industrial uses for silver, one such use - film - has been in decline for years. In addition I think one should consider the cost of production. There is probably some price level at which mining and processing would cease based on 2013 production costs (labor, energy, etc.). The price point at which production would cease is probably close to the floor.

I would not be a buyer at current prices.

[camaro327]

I think what brought silver, gold, etc. off the "floor" was the proliferation of metals etfs. These have really boosted access to these types of investments with the click of a mouse or purchases by large institutional investors.

[WHL]

I own silver, and just like all of my other investments, I hope the current price goes down. It allows me to buy more!

Silver is about the only thing I DCA. I don't put any specific amount of money into it, I just buy based on spot price and my gut feeling. It's a long-term investment, but if the price ever jumps back up to the $47 we saw last year, I'm selling 100% of it.

[Dale_G]

I agree that 1 greenback dollar per ounce is the floor for $1 silver coins, but I don't expect that level to be reached.

Silver coins are are least worth something as paperweights or curiosities - and the greenback dollar is now worth about 1/3 to 1/4 of a loaf of bread or 1.4 light weight candy bars, take your pick. Neither one is good for a paper weight.

If the Treasury eventually issues wooden nickels, my prediction is that they in time will disappear from circulation. They will be more valuable as fuel.

Bad money drives out the good. More certain than death and taxes.

Dale

[HenryPorter]

I own silver, and just like all of my other investments, I hope the current price goes down. It allows me to buy more!

Silver is about the only thing I DCA. I don't put any specific amount of money into it, I just buy based on spot price and my gut feeling. It's a long-term investment, but if the price ever jumps back up to the $47 we saw last year, I'm selling 100% of it.

I like the DCA'ing idea. Some might think of it as dead money. I can think of many things I bought for some gratification that have lost 90% of their re-sellable price over time ( electronics, cars, cassettes, records, books, clothes,etc). Don't get me started on pizza or beer either. Point is, a long term hold on something like a precious metal, or a base metal like copper or nickel ( see http://www.coinflation.com for info) might fill some need to have an asset that behaves differently from your other assets. Uh, if you were loaded with mucho funds, I guess you could buy a few monster boxes of silver eagles and be done with it, so DCA should be a work-around, especially if a contrarian's contrarian tells you that silver is at bubble pricing.

[LH]

Do you own any silver?

I have 4 one ounce silver pieces given to me as a Christmas present, and one 1964 half dollar given to me by a friend : )

I keep kicking around a pm allocation, but it's so high now.

I read silver is more volatile than gold, so if looking for volatility, might go half silver half gold.

But effectively no, I do not own a serious amount if silver portfoliowise

[camaro327]

Based on my earlier comment on metals ETFs the potential floor may be $10, if needed for an estimate. The ETFs made it much more tradable. It might always be better to invest in companies that mine silver.

If you're looking at the real stuff the DCA idea is good, since prices are fairly high in nominal dollars.

[Peter Foley]

Is the floor for silver a function of supply and demand? Note the following opinion of a retired geologist:

Silver has now dropped below its total cost of production, which averages about $29. Back in 2007, producers could produce silver at about $22 (which was above the spot price of the time as well) but at a 10% inflation rate, cost per ounce now, about 4 years later is going to be around $30. Ignore mining companies that say they can produce silver at 5 or $6. That’s just mining costs and ignores exploration, smelting, refining and shipping. Back in 2007, if you looked at the top three miners, looked at their production and profits, you could calculate their total cost at $20-$24 back while the spot price was $18. Essentially, silver has been produced below total costs since the 1930′s, which is why only 22% of silver mines subsist on silver alone and the other 78% survive on their other metal production with silver as a mere by-product. No straight silver mine makes money, unless it is very, very high grade.

There seems to be some debate about this; when I search for silver production costs on the internet I found fairly recent studies that concluded $9.53, $14.50, $17.00 and $29.00. My guess is the floor of silver would be somewhere in that range.

[hazlitt777]

Do you own any silver?

I have 4 one ounce silver pieces given to me as a Christmas present, and one 1964 half dollar given to me by a friend : )

I keep kicking around a pm allocation, but it's so high now.

I read silver is more volatile than gold, so if looking for volatility, might go half silver half gold.

But effectively no, I do not own a serious amount if silver portfoliowise

We have chatted about this in the past I think...

My thought is just take a percentage allocation and rebalance. Forget about all this "floor" and "top" business. And a standard rule of thumb for gold vs. silver is set your precious metals allocation at 4/5th gold 1/5th silver. If you want a little more volatility, you could go 2/3 gold 1/3 silver. That is in terms of dollar value by the way, not ounces.

You should get it out of your system and just go for it...5% of your portfolio in precious metals

(I would also stick with the one ounce rounds or one ounce Eagles/Philharmonics/Mapleleafs when dealing with silver.)

[LH]

Is the floor for silver a function of supply and demand? Note the following opinion of a retired geologist:

Silver has now dropped below its total cost of production, which averages about $29. Back in 2007, producers could produce silver at about $22 (which was above the spot price of the time as well) but at a 10% inflation rate, cost per ounce now, about 4 years later is going to be around $30. Ignore mining companies that say they can produce silver at 5 or $6. That’s just mining costs and ignores exploration, smelting, refining and shipping. Back in 2007, if you looked at the top three miners, looked at their production and profits, you could calculate their total cost at $20-$24 back while the spot price was $18. Essentially, silver has been produced below total costs since the 1930′s, which is why only 22% of silver mines subsist on silver alone and the other 78% survive on their other metal production with silver as a mere by-product. No straight silver mine makes money, unless it is very, very high grade.

There seems to be some debate about this; when I search for silver production costs on the internet I found fairly recent studies that concluded $9.53, $14.50, $17.00 and $29.00. My guess is the floor of silver would be somewhere in that range.

Interesting.

I do not follow per se that it's mined at a loss. It would be akin to saying a certain fractionation product of crude oil, say gasoline, is sold for a loss, ignoring the profit from all the other oil products????? Seems to be a weird way of looking at it, but maybe that's proper economic way of doing it. I have zero clue. Very interesting.

Thanks for the info.

[LH]

Do you own any silver?

I have 4 one ounce silver pieces given to me as a Christmas present, and one 1964 half dollar given to me by a friend : )

I keep kicking around a pm allocation, but it's so high now.

I read silver is more volatile than gold, so if looking for volatility, might go half silver half gold.

But effectively no, I do not own a serious amount if silver portfoliowise

We have chatted about this in the past I think...

My thought is just take a percentage allocation and rebalance. Forget about all this "floor" and "top" business. And a standard rule of thumb for gold vs. silver is set your precious metals allocation at 4/5th gold 1/5th silver. If you want a little more volatility, you could go 2/3 gold 1/3 silver. That is in terms of dollar value by the way, not ounces.

You should get it out of your system and just go for it...5% of your portfolio in precious metals

(I would also stick with the one ounce rounds or one ounce Eagles/Philharmonics/Mapleleafs when dealing with silver.)

When it comes to possible allocation changes, my rule is think a lot, do little. Especially when it's a hot asset like gold silver are currently.

Appreciate your help. I may slowly add a silver and gold allocation in. Why is the rule of thumb 4/5 1/5? Is it store of wealth vs use as transactional money? Or some other rubric?

Thanks again,

LH

[hazlitt777]

Do you own any silver?

I have 4 one ounce silver pieces given to me as a Christmas present, and one 1964 half dollar given to me by a friend : )

I keep kicking around a pm allocation, but it's so high now.

I read silver is more volatile than gold, so if looking for volatility, might go half silver half gold.

But effectively no, I do not own a serious amount if silver portfoliowise

We have chatted about this in the past I think...

My thought is just take a percentage allocation and rebalance. Forget about all this "floor" and "top" business. And a standard rule of thumb for gold vs. silver is set your precious metals allocation at 4/5th gold 1/5th silver. If you want a little more volatility, you could go 2/3 gold 1/3 silver. That is in terms of dollar value by the way, not ounces.

You should get it out of your system and just go for it...5% of your portfolio in precious metals

(I would also stick with the one ounce rounds or one ounce Eagles/Philharmonics/Mapleleafs when dealing with silver.)

When it comes to possible allocation changes, my rule is think a lot, do little. Especially when it's a hot asset like gold silver are currently.

Appreciate your help. I may slowly add a silver and gold allocation in. Why is the rule of thumb 4/5 1/5? Is it store of wealth vs use as transactional money? Or some other rubric?

Thanks again,

LH

Well LH,
Thinking like this...last year stocks did around 14% and gold only did 7%. So maybe it isn't that hot...and now would be a good time to Dollar cost average into it?

Hazlitt

[hazlitt777]

Is the floor for silver a function of supply and demand? Note the following opinion of a retired geologist:

Silver has now dropped below its total cost of production, which averages about $29. Back in 2007, producers could produce silver at about $22 (which was above the spot price of the time as well) but at a 10% inflation rate, cost per ounce now, about 4 years later is going to be around $30. Ignore mining companies that say they can produce silver at 5 or $6. That’s just mining costs and ignores exploration, smelting, refining and shipping. Back in 2007, if you looked at the top three miners, looked at their production and profits, you could calculate their total cost at $20-$24 back while the spot price was $18. Essentially, silver has been produced below total costs since the 1930′s, which is why only 22% of silver mines subsist on silver alone and the other 78% survive on their other metal production with silver as a mere by-product. No straight silver mine makes money, unless it is very, very high grade.

There seems to be some debate about this; when I search for silver production costs on the internet I found fairly recent studies that concluded $9.53, $14.50, $17.00 and $29.00. My guess is the floor of silver would be somewhere in that range.

I don't take cost of production into account when determining the potential economic value of something. If it costs more to produce than the market values it, then it will no longer be produced till the price covers the cost of production plus some minimum profit.

Therefore, just basing oneself of the cost of production, taking your numbers at face value, one could still project silver to fall to $20 dollars or less per ounce.

I don't think that will happen, but this is totally for reasons other than cost of production.

[Peter Foley]

hazlit777
In my first post in this thread I said I really have no idea as to what the floor price is for silver. After doing a little research I concluded that I still didn't know, but that I disagreed with the lowest estimates posted based on economic principals. A couple earlier posts implied that the floor might be $1 or perhaps $10.
The law of supply and demand would lead one to believe that if demand is greater than supply (that is purported to be the case with silver), then the price of the product could rise until there is some equilibrium. If we were to guess that the cost to produce and bring to market (commercial or industrial) is in the neighborhood of $20, then a prolonged period of time below $20 might impact production and create a shortage. The shortage would, assuming supply and demand laws apply, increase the price.

My hypothesis would be that the floor for silver would be somewhat less than the cost of production. 10% less, 25% less, I don't know. You and I are saying essentially the same thing when you state that "If it costs more to produce than the market values it, it will no longer be produced till the price covers the cost of production plus some minimum profit."

If one is trying to limit the downside of investing in an asset like silver, I think considering the cost of production would be one factor to consider.

[hazlitt777]

hazlit777
In my first post in this thread I said I really have no idea as to what the floor price is for silver. After doing a little research I concluded that I still didn't know, but that I disagreed with the lowest estimates posted based on economic principals. A couple earlier posts implied that the floor might be $1 or perhaps $10.
The law of supply and demand would lead one to believe that if demand is greater than supply (that is purported to be the case with silver), then the price of the product could rise until there is some equilibrium. If we were to guess that the cost to produce and bring to market (commercial or industrial) is in the neighborhood of $20, then a prolonged period of time below $20 might impact production and create a shortage. The shortage would, assuming supply and demand laws apply, increase the price.

My hypothesis would be that the floor for silver would be somewhat less than the cost of production. 10% less, 25% less, I don't know. You and I are saying essentially the same thing when you state that "If it costs more to produce than the market values it, it will no longer be produced till the price covers the cost of production plus some minimum profit."

If one is trying to limit the downside of investing in an asset like silver, I think considering the cost of production would be one factor to consider.

Peter,

I didn't mean to quibble. I should have read all the posts I suppose before posting. Your reference to the cost of production got me going. I never liked the "cost of production" theory and take jabs at it perhaps needlessly.

I might add that if memory serves back in 1964 a gallon of gass cost twenty cents. Two silver dimes consisting of a total of .14 ounces of silver bought you a gallon of gas. Today it would buy you 4.30 dollars of gas. So, since gas is now here in my part of Wisconsin, 3.75 a gallon, I would argue perhaps silver is a bit over valued on that basis. But then again, perhaps both gas and silver are undervalued.

But I would prefer making a guess based on that metric rather than on the cost of production.

Things are a mess right now and trying to evaluate anything is challenging at least to me. So I stay broadly diversified and pray that the markets don't get too volatile.

all the best,
Hazlitt

[Peter Foley]

hazlitt777
So if your not too far from the border, hop over to Minnesota and fillup for about $3.55. I too remember gas when it was in the .20 to .25 range.
I'm not fond of commodities myself having bought silver in the late 1980's and holding it for 20+ years to make a small profit. I hate to see people rushing in to buy silver now because it is a hot item. I just see a lot of downside risk left at today's levels. I think trying to evaluate commodities is especially difficult.

I was trying to write in such a way so that, reading between the lines, a silver investor might be cautious. I'm not sure I achieved my goal.

No offence taken, regards,

Peter

[Phineas J. Whoopee]

Hi everyone,

The production price of silver is a red herring. Most extracted silver is a byproduct of other mining. So long as the marginal return from casting it into bars exceeds discarding it as tailings it will be produced.

The principal sources of silver are copper, copper-nickel, gold, lead, and lead-zinc ores obtained from Canada, (such as Cobalt, Ontario); Mexico (such as Batopilas); Poland; Peru; Bolivia; Australia; and the United States.
http://en.wikipedia.org/wiki/Silver_mining#Areas

The story is similar, but not as extreme, for gold.

Gold is also produced by mining in which it is not the principal product. Large copper mines, such as the Bingham Canyon mine in Utah, often recover considerable amounts of gold and other metals along with copper. Some sand and gravel pits, such as those around Denver, Colorado, may recover small amounts of gold in their washing operations. The largest producing gold mine in the world, the Grasberg mine in Papua, Indonesia, is primarily a copper mine.
http://en.wikipedia.org/wiki/Gold_mining#Byproduct_gold_mining

Are you sure you fully understand what you're investing in?

PJW

[LH]

Hi everyone,

The production price of silver is a red herring. Most extracted silver is a byproduct of other mining. So long as the marginal return from casting it into bars exceeds discarding it as tailings it will be produced.

The principal sources of silver are copper, copper-nickel, gold, lead, and lead-zinc ores obtained from Canada, (such as Cobalt, Ontario); Mexico (such as Batopilas); Poland; Peru; Bolivia; Australia; and the United States.
http://en.wikipedia.org/wiki/Silver_mining#Areas

The story is similar, but not as extreme, for gold.

Gold is also produced by mining in which it is not the principal product. Large copper mines, such as the Bingham Canyon mine in Utah, often recover considerable amounts of gold and other metals along with copper. Some sand and gravel pits, such as those around Denver, Colorado, may recover small amounts of gold in their washing operations. The largest producing gold mine in the world, the Grasberg mine in Papua, Indonesia, is primarily a copper mine.
http://en.wikipedia.org/wiki/Gold_mining#Byproduct_gold_mining

Are you sure you fully understand what you're investing in?

PJW

Interesting info, thanks.

[leonard]

Considering that efficient market prices are determined by future new "news" - especially in markets as watched as commodities - why would one think they could guess the future price - let alone the unknown parameters around that price?