Article written by Shaun Connell
We are living in extremely exciting times. The Europeans are struggling to get their economy back on track and they have made some recent decisions that might cause silver prices to continue to drop like a rock.
The details that matter
First, Europe has a total of 9 countries on its credit watch. They will be adding 6 more. These 6 currently have a triple AAA rating and make up much of the traditionally core “good” economies of Europe, so being added to the watch list will effect the economic outlook of Europe negatively.
Second, the European Bank has again stated they don’t want solve this problem by printing money. If they maintain this position, three countries will likely default on their debts: Greece, Italy and Spain. If even one of these countries default, there will be a massive credit crunch throughout the world – not unlike 2008.
Third, while this is a sovereign countries debt liability, the bigger issue is the “insurance” banks across the globe carry on the bond’s within these countries. If the banks are required to pay out on the insurance for the debt that these countries carry, it would have a massive global ripple effect and squash available credit supply, especially when cash reserves are liquidated for the insurance of the bonds.
If this becomes a global problem, we might see some under the table finagling from the Federal Reserve with the banks that back the bonds. While this is pure speculation, its not a long shot considering how the Fed floated trillions of printed money to banks in Europe during the ‘08 crisis.
As it stands – we need to watch the European Central Bank. If they won’t print, at least one of the three countries will likely default on its debt (as long as our Fed doesn’t get involved).
How prices may continue to drop…
If a country defaults and the European Central Bank doesn’t print money to save them, the resulting credit crunch will drive down silver prices. Why?
Significant debt default has forced the precious metal markets down throughout history.
Most people will have to liquidate their assets (silver) to cover their shorts and debts in other areas.
Also, as the ripple effect of the debt default moves throughout Europe, many people will begin seeing the dollar as a safe haven from the euro. This rise in the dollar will likely cause downward pressure on the metal markets.
Why Silver Prices won’t stay down…
From 1950 to now we’ve gone from an estimated 10 billion ounces silver to 700 million ounces in above ground available physical silver. That’s a 93% drop.
But demand is still surging.
For example, in 1999 we had around 100 million ounces in the electronic industry. Today we have closer to 250 million. In the solar industry silver wasn’t really used in 1999. 2014 projections are expecting the industry to use 130 million ounces a year.
Investment demand of physical silver is also rising. In 2010, there were 35 million American Silver Eagles sold. That nearly equaled the entire physical silver mined that year. This year, 22 million American eagles were sold by June.
Production seems to have peaked in silver as well. A recent report (seen here: http://www.scribd.com/doc/68287518/Peak-Silver-Revisited) shows that of the top eight states in the U.S. have peaked in silver production. There are several reasons, but one is because silver is mostly a by-product of copper mines. Copper supply has peaked worldwide and is exponentially getting harder to supply. This means silver focused mines take much more financial investment to get a return of silver – in both energy, capital and time.
The fact of the matter is simply this: despite advances in technology and machinery, it is taking more resources and time to mine less silver that it did in the past.
Even though we can mine ten ounces for every one ounce of gold (10:1) and silver has more industrial demand than gold, silver is still valued (on average) at 1:53 the price of gold.
Physical silver supply is diminishing, but demand for silver across industry and as an investment is growing.
Those who know and foresee the results of silver’s future will likely jump into the silver market with extreme energy when the European default causes downward pressure on the silver price. (If only to buy up a needed commodity for the production of their industry products.)
But immediate depression in our economy will be stronger than long term supply.
It is even possible, especially if a European country defaults, that silver goes under the mid-twenties before the industry buy-up begins.