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How might cost pressures and reduced supplies affect the decision to buy silver?

April 24th, 2012 No comments

Mining companies around the world are feeling the pressure from rising oil prices, labour costs, and taxes. Industry leaders at the Reuters Global Mining Summit in early April 2012 have suggested that keeping a steady level of supply and boosting production of precious metals could become a challenge with these increasing costs. A reduction in silver supplies could push up prices and make it a good time for investors to buy silver.

Reuters reported that while many miners were reporting record profit margins, capital costs for building new projects were surging with energy, material, and labour prices. An example of this was Newmont Mining’s recent shelving of its Hope Bay gold mining project. The project was cancelled and written off for $1.61 billion. With many investors keen to buy silver, rising costs of mining and exploration could potentially push up silver prices.

Are silver supplies going up or down?

Will we see a curtailing of supply due to cost pressures driving higher demand to invest in and buy silver? Based on very long-term historical averages, Mexico has been the world’s largest silver producer, providing around one-third of the world’s silver over the past 500 years. It was overtaken by Peru in 2009 but still accounts for around 20 percent of world silver production. In 2010, Mexico produced 3,500 metric tonnes of silver. Peru, China, Australia, Chile, and Bolivia are some of the other major silver producing countries that tend to produce and sell rather than buy silver.

The Silver Institute’s 2011 World Silver Survey found that total silver supply rose by 15 percent in 2010, though the growth was led by producer hedging and government sales and recycling. Mine production grew by only 2.5 percent in the same period, although supply levels were at a historical high of 23,889 tonnes.

Scrap supply or reuse rose by 14 percent in 2010, predominately through industrial and jewellery recycling. At the same time, industrial demand to buy silver grew by 20.7 percent, with strong growth in coin minting, solar panel production, the car manufacturing industries, and the jewellery industry, all of which drove the demand to buy silver.

Is it time to buy silver?

While figures indicate that silver production is still high, it should not be taken for granted that supply will be sufficient for everyone who wants to buy silver. Demand to buy silver across different sectors is growing, particularly in the industrial sectors. Should energy and labour costs continue to grow to the extent of affecting viability of new projects, silver prices could continue to see high growth over the long-term. This could mean that now might be a good time to buy silver.

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