The gold crash might have a silver lining, literally

A must read: CYA: SE:
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Published: July 31, 2015 1:23 p.m. ET

70% of silver production in 2014 came as a byproduct of other mining

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Fewer silver ingots to come?

By

WilliamWatts

Deputy markets editor

It has been an unhappy July for gold bugs, but the yellow metal’s rout—and declines in industrial metals prices as well—could be setting the stage for a significant silver rally, argues one analyst.
That’s because silver is often mined as a byproduct of copper gold, zinc and lead, wrote Simona Gambarini, a London-based commodities economist at Capital Economics, in a note. In fact, around 70% of silver production in 2014 came as a byproduct of other mining activities (see chart below).

The plunge in prices for many of those other metals (gold is on track for its biggest monthly drop since June 2013) is translating into substantial cuts in capital spending by miners, which in turn means lower output, Gambarini notes.

All well and good. But silver isn’t immune to the same bearish factors, including abundant supplies, a rising dollar, expectations for a Fed rate hike, and concerns over China, that have served to drive down other metals prices. September silver futures SIU5, +0.44%  were up 10.4 cents Friday at $14.81 an ounce, but silver remains down more than 5% since the end of last year.
Read: Forget about whether $100 silver is possible—how about $1,000

US:SIU5

$14$15$16$17$18$19

While silver hasn’t suffered the same recent plunge as gold GCZ5, +0.58% which is down more than 7% since the beginning of the year and notched a 5 1/2 year low this week, the metal has suffered a steeper price drop than its yellow counterpart or major industrial metals over the past three years. (Zinc prices have risen, but that is due in part to mine closures, Gambarini said.)
Oversupply has been a big driver of silver’s decline over that period, said Gambarini. And even as prices fell, silver production continued to rise thanks to investments made when prices were much higher, she explained.
Gambarini, however, contends that production had peaked and was already set to decline over coming years. Now, the slump in precious and industrial metal prices could accelerate the process, she said.
“As a result, silver as a byproduct could start to dry up soon, leading to a much sharper slowdown in output than we had originally anticipated,” she wrote. On top of that, the latest data for the top 15 primary silver mines showed a 3% year-over-year fall in production in the first half of 2015, she said.
All in all, it should add up to a 1% fall in 2015 silver output, said Gambarini, who has penciled in a year-end price target of $18.70 an ounce.