Potential Bull Silver Market Ideal for Mexico’s Producers

Silver is making up for lost time. After losing roughly 32 percent of its value in March, falling to US$11.85/oz, silver prices have climbed back up to US$17.20/oz at the time of writing. Analysts are pointing out that the trend in silver’s price shows potential for a further increase due to a supply deficit and to investors seeking refuge in precious metals as safe-haven assets. Silver miners in Mexico are due to benefit from the expected bullish market.

A supply deficit in silver is expected due to the temporary suspension of mined silver production around the world as a response to COVID-19. As Capital.com notes, “the deficit is expected to widen this year as the fall in production outweighs the fall in industrial demand. Supply is forecast to fall to 959 million oz in 2020 from 1,003 million oz in 2019, while demand is set to fall to 1,096 million oz in 2020 from 1,127 million oz last year.”

Additionally, it is not unreasonable to foresee a surge in industrial activity starting in the closing months of 2020. To this point, Michael A. Hayed, writing for Seeking Alpha, comments: “Unlike gold, silver's utility in the industrial landscape is a lot more pronounced. That should bode well for the prospects of silver, with industrial demand accounting for about 55 percent of total silver demand.” Higher demand for silver coupled with a contraction in supply would push the metal’s prices up.

Silver’s appeal as a safe-haven asset is also likely to make its price rise. In March, the gold-to-silver ratio reached a record high of 126:1. That means that 126 ounces of silver were needed to purchase a single ounce of gold. The unprecedented ratio is partly explained by investors rushing to gold after stock markets crashed in late February. While silver is considered a safe investment in times of crisis, gold is definitely seen as more appealing than silver. However, the ratio has decreased since then and is at around 100:1 at the time of writing. The ratio is still very much above average, indicating that silver is undervalued in comparison to gold; and that it has fallen from 126 to 100 in two months may indicate that silver is gaining momentum. As Seeking Alpha notes, “on account of the unprecedented level of recent monetary stimulus that has decimated the value of paper currencies, precious metals will be increasingly seen as a store of value. Gold has been the rockstar of asset classes in the recent past, but there is greater value to be seen in silver. Physical investments in silver will ramp up as investors diversify away from uncertain equities and seek suitable alternatives to cope with a potential reflation scenario.” 

Potential high silver prices in 2H20 and 2021 may put silver producers with assets in Mexico in a better position than they might have expected after the COVID-19 temporary suspension in operations. For example, Impact Silver, which owns three silver mines in Mexico, recently said that its “ongoing operational improvements, coupled with strong silver fundamentals,” result in the company being “well-positioned to capitalize on increased investor demand for pure precious metals miners.” Frederick Davidson, President and CEO of Impact Silver stated that “thanks to the disciplined operational control we set in place to survive the difficult low silver prices stretch for the last six years, we are now seeing dividends from our efforts.” While referring to the good results the company had in 1Q20, the same operational improvements and strong silver fundamentals Davidson mentions may prove beneficial to Impact Silver in the near and medium-terms.

First Majestic Silver, one of the Top 5 silver producers in Mexico, is also expecting higher silver prices in the coming months. The company announced in its 1Q20 report that it “postponed the sale of 292,000oz of silver and 700oz of gold worth approximately US$5.3 million at the end of 1Q20. First Majestic holds 1,045,342oz of silver and 1,459oz of gold in inventory.” Keith Neumeyer, President and CEO of First Majestic declared that “as the COVID-19 pandemic sparked higher than normal volatility in the metals market near the end of the quarter, we temporarily suspended our silver and gold sales as paper prices dropped significantly below true physical prices.” Neumeyer went on to say that “these inventoried ounces have been carried over into the second quarter and will be sold as prices improve.”