Simple Economics Say Silver Prices Could Surge
There’s something very interesting happening in the silver market. It could be great for silver prices. If you are bullish on silver, you could generate immense returns in the coming years.
Before going into any details, let’s talk about basic economics. This is one of the first few lessons you learn at school in economics…
You see, a business’s main goal is to generate profits.
Profits are essentially the cost of production subtracted from the selling price.
The higher the selling price and the lower the cost of production, the bigger the profits.
If a business sells a chair for $10.00 and its cost of production is $7.00, then its profit is $3.00. In case the selling price of the chair increases, the business’s profit jumps. Or if the cost of production drops and the selling price remains the same, profitability improves.
Stepping it up a notch…
Let’s say, for example, that the chair business is down. Consumers don’t want to buy as many chairs and the selling price has dropped to $5.00.
Simple math here; chairmakers are losing $2.00 for every chair they produce in this case.
Will the chairmakers produce more? It’s highly unlikely. If they keep producing, they could run into a lot of issues. It’s just bad business management. Don’t forget, a business’s main goal is to generate profits.
Looking at the even bigger picture…
In case all chairmakers are facing similar issues, this could eventually create a shortage of chairs in the market.
Silver Miners’ Production Costs Are Surging Across the Board
As it stands, silver mining companies are going through the exact same basic economic problem. Their costs of production are high and silver prices are low.
Consider First Majestic Silver Corp. (NYSE:AG), for example. In the third quarter, it produced an ounce of silver at all-in sustaining costs of $15.12. This was higher than the same period a year ago. (Source: “First Majestic Reports Third Quarter Financial Results,” First Majestic Silver Corp., November 7, 2018.)
At the time of writing, silver prices stood at $14.28.
So, for First Majestic Silver, for each ounce it extracts from the ground, it is losing about $0.84.
Mind you, First Majestic Silver is one of the most efficient silver miners out there. At some companies, the cost to produce is much higher.
What’s Next for Silver Prices?
Dear reader, the silver market has been operating in a deficit over the past few years—this is when the demand is higher than the supply.
It has to be questioned what happens in the silver market if silver prices don’t move.
There’s a high probability that we see a shortage of some sort.
And you know what happens when there’s a shortage? You see prices surge higher.
I will say this: The longer this situation remains in the silver market, where the cost of production is higher than the selling price, the bigger the shortage could be. This could be great for those who hold silver or silver-related investments. The bigger the shortage, the more robust the move to the upside.