Three charts: investing in silver is a bargain

 

Silver and gold are not undervalued according to their production cost, but they are undervalued as a store of value. Markets forgot this, since we live in a risk-free world. Investing in silver and gold seems a no-go zone. But there is no such thing as a free lunch. This limits downside risk but it provides a high upside potential.

The price of oil has an important impact on the price of silver (in this article we highlight silver, but the same goes for gold). The beaten down silver price as a store of value makes it depended to oil prices.

Energy is the key reason that drove the value of most assets for centuries, and it still does.This means silver has the power to rise significantly in the next financial crisis. And there will always be a new financial crisis.

The price of silver has moved in tandem with the price of a barrel of oil for almost a century.

Last time oil prices were this low, silver was less than half todays price. This may give silver investors a bad feeling as this relationship portends for a much lower silver price. But the silver market today is very different from a decade ago.

The average yield by the primary silver miners fell from 13 oz/t in 2005 to 7,6 oz/t in 2013. This was a 42% decline in average yield in just eight years. Only the Tahoe Resources Escobal Mine reversed this trend in 2014, but just for one year.

Investors need to realize the primary silver mining industry is processing almost double the amount of ore to produce the same or even less silver than it was just a decade ago. This means costs are on the rise, despite the lower oil prices.

We can take Pan American Silver as the blueprint for the industry. PAN has a break-even cost at just a bit less than $16 per ounce. Thus, a lower oil price will not translate into the same corresponding silver market price we had in 2004.

 

Investing silver: Conclusion

Silver is not undervalued due to its present primary silver mining production cost, but rather due to its misunderstood store of value. Right now silver is just a commodity hovering around production cost. This limits more pain for investors but it provides u enormous potential the coming months and years.