Why Is Silver Falling

The question on everyone’s lips right now is of course, should one still be invested in physical silver? To answer this question one has to take a look at what the alternatives are.

Cash

Cash is King they always say. This is true to take care of living expenses as well as an emergency fund. But we all know that for longer term funds the bank interest rate just does not cut it and your money will lose purchasing power because of inflation.

Stocks

If we are going into a recession as is widely expected, stocks will pull back significantly from current levels. The current flooding as well as bush fires and drought in many parts of the world are going to put huge financial stress on many countries. Most of these are first world countries which will make the impact on world financial systems even worse. Then of course there is the Russia and Ukraine issue which is causing unprecedented energy complications for most of the first world countries.

Bonds

With interest rates rising so rapidly, bond is not a good idea. Higher interest rates mean the bond issuers must pay more interest to their customers. The risk of bonds going into default is much higher that 12 months ago. The higher the interest rates, the higher the chances of default. For us south africans, investing in our own government bonds is very risky given our government’s poor performance record. To invest in overseas bonds you will have the added risk of currency fluctuations.

Property

Owning the property you live in is always an excellent investment. If you are invested in other properties you will have a liquidity problem no doubt. If liquidity is not a problem for you, this is a good option for the long term.

Physical Silver

Realistically the price of silver should not go below $19.50. The reason is very simple. The production cost of making a 1 oz silver coin is $19.50 on average. Right now the silver price is at $18.60 which means the silver miners are making a loss on their silver. This situation is getting worse by the day due to the rapidly rising energy costs miners have to contend with. This, coupled with falling ore grades are crippling the silver mines all over the world. The only option left to miners is to start hoarding their silver to create a shortage. This will push prices back up. Right now we are in the calm before the silver storm. I have included a graph below to illustrate how the silver price always bottoms out at the cost of production levels. That is where we are now.