The past year has been a trying period for long-term gold and silver holders.
Despite what appears to be a continuous decline, gold has been on a steady, albeit volatile, uptrend since 2015, while silver has been locked in a sideways trading range.
The question now is whether something in the economy might trigger an upside move.
The answer to that question came last week, its implications contained within two words: “neutral rate.”
The Federal Reserve stated that they believe the current rate of interest is right below the neutral rate--that rate at which the economy will neither be slowed nor accelerated.
Essentially, the Fed has decided to pause rate hikes in 2019. What does this mean for metals? As Sprott Inc. money manager, Trey Reik, states: “Once you get to the consensus view that the Fed may be done, the dollar may come under severe pressure. Gold will erupt.”
The Goldman Sach Group seems to share this view, endorsing long bullion as one of their top 10 trading ideas for the coming year.
“If U.S. growth slows down next year, as expected, gold will benefit from higher demand,” says Goldman’s Jeffrey Currie. “The market has already priced in 10 out of the 12 rate hikes that we expect.”
When it comes to projecting gold and silver prices, supply and demand are typically the main drivers to be considered.
But there may be an even more accurate method to forecast the potential upside or downside of precious metals: cost of production--more specifically, mining costs.
The cost of production is one component--and a critical one at that--driving the price of gold and silver.
Right now, the price of gold is hovering slightly above the current average mining costs, while silver is slightly under its average mining costs.
If we take the top gold miners--with Goldcorp’s $1,281/oz and Newmont’s $1,144/oz defining the upper and lower range--and the top silver miners--with SSR Mining’s $22.39/oz and Fortuna Silver Mines’ $10.80 defining the upper and lower range--we get an average cost of production of $1,204 for gold and $16.10 for silver.
If we consider these average figures, then it’s clear to see, based on production costs alone, that there is plenty of room for metals prices to expand.
Factor in the fundamental triggers that may exert negative pressure on the US Dollar, and you’ve got a powder keg just waiting to blow gold and silver prices skyward.
Between the two, however, silver holds a slight advantage, not only in its affordability but in the fact that its current spot price of $14.65 is well below $16.10, the average cost of production.
Sure, only a third of mined silver comes from silver mines, but the fact remains that this is how much it costs for the world’s top miners to extract the metal from the ground.
For spot silver to match its mining costs, it would have to appreciate by 10%.
With such low prices, mines will have to go idle, significantly decreasing supply.
Eventually, silver will have to rise above its mining costs, either through lack of supply or through bidding-up by investors who see this opportunity now.
Based on the extreme valuations and debt levels in the stock and bond markets, based on looming dollar weakness in response to the Fed’s current position, and based on current mining costs, we too see an upside for gold and silver in 2019.
A number of leading financial institutions seem to agree with this forecast--their estimations as high as $1,350 for gold and $17.60 for silver.