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Commentary

Silver is reasonably priced

3 May 2015 by Jim Fickett.

The current spot price of silver is 1% above its long-term average (see the Reference page Historical prices of precious metals for details). Given the natural volatility of the precious metals markets, this means that if you buy at current prices, you are very likely to be able to sell at a profit at some point in the future.

I am not attempting to predict the time frame or magnitude of any gains, and am not saying that silver is a particularly good investment. What I am saying is that if you are attracted to silver, as many people are, then now is a reasonable time to buy (in contrast to 2011, when the price was at twice today's level, and I pointed to a Silver bubble).

Additional evidence that silver is reasonably priced, possibly even a bargain, comes from analysis of mining costs. Silver, unlike gold, gets used up in industrial applications and supply must constantly be replenished by mining. So the price cannot stay for too long below the cost of mining. Mining cost is complex to analyze, because one must take into account capital investments necessary to maintain future production, as well as cash costs involved in mining, and also some share of general company expenses. It gets even more complex in the case of silver because silver is usually mined together with other metals and it is sometimes difficult to properly allocate company costs for each metal. Nevertheless, one can make a reasonable estimate. BMO Research, in a report Silver Industry Costs, analyzed the all-in sustaining costs, including taxes and interest expense, but only capital necessary to maintain production, not expand it, for each of a large number of silver mining companies. They found that only 25% of silver companies had estimated 2013 costs below the then-current spot price of $22.44/ounce. The price is now considerably lower, at $16.10/ounce. Thus, if this analysis is be be believed, it is very likely that the price will have to rise long-term.

All in all, I think silver, at current prices, is at least a good store of value, especially in a tax-deferred account.