Will Increased Production Hurt Silver Prices?

Mining companies are mining for silver at the highest rate in history. With the economy continuing to slide, will the price of oil and the fact that silver is being so heavily mined affect its price?

Finding the true value of a commodity is difficult. On the demand side, numerous entities may purchase a commodity to produce final goods. All of these entities have a different break-even price at which a commodity is too expensive, and each requires a quantity that varies from firm to firm. Silver has another complexity: its recyclability.

On the supply side, silver is almost solely produced by miners. Silver can also be “produced” by recycling firms, which turn unwanted silver jewelry, medallions, and trinkets from the general population into a pure commodity product. Recycling silver is essentially “borrowing” from past silver production.

But one element isn’t discussed all that much. Silver has a hedge of sorts that exists between the producer and the user. Silver mining is expensive, primarily due to the rising cost of oil, which fuels most mining machinery and refining equipment. Silver miners essentially turn energy—human and petroleum—into a finished product: silver.

When the cost of oil drops, mining becomes more lucrative and more silver is mined. This helps to keep oil at a reasonable equilibrium price. Additionally, the OPEC cartel enjoys ever rising oil prices, and it is keen on keeping price for oil as high as possible. Most inexpensive oil was brought to the surface 50 years ago anyway, so now we’re using the most expensive oil to find and refine.

Silver production is at an all-time high. Despite this fact, the price of silver shouldn’t be affected, and if anything it should continue to go up due to the fact that silver is being used at a faster rate than it can be mined.

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