Many of you read Jeff Clark's (of Casey Research) recent piece outlining the reasons why silver prices will likely move higher. It was a great piece from an organization with great reach. But it missed the unmentionable elephant in the room. Here is a summary in all its bullish glory.
1. Inflation-Adjusted Price Has a Long Way to Go
One hint of silver’s potential is its inflation-adjusted price. I asked John Williams of Shadow Stats to calculate the silver price in June 2014 dollars (July data is not yet available).
Shown below is the silver price adjusted for both the CPI-U, as calculated by the Bureau of Labor Statistics, and the price adjusted using ShadowStats data based on the CPI-U formula from 1980 (the formula has since been adjusted multiple times to keep the inflation number as low as possible).
The $48 peak in April 2011 was less than half the inflation-adjusted price of January 1980, based on the current CPI-U calculation. If we use the 1980 formula to measure inflation, silver would need to top $470 to beat that peak.
2. Silver Price vs. Production Costs
Producers have been forced to reduce costs in light of last year’s crash in the silver price. Some have done a better job at this than others, but check out how margins have narrowed.
Although roughly 75% of silver is produced as a by-product, prices are determined at the margin; if a mine can’t operate profitably or a new project won’t earn a profit at low prices, the resulting drop in output would serve as a catalyst for higher prices. Further, much of the current cost-cutting has come from reduced exploration budgets, which will curtail future supply.