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I was listening to an interview yesterday at MiningStockEducation.com with Don Durrett whic inspired this lunch time quick article.

A topic was brought up that I thought was very interesting to discuss. The conversation was essentially that, “if a silver shortage came up, would there be a $100 ceiling to silver“?

Man…the nerd in me wanted to leap out. I wanted to buy Don a beer (or 5) at a pub and talk about this topic for 3 hours. Seems like a great guy as well. That’s how my mind works. I want to see how people think. Perhaps poke some holes in arguments. They tell me what I’m missing. At the end of a few pints, we might disagree about something, but it’s an amicable philosophical disagreement and we could understand each person’s reasoning for the argument. This is a FRIENDLY discussion on this topic – which is highly interesting to me!

Back in high school, that’s the kind of culture we had in my cliques of people. I made mention before, that we were a very idea-driven group. Someone would say, “wouldn’t it be cool if….” and then someone else would say, “yeah, but what about this”…at the end of that 1 hour long conversation, we may have somehow magically built a toaster that could travel to mars and back on a double-A battery. Point was, there was a lot of give and go and ideas exchanged. As I also mentioned, one of those guys invented YouTube and was the CEO for years, so there’s that…lol. We had shared a best friend, lived a mile away from each other, and he was a year behind me in school – so we weren’t close, but I get to tell people I know that guy!!! Sadly, I am not that guy 🙂

Anyway, Don brings up a subject that no one knows the answer to, but something I hadn’t considered in my investment thesis. This was the driver of discussion for me – let’s uncover things in our investment thesis none of us may have considered.

We all hear about the concept of nationalization, but he talks about how at some point maybe a person could not buy 1,000 oz bars because they would be too important to national security. These types of conversations NEED to happen – because they help you uncover what’s known as the “unknown unknown”. In my security practices, you want people to look at your plans to find holes so you can plug them up. You hire PEN testers to test your systems. I had NOT considered a price cap, or restrictions to buy 1,000 oz bars. While most of my dollars are in silver miners, I have a little in PSLV. This would have terrible effects on ETFs, by the way. What if PSLV was not allowed to buy 1,000 oz bars ever again? Essentially, people would sell out of PSLV and those 132m oz come on to the market almost instantly. As does the billion ounces in the LBMA ETFs like SLV, SIVR, etc. That’s one way to shake the tree and lower prices from $100, by the way. As a miner investor, I could live with $60 silver. As an ETF investor, it could be bad.

So – I’m going to play devil’s advocate to his reasoning here and see if I could punch holes in some thing.. Not to oppose him, but to help him either strengthen his arguments or revise certain parts of the analysis – if he finds any of my points worthy of addressing. Like I said, my thinking here is that we’re sitting at a pub discussing a “what if scenario” that no one knows the true answer to. I find this type of dialogue to be the most intriguing and fascinating – and most worthy of my time. This is the type of person I would seek out in the real world to get to know because just talking about stuff like this is so fun. No right or wrong answers. Just interesting situations, and how do you think they would play out. Amazing.

Let’s break down the theory and supporting arguments:

Theory:

At or around $100, silver could be capped at this price due to shortages.

Arguments:

1. Suppliers could complain costs are too high and it impedes their production
2. Lack of available silver, at all, could impede production
3. Silver is a “strategic metal” and because of this, you might need to restrict who can buy it.

Impact:

1. Industries could shut down production lines
2. People may not be able to buy silver
3. Price ceilings could be implemented

Of those arguments, the best case you have there is argument 3. I had once heard some of our missiles might use 300 ounces of silver. In today’s prices, that’s $9,000 in silver. If silver was 4 times the price, that’s $36,000 in silver. I had heard smart bombs cost a million each, so if this was to be used in smart bombs, then this really increases the price in a negligible manner. That being said, to have the supply at ALL removed would be a problem.

Supply – I wanted to complete my piece early this morning on the Currie piece dealing with the 25b oz supply before writing this because one big argument people talk about is “running out of silver”. Now that my research is mostly complete on that, one can show that as price goes up, more supply becomes available. Of most issue, I pointed out, is that as price escalates, there will be bottlenecks at refineries which could impede new investment grade supply being made available – and demand would outstrip available supply very easily.

That being said, there are literally 4.5b oz available, at THIS SECOND, if the price was high enough. Even at $200 silver, the US government would not have a problem paying this for missiles. Remember, they can sort of print their own money. And – as price goes crazy like this, refineries will be backed up for years producing more. At $100 silver, additionally, you may have a lot more mines that are in care and maintenance come online. Silver that cost $30 or $40 to produce today, would be spun up and add to mine supplies. Today, there’s about 2.5m oz per day produced by mines and about 300k in recycling. One could estimate that with $100 silver, you would have the ability to increase supply by 10-30% in the short term, and perhaps fast track some other mines that are near term like Discovery with a billion ounces.

With companies complaining, I can’t really see that too much. For the same reason above, is that the higher the price goes, the more supply becomes available. The “shortage” is AT THIS PRICE. I love to write that over and over. From what I can tell, maybe the iPhone uses half a gram of silver. Maybe. $.50? If price went 8x from now, that means there’s now $4 in silver in the iPhone. They pass that on to the customer. This is a good time to bring up that most of industrial demand uses TINY amounts of silver in products. It adds up when you are cranking out a million band aids a day, but these costs are passed on in the price of the product.

Would Toyota or Ford complain? Little is known about the usage of silver in cars, but the best I can tell, this appear to be 20-40g per car. It may be spread across 50 parts as well. I looked up usage in autos and it was something like 90m ounces last year. I also saw 77m cars were produced. This falls in line with the estimates of 20-40g per car. So if the price of a car is $50,000 and the total silver content is, in today’s dollars, about $30 – would this price going up even 8x change the price of the car THAT much? Not really. I had then heard that EVs use 3x as much as ICE cars. When you are paying $75,000 for a model X, that really doesn’t change the price much either.

Who might have issues? Solar panel makers. From what I recall, each panel used about 20g, or 2/3 of a troy ounce. So an installation of 20 panels may use 20 oz of silver. Or, $500 in silver. If the price went up 8x, you are looking at $4000 just in silver, which could hurt sales. However, I read that they continue to try and make improvements to use less and less.

So with industrial production, it just seems that a “shortage” isn’t much of a shortage if you offer the right price. Additionally, there’s so little silver in most products, it would not affect the price much to easily pass on to consumers. With solar panels, you might have a challenge, but people are already paying $20-30k for an installation, so this might reduce sales. THIS might be where you can get the strategic metals argument. However, going from $500 an installation to $2000 instead of $4000 isn’t that great of a change to then mandate a price cap.

Anyone who has seriously studied economics as I have in business school knows the inherent problems in price floors and ceilings. All well-intended efforts that lead to disastrous consequences.

One thing that is overlooked in this argument is that most production today, by a large mile, comes as a byproduct of producing things like Zinc and Lead. You have First Majestic, the largest primary producer, producing only 15m oz of silver a year out of the 800m or so mined. You have to ask yourself, why?

In 1971, gold was $35 an ounce. Today, it costs $900 to pull it out of the ground. What happened was that over time, the easy gold was found. You get lower grades, less productive mines, and have to go deeper into the earth to get it. Inflation makes fuel costs go up as well as prices of capital expenditures on equipment and plants. It stands to reason that over time, it costs more to get it out of the ground, and with this, price will go up.

With silver, the price today is half as much as the high 40 years from now – in nominal terms. The easy silver has been found, the grades are much lower, and the costs to produce have gone up. This has run a lot of primary silver miners out of the business, and those that remain need to produce gold as a byproduct to pay the bills.

One can imagine that with $100 silver, more primary silver producers would enter the market. Many could buy mines that have an AISC of $37 per ounce and make a ton of money. Others could buy exploration projects that are near term and get them going ASAP. Others may have to explore to get more out of the ground 10 years from now. The point is, there’s no shortage of silver, but there’s a shortage of silver – AT THIS PRICE.

While I do not think a country might cap the price of silver, anything is possible. I think a country like China might refuse to export silver. If Mexico did that, then where would people get it from? This is where a potential shortage could come from. Imagine a political climate several years from now where silver is identified as a strategic resource and export is prevented. The US silver production is nowhere near what we need, and this then would potentially have different silver prices in different countries. Silver in Mexico might be $5, but silver in the US might be over $100 to shake it loose from the couch cushions of private investors to source the metal it needs.

So while I think it’s unlikely a price CAP could take place, it might be more interesting to look to see if countries restrict the exports of certain commodities like rare earths, silver, gold, and copper.

Don could be very right! I don’t think there’s a right and wrong answer here, as something like this could happen next year or 50 years from now after we are all dead and buried. I LOVE the topic for discussion – why? Because this type of discussion then helps everyone having the discussion share information so everyone in the discussion learns more.

I’m picturing a day inside of a year when one of these conferences happen and we can listen to a lot of these guys speak and perhaps get drinks at the hotel bars afterwards and talk about stuff like this.

Not sure if I’m “allowed” to go with an infant at the moment, but would love to meet a lot of these people in real life someday and bounce things off of them. I’ve had a ton of email conversations with a lot of you as well as a lot of back and forth on Twitter and this is a GREAT community! I tend to be someone that likes to ask hard questions rather than answer them because you have a lot of bigger questions you can then ask as you build your knowledge base.

P.S. I was on the debate team in high school and we learned to argue both sides of a topic. I love writing essays as well as understanding the other side of an argument – it’s how you learn, and either better harden your own position or perhaps change your hypothesis how you think about things. What I love doing in this space is finding interesting topics with no right or wrong answer and trying to apply what we do know to build a compelling argument for or against something.