Silver lining

As a commodity, there’s a lot of potential in investing in silver. However, experts encourage the industry to invest in itself to maximize full potential.

What does the future hold for investors of this commodity?

The majority of silver miners today can mine silver for less than US$ 15 per ounce in operating costs. With a current value for silver per ounce hovering around US$ 30, most companies will earn a pre- tax profit of at least US$ 15 per ounce this year. If we broadly assume an average tax rate of 33 percent, we’re looking at roughly US$ 10 of after- tax profit per ounce across the industry. Last year, if all silver miners reinvested all their earnings back into silver, it would have shrunk available 2011 investment supply by 82 percent. This is a purely hypothetical exercise of course, but can you imagine the impact this practice would have on silver prices?

Building trust, protecting profits

Silver miners need to acknowledge that investors buy their shares because they believe the price of silver is going higher. After all, silver is just another form of currency today, and a superior one at that. To take this idea further, instead of silver companies selling all their silver for cash and depositing that cash in a levered bank, silver miners should seriously consider storing a portion of their reserves in physical silver outside of the banking system. Why take on all the risks of the bank when you can hold hard cash through the very metal that you mine? Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals. And it serves to remember that thanks to zero percent interest rates, banks don’t pay their customers to take on those risks today.

Smarter investing tactics

None of this should seem far- fetched. One of the key reasons investors have purchased physical gold and silver is to store some of their wealth outside of a financial system that looks increasingly broken. The European banking system is a living model of that breakdown. Recent reports have revealed that more than € 80 billion was pulled out of Italian banks last year in August and September alone. In Greece, depositors have taken almost € 50 billion out their banks since the beginning of 2010. Greek banks are now completely reliant on European Central Bank ( ECB) funding to stay afloat. The situation has deteriorated to the point where over two thirds of the roughly 500 billion euros that banks have borrowed from the ECB are now being deposited back at the central bank. Why? Because they don’t trust other banks to stay afloat long enough to get their money back.

Silver miners shouldn’t feel any safer banking in the United States. Fitch Ratings recently warned that the US banks may face severe losses from their exposures to European debt if the contagion escalates. There’s very little at this point to suggest that it won’t. The roots of the 2008 meltdown live on in today’s crisis. We are still facing the same problems imposed by over- leverage in the financial system, and by postponing the proper solutions we’ve only increased those risks. We don’t expect the silver miners to corner the physical silver market, but the silver miners must make a better effort to understand the inherent value of their product.