Shawn Khunkhun: Uncovering the Silver Deficit | Surging Demand and Next Stop $75

Key Concepts

Silver as Monetary and Industrial Metal: Silver's dual nature as a historical monetary asset and a critical component in modern industrial applications, particularly in the green economy.
Gold-to-Silver Ratio: The historical and natural relationship between gold and silver prices, and how industrial demand has shifted this ratio.
Silver Deficit: The ongoing imbalance between silver supply (mining and recycling) and demand, leading to a draw-down of above-ground stockpiles.
Monetary vs. Industrial Demand: The distinction between demand for silver as a store of value or medium of exchange versus its use in manufacturing.
Inflation Hedge: The role of precious metals, especially silver, as a protection against rising inflation and currency devaluation.
Supply Chain Challenges: Difficulties in increasing silver production due to the byproduct nature of most silver mining, permitting issues, and the capital-intensive and time-consuming nature of mine development.
Central Bank Demand: The increasing interest of central banks in acquiring silver as part of their reserve strategies.
Passive Money and Momentum: The influence of algorithmic trading and passive investment flows on market dynamics, and the emergence of momentum in the precious metals sector.
Inflation-Adjusted Pricing: The concept of valuing assets based on their historical purchasing power, suggesting significantly higher current fair values for gold and silver.
Mining Investment Landscape: Different avenues for investing in silver, ranging from physical bullion to royalty companies, ETFs, and individual mining stocks.

Silver's Bullish Fundamentals and Price Outlook

Sean Kungun, CEO of Dolly Varden Silver, presents a strongly bullish outlook for silver, driven by fundamental market dynamics and historical parallels. He anticipates silver breaking through the $50 per ounce mark, with a subsequent target of $75. This optimism is rooted in the metal's dual role as both a monetary and industrial asset, a significant supply deficit, and its historical undervaluation.

Background and Personal Journey

Kungun's early exposure to precious metals was through his Indian immigrant parents, who traditionally gifted gold on significant occasions. Initially dismissing this as a teenage "crazy" notion in Vancouver, his perspective shifted when he entered the mining industry at age 22 in 2004. Through attending conferences and listening to thought leaders like Frank Giustra and Rick Rule, his parents' wisdom began to resonate. He learned that successful farmers, like his parents, would reinvest profits into expanding their farms or acquiring precious metals. With 22 years in the mining industry and now 44, Kungun is the CEO of Dolly Varden Silver and actively involved with the Fior group of companies, focusing on acquiring and advancing precious and base metal opportunities globally.

The Case for Silver: Why Now?

Kungun's conviction in silver stems from his personal experience prospering in a precious metals bull market. He notes that gold prices rose from $300 to $1,900 per ounce between his entry into the industry and 2011. During this period, while gold performed exceptionally well, silver outperformed it. He draws a parallel to the last major precious metals bull market, which ended in 1980, where gold initially led, but silver ultimately delivered superior returns. His strategy is to learn from these historical lessons and position for silver ahead of the next bull market, recognizing gold as the leader but silver as the outperformer.

The Silver Price Crunch and Supply-Demand Dynamics

Kungun references being "15 million ounces away from a price crunch," which he clarifies as being $50 per ounce. He explains that for 5,000 years, silver and gold served as money. In the last century, industrial demand for silver has surged, particularly with the transition to a "green economy." Silver's use in solar panels, electric vehicles, and the military-industrial complex is significant. Historically, over 5,000 years, silver was primarily a monetary metal, with a gold-to-silver ratio of around 10:1 to 15:1. This ratio aligns with the natural abundance of silver in the Earth's crust, which is about 16:1.

However, industrialization has dramatically shifted this. Today, over 50% of silver demand comes from industry, compared to only 10% a century ago. Kungun argues that silver has been miscategorized as solely an industrial metal. He believes its true value lies in its dual nature as both a monetary and industrial metal, making it his top investment choice and the primary allocation of his investable capital.

He reiterates the "50 million ounces away from a breakout" comment, equating this to a $50 price point. He has been advocating for silver at prices as low as $18 and $20, maintaining that conviction. The core reason is a persistent deficit: for the last five years, annual consumption has exceeded supply from mining and recycling by 200 to 250 million ounces.

Historically, metal has flowed from West to East. However, after Mr. Trump's election, tariff wars led to metal moving from London westward for the first time in decades. Kungun highlights the importance of lease rates. Typically, metal leases at 1-2%. In Q1 and Q2, this jumped to 7%, indicating a drain from the LBMA (London Bullion Market Association). While headline inventory might show 350 million ounces, he estimates that only 40-50 million ounces of above-ground supply remain available for immediate delivery. If someone were to attempt to acquire $2 billion worth of physical silver for delivery, the price would surge past $50.

He draws a parallel to the gold market in spring 2019, when gold became a tier-one asset, valued at 100% of its worth instead of 50%. This led to a breakout above $1,300 and a subsequent move to $2,000. Kungun suspects a similar breakout for silver, targeting $50 and then $75. He notes that silver has already increased by 50% since April, and regardless of the timeline, the fundamentals from mining, recycling, and consumption are "wildly bullish." He emphasizes that silver is the only asset class he's encountered trading below its 1980 nominal high.

Demand and Supply Dynamics: A Deeper Dive

Kungun breaks down demand into industrial and investment categories. While he doesn't have exact current figures, he believes that industrial demand is the driver of the 200 million ounce annual deficit over the past five years. However, he asserts that price surges are driven by monetary metal demand, not industrial demand. He anticipates that year-end data will show bullion and coins as the primary drivers of the current price surge.

He points to two instances of significant monetary demand in recent years: the "silver squeeze" in January 2021 and the COVID-19 panic in March-April. During the latter, silver initially sold off to $11.64 before rallying to a near 10-year high of $30 by August 2020. This rapid price movement is characteristic of monetary demand, not the steady consumption patterns of industry.

Structural issues plague the silver industry, with supply struggling to keep pace with demand. A critical point is that only one in four ounces of silver comes from primary silver mines. To meet demand for applications like tomahawk missiles, batteries, or solar panels, copper, lead, zinc, and gold miners must increase production, as 75% of silver is a byproduct. Primary silver mines are often deep and located in challenging regions. Mexico, the top silver-producing nation, relies on open-pit mines for 70% of its silver, and recent administrations have threatened to halt open-pit permits, creating a precarious situation.

Kungun also highlights that the fundamental reasons for owning silver are deficits, debt, and inflation hedging. He notes that inflation-adjusted silver should be trading at $150 per ounce.

Regarding investor demand, he mentions that Russia has begun buying silver for its holdings, and Saudi Arabia has purchased SLV shares. He sees this as a significant development, especially after central banks historically focused on buying physical metal rather than mining equities. Putin's announcement of silver's inclusion in Russia's precious metal strategy was a "game-changer." He also points to India as holding more gold and silver than any other country.

Generalist Investor Attention and Market Size

Kungun believes generalist investors are waking up to gold, moving from a 1% allocation to potentially 2-3%. He cites a recent Morgan Stanley report suggesting a traditional 60/40 portfolio should shift to 60/20/20, with the final 20% allocated to gold. This mainstream recommendation is a "game-changer," especially considering that less than half a percent of global capital is currently allocated to precious metals. The gold market is valued at $25 trillion, a relatively small space compared to single tech companies with $4 trillion market caps.

He references Eric Sprott and Frank Giustra, who in the 1990s wrote about central banks' aversion to gold. He notes that Gordon Brown sold half of England's gold at less than $200 per ounce, and Canada's central bank owns no gold. This historical message from central banks led populations to view gold as a "barbarous relic," while populations in India and China were encouraged to buy it. Kungun had to seek capital for his companies in places like Switzerland and Germany, where recent history, particularly the Weimar Republic, instilled an understanding of "real money." Countries like Venezuela, Argentina, Zimbabwe, and Ukraine, having experienced hyperinflation, understand the value of a gold holding as a "lifeboat" or "safe harbor."

Supply Constraints and Recycling Potential

Kungun estimates annual silver supply at roughly one billion ounces, with about 850 million ounces from mining. He reiterates the 200-250 million ounce annual deficit. He sees no immediate large mines poised to significantly impact this deficit. Two major undeveloped silver mines in Central and South America face social license challenges, which he identifies as the biggest risk for mining investors.

The byproduct nature of silver production makes it difficult to increase supply. Permitting a copper mine, for example, can take three decades and cost billions. Kungun's work in Northern Canada focuses on securing high-grade, safe-jurisdiction silver in an established mining camp, with a long-term vision spanning the next century.

Regarding recycling, which accounts for about 150 million ounces annually, Kungun suggests that a significant increase in the inflation-adjusted price could incentivize some above-ground silver to come to market. However, he notes that the large "silver stacking community," primarily males aged 45-85, may not be incentivized to sell their holdings, viewing it as a savings tool rather than an asset to be traded for depreciating currency. He acknowledges that a severe financial crisis or depression could lead to some selling, but emphasizes that holding silver is a hedge against such events.

He cautions against waiting for a crash to invest, citing the 2008 financial crisis where gold prices, despite a correction, still ended up significantly higher than pre-crisis levels. He advises immediate allocation, as "everything's going to get hurt" in a nominal sense, but precious metals will be hurt less.

Historical Highs and Inflation-Adjusted Value

Kungun addresses the historical silver highs of approximately $50 in 1979 and 2011. He argues that comparing these nominal figures is misleading. He uses the analogy of building a house with a constantly changing measuring stick. He believes that even without considering industrial use, social license, or mining challenges, the fundamental drivers of deficits, debt, and monetary policy point to a significantly higher valuation.

He notes that gold was range-bound between $1,000 and $1,300 from 2013 to 2019. The breakout in gold was signaled in other currencies before it occurred in US dollars in 2019. He believes silver is already experiencing this breakout in other major currencies (Euro, Franc, Yen, Aussie, Canadian Dollar), and the US dollar breakout will follow. He dismisses the concept of a "triple top" in technical analysis, suggesting that when silver reaches $50, it will surpass it.

The rise of passive money, now over 50% of managed money, relies on algorithms and momentum. For the first time in 14 years, there is momentum in the precious metals industry, attracting this passive capital. He suggests that instead of $50, the target should be $150, aligning with the inflation-adjusted argument. He also touches on the debate around CPI inflation, suggesting that hedonic adjustments and exclusions of key items like food, energy, and rent can manipulate the numbers. He believes that if inflation were truly measured, the price of silver should be $150, and potentially $250 if one considers alternative inflation metrics.

Gold Targets and Monetary Policy

Kungun shares his historical gold targets. In 2004-2005, based on inflation-adjusted 1980 highs, he calculated a target of approximately $1,684, which gold then overshot to $1,900. He believed gold would average $3,500 and spike to $8,800. However, this was before the significant increase in the monetary base in spring 2020 and the GFC. He admits he was wrong about interest rates spiking higher, as they have been artificially maintained lower. He believes the current strategy is to "inflate our way out of this," making hard assets like gold and silver, which have no counterparty risk, essential for protection. For leverage, he recommends gold and silver miners.

Allegations of Price Suppression

Regarding alleged silver price suppression by bullion banks, Kungun states he doesn't know for sure but believes "real price discovery happens." He likens it to the Battle of Waterloo, where misinformation existed, but ultimately the truth was revealed. He is not concerned with short-term noise and focuses on long-term price discovery. He shares an anecdote from 2004 where an economist told him manipulation is to the upside, suggesting that if one owns a significant amount of gold, keeping the price down would be beneficial for accumulation.

Investing in Silver Miners

For investors bullish on silver and seeking leverage, Kungun outlines several investment avenues:

Physical Bullion/Coins: The safest option, offering direct ownership with no counterparty risk. A price increase from $40 to $150 would yield substantial returns.
Royalty Companies: Considered the "crown jewel" of the mining industry. Wheaton Precious Metals is highlighted as the top royalty company for silver exposure, led by Randy Smallwood, with a strong history of performance.
ETFs: Options like SIL and SILJ offer diversification by owning a basket of silver companies, mitigating single-company risk.
Primary Silver Miners: There are about 10 primary silver miners. Fresnillo is the largest. Pan-American Silver has a $20 billion market cap and produces 26 million ounces of silver and nearly a million ounces of gold, offering exposure to both metals.
Producers in Safe Jurisdictions: Hecla Mining, America's number one silver producer, is mentioned as an example of a company operating in a safe jurisdiction.
Developers/Speculative Plays: Three non-producing companies are identified as having potential to be acquired or become producers. Kungun mentions his own company, Dolly Varden Silver, as one of these, highlighting its 650% stock increase and market cap growth from $20 million to $550 million in five years, operating in a safe jurisdiction. He notes that the best-performing equities often have the riskiest projects, requiring higher silver prices to be economic.

Ultimately, the choice of investment depends on an individual's risk tolerance and how they "sleep at night," advising consultation with a financial advisor.

Conclusion

Sean Kungun presents a compelling case for silver as a significant investment opportunity, driven by a confluence of factors including its historical monetary role, increasing industrial demand, a persistent supply deficit, and its undervaluation relative to inflation-adjusted historical prices. He believes the market is on the cusp of a major breakout, with potential for substantial price appreciation. The investment landscape for silver offers various entry points, catering to different risk appetites, from the safety of physical bullion to the leveraged potential of mining equities.