Silver Crashes To $63.90, But Shanghai & COMEX See More Large Withdrawals

Silver Market Analysis & Dolly Varden Silver Update – January 30, 2024

Key Concepts:

• Backwardation: A market condition where futures prices are lower than spot prices, indicating immediate demand exceeding future supply.
• All-In Sustaining Cost (AISC): The total cost of mining an ounce of silver, including operating costs, sustaining capital, and exploration expenses.
• Moving Averages (50-day & 200-day): Technical indicators used to smooth price data and identify trends.
• COMEX: The Commodity Exchange, a major futures and options market for precious metals.
• LBMA: London Bullion Market Association, a wholesale over-the-counter market for gold and silver.
• Price Floors: Government-imposed minimum prices for a commodity, intended to support producers.
• Gram Meters: A unit used in drill results to quantify the concentration of precious metals over a specific length of drill core. (Grade x Length)

I. Market Overview & Recent Volatility

The silver market experienced significant volatility recently, with prices fluctuating dramatically within a short period. On Thursday, silver futures in New York reached a high of $121.76, then plummeted to a low of $71.60 by Monday. Subsequently, prices rebounded to over $90 before another drop this week, currently bouncing around $75-$76 (spot price) and $75.72 (futures). This represents a $50 swing between last Thursday and Monday. Despite the volatility, silver remains in backwardation, with futures prices below spot prices. The COMEX inventory, while historically high, is experiencing a drain, with approximately 400 million ounces currently held (down from a peak tied to 2021).

II. Factors Contributing to Price Fluctuations

Several factors are contributing to the observed price swings:

• Supply Shortages: London and India experienced silver shortages, while China’s silver supply was already reportedly low before recent issues. Metal is now flowing out of China.
• Industrial Demand: China’s industrial silver inventory has decreased from 36 million ounces (January 16th) to 27 million ounces currently, indicating strong demand.
• Retail Demand: A surge in retail silver buying was observed last week, exceeding even COVID-era levels, suggesting a potential “panic” buying dynamic.
• Interest Rate Expectations: The market currently prices in only two 25 basis point rate cuts through the end of 2027, despite statements from Donald Trump suggesting a desire for rates as low as 1%. This discrepancy creates uncertainty.
• Overleveraged Market/CME Activity: The possibility of an overleveraged market or manipulation by the CME (Commodity Exchange) was raised as potential contributing factors.
• Government Intervention (Potential): Discussion of potential government intervention through the establishment of price floors for critical minerals, including silver, was highlighted, with concerns about unintended consequences.

III. Mining Economics & Dolly Varden Silver

Sean of Dolly Varden Silver explained the economics of silver mining. With an average All-In Sustaining Cost (AISC) of $20 per ounce, miners were previously operating at a $5 profit margin when silver was at $25/oz. At a current price of $85/oz, the profit margin increases to $65/oz – a 1200% increase in profitability. This increased profitability incentivizes mining activity.

Sean argues that the market is undervaluing silver mining companies, trading as if silver were at $35/oz despite the current price. He believes this presents a significant investment opportunity, as miners historically outperform the metal by a factor of three when prices rise. Currently, silver miners have only increased 200% while silver has risen 300%.

IV. Dolly Varden Silver – Exploration Results & Future Plans

Dolly Varden Silver recently released promising drill results from its project, showing high-grade silver and gold mineralization. Results included 200 gram-meters on a gold basis (double the desired level for economic viability). The company is focused on expanding its resource base, which is currently estimated at 100 million ounces of silver and 1 million ounces of gold.

Dolly Varden is merging with Contango Ore, which will provide access to additional projects, cash flow, and increased news flow. A drill program is underway at the Lucky Shot project in Alaska, with results expected soon. The company aims to become a leading North American producer of high-grade silver and gold.

V. Government Intervention & Critical Minerals

JD Vance announced the Trump administration’s intention to establish a “preferential trade zone” for critical minerals, including silver, with enforceable price floors. This initiative aims to protect domestic manufacturers and ensure access to critical materials. Sean expressed concern about government intervention in the market, arguing that it can create distortions and unintended consequences. He suggested a true price floor would involve actively bidding up the price of silver to $90/oz to prevent metal from flowing east to Asia where better pricing exists.

VI. Technical Analysis & Trading Strategy

Sean highlighted the importance of using moving averages (50-day at $76.04 and 200-day at $49.30) to assess market trends and identify potential entry points. He suggested that the current pullback to the 50-day moving average presents a reasonable opportunity for investors to accumulate silver.

VII. Data & Statistics Mentioned:

• Silver Price Range (Recent): $71.60 - $121.76
• Current Spot Price: ~$76/oz
• Current Futures Price: ~$75.72/oz
• COMEX Inventory: ~400 million ounces
• China Industrial Silver Inventory: Down from 36 million ounces (Jan 16th) to 27 million ounces (Jan 30th)
• AISC (Average): $20/oz
• 50-day Moving Average: $76.04
• 200-day Moving Average: $49.30

Conclusion:

The silver market is currently experiencing significant volatility driven by a complex interplay of supply shortages, industrial demand, retail buying, interest rate expectations, and potential government intervention. Despite the short-term fluctuations, the long-term outlook for silver remains positive, particularly given the increased profitability of mining and the growing demand for critical minerals. Dolly Varden Silver is well-positioned to benefit from this environment, with promising exploration results, a strategic merger, and a focus on high-grade silver and gold production. Investors should carefully consider their risk tolerance and utilize technical analysis to identify appropriate entry points. The potential for government intervention adds another layer of complexity to the market, requiring ongoing monitoring and analysis.