Silver Correction Putting Miners Under Pressure

After weeks of sailing on troubled waters, the silver market is giving mixed signals. Analysts are struggling to discern whether or not the metal will be able to consolidate above resistance at $28.50, or whether silver is still in danger of further sell-offs. Much will depend on developments in the US dollar market and the global economy – a view shared by Randy Smallwood, president and CEO at Silver Wheaton, a Vancouver-based silver-streaming company.

The euro crisis has been a big depressing influence on commodity markets in recent months. With the continent’s debt crisis getting worse by the day, many investors are being drawn to the dollar. Most are confident that the eurozone is in great danger. Despite record-low yields, traders are continuing to buy US Treasurys.

Capital is also slowly moving out of China. The country's economic model – based on generating export surpluses – could be heading for difficulty. An increasing number of Western companies have announced their intention to move production out of China. Bureaucratic fees were increasing to a point where many businesses had ceased making profits.

As Smallwood notes, the increasing demand for the dollar is having a negative effect on silver and other precious metals' price development. But the long-term outlook for the white metal remains excellent. On one hand silver can be recycled at a much lower cost than gold. And demand from industrial end users will continue to grow in the coming years, which should have a positive effect on the price.

Since reaching its $50 high in the spring of 2011, the silver price has almost halved. Small and medium sized silver producers are having difficulties financing themselves without compromising their capital. European banks have been silver mines' main financiers, but now these banks are struggling with growing financial problems and are trying to reduce their own balance sheets. Many a silver mine could be harmed by this.

Just recently Aquarius Platinum announced that it will be temporarily halting production at its Marikana platinum mine, located in northwest South Africa. According to the company, current platinum prices have rendered production at the mine unprofitable. Similar production halts in the silver sector would be painful in the short-term. Nevertheless, a drop in supply would most probably have a positive effect on long-term prices.