In a recent in-depth interview featured on Mises Media, renowned economist Mark Thornton, associated with the prestigious Mises Institute, delved into the often-misunderstood dynamics of the silver market. The discussion explored the intriguing economic theory of joint supply and its surprising implications for silver prices during periods of economic distress and energy crises. Thornton, whose expertise in monetary economics and the precious metals sector is widely recognized, offered a compelling perspective that challenges conventional wisdom about silver's behavior.
Thornton, introduced as being affiliated with the Mises Institute, immediately addressed common misconceptions surrounding silver, acknowledging claims of market manipulation and seemingly irrational price movements. However, he posited that the economic theory of joint supply provides a crucial framework for understanding why the silver market can sometimes defy simple expectations.
Thornton meticulously explained the concept of joint supply, highlighting the fact that most mining operations extract ores containing multiple metals of economic value. He pointed out that while mining companies are often categorized by their primary metal output, "most mining operations harvest ore that contains both primary metals and secondary metals of economic value." These secondary metals, often byproducts of the primary extraction process, play a significant role in the supply dynamics of various metals, including silver.
To illustrate this, Thornton used the analogy of cattle production, where beef and leather are joint products. An increased demand for beef leads to a higher beef supply but simultaneously increases the supply of leather, potentially lowering its price. Applying this logic to the mining industry, Thornton explained that the production of industrial metals like zinc, copper, and lead often yields silver as a byproduct.
Silver's Counterintuitive Rise During Economic Downturns
A key takeaway from Thornton's analysis is the potential for silver prices to increase during economic crises. He explained that during a recession, the demand for industrial metals typically declines significantly due to decreased economic activity and reduced investment in capital goods. As primary mines curtail production of these industrial metals in response to lower demand and prices, the supply of byproduct silver also decreases.
"If GDP decreases, such as in an economic crisis, we would expect the price of zinc to fall as buyers decrease their demands for that metal," Thornton stated. He further elaborated, Ass primary zinc mines start to curtail their production or shut down entirely, this also reduces the quantity of their byproducts, such as silver that they supply to the market. The quantity of byproduct silver is reduced, and this restriction will put upward pressure on silver prices."
This upward pressure is further supported by the relatively inelastic demand for silver in many of its modern applications, such as electronics and batteries, where the cost of silver represents a small fraction of the total production cost. As Thornton noted, producers in these sectors "will be relatively insensitive to higher prices or inelastic."
Thornton also examined the impact of energy crises on the silver market. Higher energy prices increase the cost of mining, processing, and transporting industrial metals, leading to a decrease in their supply and an increase in their market prices. Similar to the scenario in an economic crisis, this reduction in the production of primary industrial metals translates to a lower supply of byproduct silver.
"Higher energy prices make the supply of these metals more difficult and more costly," Thornton explained. "Therefore, the impact of higher energy prices on industrial metals will diminish the quantity of byproduct silver supplied to the market, and as the quantity coming to the market falls, the price of silver will experience upward pressure again."
Again, the inelastic demand for silver in its various applications helps to amplify this upward price movement.
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A Nuanced Perspective, Not a Prediction
Thornton was careful to emphasize that his analysis, rooted in the theory of joint supply, is a simplified model and not intended as investment advice or a definitive prediction of future price movements. "This analysis is an exercise in simple modeling that abstracts away from many real-world conditions and is not intended as a prediction or investment advice," he cautioned.
Mark Thornton's insightful interview on misesmedia offers a valuable perspective on the often-complex behavior of the silver market. By applying the economic theory of joint supply, he elucidates how adverse economic conditions like recessions and energy crises can paradoxically lead to higher silver prices due to the interconnectedness of metal production. While acknowledging the presence of other factors influencing the silver market, Thornton's analysis provides a compelling framework for understanding the unique dynamics at play, offering a "silver lining" of understanding amidst economic uncertainty.
Watch the full interview:
