Thursday, October 06, 2011
So the market waits with bated breath for Trichet's last meeting as ECB President. TMM must say they are glad to see the back of him - over the years he has inflicted significant damage to their P&Ls on a consistent basis. While TMM strongly believe that given the weakening in the European PMIs that the ECB must cut - in particular to provide global cover for the BoE and Fed to embark upon a new round of QE - history would dictate that the ECB stubbornly refuse to cut until it is too late. We hope we are wrong here and that the ECB have seen the light, but given the risks, TMM have lightened up with a view to buy a dip in risk.
But now onto one of TMM's favorite subjects - precious metals. While our opinions remain divided on gold, we think our previous comments on platinum and palladium weren't too far off the mark - performance was good in 2H 2010 and the downside was gappy as predicted. Which leaves us with one metal left and that's silver which TMM thinks is still profoundly overpriced even 40% down from the highs of this year.
Much like PGMs silver is a pseudo precious metal. Gold gets a bid from any or all of: central banks, Congolese warlords, Chinese retail, Indian weddings and The Illuminati, with industrial uses not really being that big a part of the picture. Any sort of analysis of demand misses the point as soon as you are above marginal cash costs, which in for gold are now above $1000 for higher cash cost operations.
If you get the GFMS data or the data from the Silver Institute, silver is about 50% industrial demand of which 20% is from photography - a dying business if ever there was one. Similarly silverware appears on the decline and the only thing keeping silver up is demand in ETFs/investment and the like. So far so good - basically it's got horrible fundamentals on the industrial side, but the investment demand is fine, right?
Well, no, it isn't. You see silver, unlike PGMs, does not come from the godforsaken political and labor relations minefield known as South Africa. It is mostly mined in stable places in Latam and Australia and production has been rising steadily - not least of all because silver is a by-product of making other stuff.
So supply has been going bananas and cash costs, thanks to the by-product game, are $5 per ounce - about 15% of the current spot price. By way of comparison many industrial metals aren't that far above cash cost now. If you're looking for something that performs due to cost push pressures, silver is not it.
TMM used a very quick lift of the Silver Institute data to work out how much investment demand is required to balance the market for 2011 and 2012 and compare that to ETF flows and the picture is not pretty. ETFs aren't everything, but 50 million ounces have bled out of the ETF market this year while there is a requirement for 214 million ounces in demand to fill in order to achieve balance in the market.
So with cash costs about 80% down from here and pending collosal oversupply, TMM can't work out why people like this metal. If you want something with cash cost support, buy some PGMs. If you want to trade monetary debasement, buy gold. And if you're not comfortable with all that metals risk, short some silver because this market makes absolutely no sense.