Thursday, October 06, 2011

Scrap silver

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.


Amplitudeinthehouse said...

I don't want to gloat guys, but seriously, is there a more honest lady out there then my lady betty?

ps....thats wife material!

abee crombie said...

silver = poor mans gold

but do remember that when the gold standard was upon us, Silver was usually the medium of exchange for the average person/transaction, since gold was too expensive (Silver Dollar etc)

I'd buy it again at $20.

Anonymous said...

Tom Demark at

Excellent. He said Tue. Wed was shorts covering, looking for mkt to go down again and then go long Thur or Friday?

Skippy said...

Excellent note - preaching to the converted. The technical setup also suggests that the residual optimism in silver is about to be crushed.

Given the recent weakness in EM currencies, perhaps it is time to go long Dong/silver?

Sorry, couldn't resist..

Anonymous said...

C says'
Silver is just so yesterdays song.
Ignore it as the bump in the road it was and it will just drift back into obscurity which is probably the right place for it.

BOE and ECB are what we are really interested in and Brother Benny of course.

Nemo Incognito said...

Dong peg is weakening actually - likely to go sometime soon. Look at onshore gold prices vs offshore - always a tell in 'Nam.

Skippy said...

Thanks Nemo - good point. Just a shameful excuse to use that line ;)

Anonymous said...

Just a couple of tidbits on gold: were mine production that important, and the mining sector's response to prices has been woeful, then the actual premium is about $730. I would refer you to a chart by metals economics group if i could squeeze it in, showing how despite massive exploration spend, they're just not finding the good stuff. supply will have to come from recycled gold. Again, elasticity from this source over the last few years? declining. Central banks? not supplying any more. Disinvestment? yes possibly, though the fast (read fickle) money has dumped quite a bit already. As for silver..not bothered.

Leftback said...

Since we are in Commodity Corner this morning, here is a piece on China. The Chinese Hard Landing guys are out there in full force, at the moment, as though the large Chinese economy were about to go from +9% to -9% overnight.

The thing is, we know that there are bad loans in China, but they not only have their own currency that can be printed, they can also generate boatloads of dollars by selling USTs. So the idea that China, Australia etc., crashes is in fact, late. It has already happened, to the extent that it is going to during this cycle.

China Hard Landing?

The only way this guy's scenario comes about is if there is another uncontrolled Eurodollar squeeze. Central banks around the world understand this and will go to extraordinary lengths to prevent it.

Anonymous said...

C says,
lb i'm inclined to agree with you more than I am the extremists. Like you i think trying to compare China to the West in terms of how it handles misallocation is silly.They have huge advantages in that department. I suspect they'll do a nice gradual adjustment.One that we can only watch with envy by comparison.

Leftback said...

We love the aroma of toasted Bear!

I am just LMAO today at the market going up while every article on MSM and the more mainstream parts of the blogosphere is extremely bearish. So often when a big rally begins, the first 10% move happens before MSM and the public realize it has happened.

DAX rallied into the close, and we note that the DAX has been making higher lows and higher highs for a while now. Price Is News, apparently.

Lots of positioning still expecting a disappointing number tomorrow, which I think is certainly likely, but if they did print a decent number, say 80-100k, a lot of people will be caught off-sides. There are a few seasonal factors at work that might pump this number, plus it's a noisy series and we are coming off a stinker. It's a little bit stochastic....

There are certainly shorts set up around 1175, but the big resistance line remains up above 1200. So there is a quite a bit more fuel available to push this higher. Even if we do have a weak number tomorrow, the likelihood is that there will be high volume buying of the dip, especially once the non-apocalyptic earnings data begins to come in.

The 1998 analogy is on - it's good until it isn't.

JG said...

'cash costs, thanks to the by-product game, are $5 per ounce - about 15% of the current spot price.'
I may take that one over to the kitco rant boards and see how I get on, would that classify as trolling?
In the goldbugs defense one should remember that fundamentals can remained detached longer than one can stay solvent. I'm sure that the fundamental fact you've kindly highlighted was well in place when the poor man’s stake went from 25 to 50 within the space of 3 menstrual cycles

Leftback said...

We still need this monkey to climb out of the bunker and back into the banana tree. EURJPY at a deep deep low. Almost irresistible for proponents of mean reversion.

Carry Monkeys Still Not Active

Leftback said...

We would also like to note that just as the stock market isn't the Real Economy, that Lakshman Achuthan isn't a Real Economist, although he gets trotted out on the TV as though he was one.

The ECRI's main index has a big component of SPX. As we all know, SPX doesn't always lead.....

Achuthan completely missed the downturn in 2007 and has since predicted two of the last zero recessions. A failure to adequately assess prevailing credit conditions is the most likely explanation. His credibility is significantly less than that of the bloke on the Clapham omnibus.

Leftback said...

After excoriating the pointlessness of Operation Twist for some time, some of our more excitable brethren in the blogosphere have made a stunning discovery today: when the NY Fed sells Treasuries, the price of the Treasury securities can go DOWN.

We salute The Blog That Cannot Be Named for this big step in their intellectual development. Look, just b/c you don't love Bernanke, Tricky and the rest doesn't mean you can ignore the likely market consequences of their great big footprints....

Now, let's pursue this wizardry a little further, shall we children? The next TWO POMOs this week and next are going to be purchases of long bonds. Then next week, on the 12th, those naughty Fedsters are going to dump another $8B of 2y Ts. It's not really a dark secret, it's on the bleeding web site.

They are going to keep on doing this. Do you think the Fed might manage to eventually get people out of short term Treasuries and into longer term corporates, equities and MBS?

Gosh, a few bright sparks might even be front running these trades.....?

Leftback said...

To return to the topic today's post, it's a no brainer. Think about the catalyst tomorrow.

Strong jobs data, BUCKY surges, Au/Ag sell off.
Weak jobs data, less metals demand, Ag/Cu sell off.

Leftback said...

LB lightened up on risk today, bought some Treasuries and is short silver. LB has no f***ing idea what will happen tomorrow but we reckon we will definitely have something in there that will make money for the next few days.

WellRed said...


I am having a hard time following your reasoning re: the implications of the Fed's selling of the short end. By considerably increasing supply, how is that going to push people out of the Treasury market and down the credit spectrum?

Call me an academic (I am one, so it won't hurt too much) but by increasing supply, how are they going to push people out of the market. Won't the market clearing price simply have to drop until it attracts people from other credit product (or further down the yield curve)?

Net/net, there is no new money or product coming into the system and I see how your argument could apply to their purchases in the long end, but I am quite confused by your comments re: selling the short end.

Lemmiwinks said...

How about EURCHF? It was a riskless long until this Monday, what's next? Go over 1.30 as the officials would like it, or go back to 1.20?
If EURJPY goes, shouldnt EURCHF follow?

Leftback said...


The argument is not academic at all, and is a very very simple credit market dynamic: the purchases of short-term Treasuries were driven by fear of loss of capital. When the price of these safe haven instruments begins to decline (as a consequence of POMOs), then the attraction of riskier assets with higher yields within the fixed income universe becomes irresistible. Their prices rise in turn, and credit spreads begin to tighten. Short-term credit to US corporations, is I believe the main target of the action.