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11/7/15

The IKN Weekly on silver

For a different reason this evening I opened the back copy of IKN320, dated June 28th 2015, but once there something I wrote about silver that weekend caught my eye and I read it through again.

Remember that time early this summer when Keith Neumeyer of First Majestic (FR.to) (AG) wrote that stuffy letter to the CTFC people? When Jim Sinclair was up in his golden arms about the manipulation of the silver market (again)? When it was only a matter of time before silver exploded to the upside? Well, this below was written at that time and on reading it through again it looks just as relevant today as it did back then.

This weekend silver stands at U$14.74/oz, for reference purposes.

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A half-year review of IKN's position as regards silver

No specific mining stock again this week, instead a shorter note as I coast lazily through the summ...sorry, as I carefully consider options for investments during this quiet market period (see 'Market Watching' below for a little more on those). You know IKN likes gold miners more than any other right now (check the main places in which we're invested right now if that's not clear), you know I'm leery of industrial metals exposure (first up copper, but zinc, lead, alu, nickel moly etc all count too) but what about the one that causes the headaches, the Jekyll and Hyde metal, silver?



I've spent at least a chunk of time in the past seven days checking over my thesis on silver and why I prefer gold exposure in my mining stocks to that of silver, stress-testing if you like. The upshot is that I'm happy with my preference for gold over silver. Let's start by opening myself up to accusations of cherrypicking with a January 21st 2015 Bloomberg report, "Silver Poised for Bull Market as Economic Woes Boost Demand" (4). Yes it suits my argument against silver to pick an example of what's gone wrong in the pro-silver camp but believe me folks, after spending a while wading through the hype-laden silverbug material and what passes for analysis (total guff) that's out there I could have chosen something that looks plain stupid instead of just wrong. Anyway, to the example and here's a quote:



“Silver will benefit from all the stimulus measures and rate cuts being announced aggressively by the central banks,” Caroline Bain, a commodity economist at Capital Economics Ltd. in London, said in a telephone interview. “The stimulus measures will at some point boost usage of the metal.” Bain said she expects the price to rise to $20 by the end of the year.



On January 21st, the date of that report, silver closed at $18.22/oz on the London Fix. This weekend we're at $15.83, a drop of $2.39 or 13.1%. And before you say anything that same day had gold at $1,199/oz, which is a tad higher than today's close but still under U$1,200/oz and in the at-or-abouts range with which your author is trying to model investments in the gold space. So okay, long story short some analyst at a desk made a bad call, not the first time and not the last but I'll bet you a large amount of my money to a small amount of your money that calling badly to the upside only gets remembered by irritating little guys such as myself who snuffle around the web and dig up forgotten news reports. Dare to call silver lower (dare to call anything shiny lower) in public, get the call wrong in your timeframe and you never hear the end of it. I can promise on that one, I have the scars and the mails to prove it.



Next up, I also spent some of my Friday reading Jim Sinclair's views on silver. Yes seriously, that Jim Sinclair the "Dear Comrades In Golden Arms" Sinclair, via this post on his website (5) dated Friday June 26th and entitled "Don’t Push A Bad Position" which seems to be either co-authored or authored with Sinclair's tacit approval by one Bill Holter (I'm not sure of the protocols in silverbugland and can't be bothered to find out). Anyway, there was a lot of the usual "it's a fix!" and "it's not fair!" stuff so go read it if you like, but along the way a point made in this paragraph caught my eye and I've highlighted the bit that matters:



To finish this section, there is NO market anywhere on the planet where the amounts of futures dwarf the physical product so overwhelmingly than in silver. Why is silver so important? Why has it been bludgeoned so badly and even priced below the cost of production? You must understand how small the silver market is. Total global production is less than $15 billion per year …"but", silver cannot be left alone because high silver prices do not jibe with low gold prices. …And gold MUST be kept down and out of the limelight because high gold prices do not fit with low interest rates …which are an absolute must in an effort of reflation. You see, in no way can interest rates be allowed to rise with the amount of global debt outstanding. Higher interest rates will crush the debt outstanding, the silver market is at the VERY BEGINNING of the "food chain" that keeps the lid on interest rates. I believe the Chinese hold this market in their back pocket paid for with "pocket change", they will use is it at their own discretion!



And in that bold-typed and underlined section there are three points with which I agree:



1) Total global production is less than U$15Bn per year. In fact, if we take 2014's production number and a U$16/oz price for 2015 and it would be under U$14Bn.



2) Yes, it makes sense to use silver as a "handle" to keep a cap on gold. We all know about the gold/silver ratio and how it's moved up to towards 75/1 recently. We also know about the 15/1 legends and the 50/1 averages since the US dropped the gold standard, there's any number of numbers with which one can feed.



3) It helps the "mainstream financial world" (an ugly phrase, but it'll do in a pinch and you at least know what i'm talking about) to keep gold out the limelight or under control.



However, this very paragraph also points to how and why this horrible naughty unfair stomp-your-feet silver manipulation isn't going away anytime soon. Something Mr. Sinclair ignores.



·     Yes, silver's a "handle" on gold but by no means completely effective, else the gold/silver ratio would not have drifted to where it is today, North of 70X for for over half a year.



·     Yes, silver's a small market in absolute terms and that makes it easy enough to control, as all the articles pointing to the large JP Morgan position in silver will attest.



·     But why is there this assumption, or at the very least implication, that just by pointing to out the manipulation it's going to go away?



We've witnessed metals market manipulation on a far greater scale recently in the copper market and that only saw action taken against it because end-users we're complaining that the price they were paying was artificially high (and as a result threatened the LME which in turn changed its rules on warehousing, bringing all the fun to an end). So tell, me, what end user (rather than end-hoarder, big difference) is going to kick up a fuss and complain about artificially low silver prices? The masochist end of the silver market, perhaps? Silver is nominally "precious" but it's still an industrial metal and more than half of annual production goes to industrial uses. It's not gold, never has been, never will be.



The fact is, this silver manipulation by the big bad nasty JPM and its friends shows no signs of going away soon, none at all. We've even seen the bank successfully defend its position in courts, which annoys the manip-callers no end but that's the way it is. Call it legit market device, call it immoral, call it illegal, your opinion counts as much as mine (i.e. zero) but if we assume 1) the runners of this silver market are making their profit and 2) there are no rules being broken and 3) it's small money in comparative terms and 4) it at least helps the bigger game of gold control, I see no reason why it should suddenly stop just because Keith Neumeyer sends a mail to the CTFC. "Not fair" you say? Well f__k fair, since when has 'fair' been a part of capital markets?