Silver Losing its Shine or WSJ Losing it’s Mind 


It was bound to happen sooner or later. And this month we got it…. The WSJ ran it’s hit piece on silver. 

This Precious Metal Needs a Silver Bullet

The irony was rich. The first chart they ran with was a pristine display of the absolute most bullish short-term indicator one could find. It is the very same managed money short that we’ve been highlighting over and over. The data comes directly from the CFTC Commitment of Traders Report. 

Yet on and on they rambled, pulling out all manner of rationalizations for where ‘we are now’… Pouring salt into the open would of sentiment. A commentary based on the illusion created by a completely managed price.

Alas, this is how investment demand — that which must be controlled - is managed or contained. 

I’ve highlighted a few ripe gems (in bold) from the hit piece  — and then added a few more comments below.

Once prized as a precious metal that could be put to practical use, silver is now getting the worst of both worlds.

Silver has rarely been prized by anyone. The vast majority have no idea about silver. Most simply lump it in with gold, if ever at all.

Like gold, silver has lost its shine among investors who are no longer seeking a shield from market turmoil or a store of value to protect against inflation. Silver’s use as an industrial metal also is on the wane as growth in world economies, particularly China, starts to slow.

“Silver is getting whacked from both sides,” said Ed Meir, a commodity analyst with brokerage INTL FCStone.

It has added up to a bad few months for all things silver.

In the past 12 months alone, the price of the benchmark silver-futures contract has declined 27% to below $15 an ounce, far outpacing the 16% slide in most-active gold and extending a bear market that began in November 2013. From a three-decade high of $48.599 an ounce hit in April 2011, silver has slumped 70%.

Investors are very much active in silver. Though mainly it’s by proxy - led via the managed money traders who have collectively sold down the river of price momentum. 

Share prices of some silver-mining companies have lost about a quarter of their value this year. Yet production is rising.

Supply increases or steadies because most silver is produced as a by product. 

And many traders and analysts aren’t optimistic about an upswing. Analysts at Barclays predict silver prices will fall 20% in the coming year. Bearish wagers on the metal have jumped fivefold since May by one measure. Investors are yanking money out of the biggest silver-focused exchange-traded fund at the fastest pace in four years.

First off, the terms “traders” and “analysts” says it all. A trader is focused on price action and momentum - as a rule. The analyst simply comments on that price action. Completely detached from reality. 

As for “yanking money out of the big silver ETF”…that’s not entirely true at all. GLD may have been drained, but the SLV has remained counter-intuitively well stocked over the same period. 

Silver’s downfall is emblematic of the challenges investors face across commodities markets, from crude oil to copper and corn. After piling into commodities during boom years fueled by China’s double-digit growth and easing by the world’s major central banks, investors are quickly retreating. The S&P GSCI commodity index tumbled 14% in July, reaching a 13-year low on Monday.

Notice the terminology. “Investors” as opposed to “traders”. Not synonymous at all. To imply they are the same is sloppy work. “Investors” have never been more absent from precious metals. Silver alone, is a mere $15 billion dollar physical market - with an ever dwindling production. Yet there is a constant, voracious flow of demand for the metal “as commodity”. 

It is a far cry from the years immediately following the financial crisis. Silver soared in 2010, amid fears that the Federal Reserve’s extraordinary stimulus measures would fan runaway inflation. At the same time, the world was coming out of a recession, stoking demand for raw materials.

Demand for silver following 2008 was sparked by both wholesale and retail shortages. Shortages that caught the big commercial net short (JP Morgan Chase) completely off guard - having recently taken over the position from the defunct Bear Sterns. 

“Silver can well be described as a hybrid metal—half precious, half industrial,” said Bart Melek, head of commodity strategy at TD Securities in Toronto. In addition to the concerns surrounding China, investors are bracing for the Fed to raise the short-term benchmark interest rate for the first time in nearly a decade. That is likely to be negative for precious metals as the opportunity cost of holding a zero-yielding asset grows, Mr. Melek said.

Ah yes, never a complete bashing without bringing out the ole’ “no yield” argument against precious metals. For the individual, an asset that doesn’t need a bribe (interest rate or paper-denominated yield) to be held is a rare find in today’s world of black swans. 

A rebound in manufacturing activity that relies on silver—or renewed economic worries that send investors flocking to haven assets—could prompt a recovery in silver prices. 

Which is it? Your publication has been a cheerleader for the so-called recovery that isn’t. Yet, at the same time, the world presents us with a thousand black swans that a blind man could see. 

Retail investors already have gone bargain hunting. In July, sales of silver coins by the U.S. Mint more than doubled from year-ago levels.

Another ‘investor’ class appears to confuse us. The bargain hunting - surely contrarian - “retail investor” is buying from the U.S. Mint. Of course, retail investors don’t buy direct from the Mint. Besides retail sales of silver coins have been reported as slow across the board. And what about four years of record sales by the US Mint. Retail investors, normally swayed by publications such as these who are chronically would need to be staunch contrarians to buck the trend or convince “the spouse”. 

On Wednesday, the most-active silver contract, for September delivery, closed roughly flat at $14.553 a troy ounce. The metal is down 26% since first entering a bear market—defined as a 20% fall from a recent high—in 2013.

Silver is called the “poor man’s gold” because its relatively low price attracts individual investors, who often make wagers through shares on exchange-traded funds and other securities. The price of gold on Wednesday was $1,085.60 an ounce for the most-active contract.

Which individuals? 

These same “individuals” don’t see inflation — but they buy the SLV - shares… for convenience - as a hedge? Why would anyone truly concerned about inflation, first of all not see it for what it is, and secondly choose to hold it through a derivative denominated by the devaluing currency. 

The price ratio of gold to silver, a widely watched gauge of the relative value of the two precious metals, is currently 75-to-1, far above the historical average of about 50-to-1 that endured during the four previous decades. In the past, a surge in this ratio has sparked buying, but many investors are steering clear of silver this time around.

Once, again, the surge from 2008 until May of 2011 was driven by physical shortage. The price ratio is a loose abstraction and triggers bland interest, if anything at all. The two precious metals long ago diverged on physical inventory ratios as well as industrial uses. The only thing they share is a potential investment demand with an ancient - perhaps DNA-encoded legacy. 

From the start of 2015 through July 31, investors yanked more than $50 million from BlackRock Inc.’s $4.8 billion iShares Silver Trust, the biggest exchange-traded fund backed by physical silver, according to fund tracker Morningstar. It was the largest outflow for that period since 2011.

David Miller, chief investment officer at Catalyst Mutual Funds, said he initiated a $1.2 million bet against silver ETFs in recent weeks as the market fell and recently added shorts against silver-mining stocks as well.

Shares of silver miners, including Silver Wheaton Corp., Coeur Mining Inc. and Tahoe Resources Inc. all are down at least 25% so far this year, compared with a 2% gain for the S&P 500 stock index.

“We think demand in China is definitely weakening,” Mr. Miller said. “They can’t keep growing the way they did historically.”

China accounts for about a third of total global industrial demand. Its industrial use of silver rose 3.6% in 2014 to 186 million ounces, but it plunged in areas such as jewelry fabrication, according to the Silver Institute, an industry group.

The sharp decline in Chinese stocks in recent weeks and renewed signs of a slowdown in the world’s second-largest economy suggest China’s silver demand could decline in coming years, investors and traders say.

Once again, outflows of 50 million in a $15 billion dollar physical market. In a a futures market that maintains a collective hedge fund pile-on naked short bet to the tune of 1/3 of annual mining supply. 

Enough with China already! Silver industrial demand is based on a constant trickle of just in time inventory delivery. All it would take is one big user to panic order on rumors of supply constraint to light the fire of investment demand. 

World-wide, overall silver demand sank 4% last year, according to Silver Institute data. The drop was due largely to sliding investor demand for precious metals, whose appeal has faded amid tepid inflation and steady improvement in the U.S. economy.

“Investors aren’t really expecting inflation,” said Erica Rannestad, a senior analyst at metals research and consulting firm GFMS, a Thomson Reuters unit. “Right now, it’s not important.”

Erica from the GFMS must not be referring the retail investors - who see inflation everywhere, and especially as far as the eye can see. Retirees making adjustments to future income based on 0% interest rate policy some of the hardest hit. 

Industrial demand for silver fell 0.5% last year due to declines in Europe and North America. Many factors are behind the drop. The more consumers use digital cameras, the less need there is for film, which contains silver. The growing preference for tablets also hits silver demand because less silver is used to manufacture tablets than standard personal computers. Makers of solar panels are moving away from silver as they seek to cut costs.

Solar power? Less because it’s cheaper? It seems that would be the opposite. Perhaps Mr. Berthelson was just piling on for fun at this point?

Silver output is expanding, putting further downward pressure on prices. Production from mines that primarily focus on extraction of the metal rose 8% last year, bringing global supplies to their highest level since 2010, according to Silver Institute data.

The photography argument against silver is getting old. It simply means less supply becomes available from scrap. But nevertheless, more silver is now used for digital camera electronics and soldering. 

There are thousands of industrial uses for silver that add up to a massive cumulative demand - ill understood by the likes of most analysts. 

And why not look at the mechanics of the futures — look under the hood - compare the CFTC”s data. You are so willing to use government sponsored inflation data…

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