Here is a little pro tip that applies to every aspect of life.
Never stop reading. Ever.
I know, broad and vague, but this week I want to use a quote from an otherwise useless article to keep you filled in on rumblings about silver that are coalescing into a much larger story.
It should come as no surprise that people involved in finance are utterly hopeless news junkies. Half of our job is to constantly read, and we’re always taking that portion of work home.
We’ll read just about anything to find that one nugget of information that is worth remembering.
If you’ve ever perversely looked forward to wading into quarterly earnings, 10-K forms, and NI 43-101 reports, you’re on the same page.
Last week, this constant reading strayed into an area normally bereft of any benefit. Yet there was a gem in Bloomberg‘s “Fourteen Wall Street Veterans Share the Best Advice They’ve Ever Received” article.
It was vague and probably disingenuous, but it did have this little gem that nailed the essence of breaking away from the herd and carving your own path to profit.
This is from David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates.
“Best pieces of advice I have ever received were from Bob Farrell: “When all the experts and forecasts agree, something else is going to happen” and from Don Cox: “Short the story on page A1 and go long the story on page C16 on its way to page A1.”
Both of these legends were mentors of mine. And what this sage advice speaks to is of the necessity and discipline of leaning against the herd mentality and, no matter good or bad the news may be, assessing at all times the extent to which such news is already being discounted by the markets—in other words, how much is “in the price.”
Turn To C16
The most important line in there is the one from Don Cox — “Short the story on page A1 and go long the story on page C16 on its way to page A1.”
We all know the stories that are “above the fold” (quick aside, is that saying doomed to go the way of the buffalo as newspapers die off?).
We often bring them up in our editorials, either to dig deeper than the surface or to refute them.
However, it is the stories buried deep that really ought to draw our attention. We’re starting to see more and more of them that will create a strong upward pressure for silver prices.
Here are some highlights that are starting to come together…
The A1 story might be that commodities are a lost cause. The C16 stories show how that generalization may be true for many metals, but their descent will only help silver.
China demand is slumping. Overcapacity for mines, construction, housing, and infrastructure is out of control. I recently read an article about a massive, modern airport that only brings in three flights (!!!) a day.
Debt fueled it, and it is a major force dragging down GDP and global growth.
Base metal production is now out of sync with growth, leading to historically low prices. China accounts for a whopping 57.7% of iron imports and 31% of copper ore imports.
What isn’t being mentioned in the top headlines is the effect of a steep slowdown in base metals on silver production.
Roughly 70% of the world’s silver supply is produced while mining other metals, particularly gold, copper, lead, and zinc.
Following 12 years of gains, global silver production is expected to fall this year, and even further next year.
Mines are aging, there are essentially no new mines, and the capacity to continue production growth simply no longer exists.
With China facing many years of slowdown ahead, it will continue to drop. A supply squeeze is in the works as base metal investment dries up.
Silver mine supply lagged demand by 4.9 million ounces last year, or about 0.5% of total demand, which stood at 1,066.7 million ounces, according to the World Silver Survey. This mismatch will only increase going forward.
This comes as silver demand is finding renewed strength.
Buried well past the front page commodity stories, silver coin demand is blowing up.
In the third quarter of this year, silver coin demand went berserk. Mints couldn’t keep up with demand.
In particular, the U.S. Mint had to ration deliveries of Silver Eagles, yet utterly failed to fulfill its mandate to keep the market supplied.
The U.S. Mint sold 14.26 million ounces of American Eagle silver coins in the third quarter, the highest on record going back to 1986.
It is reminiscent of the severe shortages we’ve seen in recent years, but it masks a major difference. Back in 2008, the U.S. Mint ran into the same problem.
However, it produced three times as many Silver Eagles this time around.
Mints in Canada couldn’t meet demand either. Same goes for Australia. The Perth Mint sold four times more coins in September than in August.
This is also creating a mismatch between the farcical paper trading and real prices in the market.
“We can only get a fraction of what we could sell,” said Terry Hanlon, president of Dillon Gage, one of the world’s biggest precious metals dealers, to Reuters.
Hanlon said he has seen premiums for coins, which are paid on top of the spot price for physical delivery, surge to about $4 to $5 per coin in wholesale deals, compared with $2.30 in June.
The higher premiums for buyers may very well be worth it. Low spot prices are driving demand right now. Waiting for the premiums to shrink will only result in buying coins at a point when higher spot prices negate any benefit.
Finally, artificial market action is suppressing silver prices, but it is inherently unsustainable.
A massive spike in silver futures just appeared.
The open interest (or number of futures contracts) rose by a whopping 2325 contracts.
The total silver open interest represents .838 billion oz, or 120%, of annual global silver production. It is kind of a joke, because fulfilling that is utterly impossible.
Coupled with how the price moves, open interest information gives us an indicator of long and short positions.
In this case, the spike came with silver moving up five cents. It isn’t much, but it shows that the perpetually shorting banks are facing stiffer resistance from investors who see the upward silver trend coalescing.
In other words, the silver bulls are starting to win.
The weight of the short positions will lessen as silver prices rise. If silver rises far enough, prices will become unshackled by manipulation as short positions get hit with margin calls.
If and when that happens, prices will snap upward quickly, richly rewarding anyone holding silver in any form.
Do It Right
The long-term outlook is strong for silver. The current drawdown in base metal production will only help silver prices as supply and demand forces greater deficits for years to come.
Faith in central banks is shot, along with the banks’ ability to deal with the new downturn. There are no more tricks or tools left. Precious metals are the only way to side-step the global devaluation and debt race to the bottom.
