Saturday, November 29, 2014

What's Up With the Precious Metals?

Heck if I know!

Unless you don't pay any attention to precious metal prices at all (in which case you're kinda out of place around here) you know that prices have been in the tank lately.  Gold closed at $1168/oz Friday and has been struggling to clear $1200/oz since mid-October.  It hasn't seriously challenged $1400 in the last year.  What's significant about that?  Just that analysts conclude that the
"all-in costs of gold producers are now above $1,150/oz, even after big cost reductions and a focus on higher-grade mining. If the price drops to $1,000/oz, there will be many shutdowns. The industry needs a price of at least $1,400/oz to support sustainable production, and that number will rise, as early as 2015 or 2016."  It's progressively harder for gold miners to mine profitably at today's prices, and that gets worse as the world's central bankers create more and more inflationary pressures on the dollar. 
Silver is just as bad.  The number of ounces of silver it takes to buy an ounce of gold (or the number of silver ounces 1 oz of gold will buy) is 75.4.  Historically, that's on the high end of where it ranges, but not an all time high.  Here's your kicker: the average silver to gold ratio from 1687 until now was 27.28, just about a third of what it is now.  The ratio went above 40 in 1984 and has only rarely gone below 40 since then.  A high ratio represents either historically cheap silver or expensive gold - but the preceding paragraph explains that gold is almost selling too cheaply to mine.  To me that implies gold is cheap, and silver is full-tilt-bozo, ridiculously, crazy cheap. 
(Note this is from 11/27 - Thanksgiving - when all the other world markets were open.  My value of 75.4 is from 11/28's closing prices.)

Silver has been in a down trend since mid 2011, although a couple of those vertical price drops came from the commodity markets changing the their rules.  It was almost net zero movement since May of '13, but the last couple of months have been brutal.  With "above ground" supplies of almost a billion ounces (978 million), more than last year, and the economic forecast for slowing growth worldwide (if not outright global recession) the price of silver seems to be caught between the strangely resurgent dollar strength and the investors eying the white metal more as an alternative currency than as an industrial investment.  Silver's price correlation to gold is 0.82 (1.0 being perfect... and never seen); its correlation coefficient to industrial metals is 0.27. 

So if there's so much silver around that you can get all you want, spot prices are in downward spiral and the price of silver is prices last seen in 2009, you might think this is a good time to go buy some.  I know that a year or so ago, 90% junk silver coins (90% silver US coins from 1964 and before) sold for about a 6 or 7% premium over spot price.  Tonight, checking the cheapest junk silver coins, I find the premium is closer to 17%!  I thought supplies were so high we were tripping over silver. 

It's widely thought that the spot price is set by paper traders who have nothing to do with producing, or really buying actual metal.  Keith Neumeyer, the CEO of First Majestic Silver took the bold move of holding back 35% of his company's silver production rather than sell it at the paper trader's price. 
Now, Mr. Neumeyer has taken things a step further by suggesting that silver miners should form a semi-cartel and hold back sales of their production in order to break the backs of the paper manipulators. He encourages all miners to hold back silver, pick a month, get together and hold back silver for 30 days, putting out a news release collectively. The goal is to call the bluff of the paper markets, which trade over the entire year of global production in a day. First Majestic itself is a small fish, but imagine the impact if a few of the top producers joined in the effort and physical supplies tightened.
Attempts to manipulate market prices are widespread, and metals investors in particular are very loud about it.   The current extremely low price of oil (closed at $65.99 Friday) is said to be an attempt by the Saudis and the Russians to collapse the US shale oil resurgence.  Both Saudi Arabia and especially Russia need the price to be closer to $100, but the combination of the US energy production improvements and forecast for lower demand have helped pressure prices lower.  The point is, anyone who can try to influence commodity prices will.  Still, it's widely reported that despite the large number of above ground ounces, the important part is that demand for that above ground silver exceeds supply, which should imply the price can't be held down too much longer.

As always, the real question is what the future holds (and long time readers know my answer usually starts with Bohr's quote).  As I said before, 90% silver coins have jumped a lot in price compared to the spot metal price.  The US Mint regularly sells out of silver eagles.  Combine that with silver producers trying to raise prices.  My view is that the separation of price for physical metal vs. the paper price means that sellers are just plain refusing to sell at that paper price.  If you really want the silver, you'll pay more.  That tells me there's a fundamental stress in the market that will only be relieved by silver going up in price.  I expect next year to be better than this year for the metals. 

Standard disclaimers apply: I'm just some dood with a blog on the vast Sargasso sea of the net.  YMMV.  Under penalty of law, do not remove mattress tag.  Professional drivers on closed course.  No animals were harmed during the writing of this blog (although one white cat was annoyed that I wasn't paying enough attention to him). 


  1. I've been buying silver, both junk and American Eagles, for several years now.

    Yeah, I bought when it was "too expensive", and that smarts, but if it shoots back up to where it was, all the stuff I've bought since then will go up, too.

    And I've even bought a small amount of gold because the price was "down".

  2. Local shops have stopped carrying gold coins. They did not buy replacements when they sold out about a year ago. Good way not to take a loss I suppose, as good continues it's slide.

  3. Just a few observations from a "former" investor in precious metals - (and a still realistic preparedness advocate)...
    Observation #1: When a person says "the value of my gold, silver, unobtanium, whatever - has 'gone up' (or down, lately)", take note that they always quote current value in US dollars.
    Observation #2: Have you tried to "spend" a gold or silver bar lately? How about a silver 50cent piece? The value you can trade that silver 50c walking liberty coin for at the grocery store... is 50 cents(if they don't reject it). To get those "spendable" US dollars back, you have to go pay the guy at the coin store 10 or 15% vigorish to trade your metal for cash(plus -assuming the value of your metal has gone up in US dollars- any IRS "collectible" tax you're also responsible for... wink wink). Example to follow.
    Observation #3: Just by blind luck, my last investment in silver Walker half-dollar rolls was purchased from APMEX when silver was approximately $11.50/oz. I sold those rolls a few years ago when silver got above $40/oz. I wasn't about to take the dealer hit, so I sold on ebay and got "market pricing" for the coins(which I deemed acceptable fair value). Instead of almost quarupling my investment as the "silver price" reflected, after the initial dealer markup, shipping/insurance costs, ebay fee and shipping cost. I barely doubled my money.
    Observation #4: If the poo hits the impeller, trading the metal, coins, etc. for goods will be dicey at best. There have been well documented cases where people have experimented by trying to sell a gold coin on the street to passersby... the offer was, "I'll sell you this gold $10 piece (or whatever, I don't recall the denomination) for $50 bucks cash. Everyone reading this knows that coin was easily worth five times that, but the seller couldn't get any takers because a: "joe average" doesn't have a clue what that coin is worth b: people claimed not to have the cash on their person, c: people were wary that it was a scam d: the coin could very easily be a 'slug' and they'd out 50 bucks.
    These are all reasons why I am no longer a metals investor, holder, stacker, whatever. I hold the unpopular view in the preparedness community that they are relatively terrible investments that make more money for the dealers and advertising dollar recipients like Glenn Beck, and help relieve panic'd people of money they would be better off allocating elsewise.

  4. PM's are insurance, not investments.
    Insurance against the USD dropping to fire starting value. Like all things, best in moderation.

  5. The world economy is huge and in spite of various countries around the world being in a decline the economy in general is still huge. There are big, small and intermediate sized investors around the world trying to keep their money safe and earning more then 1%. In a nutshell that is why the stock market is in this huge bubble. Foriegn investors big and small don't have many decent places to invest and the American stock market looks the most promising. But it is more a self fullfilling prophecy then it is a market based on reality. But never the less it continues to inflate and more and more investors want a piece of it. That is why they are selling their PMs. Buying and holding PMs when you aren't the Hunt brothers requires a lot of patience and will power. In the late 80's and 90's I got into gold and silver pretty heavily. In fact I couldn't even carry it I had so much. I sat on that huge investment in PMs until it started to climb around 2005. Yeah I sold, wish I hadn't but I did. Made a profit, finally. But the point is with PMs you may have to hold it for 20 years or more just to break even someday in the future. I would be willing to bet that 90% of those who bought PMs over the last 6 years didn't anticipate that and now they are willing to get out with a loss and invest in Google or Apple. And that in a nutshell is why the stock market is up and the PM market is down. Not because of underlying factors but simply because on the upside of a HUGE bubble every investment (in that bubble) is a winner and it is sucking the money out of PMs. No worries, this bubble like all bubbles will burst. The stock market is no respecter of hopes and dreams and when it crashes I expect it to be biblical.

  6. Where are the Hunt brothers when you need them?

  7. Several good comments here, but my summary is: it's complicated.

    As Anon 1526 says, the world economy is big and everyone is trying to find yields above inflation. If you believe official numbers, inflation here is in line with the Fed's desired 2%, but that's an artifact of all the crap they use to calculate it, like omitting food and fuel costs and using hedonics adjustments. If you measure inflation the way it was measured before they started screwing with the methods, it's around 9 to 10%. Makes 1 or 2% yield look pretty bad. The US stock market "looks good" because it's running on the quantitative easing (free money) the Fed creates. The banks who get that money first are getting fat on the stock bubble. Other nations aren't as free to do as much.

    To borrow the quote from Henry Ford, "If the American people understood how the banking system works, there would be a revolution by tomorrow morning".

    My personal take on buying PMs is more like Anon 1441 said: as insurance, and even there, part of a larger plan. I think housefitter says a lot of things people should think about long and hard. A lot of preppers envision a scenario in which dollars become worthless (or worth less in a devaluation). This sort of scenario - which happens somewhere around the world pretty regularly - forces people who wouldn't give you more than 10 cents for a silver dime today to learn the difference. Silver is simply a barter item that has a good chance of being recognized. Of silver coins, the ones that will probably be most easily recognized are the ones people hear about on the street. 90% silver US coins and one ounce coins from the US Mint, Canada and a few others will probably be recognized quickly.

    But you should also think of what you do if you wake up and instead of finding the SHTF and dollars are worthless, you wake up and find the recession is over, the world is prosperous and happy and silver is selling for $5/oz. A more mundane scenario is that you put a chunk of your savings into PMs and find you need to cash out of some of it for an emergency. If that happens, you face the problems Housefitter talks about.

    I can't help but wonder about the scenario of a someone coming up to you cold on the street and offering to sell you a $10 gold coin for $50. I would personally think of it like I do the guy who wants to sell me a Rolex or diamond ring for $50.