As I take a break from the Corzine testimony before the House Agricultural Committee, I'd like to briefly comment on the prospects for the precious metals vis-a-vis the U.S.D.
The first thing I notice, as someone who always looks at charts to see if price action is in line with my view of the fundamentals, is that a closed-end fund that is half gold and half silver, Central Fund of Canada (CEF) has just tipped into a bear configuration, with the 50, 150 and 200 day simple moving averages aligned so that the shortest moving averages are weaker (lower) than the longer ones. Thus if one doesn't want to differentiate between gold (still by those criteria in a bull market) and silver (clearly in a short- and intermediate-term bear configuration), and go "halvsies" by owning equal dollar amounts of each, the message of the market has begun to tilt against one.
Briefly, my record on silver has been good, probably because it has been short and with few calls, thus allowing randomness to work in my favor. I announced quite bullish sentiments in September 2010 around $20/ounce and turned bearish on silver in early May around $40. After the collapse carried it to around $33, I issued a qualified trading buy but after that reiterated that I was staying "risk off" for all commodities other than gold.
I began to raise bearish questions this spring about the trend for the price of silver based in part on the persistent high price premium of the Sprott Physical Silver Trust (PSLV). I admire the fund's construction from a tax and redemption standpoint. I also admire Mr. Sprott's investment acumen and his forthright stand in favor of transparency and soundness in monetary affairs. I have owned PSLV shares and those of other metals funds and "believe" in their value. On the other hand, I was naive enough after the bubble markets peaked in 2000 to think that some ebullience in pricing would be differentiated from bubble pricing, but irrational exuberance has returned. In my view, the continued high teens premium of PSLV to the value of the silver the trust owns (i.e., its NAV) is worrisome. Yes, the overpricing may not matter much if silver in a year or two is going to $200/ounce from the current low-$30s price. But we are in a world that if one were to buy PSLV and one year later, the value of its assets were to rise 10% after expenses, the investor in PSLV could easily lose money because the premium to NAV could shrink much more than that. By comparison, a virtually identical Sprott fund owns gold rather than silver, stock symbol PHYS. This fund has settled down from its early near-20% premium to NAV to trade in the 1-4% premium range. PSLV in my view should trade roughly in line with PHYS. That is does not do so worries me.
For some time, I have read a variety of precious metals-oriented blogs and position papers. I perceive a high degree of certitude and often very bullish price forecasts for silver that I never see for the non-monetary precious metals or a base metal such as copper. I put that confluence of circumstances together and get cautious. Thus I plan to buy PSLV or one of its relative should despair in PSLV's fans (acceptance of financial reality, in my view) become more prominent.
I'm one of those people who would rather buy at $40 on a breakout to the upside on a one-way trip (one would hope) to $70 or $100 rather than buy at $32 and bail if the price drops because I really think that $20-25 is a realistic trading target at some point next year.
Readers should understand that these comments are trading comments. In the long run, my guess is that physical silver is a "good", sound investment at today's price, and that a great way to own silver is in a bank vault or in a basement, where the cost of storage is respectively minimal or zero. My observation though is also that silver is probably trading well above its fully-burdened cost of production, whereas I read this week that the cost of producing an ounce of platinum by one of the South African producers is slightly above the current spot price. I "get" that in a Mad Max scenario or in a hyperinflationary depression, there won't be much demand for platinum while silver may become the go-to transactional money, at least for a while. But that's not today's reality, and in the U.S., I don't think it's going to be a 2012 reality either, recession or no recession. Are the markets already reflecting the likelihood of something such as those disasters? Of course, that's possible, but that's not my expectation, and these are the sorts of interesting issues that, as they say, make markets.
Finally, while recessions and expansions (busts and booms) come and go, and given that much of Europe is now acknowledged to be in or tipping into recession, much may already be priced into the metals and other commodities markets, neither China nor the U.S. are in acknowledged recessions. If they go into recessions, then since recessions tend to be disinflationary or deflationary (price, not Austrian definition of those terms), and in this highly-leveraged world, there is just no telling how far a spike down in price any commodity might (or might not, of course) have should one or both countries be seen to be in that economic state.
In conclusion, I'd feel a lot better about the many calls that silver is finishing a major consolidation and is ready to break out to the upside in a major way if I saw stronger price trends in the non-oil general commodities markets and if I saw less inherent confidence in the pricing of such vehicles as PSLV. Note I am not making a directional "call" at all today.
As I've been saying for a while, sometimes sitting quietly in cash or other relatively stable assets and watching trends evolve with which one is comfortable may be wiser for many people than betting real money in what I view as unusually uncertain times. That's what is working for me right now, and of course nothing said here should be construed as anything other than my personal views, and should not be construed as investment advice in any way.
No comments:
Post a Comment