Tuesday, February 12, 2013

iShares Silver Trust (SLV), Silver Wheaton Corp.

(SLW): Is Silver in a Bubble?

From insidermonkey.com
Over the past five years, silver as represented by the iShares Silver Trust (SLV) is up roughly 75% on the type of steady march higher that investors dream about, despite being down about 7.5% over the past year. Earlier this week, Silver Wheaton Corp. (USA) (NYSE:SLW) CEO Randy Smallwood told CNBC that he saw precious-metals pricing going much higher from current levels. The comment led me to consider what alternative Smallwood might have to that position, if any, and to consider whether the long-term uptrend could continue.
While there are many typical hallmarks of a bubble scenario, most are not present in the silver market -- I hesitate to say none for fear of a barrage of examples. Ultimately, I agree with Smallwood and remain bullish on silver. Let's look at four common features of a bubble that aren't present in the silver market.
Disconnect from reality: Perhaps the greatest hallmark of a bubble is the ability of investors to ignore reality. For example, during the housing bubble, banks continued to lend on the theory that "housing prices cannot go down." From 2007 to 2009, the Case-Shiller Home Price Index collapsed from 225 down to 150.
The recent decline in the price of silver has been under control and driven by negative catalysts. Recently, the Bureau of Labor Statistics released data that indicated that jobless claims had hit a five-year low. This is negative for silver on two fronts. First, it may suggest that the economy is strengthening, making the safe-haven nature of precious metals less attractive. Secondly, the Federal Reserve, as a part of the current round of quantitative easing, has made clear that its current actions and policy initiatives are tied to the labor market -- the Fed it will keep rates near zero until unemployment dips below 6.5%. Smallwood cited the actions of various central banks and the primary positive catalyst he currently sees for silver prices.
A parabolic move higher. If you go back and study some of the previously celebrated bubbles, one common feature is that before the bubble bursts, buying became so frenzied that the asset prices climbed in a nearly vertical path. When these bubbles then burst, prices tend to crater. That's particularly true in precious metals and even more pronounced in silver.
Yet the move lower has been gradual and not what one would expect in a bubble scenario. You could argue that we are in a bubble, but that the really big up move has yet to come. If this were true, an investment would still be safe. Even so, I do not believe this is the case.
Structural breakdown. In the midst of a bubble, any asset even loosely tied to the hysteria begins to trade as if it were the same thing. In the case of silver, miners such as Pan American Silver Corp. (USA) (NASDAQ:PAAS) and First Majestic Silver Corp (NYSE:AG) would be expected to trade alongside silver. In the past month, however, while SLV is up nearly 4%, Pan American is down nearly 4% and First Majestic is down 6.5%. The move lower for Pan American comes even as the company reported record production for the most recent quarter.
Part of the reason for this divergence is that when recessionary forces exist in the economy, miners may be treated as companies rather than as commodity plays. Ongoing cost pressures, global macroeconomic weakness, and the debt crisis have each contributed to pushing down on mining stocks. Trading the miners can be tricky because of these often competing forces. As some of these recessionary pressures are alleviated, if the upward impetus on silver remains, the miners may outperform in the immediate term.

I forgot this one Shaza sent me yesterday.

China accounts for nearly half of world's new money supply

  • Staff Reporter
  • 2013-01-30
  • 10:59 (GMT+8)
Renminbi banknotes. There's new ones all the time. (File photo/Xinhua)
Renminbi banknotes. There's new ones all the time. (File photo/Xinhua)
China has seen its money supply surpass that of developed countries since 2009 and has emerged as the world's biggest "money printing machine."
In 2008, the country added 7.1 trillion yuan (US$1.13 trillion) to the currency market, while the United States added 5.08 trillion yuan (US$815 billion) and Europe 5.7 trillion yuan (US$915 billion).
In 2009, China added 13.5 trillion yuan (US$2.1 trillion), while the US, Japan and the eurozone significantly scaled back their supplies. China has been steadily adding 12 trillion yuan (US$1.9 trillion) each year since 2009.
Following the global financial crisis of 2008, major economies in the world have been "printing money." Examples include the quantitative easing measures adopted by the United States and the European Central Bank's "unlimited" bond-buying program. Most recently, Japan launched its own version of quantitative easing on Jan. 22 by raising its inflation target and announcing open-ended purchases of government bonds.
The amount of newly increased money supply peaked in 2012, totaling over 26 trillion yuan (US$4.1 trillion), with China accounting for nearly half of it.
China also saw record surplus money in 2012, with its money supply pegged at 1.88 times that of its GDP. The global average in 2011 was 126% of GDP.
A jump in China's consumer price index in December last year had further fueled concerns about the surplus supply of money printed by the central bank and its potential risks. Some analysts played down these concerns, saying that surplus money had become a universal phenomenon and that most of the countries experiencing it could boast a higher per capita income.