Monday, June 06, 2011

So we’ve had a correction, so what! There are bigger stories.

While I only posted it on Facebook (I was too busy working an election campaign to blog) I mentioned a number of weeks ago that we had gone too far too fast and I suggested selling silver equities between $45-50 silver and waiting for what seemed a guaranteed and much needed correction. It turns out I was correct in theory but was once again too busy to fully execute my devilishly cleaver (dumb luck) plan. I started to get antsy about $47 and pulled the trigger on my silver Wheaton, Arian, and a couple others but I didn’t get around to selling everything. Still it was a decent call and while fearful of catching the falling knife I re-entered the market and rebalanced my portfolio on the way up at about $35. I’m relatively confident we’ve seen the worst moves the year and it’s mostly up from here but this correction may not be the most important story of the year. I believe the bigger but largely ignored story is the state of the COMEX stockpiles which highlights two important trends

Total silver

While the total amount of silver in warehouses fluctuates as you’d expect, the total of silver on hand continues to trend lower. I believe total silver stocks will break below the 100 million ounce mark this year, a move which should be a major psychological milestone bringing much more ignorant chatter about industrial shortages to market.

Deliverable silver

The other trend has been the shift in delivery status of COMEX silver to a point where only about 30% of their stocks are in the registered category, the category that’s available to fulfill contracts. This is a strong signal that the owners of silver are either not interested in selling their silver at today’s price or perhaps not interested in delivery at any price. This reduction in deliverable silver will eventually be a big story, one which relevant or not will push the next wave well past $50 oz.

Reality vs….

Of course any talk of absolute shortages at this point would be total gibberish as smart silver users would have looked into direct mine/smelter purchases or created a large enough SLV position to demand delivery from London some time ago. As long as SVL is actually backed by bullion(?) and the rules allow large baskets to be delivered there will be no real shortage. This situation could however create additional hurdles for manufactures in both costs and complexity. Any COMEX shortage story will not necessarily indicate a real shortage but could in time turn into a self perpetuating prophecy as large players and greedy speculators (us?) start hoarding.

All said it could get nauseatingly volatile in the next year or so if you must speculate do so in cash and only in equities, hold on to your physical silver so tight your fingers bleed.

There will be a time to sell physical silver but not below triple digits or a Mad Max scenario.