Silver lining or lead by-product balloon?
17 November 2010
WHAT if QEII was so well expected that the only people who actually sold US dollars and bought commodities after the announcement are the kind of people who should stick to their day jobs and not believe that they too can be George Soros, trading FX and/or precious metals on 1-5% down, based on the knowledge gained at a free seminar they learned about in the Sunday paper and some slick (and overpriced) software they bought whilst there?
Looking at silver (which often seems to fill the role of the ideal thing for mums and dads to buy very late cycle-because it’s cheap ... well, cheap when compared to gold) it certainly seems to be living proof that there are many out there who don’t subscribe to the old market adage, “buy the rumour, sell the news”. Silver already up 32% since August managed to run from $US26.70/oz on Monday last week to $US29.40/oz on Tuesday 9 November 2010 finishing that day at $US26.90/oz and the week at $US26.10/oz; lower than it started. Today (Tuesday) it’s lower still.
Taking a look at the attached chart (below) you can see the outcomes that followed similar buying flurries where everyone simply had to own silver and took the prices to 15% above its 50-day and 40% above it 200-day average. Yes, in all cases it did eventually end up being higher but please note the depth and duration of the time frames from the spike highs to a fresh break of that high. You can almost see the periods where the “just have to have its” became the “just can’t stand the pain anymores”.
Only a few days ago silver’s late and furious run into the spotlight was being crowed about as the silver lining that gold bugs were looking for to confirm the death of paper money. A week later all is quiet on the silver front, bulls dare not speak its name for fear of attracting undue attention. People might just look at the chart attached and decide that silver is more of a “by-product of lead balloon” that’s serving to show just how frothy these “obvious” “must go up” in the face of QEII markets are.
Silver may well go higher over time but right now it looks like a very crowded trade and has all the hallmarks of a third world ferry that will capsize as soon as all the current passengers run to one side.
There is a very old market adage that says, “the market always does what you expect it to do, it just never does it when you expect it”. Silver may well go higher over time but right now it looks like a very crowded trade and has all the hallmarks of a third world ferry that will capsize as soon as all the current passengers run to one side.
Lots has been written on the best way to invest/trade (call it what you will) but it seems to me the single best advice I have seen is to buy well. Obviously it’s easier said than done but like so many things in life it’s much easier to identify the foibles of others than to recognise them in ourselves. I think it’s not unreasonable to say that recent buyers of silver did not buy well.
Enter the seller. The flipside of observing people not buying well is recognising the opportunity to sell a little bit more than you otherwise might. Call it hedging, call it harvesting, call it opportunistic selling, call it what you like, but if you are a producer of something that is in the grip of an irrational buying frenzy it makes sense to sell a bit more than what you are producing right now, so you don’t have to sell your products weeks and months later during the inevitable hangover. It’s not about selling years into the future; looking at the characteristics of previous events 6-9 months forward possibly a bit longer, seems sensible. Don’t go crazy either with the volume but look at your numbers and if you sell 50-60% of your expected production you might be surprised to see the positive impact on your bottom line.
As I said it’s easier to recognise the foibles of others and that’s particularly apt in the present. Most of us have a reasonable ability to recognise our own irrational behaviours with hindsight. So take a few steps forward in time and imagine how you might look back on these prices and wonder what you were thinking standing by and selling as per normal. Sure silver might be going to $50 by Xmas but those guys who told you that never said which year.
Come to think of it, while you are out in the future looking back, glance at gold and copper and nickel and wonder if they aren’t so obviously going up that it might be obviously wrong, at least in the short to medium term. Remember you keep producing week in week out while the buyers seem to behave in manic but quite short waves of buying frenzy followed by extended hangovers.
There’s another old saying: “Avoid hangovers, stay drunk”. In producer speak that might be translated into, “avoid hangovers, oversell irrational rallies”, but as it says on the bottle, please hedge/sell/harvest responsibly. Oh, and don’t ask the brewers for tasting tips.