I agree. I continue to expect mostly sideways motion in silver, staying range bound from 16-25 for at least another year. The best thing for PAAS to do is to focus on keeping costs low enough that they stay profitable, and they are doing a good job of that. There is always a risk that prices will fall to the lower end of that range for awhile, and they need to stay financially healthy if that happens. The two ways to do that are to hedge some silver, which the market rejects, and to maintain a healthy cash balance, which is the preferred method.
So long as they remain profitable, I see no reason not to devote part of current earning to share buybacks, as you suggest, but now is not a time to be overly aggressive. I don't think this downturn will last nearly as long as the one from 1980-2003, but on the other hand, I don't think it will be over in a matter of months, either.
I continue to have no position in silver and almost no position in silver miners, and have been happy I moved to natural gas a year ago.
I agree that the hedge was largely irrelevant. It wasn't big enough to make a huge difference. It was only about 2 months production anyway. With or without that hedge, if silver prices rose, PAAS's receipts would rise. Now, if they had sold 2 year's production, that would have been different. As you said, PAAS is going to move with silver, not on its own.
I also agree, the story right now is about keeping the mining cost under the sales price. PAAS has some low cost mines, so it's certainly possible. I wouldn't mind seeing them sell more of the higher cost mines, such as Peru or Bolivia. The one thing that could make those mines profitable again would be for zinc and lead to go back over $1.
I'm sorry if I wasn't clear on that. I didn't mean that higher rates lead to a strong economy. I meant that the Fed is more likely to raise rates only when the economy is strong. The 70's were a unique time because the Fed at that time let inflation get out of hand before they tried to raise rates to stop it. If rates are 10%, but inflation is 12%, the interest rate is actually low, negative in fact. While interest rates rose in the 70's they stayed under the inflation rate, so the real interest rate remained negative, and inflation (and gold prices) kept growing.
It was not until after 1980 when the Fed finally raised interest rates above the inflation rate. At that point there was another recession. The high real rates did finally kill inflation, though, as well as gold prices and the stock market, which bottomed in 1982 in real terms.
Re: "One common factor is economic distress: gold goes up when people doubt their economic future. Conversely, gold goes down when people are getting confident about economics."
Exactly, and interest rates do the converse. The more uncertain the economy, the lower interest rates go. Blame it on the Fed, or, blame it on the fact that when the economic future is uncertain, no one wants to borrow, and people do want to pay back what they already owe. Thus, there doesn't need to be a cause and effect for the relationship "interest rates up, gold down" to hold true.
They say that rising interest rates are bad for precious metals because historically that had been the case. Why? There are a variety of reasons, and of these, some may be more true at certain times than others:
1. Gold is a passive investment. If you have a choice between holding gold for no return other than potential long term gains, and holding bonds paying 1%, you might choose gold, but the higher the rate of return, the more likely you are to choose bonds instead.
2. Rising interest rates can mean a tighter Fed policy, given that they control interest rates. Tighter Fed policy is typically bad for precious metals.
3. Interest rates typically rise in a strong economy, and fall in a weak one. A strong economy typically means a lot of good investment alternatives, and it also means less risk of a total economic collapse.
4. Because it always has been true in the past, traders expect it to happen again, so it becomes self-fulfilling.
At the current time I think 1 and 3 would be the main factors. As the economy strengthens in the years ahead, people will see less risk of economic collapse, and more alternatives that they find to be more attractive investments. As the economy strengthens, the Fed has little choice but to tighten, to pull out of the economy the reserves they pumped into it. If they don't, then the rapid inflation people have long expected would finally happen. If it does, that would be good for precious metals, but I think the Fed will tighten, and prevent it, though they may well trigger another recession in the process.
It depends how they hedge, I guess. If they buy puts, then would lose on the time value. I presumed they just sold the silver for future delivery. I just looked at Comex prices for yesterday. Silver for current month delivery was $23.12. Silver for December delivery was $23.17. That isn't a lot of premium, but it's still positive. Alternately perhaps they could have sold covered calls? I have no idea where to find the prices for those, but based on the differential between current month and December, they probably are pretty cheap, too.
Yes, I agree that at $15-25, there isn't much point in investing consistently in silver, which is why I've been on the sidelines the last year. I was laughed at on here for suggesting we'd see $18. We didn't quite get that, but we did see a low of $19.10 on July 9th. I have no strong opinions about the $15 price. I just kind of expect silver to be range bound for awhile.
I'm more optimistic about natural gas at this point, and for that am holding FCG, which is a fund of natural gas stocks. It's up nicely from where I bought it, at about $15.50, so I've been happy with that switch, though honestly the S&P is up just as much.
The ironic thing is that selling silver hedged is the smart thing to do, so long as they don't get crazy about it, and sell only a little. If they sell silver for 3 months out, they get the current price, plus a time premium.If silver is flat, or only goes up a little, they come out ahead, and if silver goes down, they come out way ahead. They only lose if silver goes straight up. Even then, so long as they only sold 3 months worth, its not a big deal. If they keep #$%$ it, quarter after quarter, they would come out ahead in the long run.
I sell very little chance of silver making any big moves in the next twelve months. I see interest rates continuing to rise, and that's normally not good for precious metals (or for the stock market). I see silver staying in a trading range of 15-25 for the next 12 months. I'm still just watching, having had no position in PAAS since selling a year ago.
"Anyway you calculate it, RYJUX is the worst of the bunch."
Well, now we have five years of history to look at, and we can evaluate the accuracy of this statement. In the intervening 5 years:
TYX is down 15%
RYJUX is down 40%
RRPIX is down 50%
DXKSK is down 55%
TBT is down 70%.
If we want to see how these alternatives fare in a rising rate period, let's look only at the last 3 months:
Thus, TBT is the most heavily leveraged, and the highest risk. DXKSX hasn't done well over either time period. RRPIX and RYJUX appear to be the best all around choices, but neither comes close to matching the performance of TYX, trailing it when rates are going down, and trailing it when rates are going up. Using either fund to speculate on rising interest rates is not for the faint of heart.
I don't disagree with anything you have said here. As always, it is a complex situation that could go a lot of different directions. All too many people in overly simplistic terms, and think that gold must invariably go up because the Fed printed a lot of money in recent years. So far the Fed has managed to walk the tightrope rather well, and kept inflation in the 2% range, and as a result gold has come down a lot from its peak.
My personal opinion is that the Fed will try to tightrope between the two positions. They will let rates rise some, but try to skate the narrow like between recession and inflation. If they are successful, there will be slowly rising rates will inflation staying at current levels, a result that will not be helpful for gold/silver. It will also not be helpful to the broad market, which will see PE contraction. The current Moore Interest Rate Predictor calls for inflation to remain in the 1.5% range for the next year, and unless that changes, I don't see silver/gold being able to rally in the context of rising interest rates.
oh, my eyes...
First, the paper market can't overrule the physical market because at the end of the contract, a seller has to deliver on his agreement. When its all said and done physical changes hands, so it isn't just paper.
Next, we've know QE would end eventually. We have long said that the Fed has pumped reserves into the banking system, and that in the end they will have to raise interest rates to remove them, or the result will be inflation. PM bulls think the Fed will be slow about it, and that that inflation will rise before rates, meaning rising PM prices. PM bears have said that the Fed was on course, and that they would raise rates before inflation, killing PM prices. At this point it looks like the Fed is letting rates rise, and withdrawing reserves even though inflation is not ramping up yet, so PM prices are taking a hit, as one would expect with that course of action.
You are correct that over the longer term, higher rates will make Federal deficits worse. Rather than selling 30 year bonds at low rates, they actually have been buying them, and financing those at short term rates, which will increase future rate volatility. As rates rise, and the deficits worsen, the government will have to borrow more, and unlike the last 30 years the Social Security system has a cash deficit and is selling bonds, not buying them, further increasing the need for financing. Will the Fed chicken out, or will they let rates rise to a market rate, which as you point out, could be quite high? If they let it rise to a market rate, there will be another recession, no inflation, and silver and gold will suffer badly. If they chicken out, and try to hold interest rates down, inflation will pick up, and silver and gold will rally again.
I continue to have no position in precious metals. I am long cash, long DOG, and long FCG. The latter two positions have been about a wash lately. I also have a small position in RYJUX. I see no urgency to make any changes at the moment.
It's always easy to blame everything on the Fed, but I don't think its appropriate here. A stock market bubble and a real estate bubble were both widely anticipated by many people, as was a long term period of economic weakness to follow them. Could the Fed have slowed the economy in the 90's and reduced the size of the interenet/Y2k bubble? Perhaps a little, but having been there, I don't think so. The way stocks were moving, do you really think that if interest rates had been 2% higher anyone would have cared? They were lining up for the IPOs (of junk), they were daytrading CMGI because it moved $50 in a day. Interest rates? Ha. No one said, "yeah, i'll take this IPO because rates are low".
As for the housing bubble, the Fed had a bit more role, because home prices are so closely tied to interest rates. Yes, the Fed could have clamped down earlier, and caused a housing crash sooner, but the economy was not booming along, and there was no significant inflation - it was in the 2%. I see no reason to say that the Fed should have raised interest rates in a time of no inflation, just for the purpose of starting a recession and killing housing prices. Would we be better off if they had? I don't think it would have made the least difference. We'd still be right where we are.
The bubble that is the easiest to blame the Fed for is the Gold/silver bubble of 2011. There is no question that by driving real interest rates to negative, the Fed was taking unusual action, and also action that could reasonably be anticipated to cause a gold/silver bubble. That a lot of people have been hurt in that bubble can't be questioned, and more will be if the Fed acts responsibly, and begins to raise rates before inflation begins to appear. Of course, if they don't, which is what you expect, we may see another gold/silver bubble, which again, you can blame easily on the Fed.
I would disagree that the Fed "caused" either bubble. I know lots of people like to blame them, but I would attribute both bubbles to demographic causes. The real estate bubble was also caused partially by moronic policies encouraging bad loans, policies which remain mostly in effect (meaning we'll have another real estate crisis in our future in 20 years or so).
In any case, I would agree that the Fed could perhaps have done more to burst the bubbles earlier, but I don't think the result in the end would have been much different.
As far as how this will turn out, you are correct - I agree that they could be too late, but they could also be timely. My point was just that it is too early for me to make a decision on this yet, and the ending is not as obvious as some would have you believe.
The whole concept of "pushing on a string" is exactly what a lot of people missed in recent years. The Fed can pump money into the banking system, but effectively they are trying to push on a string, and little happens. Most of it just sits there. Thus it doesn't stimulate the economy very much, but neither does it cause inflation. Instead what happens is that velocity falls enough to offset the increase in volume.
Most people similarly miss the other ramification of this - that when the economy does start growing again, since the money hasn't gone anywhere, the money can be fairly painlessly withdrawn again from the banking system by increasing interest rates. This will create an odd phenomenon - the stock market can rise now even with little economic growth because of low rates, yet when the economy grows, the stock market may actually fall due to rising rates.
Similarly the ramifications for gold/silver are not necessarily good. If the Fed extracts the reserves too slowly, we might see a surge of inflation, which would be good for gold/silver. On the other hand, if the Fed does extract them quickly, inflation may continue to be fairly low, but with interest rates rising, which would be bad for gold/silver. I don't have a strong feel for how this will play out, but I think a bad for gold/silver scenario is more likely than one that is good for it. As a result, I remain on the sidelines for now.
You make a good point, maverick. Falling price won't affect mine production very much, at least at first. Over the longer term we will see some high cost mines shut down, and a decrease in new mine development, so supply will eventually be affected somewhat, but silver produced as a byproduct of lead and zinc mines will continue to be produced.
A better question is what will happen to demand. Silver production moved to surplus a few years ago, and today the surplus is quite large. So long as investors keep scooping up supply, that has no negative implications, but if investors slow their purchases, or start divesting, the effect could be quite dramatic. Will falling prices encourage investors to buy more? Or will investors get frustrated and decide to cash out? So far they have continue to buy more.
Let's say it's 1980. Which silver miners were the most likely to make it to 2003? Those that spent their cash, or those that hoarded it? Obviously the latter.
It seems clear enough that the bubble top of $48.70 on April 28, 2011 will stand as the peak for this cycle, but what is not clear is whether we have entered another prolonged downturn like 1980-2003, or whether we will move to a period of stable/slightly rising prices and reasonable profitability. Which it turns out to be will make a huge difference in terms of how much cash it is wise to spend here.
For now my inclination is that we will see a relatively shorter downturn, lasting perhaps another year or two, which will flush high-cost producers out of the market, and cause speculators to unwind positions, followed by a longer period of stable to slightly rising prices. Based on that scenario, I think PAAS is acting responsibly. I think they should continue the dividend, and continue buying shares at a moderate pace, but also should hang on to a large cash position for now, and focus on improving mine efficiency and reducing costs. In a year or two, I think there will be some good acquisition targets.
It's never that simple. With an improved economy will come increased industrial demand, but also decreased fear of a monetary collapse, and therefore decreased speculation and hoarding. With it may come higher inflation, but will also come higher interest rates. Stronger industrial demand and higher inflation are factors that tend to push silver higher. Decreased fear of a monetary collapse, and higher interest rates are factors that tend to push silver lower. Which will be the stronger force?
There is a great deal of misunderstanding about exactly how this process works, and therefore about what the result will be. The common misconception is that if the Fed pumps liquidity into the system, the result will be inflation, and that is why there has been widespread expectation of increasing inflation, even hyperinflation. That expectation has been wrong, however, and those who bought into it have not been right in their forecasts for the metals. Why not? What went wrong?
The first problem is that, while the Fed can put liquidity into the banking system,they can't make the banks lend it. With the weak economy, much of the liquidity is just sitting there. The second problem is that the GDP equals the money supply times the velocity. If the velocity remained constant, extra money supply would mean inflation. Instead, as the economy slowed, the velocity has dropped dramatically, preventing the expected inflation.
For those that have read this board a long time, you know I have long wavered on the "inflation/deflation" arguments, and never really forecast one or the other. I continue in the same vein. I do think that in a few years the economy will start to grow, and that, when that happens, banks will have qualified potential borrowers again, and they will start lending again. At that time, we may see inflation heating up, but no doubt we will also see the Fed trying to soak up the liquidity by raising rates. What will happen? My crystal ball remains murky as forces again collide. Inflation will be good for metals, but improving economy will be bad for it, as will rising interest rates.
I agree that it is all speculation whether MFN or PAAS would have fallen more. I agree that MFN had issues at Dolores, but it's also true that PAAS had issues related to Argentina and Bolivia. It's water under the bridge at this point, so we should be worrying about the future at this point.
A point you seem to miss is that, had PAAS waited until now to buy Minefinders, yes, Minefinders would have been a lot less expensive, but the value of PAAS shares would have been a lot less, too, so they would have had to issue just as many. Actually, though, Dolores produces silver at a much lower cost than the average for PAAS, so Minefinders probably would not have fallen as much as PAAS has fallen. Also, Minefinders had no exposure to either Argentina or Bolivia, so again, Minefinders would probably have fallen less than PAAS has fallen. Thus, if PAAS had not purchased Minefinders a year ago, but instead purchased them now, the odds are good that PAAS would have to issue more shares today than they did in the actual purchase.