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Backward Silver & Forward Weather
BACKWARD
To make a point on silver I show the spot and forward swap prices for AUDUSD.
Now look at 1 year Treasuries and the same maturity for Australian federal paper.
Put it together. The interest differential is 4.61% in favor of
Australia. Note the swaps are at a discount, meaning the left side (bid)
is lower than the right side (offer). The forward Aussie discount is
equal to the interest differential. Take the mid point of the swap
(.0453) and divide it by the spot (.9965) and you get 4.50%. (the 11bp
is spreads, ‘noise’ and basis risk differentials.)
Conclusion you can take to the bank: The forward price is equal to the interest differential. Simple.
Okay, with that in mind look at silver today. The futures price is
trading to a discount to the cash price. Go back to my example for the
AUDUSD. For silver to be backward it MUST mean that the cost to borrow silver is GREATER than the cost to borrow dollars. This is one of those ‘red flags’.
My conclusion? There is a shortage of the physical metal. Blame
it on whoever you like. The Mint, the JP Morg, underwater producers.
There are dozens of suspects to consider. Either way, it’s bullish for the price.
*******************************
FORWARD
There is some fairly conclusive information that short-term
weather patterns are changing. The evidence is in the most recent ENSO
numbers. The extreme La Nina conditions that have brought so much pain
to Australia (and other parts of the globe) are in the process of
abating.
Consider first this chart that tracks the La Nina El Nino cycle. We have moved off the trough set in December. (From NOAA web site)
The updated (December-January) MEI value has strengthened slightly to -1.62 standard deviations after almost dropping below -2 standard deviations in August-September.
The -1.62 still represents a strong La Nina. A closer look at conditions
in the four regions that make up the index shows what's going on:
This shows the cumulative change in conditions. We have backed off the extreme.
Where are we headed is the question. There are many computers looking at
this and many possible outcomes. A chart of the various forecasts:
Note that the projections broadly point to a reduction of the current
conditions. Some of the models are even pointing to a reversion to El
Nino status by the end of the summer.
Should a +.05 /+1.0 ENSO (modest El Nino) be the reality this fall it
would create conditions not unlike 2004 -2005. Those two years were the
biggest hurricane years in the past 25.
Quite a number of folks have suggested to me that ENSO is just part of
the picture and I over emphasize its importance in short-term weather
patterns. Fair enough. Yet I keep getting hit on the head with
evidence that confirms to me that this cycle is driving most of the
short-term results. Consider what has happened in Australia over the
past six months. They got rain like rarely before seen. What was happening to La Nina conditions that most affect their weather (Nino 3.4)? This from NOAA:
After a
drop to +2 in June, July rebounded to +20.5, followed by values between
+16 (November) and +27 (December), including +20 in January 2011. The last time that this index showed higher values for the average of any six months was during the same half-year in 1917(!), so any SOI-based classification would classify this event as one the second-strongest event of the last century
The 100-year La Nina was the cause of the 100-year rainfall. For me the
cause and effect is too clear to miss. The questions to ask are, a) why are we seeing the extremes? and b) why is the life of the cycle(s) getting shorter and shorter? To my knowledge the folks with the computers haven’t figured that out yet.
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You must have a crisis in order to get funding in order to buy expensive instruments and computers and especially $alarie$ for PhD's in order to make charts. Therefore, if there is no global warming but rather just "weather" on the "earth" no one will give you a $2 million grant for two years to "study" the "crisis".
I believe there is pollution and that we need to be stewards of the planet but we are nowhere near that omniscient in affecting the climate. There are patterns, and things such as solar flares and ocean currents crossing the globe with varying salinity and temperatures that humanity has never and will never affect or control.
Give a hoot, don't pollute - but don't become a species narcissist either.
Bruce
Is there any good way of telling whether the Pacific Decadal Oscillation is actually flipping to cold? This seems like it would underly the very obvious effects of of what phase of La/El the ENSO is in?
I don't know. Good question. Ask NOAA, they might have an answer.
Correct unless people are leveraged to the max already and increased margin requirements would mean they need to raise more capital to stay in their positions?
I don't understand why people belive raising margin requirements will have a negative impact on PM prices. Margin applies to long and short. Raising will have an impact if one side of the OI is concentrated in a few hands and the other side is well distributed.
In this case, peoiple tend to think the short side is concentrated in a few hands and the length is well distributed. So IMO, raising margin should be neutral to positive for PM prices.
Somebody pointed out something very material about Silver Eagles vs Silver Maples the other day.
Silver Eagles are technically the property of our corrupt government and it would be very much like them to "call" it back in a predetermined price.
I think Maples are better (silver or gold)...any thoughts from a more intelligent PM crowd here at ZH?
I've not heard that before. Since Eagles are legal tender it would be a difficult task to recall them. The gold confiscation covered any gold in any form other than numismatic coins. Googling various phrases yields no results. Please find some documentation on this if you could. Thanks.
It was eluted to at the end of part four of the silver bears.
backward intelligence, forward pestilence. Time to uncork the champagne in Rome before it burns.
Great post Bruce.
The weather thing has me concerned. I'm afraid we are on the threshhold of some MAJOR earth changes.
In regards to the weather part.
I recall back in 2004 we had a brief discussion in class about a 2004 Pentagon Report. I can't find a copy of the report anymore, but Fortune Magazine ran an article about it. *Note it is just a scenario, I think by some people who spend all day dreaming up these worse case scenarios)
"The Pentagon's Weather Nightmare The climate could change radically, and fast. That would be the mother of all national security issues."
http://bit.ly/bHLMXG
Anyways, for those survivalists out there, I guess little bars of gold/silver may help if some crazy scenario actually did play out and you needed to flee/migrate during the initial stages. But I have a feeling that a scenario where a major catasrophe disintegrates most of civilization, money/currency would be worthless (at least at certain points in time until society re-organizes) as people would resort to bartering goods or services.
I've been watching too many zombie movies. :o
elegant explanation of backwardation and present value. however the backwardation appears small and the implied interest is not that high. You really need to see some serious backwardation with high implied carry rates before this gets serious. Of course if that does happen, by that time the easy money will have been made in silver. We can handle a silver blow up. what the world cannot handle is a gold blow up.
If silver blows up gold will follow.
gr8 lafix! oReyeBE a nincle'Zfikwhole, eeeeYorE!lol CYA on the ass.trail, undercover luvR!isdaG/S.a.hangedMANtorus?stfUP&DEAL?WB2goingtogrondZero?heheepullZdatrane(feeSimpl);C)...and isProb2styoooped2gotoIrTHwiddersquid:8)gotPaper?longdaCrimeanWealthR/shortDaEeetTF!!!tectonicallyMEpReshushw/slew'nMIRVz/maKing.nuk.M0mW/iR@NnewKeyZ(?).nosueNAMeZ.letTHEM&Mquack.marked toscutLbux.lollol truBEeZ aka gollum_smeagolORbeakFAST@MIT
Count on it, why else do TPTB manipulate both markets?
Bruce,
You are, as always, worth reading.
One question - Do you think we will see a classical sharp spike up significant enough to sell physical silver and then BTFD? or will it be ignore the spike, hold and THEN BTFD?
One comment - I think the people cautioning you on weather may be coming from the outlook that our ability to model weather accurately in even the short term (+/- 3 months) is equivalent with the cave paintings in Southern France rather than than the ceiling of the Sistine Chapel as some believe.
barliman
I think demand for physical PMs is going to spike at some point. We may have started the process by going backward. The natural pricing is for a forward premium, not a discount. So something is wrong with this picture.
I would say there is a small chance (10-20%) that the situation gets out of control for a bit and we see silver make a big run to $50. The more backward the market gets, the more probable this outcome is.
Seems like the only man with any real science behind weather forecasing is Piers Corbyn. Bruce, perhaps you will find correlations with-in his work.
Silver in backwardation. That is sweet. Doesn't hurt anyone except the illegal naked shorters.
ORI
http://aadivaahan.wordpress.com/2011/02/16/truth-about-america-truth-about-us/
And keeping with the backwards theme:
We blame you.
Back at ya. :)
I blame us.
Bruce, based on your last prediction perhaps you should stick to financial blogging.
Not sure what you are referring to. Consider what I said on 12/23/2010. This was way before the most recent data indicating some diminution of the then extreme La Nina:
There will be violent weather episodes all over the globe. The La Nina condition that is now dominating global weather is the strongest in 50 years. This will make a dramatic shift to El Nino conditions this summer. This will set the stage for a very big Atlantic hurricane year. There will 12 named storms. Two cat. 4 storms will hit the mainland.
It is far too premature for me to say I was right with this call. A lot has to happen. But I am headed in the right direction......???
About 3/4 down in this piece:
http://brucekrasting.blogspot.com/2010/12/2011-whats-coming.html
Great stuff. BK does get great photos. Living in a large Pacific Ocean archipelago for the last decade I concur with the notion that "the cause and effect is too clear too miss." (for the better part of the decade also surrounded by AGW freaks who would refuse to believe the sun and the oceans are the culprits...geeesh)
I welcome El Nino. This is supposed to be paradise. 10 weeks of getting belted by cold rain isn't cool man. No one should have to endure lows of 58 degrees fahrenheit.
And others who have lived here a lot longer than me (still blaming AGW for the cold rain....good grief) expressed the same observations about the type of rainfall. La Nina skeptics may have their points. But I'm not chalking this up as some strange coincidence.
The pendulum swings.
Thanks Bruce, you confirmed my worldview on Silver.
Your graph on surface temperatures comes courtesy of International Research Institute for Climate and Society, which is a global warming promoter. The big tip is the buzz word "society" in the name, which means it's totally politicized and not a serious science endeavor, and explains the results.
You did so well on silver, too.
.
You consistently find the greatest pictures. The global warming one is a classic. BK rocks.
Considering that the UN themselves used a Photoshopped pic on a brochure, I would assume that the more ironic, the more "perfect" a message photo, the less likely that it wasn't contrived.
I dissed a BK piece once. WTF was in my head? BK rocks.
Agreed.
so long silver and short the weather channel?
rather, what gets destroyed during intense weather events that we can short...oil companys as their rigs get wrecked due to hurricane activity?
what else...
There are weather futures that you can trade, check the offerings in your futures account.
http://www.cmegroup.com/trading/weather/
The real concern, as I see it, is solar winds. Our atmosphere has protected us from much of their damaging rays but the ozone is seriously depleted and we are entering another burst cycle which could be much greater than anything Earth has seen since before the dawn of man. I fear for our souls.
My concern is more for our kids. Something that has happened which is a real concern and might be the canary in the coal mine is the dead birds and fish that all showed up around the new year. It happened all over the world. Not just the U.S. Don't know what to think about these events.
we had a pole shift end of last month, and as a result the sun rose on the westcoast of greenland 2 days early (you know that place where they live in perpetual dark and light for a given period depending on the season/time of year.
well a theory goes, not necessarily mine but if anyone has a better theory please share is when we had this recent magnetic pole shift it messed with something in the birds causing them to literally fall out of th sky, does it sound crazy to be honest during these crazy and surreal times nothing suprises me anymore
Also the whole pole shift thingy explains the strange weather patterns we are seeing globally, apparently we are going to have another pole shift event in late march.
any other views, info people got on this id be interested to hear.
c..m..s :
Great morning laugh!
You should have stayed awake in your grade school science class.
Magnetic Pole is not the same as Earth's Rotational Pole.
Thanks for the chuckles.
bk,
backward silver and forward weather
brilliant.
~MV
Agreed.
Margin increase coming again soon?
It looks like the bottom is in for the latest corrections in gold and silver but notice the stocks are still trending well below the metals here even after the nice bounce this week. In particular silver is now back above $30 and has recovered most of the losses, but the silver juniors are still very sluggish. I can think of several possible explanations, including many traders that had anticipated a deeper correction and are still positioned on the sidelines.
The new junior mining ETFs are probably not seeing the same kind of money flow now that they enjoyed late last year. But I also sense the heavy invisible hand of the shorts in this market. There also seems to be a
lot of premarket fun and games going on and large phantom blocks showing up to discourage specs from getting too aggressive.
Just based on my own observations I suspect another margin increase is coming soon to the COMEX. And for sure if I am right then there are a few insiders that have been tipped off and are happily shorting the mining juniors ahead of the announcement.
The open interest in the March contract is too big for the Cartel to stand by and not throw something in the mix to try and trip up the specs. My gut says batten down the hatches, this is going to be a volatile month.
How many times over the years have we watched The Gold Cartel stop gold and silver in their tracks following a very constructive day like yesterday?
The bums use the same tactics time and time again to control the "excitement" factor. The good news is that when the gold and silver physical markets are on fire as they are now, that is all a mini-raid like this will turn out to be, a raid with very short term effects.
Not long after gold and silver were under the most pressure for the day, I received a call from a colleague who relayed to me from a highly respected international gold dealer that, despite the dip, the physical gold market was on fire. Gold, along with silver went back up on the day, which gives additional credence to the point about these gold and silver markets made above.
The fundamental reasons for gold and silver to move to MUCH higher levels are in play. The Gold Cartel can play their childish games here and there, but in the end they are going to be blown out of the water.
GATA BE IN IT TO WIN IT!
via LeMet
I hear this rumor too much from scared shorts lately.
Of course there will be margin hikes coming. That's the main tool they have for trying to force people to sell. Problem for them is the rule of diminishing returns. Anyone opening a position today has fresh on their mind margin hikes and will be reluctant to put on a trade if they don't have adequate reserves. The good news is that those taking positions are much stronger and better capitalized than those who otherwise would have taken positions. Bad news for those who want to see positions liquidated.
As far as the miners lagging, that actually could be a bullish indicator for the price of the metals themselves. Hedge funds were putting on this spread trade last year where they would buy gold and short the miners which caused the miners to be artificially depressed. Eventually that trade is going to stop working due to miners catching up in performance but for now they may be stepping in again and putting on the same trade.
Brazilian billionaire Eike Batista has apparently bid $1 billion for junior mining company Ventana Gold (VEN.TO), per the article below.
http://www.bloomberg.com/news/2011-02-14/batista-gold-bid-has-brazil-s-richest-man-making-explorers-cheap-real-m-a.html
Not so long ago, there were only a handful of billionaires on earth, as a billion dollars used to represent A LOT of money. Only the greatest of businessmen, such as Bill Gates, or the richest oil sheiks had the ability to build that kind of wealth. However, today there are 1,125, many of them as obscure as people worth $200 million ten years ago, and many in far-reaching parts of the world.
One can amazingly still buy a HUGE amount of gold and silver for $1 billion, although that window is about to close shut.
For $1 billion, for instance, one can buy ALL the silver dealer inventory on the COMEX, ending the scheme at one fell swoop and transforming Western perceptions of what inflation really is (assuming that inventory even exists).
You don’t have to tell people in the East, who care of the U.S. dollar’s reserve currency status and unlimited Federal Reserve money printing, are experiencing record-setting rates of inflation. This inflation is what toppled Tunisia and Egypt, and what will soon topple the regimes of countless other countries worldwide.
The Precious Metals market is very, very, very small, both in terms of shares (0.2% of ALL global financial assets, compared to nearly 30.0% in the late 1970s) and bullion itself (less than $30 billion of investable silver WORLDWIDE).
The U.S. government will print $600 billion early this year just for QE2 alone, in other words roughly $30 billion EVERY TEN DAYS.
Billionaires such as Eike Batista alone can take this market to the stratosphere, and they will…..very, very soon.
There will be a time in the very near future when gold, and particularly silver, are UNAVAILABLE FOR PURCHASE.
via LeMetropoleCafe
The interesting fact about silver is that every one can own some. The local coin folks have small, coins that every body recognizes and can afford ,1964 US dimes are cheap, and can be bought NOW! Get some!!
"The Precious Metals market is very, very, very small"....so cotton is really a mini micro sized market where $100 million can shake things.
One reason I do not trust the run ups we are seeing in all the commodities...by that I mean it is not so much supply and demand as baskets of $$$$ being given to trend following hedge funds whose algos chase what moves, very much like my 2 rat terriers, though they are more intelligent.
I am convinced that there is very little silver available for physical delivery and SLV has no backing other than leased silver which is most likely leased to 100 others, or is allocated to others. Something is going to give soon and if so, bottlenecking will make the exit gates impossible.
Tread carefully as the PTB can change the rules of the game on a dime. Your only solid choice is silver bars and coins in your hands.
"and if so, bottlenecking will make the exit gates impossible. "
This is exactly right, and VERY much applicable to physical hoarders too.
Having a few silver stocks does not hurt if they change the ETF rules. Kitco has some great small and large cap table screens listing many juniors and senior minors for those who would like some ideas. Good Luck All. It surely will be interesting over the next two years.
All hell, I'll do the leg work for our readers. Here are the addresses for both great tables. Shows other commodities too.
Juniors: http://www.kitco.com/ind/matlack/feb142011_juniors.html
Seniors: http://www.kitco.com/ind/matlack/feb142011.html