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Will Falling Silver Production Start To Impact SLV?

Summary The price of SLV lost 9% of its value during 2015. Silver production may drop in 2015 — for the first time in over a decade. As the deficit in silver keeps rising, this could eventually start affecting the price of SLV. The silver market didn’t have a good year as the price of the iShares Silver Trust ETF (NYSEARCA: SLV ) shed over 9% off its value. The direction of silver will continue to be dictated by the direction of long term interest rates and U.S. dollar (among other things that silver investors look for when investing in the precious metal). But what about the changes in the physical demand and supply for silver? After all, the ongoing low silver prices contributed to the decline in silver production this year – perhaps 2015 will be the first year since in well over a decade, in which production won’t rise. Will this be enough to drive up the price of SLV? I have already addressed the recent rate hike by the Fed and its impact on SLV. Currently, the market isn’t convinced the Fed will raise rates by another 1 percentage point as its members estimated in the last FOMC meeting. The implied probabilities , as collected by Fed-watch, suggest the market projects only two hikes of 0.25 basis points in 2016. If the Fed wind up raising by only 0.25bp or not raise at all, this could bring back down long term interest rates and perhaps even depreciate the U.S. dollar – two shifts that could behoove the price of SLV. What about the changes in production? According to the Silver Institute the balance between supply and demand was in deficit (i.e. the demand was higher than the supply). And this has been the case for the past 12 consecutive years . This year’s deficit is expected to settle at 21.3 million oz – the lowest deficit in a decade. This decline in deficit is mostly due to net outflows from ETFs holdings and derivatives exchange inventories. Basically, as the demand for silver as investment diminishes, it helps ease the physical deficit. But there is also the matter of falling production that could increase this deficit. Up to 2014, production has been rising. This year, however, it seems production hasn’t picked up and perhaps even slightly declined. Among the top leading countries the produce silver: Mexico, Peru, China, Australia and Chile, according to one outlet , total production in these countries is slightly down for the year (up to August) – by less than 1%. So it’s still unclear how the year will end for the silver balance. But even if this year the deficit expands again, it doesn’t mean this trend will be enough to push up the price of silver. The high deficit in recent years including 2013 and 2014 hasn’t helped rally the price of silver. But perhaps this could also be a matter of timing. Eventually the deficit in supply-demand balance will matter enough to pull up the price of silver, especially as silver loses its shine as investment. When will this happen? That’s unclear. Therefore, for the near term it still seems that the direction of SLV will be govern firstly by the changes in the demand for silver as an investment tool and only secondly by the changes in supply and demand for physical silver. This means the direction of the U.S. dollar, other precious metals – most notably gold – and long term interest rates will set the pace for SLV. In the coming months, I won’t be surprised if the Fed takes a more dovish tone than it took in its recent statement, which could actually slightly pull up SLV. Finally, in the medium term, the growing deficit in silver – mostly driven by falling production and rising physical demand – may take a bigger role in moving the price of silver. For more please see: What’s Up Ahead for Silver in 2016?

Bottom-Fishing With These Commodity ETFs?

After a stretch of nine awful months, broad commodities started to put themselves in order from the start of the fourth quarter. Most commodity ETFs were in the green in early October on unexpected strength from a weaker dollar, rebounding oil prices and stabilization in the key commodity-consuming nation, China, that brightened the lure for commodities. The dollar strength, supply glut, relentless economic turmoil in China and faltering global growth have been nagging botherations for commodities this year. Notably, a rising U.S. currency makes dollar-denominated assets more expensive to foreign investors, thereby dulling the appeal for commodities. As a result, the broader commodity market, as represented by the S&P GSCI Total Return, is down 17.6% so far this year (as of October 12, 2015) and has tagged itself the worst-performing asset class this year. Soft Job Data = Weak Dollar However, with a downbeat U.S. jobs report, global growth concerns and a subdued inflationary outlook on the backdrop, all talks about the Fed lift-off cooled off instantly. The tentative timeline of the Fed rate hike has been pushed to early next year, and the greenback fell from its prior height for a valid reason. This ushered gains for the broader commodity market. To add to this, commodities behemoth Glencore Plc’s ( OTCPK:GLCNF ) announcement that it will close its supply of many actively traded commodities – from zinc to copper – also boosted trading in the space. Commodities approached the biggest weekly gain in three years in the week ended October 9. Commodities Yet to Hit a Bottom? Several analysts were of the opinion that the worst may be over for commodities. Having slid for over four years, commodities are now offering a cheap valuation. The S&P GSCI Total Return index was down 38.3% in the last one-year frame, 19.3% down in the three-year frame and 9.9% down in the five-year frame (as of October 12, 2015). As per Market Realist, if we go by the Bloomberg Commodity Index, the asset class is off around 50% from high it hit in 2011. Still, investors should note that the recent bounce in the space appears short-term in nature. The relative strength index of the iShares S&P GSCI Commodity-Indexed Trust ETF (NYSEARCA: GSG ) currently stands at 51.06, indicating that the product is yet to enter oversold territory. Fundamentally, the global economy is yet to stand on its own feet, indicating a still-weak demand profile for commodities. China: A Pain in the Neck Just as the commodities took off, the Chinese economy started hitting downbeat data points all over again. The country’s trade numbers for September might have come in slightly better than expected; yet they showed that growth momentum is on the line. Plus, the economy’s September inflation turned out softer than expected. Moreover, the greenback might have taken a pause, but would get back its lost strength once the liftoff talks return with full force. Further, most commodities like gold and silver act as hedges against inflation, which is presently subdued globally and posing as a headwind for commodities. Thus, it would be foolish to say that bad patch is over the commodities space, as ominous clouds are still hanging above. Still, investors having a strong stomach for risks might try bottom-fishing and riding out near-term tailwinds. After all, there are some metal and related ETFs which offer great protection against market volatility and come out as safe havens. These metals could be good picks if the market remains edgy for some more time. For them, we highlight three commodity ETFs below that could act as better plays in the current market. SPDR Gold Trust ETF (NYSEARCA: GLD ) Gold is often viewed as a safe-haven asset to protect against financial risks, and has performed well lately (despite deteriorating fundamentals) on heightened market volatility. GLD tracks the price of gold bullion measured in U.S. dollars. The fund is the most popular and liquid bet in its space, with an asset base of $25.7 billion and an average trading volume of over six million shares a day. It charges 40 basis points as fees. This gold bullion fund was up about 5.3% in the last one month. It has a Zacks ETF Rank #3 (Hold). iShares Silver Trust ETF (NYSEARCA: SLV ) Silver has an edge over the gold, as the white metal is used in a number of key industrial applications. This metal is also viewed as an alternative investment to risky assets during economic uncertainty. The fund tracks the price of silver bullion measured in U.S. dollars. This ultra-popular silver ETF is worth over $5 billion and has heavy volume of nearly 5.8 million shares a day. It charges 50 bps in fees per year from investors. SLV was up over 9.9% in the last one month. The fund has a Zacks ETF Rank #3. First Trust Global Tactical Commodity Strategy ETF (NASDAQ: FTGC ) This $204.4 million fund is an actively managed broader commodity ETF. It charges 95 bps in fees and has high exposure in silver, wheat, cattle feeder, lean hogs, cocoa, coffee and sugar. Notably, most of these commodities are presently witnessing an uptrend in prices, making the product an intriguing play even in a rough commodity trading environment. The fund added over 3% in the last one month. Original Post

Buy Silver, Platinum, And Palladium To Hedge Inflation

Gold is overpriced compared to historical valuations against other precious metals. Platinum and Palladium are historically cheap. Silver is cheap enough and comes with robust demand. Buying the cheapest metals should provide the best inflation hedge. Diversifying your precious metal holdings will reduce some of the risk. Many governments across the world are in excessive debt. Everyone is worried money printing in the form of quantitative easing will be the only solution. Even now, with deflationary pressures all across the world, it seems the solution for all governments is to devalue their currency to increase exports. With the exception of the British Pound, every major currency in the world has devalued against the U.S. Dollar this year. This has led to deflation within the United States in the form of cheaper imports such as oil, but high inflation outside the United States. This is only temporary, as the United States will eventually have to devalue their currency to compete internationally, fueling the never ending spiral of currency debasement and inflation. Deflation is only temporary; long term inflation will always be the case with fiat no matter which currency you choose to favor. I am not making a case against fiat. I believe any portfolio should have lots of cash due to its optionality. I am also a proponent of the fiat system, the flexibility it affords governments, and the way it allows currency to expand with increasing populations and growing economies. However, I am making a case to have some precious metals as a contingency should this never ending spiral of currency debasement build too much momentum. This is to make your portfolio more robust to a variety of different scenarios, rather than to predict a high inflation situation. I believe now is an opportune time to buy some precious metals since a more expensive U.S. Dollar has lowered the prices. This opportunity might only be temporary, as the United States will eventually need to devalue its currency as well, both to compete in international trade and to pay off its own debt. Fortunately, you can easily invest in precious metals by purchasing shares of exchange traded trusts. You get ownership rights to the metals while knowing they are stored securely behind vaults for a small annual fee. You can also purchase the bullion through trusts very near to the market price of the metal. In contrast, if you buy physical bullion directly then you must pay a premium over the metal’s market value, which can be as low as 4-5% or as high as 30%, depending on the quantity you buy, which country you buy it in, and the form you buy it such as bar or coin. These higher premiums are a deal killer to me in most cases, as I cannot afford to buy in bulk. The trusts I’ll mention in this article are the following: SPDR Gold Trust (NYSEARCA: GLD ); iShares Silver Trust (NYSEARCA: SLV ); ETFS Physical Platinum Shares (NYSEARCA: PPLT ); ETFS Physical Palladium Shares (NYSEARCA: PALL ). Gold is obviously the best choice as an inflation hedge. This is due to its long history as a currency as well as its intrinsic demand as a beautiful, ornamental metal. Unfortunately, gold is very expensive right now. It’s not as expensive as it was a few years ago in 2012, but it’s still very high priced compared to historical standards. I believe at current prices of $1,158 per ounce, gold already accounts for a major currency flight or high inflation scenario. I say this because I can still remember buying an ounce of gold in 2003 at $350 an ounce, which I considered a fair price back then. There are better options than buying gold at today’s prices. These options are silver , platinum , and palladium . All of these metals are relatively inexpensive compared to gold, and all of them are priced significantly below their historic market highs. Let’s take platinum as an example, valued at $1,019 per ounce today. Platinum is currently more than 50% cheaper than its 2007 high, and almost equal to its price in 2005. However, its price in 2005 does not reflect inflation over the last ten years, so today’s price is even cheaper than that. Granted, there were some fundamental changes in the industrial demand for platinum, as auto manufacturers began alternating cheaper palladium in place of platinum to make catalytic converters; this effectively lowered the price of platinum and increased the price of palladium. This is why I recommend to own both platinum and palladium, since they can be used interchangeably in some instances, it lowers the risk to have some of both. This brings me to my next point. It is best to diversify across your metals to reduce the risk of industrial demand falling off for any single one of them. This is why I think holding silver is beneficial to go with platinum and palladium. At approximately $15 per ounce, silver isn’t quite as cheap as the other two metals, at least according to historical standards. Its current price is roughly 200% higher than its approximate price in the mid 1990s at around $5 per ounce. Even so, its value in relation to gold is low, as the gold price to silver price ratio is approximately 77 right now, whereas ten to fifteen years ago is hovered around 45. I believe an admixture of platinum, palladium, and silver is a good way to hedge against inflation, and it is my personal opinion that these three metals combined, at their current market prices, present significantly less risk than holding gold. I think 10-15% of a portfolio allocated to these metals is a reasonable quantity. Disclosure: I am/we are long SLV, PPLT, PALL. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The shares of SLV, PPLT, and PALL represent approximately 15% of my brokerage account portfolio.