Silver is rocketing upwards as I write this article. According to Kitco, silver is up $0.61 or 4.426% to bid $14.42 $14.47 ask. I am surprised at silver's strength. Looking at the Nymex data, I note that May 2006 through December 2010 silver futures are all above $14 per ounce. Given the strength of silver prices, I am not sure why Pan American Silver Corp. (PAAS) is not up a similar percentage this morning.
Again, I remain long Pan American Silver Corp. shares.
Mark Whitehouse wrote an excellent article in the Wall Street Journal Online Dollar May Resume Slide As Foreign Oil Producers Invest in Other Markets (subscription required). It is an excellent article for two reasons: one, it highlights what many believe is the precarious position of the U.S. dollar; and second, for those that believe the U.S. dollar is vulnerable, an investment in commodities or precious metals such as gold and silver might serve as an excellent hedge.
The value of the U.S. dollar has big implications for the global economy. It's also profoundly hard to predict. Still, some intrepid economists believe they have an insight: Follow the oil money.
Over the past few years, the rising price of oil has shifted a big chunk of the world's wealth into the hands of exporters from the Middle East, Latin America and Russia, making their investment decisions an important driver of global markets. Their penchant for dollar-denominated investments has helped buoy the U.S. currency, confounding economists' predictions that the U.S.'s growing debts must eventually scare investors away and cause the dollar to fall.
Now, though, some economists expect oil producers to shift their investments away from dollars, allowing the U.S. currency to resume a slide that started back in 2001. They cite a litany of reasons: renascent economies in Europe and Japan, political reactions in the U.S. against foreign investment and those nagging U.S. debts, among other reasons.
According to the article, the U.S. needs to attract $800 billion worth of investment annually just to tread water and keep the currency stable. Put differently, that is about $2.2 billion per day, every day of foreign investment. Numerous pundits have flagged this issue for some time now with little or no consequence. No one knows when or if it will become an issue. Investors should, however, continue to watch the U.S. dollar carefully.
Although the article does not discuss hedging currency risk through precious metals, precious metals are often purchased for this very reason. Should the currency fall, the precious metals should retain their value and serve as a hedge. And if the U.S. dollar begins to slide precipitously and cause angst in the U.S. and around the world, I would expect more money to flow faster into precious metals.
One cautionary note: I have found that it is easy to find the flaws and worries in the economy and in investments in general. There are always problems. There are always difficulties. There are always dangers looming. I do not think one should be blinded by the challenges and not see the positives, of which there are many. The economy appears to be doing well, business confidence is strong, unemployment is low, are interest rates are reasonable, just to mention a few. However, as an investor, you need to be try to stay a few steps ahead. I myself have found the last few months particularly difficult to form an overall thesis. I see both the positives and negatives and securities in my portfolio reflect both positives and negatives.
Silver is rocketing upwards as I write this article. According to Kitco, silver is up $0.42 or 3.26% to bid $13.31 $13.36 ask. I am surprised at silver's strength and am curious if silver will remain at this level or higher on Monday. And I am curious Pan American Silver Corp. (PAAS) will be up a similar percentage.
Again, I remain long Pan American Silver Corp. shares.
Richard Lapper in Quito wrote a Financial Times article Oil law may hit Ecuador-US deal (subscription required) that, once again, demonstrates that another South American country is taking a more aggressive stance toward its commodities.
New legislation designed to increase the state’s share of windfall oil revenues by some $600m a year is set to derail Ecuador’s plans to negotiate a trade deal with the US, according to government officials.
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Ecuador began free trade talks with the US two years ago along with Colombia and Peru. Both its neighbours have now agreed pacts with Washington but Ecuador’s negotiations were more protracted and have become even more complicated after the announcement of the new oil plans.
The legislation – designed by Diego Borja, the economy minister – raises the government share of windfall revenues to 50 per cent, compared with an average of 30 per cent today, and would generate additional income of about $600m a year.
Commodities are in short supply and those countries that possess commodities can take and in many situations are taking a more aggressive stance—at least for now. The reality is that companies looking to develop those commodities do not have much choice. There is a dearth of alternative locations.
I am fascinated by the changes that are taking place. That is not to say that I agree with the changes, but rather I am fascinated by how the power has shifted in recent years as the world has begun to experience a shortage in commodities. From this Financial Times article, we learn how Ecuador's new oil law might threaten its potential Free Trade Agreement with the United States. Only a few years ago, this situation would have been very unlikely.
Again, if you have not already read Jim Rogers' book Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market
According to an article Exports and lending push China’s GDP growth to 10% (subscription required) in the Financial Times Online by Richard McGregor in Beijing, China's economy continues to expand rapidly. And that is positive for commodities.
The 10.2 per cent rise in GDP and a renewed pick-up in capital inflows in the first three months of this year will maintain the pressure on China to allow a faster appreciation of its currency, the renminbi, a move that Washington has demanded for more than a year.
The breakdown for China’s first-quarter growth data will not be available until later this week, when the figure is released officially by the National Bureau of Statistics. But according to data released in recent days, the prime drivers of growth continue to be investment and exports, with an extra boost from new lending from liquid banks.
As long as China continues to grow rapidly, I believe that there will continue to be strong demand for commodities. And I think the commodity cycle this time might be longer than prior cycles of 10 to 20 years because it takes that much longer now to add production. First, new mines are harder to find. Second, once a potential mine is located, more work must be done to ensure that it will comply with environmental standards. And third, many governments in South America and elsewhere are more demanding than they have been in the past in terms of their portion of the economic rewards, so more negotiation must take place, further pushing out the timeline.
While those bullish factors certainly help commodity prices, investors must always remember that consumers of commodities are only willing or able to pay so much. In other, trees do not reach the sky. As the price of commodities becomes higher, some consumers will either find substitutes or simply quit consuming.
With regard to gold and silver, I am curious as to how much further those metals can continue to climb. I have no hard evidence to suggest that both metals will climb much higher, yet I think both will. If you go to the World Gold Council's Research & Statistics webpage, you will see that jewelry composes the overwhelming majority of gold usage at about 80 percent. On the Pan American Silver Corp. (PAAS) website, you can find the GFMS 2005 World Silver Survey Summary (PDF) document. The survey shows that demand is focused on industrial applications, photography, jewelry and silverware, and to a much lesser extent, coins and metals as well as implied net investment. I expect silver usage in photography to continue to decrease as the world goes digital, but I also expect that net investment to go up, especially with the anticipated Barclay's silver ETF.
Obviously if we were able to know the future supply demand picture with certainty, then estimating future prices would be easy. But we do not have perfect knowledge, so our outlook is much more uncertain. But as long as China continues to grow rapidly, I continue to believe that the outlook for commodities is positive.
As a matter of disclosure, I remain long Pan American Silver shares.
