Which Option Sounds Better?

• Silver puts. Marginal cost and all-in cost are around $10 plus or minus a couple bucks, and the spot price is back to almost $20 with speculators record long futures and commercials very short. A 2018 $13 put can be had for under 50 cents, make 5x if the price goes back to $10.
• 30-year treasury puts. Fiat debt from banana republics is garbage, not a "magic sword of necessity" - the yield was twice as high as recently as the end of 2014. That would be $95 on TLT, a decline in value of about a third. The Jan 2018 $100 put for TLT is about 80 cents.

Longer Term Bearish View On Treasuries

In order to amortize the current public debt of $13 trillion over 30 years, the federal government would first have to permanently stop incurring budget deficits, and then the principal repayments would be about $433 billion a year.

Just balancing the budget is pretty unlikely, and to reduce spending by that much (taxing more will be self-defeating) and begin amortizing seems practically impossible.

Many people have observed this already, of course, but they were too early. Even Japanese government bonds are still increasing in value! I believe that the key insight is the astonishing demand for "safe" stores of value created by aging populations. Highly deflationary.

Realistically, this demand is going to grow, and they will borrow more at lower rates, digging the hole deeper.

We will watch for a chance to trade our "safe" treasuries for "risky" precious metals and oil, and lower rates and higher prices, respectively.

Good Day For Silver Puts

This chart "looks like" it is going to about $10/oz which, coincidentally, is about the cash cost of silver.

Comment On My Now "Classic" Seeking Alpha 2011 Silver Thread $SLV

In January 2011, one of my posts - Watch Out For The Silver Bubble - was posted on Seeking Alpha. The silverbugs were apoplectic. However, as I pointed out at the time

"The massive margin between the spot price and the cash mining cost is going to cause a huge increase in supply over the next few years. Pan American Silver projects that it can raise production from ~20 million ounces to 45 million by 2014. (In the entire year 2010, the U.S. Mint minted and sold under 40 million ounces of silver.)"

For a variety of reasons, silver has indeed gotten crushed. I saw just today there was an astute comment on the thread (which is now almost four years old):

"I am a mega buyer in the $9 to $10 range - the low for silver in Oct. of 2008.

Right now the Fed is worried about its own survival and wants to hand the fiscal great recession hot potato back to congress. But once the Fed sees the economic collapse drawing near, they will print and shower the currency on main street rather than squirreling it away in bank reserves.

When that happens I want to long and leveraged in silver.

My guess is that $9 to $10 is the zone coincident with max pain for the Fed and for the economy. I would like to see a lower low in price at that level with a higher low on the MACD before going all in."

Speaking of Pan American Silver, their latest investor presentation has a 2014 production target of 26 million ounces. Much less than the 45 million that they projected back in 2011. They claim a cash cost of $12 per ounce.

Still, they were able to increase production by 30% over three years even though the price has gotten cut almost in half.

Single digit sounds like the right price target. Mines should be closing down at that point.

The Broken Silver Parabola

I was right about the silver bubble.

Now looks like another very good risk reward for being short. The "support" at around $18 has been broken. My target to the downside would be and has been marginal cost of mining.

See the latest Pan American Silver investor presentations, for example. Based on the chart above, the production growth despite declining prices, and the mines' cash costs, $10 per ounce sounds about right.

Silver is a Very Crowded Long Again $SLV

This is a chart of commitment of traders data (source). Notice that "commercial traders" (miners) are very short silver and the speculators are very long an equal and opposite number of silver futures contracts. 



I've thought of silver puts as cheap deflation insurance. The prices are unchanged since I wrote that post; implying a 6 percent chance that silver trades below cash cost of production of $10 per ounce before January 2016, about 18 months away. About a 4% annualized chance.

Note that a 4 percent annualized chance of almost anything is low, if looked at the right way. We have stock market crashes more than every 25 years.

The nice thing about cheap deflation insurance is that it would allow us to buy more stuff that is underpriced given a status quo (and of course inflationary environment) but which is vulnerable to deflation. A case in point would be something like Canadian Oil Sands.

COS dividend yield is 6%, but that could grow as they finish a major capex program they were doing over the past two years. It's price to reserves (PV-10) at 1.4x is the lowest I have been able to find. And it has no exploration risk or political risk (besides Canada).

Cheap Deflation Insurance

Silver put options.

Silver was a parabolic bubble that ended in spring 2011, and parabolic bubbles typically end below their starting point, which would be $5-10 per ounce. Coincidentally, that is still approximately the marginal cost of silver production.

A $15 SLV put for Jan 2016 costs 35 cents. A $10/$15 put spread would cost a net of about 30 cents. That implies a 6% chance that silver will retrace its bubble and go back to the marginal cost of production over the nest 18 months.

Dude, Where's My Hyperinflation?

Check out this chart from StockCharts.com for SLV

Who Is Off Sides Right Now?

Everyone is always a little bit wrong about anything. Our mental models are incomplete representations of the world. But, who is most wrong and whose wrong ideas are at an inflection point?

My opinion:

• Bets on interest rates to rise, especially people who were short Treasuries to hedge equity portfolios.
• Owning momentum garbage at high P/S ratios. The astonishing "No Exit" article in Wired (which is great evidence of the mimicry hypothesis of the business cycle) and the Candy Crush NYSE open marked the top of the revenue-lite tech bubble.
• Inflationists who were long silver. Take Pan American Silver, for example. They increased silver production in 2013 while reducing cash costs by 10% to under $11 per ounce.
• People who think Radio Shack can pivot to a profitable business model with this amount of debt, interest expense, and burn rate. 
• People who were long the biotech bubble.
• Complacency (not just bullishness) about China.

Where's the 'flation?

Not in silver - that keeps unraveling:


[Kitco]

Silver Bubble Continues to Collapse

This is great! The low last summer was 17.75 and it's back down to 18.50 today. Down more than 60 percent from the peak when all the silver bugs were hassling me in the comments section.



Absolutely grand. I'd guess the thing that would make retail commenters most irate right now would be owning ten year Treasuries. I should do an experiment on Seeking Alpha.

And the silver/gold ratio has been steadily falling. Air coming out of the speculative tire.



Finally, take a look at the ratio of the biotech ETF to the 10 year treasury ETF.



Look at that parabolic bubble with the blowoff top!!

Silver Settles At 19-Month Low

"[A]s silver has fallen below $30, instead of SLV holders acting all fearful and rushing the exits, they have been doing a little dip buying instead. For example, in late April with silver then near $30 and threatening to break lower, SLV reported holding 9,552.14 metric tons of silver metal in their London-based custodian’s vaults,' he said. '“Today, as we write, with silver trading either side of $27.00, not far above its $26 implied support, the silver trust reports holding 9,875.75 tons, or more than 323 tons more silver than in April...'"

I'd be a buyer again in the $5-10/oz range.

Kodak's First Day Affidavit Mentions Silver Prices

Even though Kodak had projected [Film, Photofinishing and Entertainment Group] (“FPEG”)to generate less cash as film was replaced by digital imaging, the FPEG business was still anticipated to generate substantial cash flow. The rate of the decline of the market for film between 2008 and 2010, however, was significantly steeper than anticipated by nearly all observers: the industry projected a 10% decline, Kodak forecasted a 20% decline and the actual decline was approximately 40%.

In addition to demand impairment, increasing commodity prices negatively impacted FPEG’s cash flow. FPEG purchased approximately $300 million of silver in 2011. Silver prices have ranged between 199% and 294% higher than 2008 prices. Because of the lingering effects of the economic crisis, Kodak cannot pass through all of these price increases to its customers.

The first day affidavit [pdf], which the Bankruptcy Litigation blog did a post about.

It was about a year ago that I mentioned rising silver prices were causing industrial users to substitute other, cheaper, and less price-volatile materials. 

Silver Crushed Again

Down almost 6 percent today!

Silver Collapse

What an ugly chart the silver collapse has made since April. And yet, the silver bulls have been fighting it every step of the way, even though silver is fundamentally overvalued and the technical picture is really ugly.

I'll probably start feeling excited at $10-$15, and I might load the boat if it ever gets back to $5.

The Waiting Was the Hardest Part

Silver is getting crushed today, back below $30 an ounce. It has completely reversed the bubble gains from the spring of this year. Silver could actually be a good short from here since it has no "support" and is still trading far above fundamental value. The best part is that the bulls on Zero Hedge are saying "we are still in a bull market". Sure.

On the other hand, equities are currently lagging the drop implied by silver. Normally they are highly correlated. Also the U.S. equity market is lagging the decline in the Chinese stock market. Anecdotally, the bears seem scared to press their advantage here.

Silver vs Bananas

Where are all the banana speculators? Why are bananas still selling for 69 cents a pound at my local grocery store? Why silver? Why not toilet paper or aluminum foil or things we may someday actually need personally?

Silver Market Open

Silver down 7%! Just dropped 40% like a rock in three days, amazing.

Silver Bubble Finally Pops

I have been pounding the table about the dangerous silver bubble for a long time. With the 25% decline back below $30 last week, I think we can say now that the silver bubble has popped.

My first post about silver was in January, when the price was crossing $30 for the first time. My two most conceptually important posts about silver, both in late February with silver at about $33 were the one about the precious metals boiler room and also the thought experiment about why nickels would outperform silver in every conceivable scenario.

The silver bugs would get hopping mad about these posts, which was all you needed to know about who owned the metal and how weak their hands were. I probably got more comments on my silver posts than everything else I have written in five years combined.

Longer term, I am really glad that silver is going to get cheap again. The ideal opportunity would be if sometime next year you could short a 30-year Treasury bond yielding 3% and use the proceeds to buy silver at or below the marginal cash cost of mining. Although, it's possible you will want to buy the mines themselves since the mood of miners will be pessimistic, as they will regret topticking the metal price by starting so many projects.

By the way, there is going to be an pretty astonishing amount of silver coming out of the ground. When I did my survey in April of silver miner investor presentations, it was all photos of projects under construction and bar charts of growing silver production.

Putting the Silver Bubble in Perspective ($SLV, $PPLT)

A great way to shed light on the silver bubble is to look at the silver/platinum ratio, as expressed by the physial silver and physical platinum ETFs.

Rather than speculate on the price of silver (or any other commodity) it is helpful to look at the ratio of two things that are at least somewhat substitutable. If platinum can satisfy some or all of the demand for silver - say for investment purposes - then you would expect the price ratio to be mean reverting.

We already know that the gold/platinum ratio is strongly mean reverting once an ounce of gold costs more than an ounce of platinum.

I wonder whether the "cheapness" of silver - not in an valuation sense, but in the sense of an arbitrarily low price per ounce - has led to irrational demand from small investors? That would not bode well for the silver price.