Wednesday, September 22, 2010

The Billion Report : Gold vs. Silver

Precious metals often find themselves sharing a stage, being analyzed through blanket statements about investment demand, inflation, and other fundamental concerns. However, there are also moments when silver gets singled out. It is sometimes lauded as being undervalued and poised for explosive interest and gains. Other moments may find it being treated like the ugly step-child and viewed as a tailcoat rider, ready to be dropped at a moment of weakness. Before jumping to any conclusions about the true relationship between gold and silver, let’s take a look at the beating heart for each.


Past performance is not indicative of future results.

***chart courtesy Gecko Software’s Track n’ Trade Pro


Past performance is not indicative of future results.

***chart courtesy Gecko Software’s Track n’ Trade Pro

The Breakdown

There are three key components to both gold and silver market demand; jewelry, investment, and industrial. On the supply side, the main shared concerns are the mining production and the resale and reuse of existing above ground supplies. Now, all of these similarities are in title only. The actual state of supply and demand for each of these metals can be very different.

Talk of modern gold mining will normally conjure up an image of South Africa, one of the largest current gold mining areas. Silver is linked to South America, primarily Peru. In recent years, this production from mines contributed 75 percent of silver supplies and 59 percent of gold supplies. At a glance, this might suggest that where prolonged mining concerns like strikes or power outages rear their heads, the impact on silver production may be felt deeper than the same for gold. Of course, this kind of information would have to be weighed against the existing supplies.

The above ground supplies for each metal would probably suggest that silver supplies surpass gold. After all, gold’s place as a precious store of wealth was often attributed to its rarity and one of the common bimetal ratios applied to silver and gold is 15 or 16 ounces of silver to one ounce of gold. That is, one ounce of gold could be purchased for 15 or 16 times more silver. The total identifiable above ground stock of silver according to the GFMS was around 700 million ounces, while other outlets suggest nearly 2.2 billion ounces. Estimates for all the gold ever mined run around 140,000 tons. Either way, this could put gold ahead of silver in quantity. The possible catalyst for this difference is that silver mines and their output have not been meeting the consumption demands for silver. This has suggested to some analysts that silver is operating with a diminishing supply situation. So what about demand?

Applications for each metal cross from jewelry and investment vehicles to electronic and consumer devices. The main difference, of course, is that gold is more heavily in demand for the former while silver rules the roost in the latter. According to the World Gold Council, the demand for gold as ornament and investment claims over 80 percent of the demand pie. Dentistry absorbs another 2 percent and the remaining gold is used for electronics and other industrial applications. Normally, this involves electroplating other base metals to make components for electronics.

Silver’s demand landscape leans more towards the industrial applications in the last decade. Investment has grown recently on the back of the economic crisis, but overall remains lower on the scale. Photography obviously held a lion’s share of the consumption of silver prior to the dawn of digital age, but the failings of that sector were met with the increased need for electronic components for everything from cell phones to smaller, more luxurious personal electronic devices. Silver has exceptional electrical conduction properties which means these commercial applications will probably recoup losses if the economy picks up. This kind of demand, especially for consumer goods which are in continuous use, is not as easily recoverable as other gold and silver applications.

Data courtesy of The Silver Institute

Summary

The short story for both metals is that they are desirable both as a store of wealth in the face of financial crisis and as marketable components in the industrial sector. Silver has thus far failed to breech its highs while gold prices have been made fresh ones. Silver prices have remained at the potential mercy of the health of the economy. The possibility of a rebound in the manufacturing sector could help drive prices higher if it materializes. Otherwise, the gains in silver price on the back of gold price could theoretically remain flimsy. If the argument for investing in silver is the aforementioned diminishing supply situation, than a slow or failed recovery of the global economy could deal that argument a blow. What is comes down to is this: A bullish world stage to bring support to silver prices and help them gain and hold their ground. Otherwise, gold will prevail and silver will remain ever the bridesmaid.

Hunger for gold is made greater as more gold is acquir

Tuesday, March 9, 2010

History Chicago Wheat Markets

Wheat production and its trade existed long before the Chicago Board of Trade (CBOT) was founded. Some of the earliest trade can be traced back to the Silk Road when it was brought east to south-west Asia from the first cultivated wheat production in the Fertile Crescent. The Romans and Greeks are said to be the very first importers of wheat as it was brought north through trade routes along the Mediterranean.

Fast forward a few hundred years to the 17th century. Europeans were beginning to settle in the Americas in greater numbers. One of the treasures they brought with them over the Atlantic Ocean was wheat. As dictated by present day wheat production, the U.S. had perfect growing conditions, including a proper climate, nutritional soil, and a large amount of land, to support a very significant wheat crop. As the industry grew, the need for a proper clearing exchange was becoming more and more evident. There were several instances in U.S. wheat history of large supply shortages and gluts resulting from a lack of proper market information. Farmers didn’t know the situation regarding wheat production of their peers half way across the nation. They were also unaware of consumption needs. Having a proper wheat exchange consolidated the data. Another consequence of not having an exchange was the lack of proper price discovery. It was not at all uncommon for there to be very large price discrepancies in different regions of the U.S. The introduction of the CBOT allowed for a medium where buyers and sellers could meet, set a price, and exchange their wheat.

The very first semblance of a wheat futures market were the “to arrive” contracts for flour in 1849. Grain futures contracts were standardized and made official in 1865. The first trans-Atlantic cables of 1866 gave foreign access to domestic markets and information on U.S. wheat production and consumption. The development of electronic price displays and trading platforms took the global wheat trade to a new level. In 1994, the first night electronic trading session, known as Project A, began. It wasn’t until the release of side by side electronic and open out cry trading in 1998 that wheat futures markets came to be as we know them today.

Leaders in wheat production and consumption depend on these historic developments of the futures markets on a daily basis. Futures exchanges allow for proper price discovery and a consolidation of crucial market information (greater significance prior to the internet). Chicago has been a world leader of innovation and developments of futures exchanges and the products they offer.

Trading in futures and options involves a substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.