BUY SILVER SHORT OIL — THE STRATEGIC CASE
Weekly Commodity Comment
Almost every commodity rebounded last week after their sharp sell-off earlier in the month, but the breaks in the uptrends in oil and industrial metals are definitely significant.
It was a key call of our 2018 investment strategy to expect oil moving into a major Q1 top, which should complete the recovery cycle, before moving into a major bear market. We had sold Oil in January and took profits on our shorts in February
With last week’s sell off and the break of the 2017 bull trend we think crude oil is finalizing its topping process and any and bounce into later Q1 we would take as a selling opportunity.
We are ready to short oil again in the coming weeks.
In a typical American way of “You Must Do what I Say and I do what I Want”, the US Dept. of commerce recommended to the President to impose curbs and tariffs on steel and aluminium imports. As a result, Industrial Metals shot up last week as end-users want to ensure their supply at pre-tarrifs costs. But ultimately, this will send metal prices lower by making US domestic steel and aluminium more expensive while freeing massive supply for the rest of te world.
The US logic of using tariffs to protect their domestic industries will ultimately backfire seriously and the consequences should not be taken lightly. On the one hand it will allow non-competitive US lame ducks to survive a bit longer, but at the expense of the entire downstream transformation industry, on the second hand, US steel makers will find themselves really sorry when China, the largest Steel import market closes its doors to US producers in retaliation. Donald TRUMP’s electorally-driven industrial strategies will have lasting negative consequences for US corporations.
Precious Metals had a very interesting price action last week. In a week where the return of inflation was vindicated by all measures of inflation Gold and precious metals had a strong week showing that the role of Gold as an inflation hedge is coming back in full force.
Indeed, when one looks at the most probable scenarios for the coming quarters, global portfolios will be facing a relatively rare combination of rising interest rates, falling equity markets and falling bond markets. The only rising asset classes in this perfectly traditional “spring Phase’” of the Kondratieff cycle, cash, real estate and precious metals usually outperform and we can only recommend investors to increasing their weightings to Gold and Silver for the coming 6 months.
The Charts below show that GOLD is very close to making a significant breakout above 1'375, a level the should sent the precious metal aiming at 1550 and then 1600 relatively rapidly while Silver is continuing a massive consolidation pattern that should send it sky-rocketing when the US$ 18 threshold is finally broken.
THE STRATEGIC CASE FOR SHORTING OIL AND GOING LONG SILVER
As we have argued many times in the past few years, the world has reached the “end of the Oil era, the energy that powered the world economy in the 20th century, after it replaced coal, the energy that powered the industrial revolution of the 18th and 19th centuries.
In the 21st Century, the world has entered the era of the “Zero Marginal Cost” energies, clean and renewable energies that will phase out the use of the highly polluting fossil fuels in the coming decades, a phenomenon epitomized by the rise of companies like TESLA.
The question is not IF this revolution will happen but HOW FAST will it happen.
Two major structural changes are taking place before our eyes :
The explosion of Photovoltaic ( Solar Panels) electricity generation and the development of Electric vehicles.
Solar Power Generation Surge is just starting
The following Chart shows the exponential growth of Photovolatics installed capacity, a strong positive for Silver and a very strong negative for Oil.
The growth in capacity installation is driven by an exponential fall in the cost of production of Solar Panels and their increased efficiency.
The average price per watt dropped drastically for solar cells in the decades leading up to 2017. While in 1977 prices for crystalline silicon cells were about $77 per watt, average spot prices in June 2017 were as low as $0.26 per watt or 200 times less than almost forty years ago. Prices for thin-film solar cells and for c-Si solar panels were around $.60 per watt. Module and cell prices declined even further.
This price trend was seen as evidence supporting Swanson’s law that states that the per-watt cost of solar cells and panels fall by 20 percent for every doubling of cumulative photovoltaic production. Studies show that price/kWh dropped by 10% per year since 1980, and predict that solar would contribute 20% of total electricity consumption by 2030.
China is a major driver of the Solar Panel energy revolution.
China’s solar industry is expected to have produced 25 percent more panels in 2017 than in 2016, supported by domestic sales and demand from the United States and emerging markets. China was expected to produce solar panels with a combined capacity of 60 gigawatts (GW) in 2017, China produced panels with capacity of 48 GW in 2016.
The United States imposed “safeguard” tariffs on imported solar cells in January 2018, a move aimed at shielding its industry from an unforeseen surge in imports, following massive demand in the US. The United States has been vying with China and India to become a market leader in an industry where production costs have tumbled, favoring producers of scale.
China had a total of 101.82 GW installed solar capacity by June, after adding 24.4 GW in the first six months of 2017. It will soon reach 110 GW, the target Beijing had aimed to achieved by 2020. China’s Belt and Road Initiative to boost trade links through regional transport and infrastructure projects will also focus on clean energy production facilities rather than fossil fuel facilities.
In the long term, there is a huge potential for the global solar industry to develop, as the Paris Accord has set a firm foundation for solar power replacement of fossil fuel energy production.
Silver is a main component of Solar Panels and will benefit from the extremely strong growth in demand worldwide. Silver powder is turned into a paste which is then loaded onto a silicon wafer. When light strikes the silicon, electrons are set free and the silver — the world’s best conductor — carries the electricity for immediate use or stores it in batteries for later consumption.
SILVER’S USE in photovoltaic cells should have held strong in 2017 according to leading analysts, becoming an ever-more key source of demand.
However, research is also now pushing to substitute the precious metal with much cheaper copper.
Whether silver prices rise or not however, PV panel manufacturers will continue to reduce the quantity of silver pasted on to the front and back of each cell, a trend starting with the precious metal’s spike towards $50 per ounce in 2008–2011.
Analysts GFMS say that the solar energy sector bought 11% more silver last year than in 2016.
So-called “thrifting” continued however, with the leading new PV cells needing only one-fifth as much silver last year as a decade before according to International Technology Roadmap for Photovoltaic (ITRPV).
Silver accounts for 15–25% of the total manufacturing cost of PV panels,” according to a December report for the Silver Institute from metals analysts CRU. Therefore it has become a main focus in cost reduction.
Continued thrifting means that growth in silver [PV] offtake was lower than the 25% headline rise in new solar energy capacity worldwide, but the pace of thrifting has slowed down notably during the last couple of years.
“Given the current state of knowledge,” said Dr.Arno Stassen, Staff Technologist of the Photovoltaics Business Unit in Singapore for Germany-based bullion and specialist refiners Heraeus, “it is inconceivable that the precious metal silver could be replaced, since no other material fulfills the requirement for ‘cost in relation to performance’ in a comparable manner. Silver is excellent due to high process stability.”
Despite the shift from so-called ‘thickfilm’ to ‘thinfilm’ cells after the 2011 price spike, “Metallization pastes/inks containing silver and aluminum are the most process-critical and most expensive non-silicon materials used in current technologies,” says ITRPV of crystalline silicon photovoltaics, the most common type of solar panel.
When putting together the parabolic growth in Photovoltaic Energy production plants and the reduction in the use of Silver per cell, the end result is still an 11 to 15 % per annum increase in demand for Silver for Photovoltaic use for the foreseeable future.
The Combined effects of the Electric Cars Revolution
Everyone has probably heard about the upcoming electric car revolution whose vanguard is Tesla Motors led by Elon Musk. The electric car is actually nothing new — the first vehicles were produced as long ago as in the 1880s. However, the mass production of cheaper gasoline vehicles triggered by Henry Ford put electric cars into limbo for decades. But this is changing quickly thanks to the rapidly falling costs of batteries.
As one can see in the chart below, the price of a battery pack declined from $1000 per kWh in 2010 to $227 in 2016. The price of a Tesla battery pack is believed to be even lower now, at about $190.
When battery pack prices fall below $100 per kWh, which is likely to happen around 2025, the sales of electric vehicles may soar, as such learning curves imply that electric cars will be cheaper to buy than traditional vehicles in most countries.
Chart 1: The average EV battery pack price ($ per kWh) since 2010.
Until then, the range and charging anxiety should be also overcome through a comprehensive charging network — once that happens, mass adoption should quickly follow. And investors should remember that although up-front costs are still higher, the per-mile fueling cost and maintenance costs are lower (most repairs are caused by the internal combustion engine), which should additionally support the shift toward electric cars.
Indeed, electric cars will account for 14 percent of global car sales by 2025, according to UBS, while Bloomberg argues that electric vehicles will reach 54 percent of new car sales by 2040.
Stanford University economist Tony Seba is even more optimistic about electric vehicles: he believes that all cars will be electric (or hybrid electric) by 2025. And his analysis is vindicated by the high growth of hybrid vehicles sales in the mix of new vehicle sales in the past five years.
Hybrid technology has reduced Fuel consumption per vehicle by one half.
The most notable data is the 45 percent increase in EV sales in the US from July 2016 to June 2017 compared to the prior 12-month period. While some may argue that 45 percent isn’t much from a 2 % base, it’s actually a surge when you take into account how EVs were performing in years past.
If the past 12 months are indicative of a shift in consumer behavior towards EVs, however, this growth rate could be sustained for years to come, UCS predicts. If just a 40 percent rate were sustainable, 10 percent of car sales in the U.S. would be EVs by 2023, and that could easily grow to 20 percent just two years afterwards.
A similar, if not more aggressive, trend is expected in the European market — a recent report by Dutch bank ING predicts that EVs will dominate European roads by 2035.
Government support also plays a role, with initiatives like California’s Zero Emission Vehicle program making EV ownership more attractive. An ordinary petrol or diesel car pumps about 4.7 metric tons of carbon dioxide into the atmosphere every year, so taking just one of these vehicles off the road is already a step forward on the path to a cleaner environment. Removing 10 or 20 percent of them is a leap.
Anyway, the age of electricity has begun: although electric vehicles account now for only a few percent of the automotive market (but in Norway electric or hybrid cars represented half of new registrations in the country in 2017) and there are still many problems, such as lithium-ion production capacity and the costs of batteries, plunging battery prices would accelerate the shift into electric cars.
The conclusion is clear: the relative performance of gasoline and diesel cars is much less important than the ongoing trend towards electric vehicles, as market shares both of diesel and gasoline vehicles are set to decline in the future.
The gasoline vehicles will suffer less, but they will be harmed too.
Hence, the dominant demand source for both platinum and palladium is likely to enter a secular bear market.
Thus, don’t hold your breath waiting for a rebound in platinum, as it was historically undervalued relatively to palladium. During paradigm changes historical relationships break up. It is more probable that palladium will follow platinum after a while than vice versa, as the automotive demand for the former metal will also decrease, but later and by a smaller percentage. Assuming that the Bloomberg’s forecast is realized, the global market share of diesel vehicles will plunge by about 75 percent until 2040 (from about 20 percent to 5 percent), while the global market share of gasoline share will sink only about 50 percent, from about 80 percent to 40 percent.
One could say that since the automotive sector accounts for about 80 percent of demand for palladium and for about 40 percent of demand for platinum, the former metal may actually be hit harder in the long-run.
However, it would be the case under a scenario of flat total automotive sales. But with the 33-percent expected increase in new light duty vehicle sales overall by 2030, platinum is likely to suffer more. One thing is clear: although there may be some short-term volatility, neither platinum nor palladium look as attractive as a long-term investment as does Silver.
While the platinum-group metals (we mean here platinum, palladium, but also rhodium) are likely to be the biggest losers (according to the UBS, the demand for them would decline by 53 percent in the world with only electric cars), other metals such as Lithium and Silver will benefit from the revolution.
Clearly, lithium demand will soar, as most electric vehicles use lithium ion batteries (however, investors should remember that lithium is relatively abundant, while scientists are already working on solid-state batteries which do not have to rely on lithium). The same applies to cobalt and manganese.
The production of each of these metals is expected to rise more than 100-fold from 2015 to 2023, while the demand for graphite, nickel and aluminum are forecasted to soar about 65 times in that period. The market in rare earth elements, neodymium in particular, could also rise.
The silver market could be significantly impacted by the upcoming changes in the automotive sector if the silver-zinc technology becomes the standard for electric car batteries.
However, electric car revolution could affect the silver demand indirectly, through the increased use of electronics in cars and through solar energy as charging an electric vehicles is best used through solar electricity.
The next challenge which is the wide deployment of EV charging stations will privilege the use of local Solar Power Stations, avoiding cabling and pollution and reducing installation costs.
Supply-Demand Considerations
We have made the case for the imbalance in demand supply for oil many times in the past, with massive production capacity and Shale oil growing capacity flowing the market with cheap oil while demand should plateau or even diminish depending on the speed at which Solar power stations and electric vehicles are deployed.
When it comes to Silver, the imbalance seems to be the other way round.
Maria Smirnova, senior portfolio manager at Sprott Asset Management, said earlier this year that the world will see a deficit of 50 million ounces of silver over the next three years as mine output declines.
“We’re just not seeing silver discoveries. We’re not seeing a lot of viable future mines in silver. It’s a problem, and that’s what reinforces our positive view on the silver price,” she explained.
Smirnova, who manages the Sprott Silver Equities Class mutual fund, noted that it is harder to find an economic gold deposit than it is to find an economic silver deposit given current prices, and therefore there has been “huge underinvestment” in the silver industry.
Indeed, there has been NO discovery of new Silver mines for the past 40 years and today’s production comes mainly from multi-metallic mines.
On the demand side,
Metals Focus says that silver bar and coin demand is seen recovering in 2018. Demand for silver in jewelry and silverware is expected to grow, but price increases in countries such as India will mean gains will be modest.
Industrial offtake is forecast to grow by 2 percent in 2018 and should reach an all-time high on rising demand from the solar and automotive sectors. Demand for silver in solar panels is expected to increase due to the Chinese National Energy Administration’s goal of increasing capacity by 110 gigawatts between 2016 and 2020.
The key unknown in the equation is macro-economic in fact. As our readers know, we expect world growth to be significant and coincident in 2018 and we expect investors to start realizing that inflation is back. We already has signs of that in the past couple of weeks.
When equity markets start falling for good in March 2018, with bond yields going up, global portfolios and hedge funds will start buying precious metals as an inflation hedge and the current short positions in Silver, caused by producers wanting to guarantee their selling prices, will be forced out by Long positions initiated by traders and hedge funds.
When that happens, Silver Prices will go up in a hurry, and you want to be ready.
Featured Article
U.S. Commerce Department proposes hefty import curbs on steel, aluminum
The U.S. Commerce Department has recommended that President Donald Trump impose steep curbs on steel and aluminum imports from China and other countries ranging from global and country-specific tariffs to broad import quotas, according to proposals released on Friday.
China’s Commerce Ministry responded by saying the report was “baseless” and did not accord with the facts, and that China would take necessary steps to protects its interests if the final decision affects China.
The long-awaited unveiling of Commerce’s “Section 232” national security reviews of the two industries contained global tariff options of at least 24 percent on all steel products from all countries, and at least 7.7 percent on all aluminum products from all countries.
Trump authorized the probes under a 1962 trade law that has not been invoked since 2001. He has until April 11 to announce his decision on steel import curbs and by April 20 to decide on aluminum restrictions.
Commerce Secretary Wilbur Ross emphasized that Trump would have the final say, including on whether to exclude certain countries, such as NATO allies, from any actions.
“The president has the discretion to modify any of these or to come with something totally different,” he told reporters on a conference call. He said a global tariff would cover every steel and aluminum product entering the American market from China.
China’s Commerce Ministry urged the United States to exercise restraint in using trade protection tools, respect the rules of multilateral trade and make a positive contribution to the international economic and trading order.
“If the final U.S. decision affects China’s interests, China must take necessary measures to protect its own reasonable interests,” the ministry added, without giving details.
Steel stocks soared with U.S. Steel closing up 14.7 percent, AK Steel up 13.7 percent, Nucor ended up 4.5 percent and the broader S&P 1500 steel index 5.3 percent higher.
Century Aluminum shares closed up 8.3 percent, while Alcoa, which has operations across the globe, ended off 0.44 percent.
Ross said he would not be surprised if countries challenged the measures at the World Trade Organization. He said “there has been no dialing back” of the recommendations due to objections from industries that use steel and aluminum.
“The objective of both reports is to get the production up to a level which will result, in our judgment, in the long term viability of each industry,” Ross said, adding that he did not believe that the recommendations would lead to significant price hikes.
U.S. Senate Democratic leader Chuck Schumer said he hoped the proposals “are the beginning of efforts by this administration to finally get tough on China.”
SPECIFIC COUNTRY OPTIONS
Alternatively, Commerce recommended a tariff of at least 53 percent on all steel imports from 12 countries — Brazil, China, Costa Rica, Egypt, India, Malaysia, Russia, South Korea, South Africa, Thailand, Turkey and Vietnam.
Other countries would be subject to a quota limiting their tariff-free access equal to their 2017 steel exports to the United States.
The country-specific aluminum option would impose a 23.6 percent tariff on all products from China, Hong Kong, Russia, Venezuela and Vietnam. All others would be subject to quotas equal to their 2017 exports to the United States.
A third option called for Trump to impose global quotas based on 63 percent of each country’s 2017 steel exports and based on 87 percent of their aluminum exports to the United States.
South Korea’s trade ministry said in a statement that it had met with executives from steel makers and agreed to make outreach efforts until Washington makes a final decision.
Separately, Seoul plans to take a dispute to the World Trade Organization against the United States for imposing high anti-dumping duties on the country’s steel products.
Ross said the remedies were designed to raise U.S. capacity utilization to about 80 percent for each industry, from the current 48 percent in aluminum and 73 percent in steel. “That is the level we believe would provide the industry with long term viability,” he said.
Some U.S. companies will be able to request exclusions for specific products if the U.S. lacks sufficient domestic capacity or for national security considerations, Ross added.
Philip Bell, president of the Steel Manufacturers Association, welcomed the proposals saying they could be “meaningful and effective” in tackling global excess capacity and relentless steel imports.
But in a joint statement the National Tooling and Machining Association and Precision Metalforming Association said steep tariffs would “devastate” downstream U.S. steel consuming manufacturers, which employ 6.5 million Americans.
“If these tariffs are imposed, the U.S. will become an island of high steel prices resulting in our customers simply importing the finished part and threatening thousands of jobs,” the groups said.
Cowen and Co. analysts Novid Rassouli and Han Zhang told clients in a research note they believe Trump will likely go for more targeted options.
“Utilizing a blanket tariff is too broad, in our view,” they said. “There is a higher level of precision needed than a blanket tariff because depending on the product spread, it could for instance knock out one product, and do little to nothing for another.”
Trump met with a bipartisan group of U.S. senators and representatives at the White House last week, signaling he would take at least some action to restrict imports of the two metals.
Some U.S. lawmakers and steel and aluminum users have urged caution in any restrictions to avoid disruptions or price spikes in the raw materials, used in everything from autos to appliances and aircraft and construction.
Source REUTERS
Originally published at Mechelany Advisors.
