Wednesday, February 09, 2011
Silver - some strange market dynamics
As highlighted by the FT this morning, Silver has moved in
to severe backwardation, which is a very unusual (unprecedented?) situation for a precious metal.
Have a look at the chart below - it's quite dramatic
The reason appears
to be producer hedging, with miners taking advantage of the massive upswing in silver prices to lock in margins.
IMPORTANTLY, this is said
to be a prevalent strategy among the producers of silver as a by-product, rather than primary producer hedging.
to take advantage of the situation? As long-dated contracts recover from the hedging-related pressure, look for silver equities with longer-dated production to re-rate, as higher long-term prices are priced in to NAVs.
top picks, covering the range of early stage and existing producers:
Bear Creek Mining (BCM CN)
Silver Standard (SSRI
Tahoe Resources (THO CN)
Hochschild Mining (
Pan American Silver (PAAS
Miners hedge against fall in silver - FT
By Jack Farchy
Published: February 8 2011 22:22 | Last updated: February 8 2011 22:22
Silver mining companies have begun to buy insurance against a sharp drop in prices after years during which hedging fell out of favour.
The move by several large miners to lock in prices comes as gold and silver prices have slipped from recent highs, with investors turning to other assets as economic sentiment improves. Some analysts have begun to warn that the precious metals may soon peak after a decade-long bull run.
Gold is down 5.7 per cent from its record high in December. Silver jumped 75 per cent from August to hit a three-decade high last month, but has since fallen 6 per cent, trading at $29.30 an ounce on Tuesday.
Bankers said at least five miners had hedged a portion of their silver output in recent months, either by selling future production ahead of time at a fixed price or by buying options to protect against falling prices. This has helped push the market into "backwardation" – an unusual condition for silver in which the price for future delivery is lower than for immediate delivery.
The quantity of silver hedged in the latest wave of activity is several times the size of previous outstanding hedges, according to bankers' estimates.
Raymond Key, head of metals trading at Deutsche Bank, estimates that about 100m ounces of silver has been hedged in the past two months. That compares with total outstanding hedges, called the global "hedgebook", of 20m ounces in late 2010 and annual mine production of about 700m ounces, says precious metals consultancy GFMS.
Michael Jansen, metals strategist at JPMorgan, said 2011 was "probably the year of the producer hedge". He added: "This bull market in commodities is maturing to a point where, as much as supply is under pressure, you can say with a bit more certainty that in two to three years it's going to be different."
Bankers and analysts cautioned against expecting a widespread return to gold and silver hedging, noting that silver was not the main product of any of the miners who had executed hedges in recent months.
Mining companies have cut back on hedging – and several gold miners spent billions of dollars buying back their hedges – after protests from shareholders who preferred full exposure to the commodity markets.
Minera Frisco, the Mexican mining company spun out of Carlos Slim's conglomerate, said last month it had hedged 70m ounces of silver production to 2013.
"Gold and silver's slide in January may have spooked some producers," said Edel Tully, precious metals strategist at UBS. "When you put it in the context of silver's massive rise last year it is not surprising some producers are locking in price gains."