Some thoughts on Analysts and the Silver market

I have been reading with some amusement the comments of some who seem as if their sole raison d’etre is to provide a perpetual example of folly masquerading under the supposed guise of wisdom.

By this I mean to say the comments of those who continue to deny that there currently exists a shortage of silver in the market. They cite their reasons, and offer their opinions, which I might add here, they are welcome to and should have the opportunity to voice, even when they are consistently wrongheaded and yet apparently feel under no sense of honor to modify even when proven wrong.

Let me first begin by saying that as a trader of more than two decades’ experience, there have been, and I am sure, will be, times when I have been wrong about a market. I feel no shame in admitting that – why should I, as I am a mere mortal and am not infallible. To give a recent example – I have been a bear on the US equity markets beginning back in 2008 and continuing to hold that bearish opinion until November of last year. It was not until that time that I realized that no matter what I thought about the reasons why US stocks should not be rallying, the stock market was going to continue to rally especially now that the Fed had announced a fresh QE program. The old trader’s adage, “You cannot fight the Fed” was proven to be true once again.

I might add here that I had also been wrong about the bond market for some time and was of the opinion that a falling Dollar would result in a falling bond market. That too was not the case during the credit crisis of 2008. I learned a good lesson about all that back then.

I still have my doubts about the veracity of this move higher in US equities or of its ability to endure but the fact is that the stock market is moving higher, regardless of what I think about it.

Now, as a trader I can do one of three things with this.

One – I can continue to stubbornly insist that the stock market should not be going up and take out a huge short position and continue until my trading account is no more, declaring that the US stock market should not be moving higher. At some point in the future, the market will no doubt correct and move lower at which time I will perhaps feel vindicated. The problem is that by that time I will have not made a dime off of my views and very possibly could have lost my entire trading account and with it my livelihood, although at the very end I will have the self-satisfaction of telling myself and others: “SEE, I was right all along. I told you so”. Result – I am broke and busted but feel proud and smug.

Two – I can do nothing and stay flat because while I see the market moving higher am greatly suspect of its lasting power. I will not make any money following this course of action but neither will I get hurt financially either.

Three – I can see the trend and while I greatly suspect its lasting power, can take a long position and attempt to ride that trend higher until such time I see it nearing an end. This course of action, while fraught with peril because of my own views of the market, will make me money as a trader if I employ sound money management techniques and use wisdom and do not get careless or complacent.

Here is the lesson in all this, a lesson I might add, learned the painful way through many years experience. THE MARKETS DO NOT CARE ONE BIT ABOUT OUR OPINION.

The sooner one learns this lesson, the better a trader/investor they will become.

I remember earlier in the past decade reading the reports from a rather well known and respected analyst who was consistently bearish on the copper market. Back in 2006, when copper was trading closer to $2.00, having rallied up from down near $1.40 - $1.50, he kept producing studies adamantly denying any reports suggesting that there was a tightness in the copper supply based on real fundamental supply/demand statistics. He cited reasons such as hedge funds artificially distorting the supply by taking huge sums of copper off the market and storing it in warehouses thereby creating the drawdown in stocks at the LME and in Shanghai that were being registered. He stated that copper was therefore overpriced and was primed for a fall.

This he continued doing while copper rose towards $2.50 - $2.60 pound. He was still bearish while copper went on to hit $3.00. “Still overpriced”; “No real shortage”; “Supply is being artificially reduced – the copper is still there just not in the public warehouses”, etc. all the while the price of copper kept rising.  Before it all ended, copper had moved up to over $4.00 in May 2006 before it finally sold off. It then retreated all the way down to $2.40 before it turned around and went back up again reaching nearly $4.30 in 2008 before it crashed alongside the rest of the commodity complex when the credit crisis erupted.

Maybe this analyst was right; maybe he was wrong; maybe hedge funds were indeed taking copper out of storage in public warehouses and stashing it into private warehouses. Who knows and who really cares at this point? Here is the point in all this recapping. One could have followed the three options just cited.

Option one:  “Well Mr. respected analyst says that copper is overpriced and should not be moving higher. Therefore I will listen to Mr. respected analyst and take a short position”.  What would the result have been for the average trader/investor? Answer – the average trader/investor would have lost the entire amount invested on a short copper position if not more due to the leverage effect. Question – was this a good course of action? Answer – obviously it was foolhardy.

Option two: “Mr. respected analyst says that copper is overpriced and should not be moving higher. He is probably right because he knows more than me but I see the price chart is moving higher and therefore I will do nothing because he must be smarter than me and I must be wrong”. Question – how would that have worked out? Answer – no harm done but neither did the average trader/investor make a single dime. He is no richer or no poorer for his choice and is as well off as he was before. He has however lost a very good opportunity.

Option three:  “Mr. respected analyst says that copper is overpriced and should not be moving higher. The price chart however tells me that the market does not care one whit about what Mr. respected analyst thinks because IT IS MOVING HIGHER”. I will therefore take out a long position in copper because I believe that the combined opinions of ALL MARKET PLAYERS is outweighing the opinion of one Mr. respected analyst. Question – how did this choice work out? Answer – the average trader/investor made money and profited from his action. He has increased his wealth and has used a market trend to his advantage.

Let’s now take this a bit further and run it back to silver. We have the same persistently negative analysts who continue to assert that there is no shortage of silver and that silver is overpriced. Maybe they are wrong; maybe they are right. I personally happen to believe that they are wrong but even at that, who am I and why does what I think about this even matter. The key is that the COMBINED OPINIONS OF ALL PLAYERS that trade in the silver market presently believe that there is a shortage of silver.  How do I know this? Simple – the price chart tells me so. Which way is it going, higher or lower? If the combined opinion of the players in the silver market believed that there was more than enough supply around, more so than current demand supported, the price would not be going higher; it would be going lower.

Not only that, but the backwardation type price structure on the silver board is also saying with a clear and loud voice: “Silver demand is currently extremely strong – so strong that buyers are willing to pay up to obtain the metal right now rather than wait for it”.

Now, we have come full circle and are back to facing the same three choices that I have listed earlier in this commentary.

Option one – the trader/investor listens to the persistently negative analysts who tell him there is no shortage, takes out a short position expecting price to be obedient to their assertions and move lower, only to get run over and left for dead on the trading floor with huge paper losses. He not only does not make a dime, he loses all the money he bet against the rise in silver.

Option two – the trader/investor listens to the persistently negative analysts who tell him there is no shortage but he sees price moving higher and doubts his own judgment. Therefore he does nothing. He makes no money; he loses no money either but then kicks himself for following their opinion and second guessing himself.

Option three – the trader/investor listens to the persistently negative analysts who tell him there is no shortage of silver but he sees the price chart and then comes to the conclusion  “ the market is telling me in no uncertain terms that it does not agree with the assertions of the persistently negative analysts because its price chart is telling me so. I will therefore trust my own judgment and take a long position in silver. Question – how did the average trader/investor who followed this course of action fare thus far? Answer – it depends on when they instituted their long positions but let’s just assume that they went long when silver closed above the $30 level and held that tough resistance level refusing to break lower. So far, so good. Now, by employing proper money management techniques, they will be able to lock in a healthy profit if they are a trader or at the very least will have managed a return or gain on the silver bullion they might have purchased.

Here is the final point in this. I have been around this industry for a very long time. Over that time I have seen countless “analysts” come and go. I have also seen some traders who have survived and thrived over that same period. Here is a vital and important distinction that needs to be kept in mind.  

Analysts get paid to “analyze” and give opinions on markets. They make money whether their opinion is right or wrong. In that sense they are no different than the TV weatherman. He gets paid to produce a forecast. Sometimes he gets it right; sometimes he gets it wrong but regardless he gets paid. He suffers no consequence for failure. However, those who rely on his forecast and make business plans based on those forecasts may suffer terribly if they act on his forecast.

Take the example of a guy running a concrete company who plans a big pour for a certain day because the weatherman has given his forecast for no rain in sight. The big day comes, the contractor spends thousands of dollars on material and pours only to have a downpour wash it out. The Result – the weatherman goes on TV the next day, issues another forecast and collects his paycheck at the end of the week. He has no accountability or suffers any consequence whatsoever. The unfortunate concrete contractor, who put his faith in the weather forecast, is entirely a different matter. He has lost his thousands and suffered immense pain as a result. Life goes on for the weatherman but the concrete contractor might possibly have been ruined.

Analysts are the same – they can issue opinions all day long and suffer not the least bit of consequence for their failure. However, those who listen to them and make decisions based on those opinions can suffer immense harm. Life goes on for the analyst, no matter how often he is utterly and completely wrong; life can be extremely difficult however for those who took their guidance from him.

Analysts therefore make their living OFF of the market – not IN the market. This is a vital distinction.

Traders on the other hand, make their living IN the market. If we are wrong, we suffer the consequences of our actions. If we are right, we enjoy the reward. If we are wrong, we are forced by the nature of the business to QUICKLY realize and ADMIT we were wrong. By doing so, we survive and even prosper. Failure to admit when one has erred is not only stupid and foolish, it is ruinous.

Analysts on the other hand generally cannot make a living trading a market. The reason is because many of the ones that I have seen over the decades have had one huge failing that hinders them from ever becoming successful as a trader – their EGO prevents them from admitting error.

Remember this well the next time you read an opinion by an “analyst”.

Good traders are confident but are also humble. If they survive long enough it is because the markets have humbled them and they have learned to respect it above all others. That is why as a trader we let the markets tell us what the COLLECTIVE OPINION of the market players are at any given time. That opinion is always right, even it may happen to be “wrong” in our own minds. Learn to respect only THIS OPINION and you will be successful. Learn to ignore those whose opinion contradicts this COLLECTIVE OPINION, and you will thrive.

The goal in trading is not to be “right” but to make money. Everything else is noise.