I've been keeping track of the threads here over recent weeks but haven't posted anything for some time, as a result of a few other distractions that have been keeping me occupied.
However, there was one topic that I have been meaning to raise, and it feels like 'now' might be about the right time.
I have noticed an air of despondency with respect to the outlook for silver of late, or at least in the mainstream financial media. One pundit on the Livewire site last week more or less summed up this despondent bent: '...We have seen what amounts to an outright capitulation by silver bulls...'
Obviously, this pundit doesn't follow the IVR thread, as based on what I've been reading here over the past several days, it would appear that there are more than a few shareholders in this company who are yet to give up the ghost.
But even more generally, I get the sense that there is a fairly widespread hunch within precious metal circles that the current silver level is out of kilter.
While I think this contrarian instinct is not unfounded, I think I might also be able to articulate an argument as to why this view might have some substance.
In previous posts, I've discussed a few potential drivers of the silver price, such as the price of oil, however, I never got the chance to raise what may be the most significant of these: namely, the price of food.
I've pasted below a chart that depicts the price of wheat against that of silver over the past 25 years. What I find interesting about this chart is the way in which the wheat price seems to foreshadow movements in the silver price.
While the correlation between the price of silver and that of food staples such as wheat is of an indirect nature, I don't think the pattern is a mirage.
The value of silver tends to be measured against that of gold, and the gold:silver ratio is in turn influenced by energy prices.
High energy prices put upward pressure on food prices, with agriculture being an energy intensive industry.
Thus, since the start of the oil age, food prices have tended to follow the direction of energy prices, which has also had a bearing on the price of silver over the 20th century. This would be even more true for silver today, with silver being employed in the manufacture of solar panels, one of the least controversial sources of energy.
High food prices, in turn, have always been associated with instability, which in turn is a demand-driver for gold.
In other words, if food prices are elevated, there is a good chance that both gold and energy will be on the up and up as well, and these two commodities give silver its wings.
This takes us back to the soft commodity outlook, which is looking grim at time of writing.
The chart above depicted the wheat price, which has drifted lower in recent months. However, this pattern isn't in evidence for all soft commodities. Rice, depicted below, is one counter example:
Clawing at ten-year highs, the rice price looks like it could be poised for a breakout.
As a staple crop for over three billion people, rice is probably be a better proxy for food prices than wheat, which is often a plaything for traders.
To some extent, the suggestion of a pending soft-commodity shock isn't especially speculative. Indeed, the writing may well be on the wall already.
Just take a step back, and look at the pressure that soft commodities of all types are under across the globe:
♦ China: China looks to be facing a severe shortfall in the autumn harvest of rice and wheat in the Yangtze basin as a result of drought and heat, according to Bloomberg.
♦ India: Likewise, India’s rice planting has shrunk 8% this season due to a lack of rainfall in some key growing areas.
♦ United States: Late last month, the annual Pro Farmer Midwest Crop Tour turned up some lackluster yield results across the Midwest, as a result of unusually dry conditions. Meanwhile, over in California, the Nasdaq-Veles water index hit an all time high, with no end in sight to the extended drought in the state.
♦ Europe: The European Drought Observatory has reported some 60 per cent of the European Union is officially drought affected, with yields for both winter and summer crops downgraded in Germany, Hungary, Italy, Poland, Romania, Slovakia, Spain and Ukraine.
♦ Pakistan: Another soft commodity under pressure is cotton, with the floods in Pakistan believed to have wiped out around half of the cotton crop in that country, which typically accounts for around 6% of the world's cotton supply.
Bear in mind this is against the backdrop of the war in Ukraine, which has caused the cost of fertilisers to skyrocket. As farming is an energy intensive activity, the associated spike in oil prices represents another considerable input cost.
Given the pressures that growers around the world are under, there is some good reason to suspect that crop yields and crop volumes are set to disappoint in many of the major growing regions over the weeks and months ahead. My guess is that the food spike price we saw at the outbreak of the Ukraine war will soon be eclipsed by an even greater surge.
Energy prices, food prices and the silver price are hard to disentangle. So, with another surge in soft commodity prices looking imminent, this might just be the spark that lights up silver.
(20min delay)
