4 Alpha-Seeking ETFs Crushing SPY
April 30th, 2010 | Posted by tipsOne of the hottest topics in the industry at present is the future of actively-managed ETFs. The issue is also a very divisive one; some expect that widespread adoption of active ETFs is only a matter of time, while others believe mutual funds will continue to be the vehicle of choice for those interested in active management. So far, the flows into active ETFs have been little more than a trickle, although a few funds have seen spikes in assets in recent weeks.
The steady surge in popularity of “enhanced” or “intelligent” ETFs has received far less publicity, but has been an interesting development in the ETF industry over the last year. While the majority of ETF assets are found in products that replicate traditional cap-weighted benchmarks (such as the S&P 500, Russell 1000, or MSCI EAFE Index), alternative indexing strategies have become increasingly popular. In addition to methodologies that use other fundamental metrics–such as revenue, earnings, and dividends–to determine weightings, a number of ETFs seek to deliver superior investment returns by tracking indexes that employ various quantitative screens and analysis.
Not surprisingly, the ETFs included in the Quantitative Methodology Indexes ETFdb Category have delivered mixed results. Some have blown past traditional cap-weighted benchmarks while others have delivered less-than-impressive returns. All of the ETFs in this ETFdb Category are tagged as “passive,” as each of them is designed to replicate the performance of a specific index. But they all provide an opportunity to outperform broad market indexes traditionally used as barometers of market performance. Below, we profile five funds that have beaten the S&P 500 SPDR (SPY) by a wide margin since markets bottomed out in the first quarter of last year.
Claims alleging misrepresentations about illegal tax shelter are unsuitable for class treatment
April 30th, 2010 | Posted by taxDeclining to certify the plaintiffs’ case as a class action, the U.S. District Court for the Southern District of New York ruled that variations in states’ fraud laws and in representations made to the plaintiffs in the sale of a tax shelter demonstrated that individual issues would predominate over common ones.
KPMG, an accounting firm, and Brown & Wood, a law firm, sold an illegal tax shelter known as Bond-Linked Issue Premium Structure (BLIPS). Mark Kottler, Karen Long and Robert Long sued Deutsche Bank AG and other defendants alleging fraud and unjust enrichment among other claims. The plaintiffs sought to certify a class of all persons and entities who entered into BLIPS transactions in which KPMG and/or Brown & Wood issued letters about the tax consequences of the transactions.
The district court determined that the requirements of numerosity, commonality, typicality and adequacy were met. The putative class consisted of approximately 180 members and each class member was allegedly injured by the defendants’ identical scheme to sell BLIPS. The plaintiffs’ claims and those of the putative class arose from the defendants’ course of conduct in selling BLIPS. Accordingly, the plaintiffs’ interests were not antagonistic to those of the class.
The district court found that individualized proof of reliance would predominate at trial. The district court reasoned that the BLIPS’ sales presenters made different representations at different times to different people. Some consumers thought that the presentation was about a way to make money, others thought that it was a tax scheme while others may not have relied on the presentation at all.
The district court also found that differences in the 22 relevant states’ laws made a class action inappropriate. Additionally, a class action was not the superior method of adjudication. The class members were high net-worth investors with large claims that they could litigate individually. The district court observed that approximately 25 class members had already brought individual lawsuits and others settled their claims without filing lawsuits.
The district court denied the plaintiffs’ motion for class certification. (For an earlier decision in this case, see 9 Cl.Act.L.Mon. 27, Jan. 31,2009.)
Judge : Paul A. Crotty
Source: Class Action Law Monitor, 04/30/2010
Copyright © 2010 by Strafford Publications, Inc. http://www.straffordpub.com / All rights reserved. Storage, reproduction or transmission by any means is prohibited except pursuant to a valid license agreement.
You Don’t Need Currency ETFs to Bet on Exchange Rates
April 30th, 2010 | Posted by etfBy John Gabriel
The case for currencies as an asset class is a debate that has been gaining more and more (pardon the pun) currency these days. In 2009, currency exchange-traded funds saw inflows of roughly $3.7 billion, not bad considering that as of the end of March there was about $6.2 billion invested across 28 currency funds.
This is yet another example of ETFs democratizing an asset class that was previously difficult or impractical for retail investors to gain access to. However, just because these tools are readily available to everyone (thanks to their exchange-traded nature) doesn’t mean they’re appropriate.
Before rushing to purchase a currency ETF or ETN, it would be useful to evaluate the implicit currency bets that might already be lurking inside your portfolio. U.S.-based investors who own non-U.S. assets most likely already have sizable exposure to foreign currencies. Remember, the total return of foreign assets is composed of two parts: its local price return and the currency’s change relative to the greenback over the investment period. As international stock and bond allocations make up bigger and bigger slices of many investors’ portfolios, it becomes increasingly important to recognize and understand the impact that currency exposure can have on your portfolio’s risks and returns.
Consider a few examples. In local currency terms, the MSCI Australia Index returned roughly 32% from the start of 2009 through mid-April, but in U.S. dollar terms the return was well over 70%. Over the same period, we saw similar cases with Brazil and Canada. The local returns for the MSCI Brazil Index and the MSCI Canada Index were about 54% and 31%, respectively. In U.S. dollars, however, Brazil more than doubled and the Canadian index enjoyed a return of approximately 60%.
By the same token, a strengthening U.S. dollar relative to a foreign currency would be a drag on the total return of unhedged international stocks. We saw this back in 2005 when the greenback was strengthening against most other currencies. For instance, the local market return for the MSCI UK Index in 2005 was 20.1%–not too shabby. But the pound sterling lost nearly 13% of its value against the U.S. dollar, leaving U.S.-based investors with a total return of 7.4%. Similarly, the local currency MSCI Japan Index rose 44.6% in 2005, but because the yen lost roughly 19.1% relative to the greenback over the same period, U.S. investors enjoyed a return of “only” 25.5%.
As the above examples illustrate, it can be critically important to understand the source of your investment returns. Again, this is not to say that investors should consider plowing into currency ETFs or opening a 24-hour forex trading account (we’ve all seen the commercials). Rather, simply knowing the source of our total returns can be helpful information when rebalancing our portfolios or tweaking our tactical bets.
To help investors isolate local market returns, some ETF providers are rolling out international products that include embedded currency hedges. The newest funds include WisdomTree Japan Hedged Equity (DXJ) and WisdomTree International Hedged Equity (HEDJ). Such products would beappropriate for those looking to avoid the added volatility that movements in foreign exchange rates can have on international investments. They also help investors limit their total outlay and avoid the added transaction costs from managing their own hedges via additional currency instruments.
While the currency market is the largest and most liquid market in the world, with more than $3 trillion trading per day on average, studies show that it remains less efficient than other asset classes. This is due to the participation of several non-profit-seeking players in the market (that is, corporate treasurers, central banks, tourists, etc.).
Even still, with so many factors simultaneously influencing currency movements, identifying inefficiencies and profiting from them can prove extremely elusive. Furthermore, there’s no telling how long a currency might deviate from its underlying fundamental value. Considering the difficulties inherent in currency investing, tactical investors looking to take advantage of such inefficiencies may wish to solicit the expertise of professional money managers such as 
Axel Merk, who runs Merk Absolute Return Currency[MABFX].
Moreover, we should note that currencies are a zero-sum game–as opposed to stocks or bonds, there is no positive expected return above the risk-free rate in currencies over the long term. (See Bradley Kay’s article, “Nobody Ever Got Rich Holding Cash.”) Exchange rates measure the relative values between currencies. Hence, theoretically, the respective values of every currency cannot all increase over the same time frame–one currency’s appreciation will equal the corresponding aggregate depreciation in other currencies.
Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including Barclays Global Investors (BGI), First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.
About the author: Morningstar
Do Leveraged ETFs Still Make Sense?
April 30th, 2010 | Posted by etfAs reported by Marketwire earlier this week, Rydex|SGI will close 12 leveraged and inverse Exchange Traded Funds (ETFs). Investors gave a clear thumbs down on some of the more obscure ETFs recently, which resulted in lackluster demand. Below is a closer look at the list – good riddance …
| Exchange Traded Fund | Ticker | Net Assets | Exp. Ratio |
| Rydex 2x Russell 2000© ETF | RRY | 27.46M | 0.70% |
| Rydex 2x S&P MidCap 400 ETF | RMM | 20.01M | 0.71% |
| Rydex Inverse 2x Russell 2000© ETF | RRZ | 13.47M | 0.71% |
| Rydex Inverse 2x S&P MidCap 400 ETF | RMS | 3.75M | 0.71% |
| Rydex 2x S&P Select Sector Energy ETF | REA | 11.41M | 0.70% |
| Rydex 2x S&P Select Sector Financial ETF | RFL | 22.13M | 0.71% |
| Rydex 2x S&P Select Sector Health Care ETF | RHM | 3.57M | 0.71% |
| Rydex 2x S&P Select Sector Technology ETF | RTG | 8.12M | 0.71% |
| Rydex Inverse 2x Select Sector Energy ETF | REC | 1.25M | 0.70% |
| Rydex Inverse 2x Select Sector Financial ETF | RFN | 8.02M | 0.70% |
| Rydex Inverse 2x Select Sector Health Care ETF | RHO | 1.52M | 0.70% |
| Rydex Inverse 2x Select Sector Technology ETF | RTW | 1.72M | 0.71% |
With regard to leveraged and inverse ETFs, we have been expressing our concerns in numerous articles: here, here, here and here, to list a few. Suffice it to say that the more complex ETFs are to be treated with extreme caution and are not ideally suited for average investors.
While the demand side of leveraged ETFs may be fading, there may be another reason why ETF sponsors are putting a lid on the supply side. As a result of increased public pressure and greater investor awareness, the US regulator FINRA has issued new margin requirements for leveraged ETFs which will go into effect on April 30, 2010. FINRA Notice 09-65 details these new requirements.
Essentially, a 2x leveraged ETF would require twice the normal margin requirement and also increased maintenance margin requirements. In practical terms, this counterbalances the increased leverage and makes the rationale for purchasing a leveraged ETF highly questionable. In this case, investors are much better off trading the non-leveraged ETFs which typically have much lower expense ratios. While this is bad news for day traders (btw. they should really be trading futures if they like leverage), it’s a step in the right direction in terms of bringing excessive leverage into check.
On a related note, we refer to an article What happens when an ETF closes.If you are faced with such an announcement, the best course of action would be to sell your shares as soon as the announcement is made.
P.S. Limiting the exposure towards market risk is a good thing, particularly for average investors. In terms of the securities industry, the relatively high margin requirements for buying stocks, generally set at 50%, has been a well established mechanism to reign in some of the more excessive speculative investor urges. To put these margin requirements in place or to raise them if and when needed is a relatively simple regulatory process, all things considered.
Why on earth are there no tougher “margin requirements” for purchasing property? Buying a house with a 5% down payment is basically like trading futures. While house prices do not fluctuate as rapidly as commodities and other futures prices, they do fluctuate as we all witnessed in the past few years. Limiting someone’s leverage is the primary tool for risk management and should be imposed on “novice” investors such as home buyers. Currently, the margin requirement for buying a gold futures contract is about 5.8%. The minimum down payment for a home mortgage loan through the FHA program is still only 3.5%. Curious …
Disclosure: No positions
About the author: Clemens Kownatzki
Q1 GDP Shows Growth, ETFs Yawn
April 30th, 2010 | Posted by etfStocks and exchange traded funds turned sour despite a report showing consumer-led GDP growth in the first quarter, the third consecutive quarterly gain and yet another sign that the economy’s free-fall is becoming a memory.
The economy’s 3.2% growth rate in the first quarter is attributed to a solid rebound in consumer activity. American shoppers increased their spending by 3.6%, the strongest rate of growth in more than three years. Consumer spending grew 1.6% in the fourth quarter. Better still is that consumers appear to be moving on from purchasing just staple items to buy appliances, recreational goods, clothing and dinners out. Consumer Discretionary Select Sector SPDR (XLY) is trading down this morning, despite the report. [Retail ETFs Near 3-Year Highs.]
Goldman Sachs (GS) is in for another round of trouble as the Justice Department opens a criminal investigation of the Wall Street giant. The Securities and Exchange Commission (SEC) has already charged Goldman with civil fraud. Goldman, of course, denies any wrongdoing and will fight any and all allegations. iShares Dow Jones U.S. Broker-Dealers (IAI) is down about 0.7% this morning; Goldman is 10.4%. [Financial ETFs: Look Under the Hood.]
Homebuilder D.R. Horton (DHI) posted a profit in its fiscal second quarter on a 19% increase in finished sales. A 55% spike in new orders was also reported. Of course, today is the last day for the government’s tax credit, so we’ll soon find out how much of the real estate market’s strides are the result of incentives. SPDR S&P Homebuilders (XHB) is up 0.6% so far today; DHI is 4.4%. [Moment of Truth for Homebuilder ETFs.]
The massive oil spill spreading through the Gulf has been sending the leading oil ETF, United States Oil (USO), higher this week. Yesterday, it gained 2.7% as the spill intensified and today it’s up another 0.8%. The spill has already spread to the Louisiana coast and is estimated to be spilling 5,000 barrels a day. Crude oil prices have been rising and may post a monthly gain. [Using ETFs to Hedge Inflation.]
About the author: Tom Lydon
5 ETFs to Play the U.S. Recovery
April 30th, 2010 | Posted by etfThe signs are all there. U.S. GDP in the first quarter rose, the joblessness situation is slowly improving, consumers are coming out to spend more and homebuilders are feeling more bullish than they have in awhile. That just leaves one thing: which exchange traded funds will give you exposure to our recovery?
The data for the U.S. economic recovery has been favorable: GDP rose 3.2% in the first quarter, jobless claims are down almost 27% year-over-year and the total number of people collecting unemployment benefits is also declining,comments Kevin Grewal for TheStreet. Additionally, March new home sales jumped 27%, orders for non-transportation durable goods are up and first-quarter corporate earnings were better-than-expected. The International Monetary Fund (IMF) has revised upward its forecast for U.S. 2010 GDP growth to 3.1%.
Despite impressive first-quarter earnings, equities still remain cheap. The S&P 500 index is only trading at a price-to-earnings ratio of around 14, its lowest P/E ratio in the last 20 years. Grewal has noted four sectors that are more sensitive to changes in the overall economy and are likely to grow with a recovering economy, and we’ve added in some of our own ideas, as well:
These are just a few ideas, but look around – there are hundreds of ETFs and dozens of ways to play the economic rebound. Exploring these sectors should get you started.
Disclosure: Tom Lydon’s clients own shares of XME.
Max Chen contributed to this article.
About the author: Tom Lydon
Time for a ‘Pure Play’ Railroad ETF
April 30th, 2010 | Posted by etfEarlier this year, railroad stocks received a lot of attention after the world’s most famous investor, Warren Buffett, announced that he would buy the rest of Burlington Northern Santa Fe for $26 billion. This mega-acquisitions put a ‘boring’ industry in the spotlight for a brief time and once again on investors’ radars. However, as quickly as railroads jumped into the forefront of investors minds they disappeared again; relegated to their traditional role as the unsung backbone of the American economy. For investors seeking to make a play on railroads, there isn’t currently a real pure play ETF option. This is unfortunate for several reasons, since this sector can offer a compelling choice for investment in both good and bad economic times.
Why It Would Make An Interesting Choice
With oil prices spiking, many will be surprised to know that one of the least affected industries is that of railroads. “Burlington Northern Santa Fe last year moved, on average, a ton of goods 470 miles on a single gallon of diesel, and society has an enormous interest in using less oil to transport goods,” according to Mr. Buffett. This suggests that if oil prices continue to rise, rail firms are likely to be a major beneficiary since they are able to move more goods using less fuel than their trucking or air-freight peers. Railroads may seem like a remnant of an earlier era, but they remain a critical part of America’s transportation infrastructure.
In addition, railroad firms have a substantial competitive advantage; the barriers to entry in the industry are more or less insurmountable for new firms. “Railroads have this because potential newcomers would have to pay so much to set one up. Burlington Northern, for example, owns more than 20,000 miles of track in the United States and Canada, and it owns or leases more than 85,000 rail cars and 23 facilities dedicated to handling distribution of automobiles. Now, it’s using that position to force rate increases on customers” said John Reese in a recent interview. The sheer size of current railroads and the immense benefits from the ‘network effect’ allow railroads to operate with minimal competition. This trend seems likely to continue well into the future especially given the enormous networks that the current railroads have built up as well as the weak debt markets which would make it very difficult to raise the kind of capital necessary to assault the many railroads’ dominant position.
IYT: Close, But Not A Pure Play
There are a handful of existing ETFs with significant exposure to railroad companies, including the iShares Dow Jones Transportation Average Index Fund (IYT). But there’s nothing available that focuses exclusivelyon the railroad industry. As IYT is designed to reflect the performance of the overall transportation industry, it also has significant assets in non-railroad stocks. For example, two of the top three holdings in IYT are Federal Express (FDX) (11.7%) and UPS (8%); rounding out the top ten are trucking and supply chain logistic firm Landstar (LSTR) (5.1%), Expeditors International (EXPD) (5.1%) which specializes in air delivery and freight services, J.B. Hunt Transport (JBHT) (5%) a trucking expert, and rental giant Ryder (R) (4.9%) (see all of the top ten holdings of IYT here).
Railroad ETF
In addition to current railroad giants such as Union Pacific (UNP), Norfolk Southern (NSC), and CSX Corp. (CSX), a pure play railroad ETF could focus on firms that provide railcar services as well as railcar leasing options. This mix would allow the fund to diversify itself beyond the household names and offer exposure to firms that can rarely be found in sector ETFs such as Freightcar America (RAIL), American Railcar Industries (ARII), and GATX (GMT) a railcar leasing firm. This mix would also give the fund diversified exposure across market capitalization levels, and finally offer investors a real way to invest in the broad railroad sector. Plus, the ticker CHOO would make for a catchy marketing campaign.
Disclosure: No position at time of writing.
Disclaimer: ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships.
About the author: Eric Dutram
Gold Hits Highs, Silver Surges
April 30th, 2010 | Posted by goldGold
Gold reached new 2010 high in dollars (over $1,175 per ounce) in Asian trading overnight and again Europe this morning (over $1,177 per ounce) as investors continue to allocate funds to gold in order to hedge sovereign debt contagion risk.
Gold was marginally lower in dollar terms yesterday but rose sharply in Asian trading with unusually strong Japanese buying. This buying has continued in early European trade. Concerns of a meltdown in European debt markets have abated somewhat but gold’s continuing strength in euros and other currencies signals that the worst may not be past.
Gold’s slow and steady rise continues and the metal is up some 6% in April alone. Market sentiment towards gold has definitely shifted and its safe haven asset attributes are now being accepted by even the most bearish gold analysts. Gold now looks good both fundamentally and technically having closed above $1,165/oz and with the trend firmly up, $1,200 per ounce seems quite likely next week.
Click on image to view full size
Silver
Silver surged 2.4% yesterday and traded higher throughout most of trade in New York, ending near its late session high of $18.56/oz. Silver is up by more than 3% so far in the week and 8% in April. Silver looks very well technically (see chart above) and is in a rising trend channel with support at $15 and $16 per ounce. Resistance is between $19.20 and $19.30 per ounce and a close above these levels should see rapid price moves to $20 per ounce. Above that the next level of resistance is at the March 2008 highs at $20.81 per ounce.
Indeed, it is interesting that after a similar period of consolidation in 2006 and 2007 below resistance at $15 per ounce (see chart above), that once resistance was taken out, silver quickly rallied nearly 50% in less than 3 months (from $14/oz to nearly $21/oz). In recent years, silver has tended to lag gold prior to sharp moves up after gold has already made significant gains.
Silver Versus Gold Performance – 1970 to Today (Quarterly). Click on image to view full size
The chart above clearly shows how silver is extremely correlated with gold. Silver too is a safe haven asset and besides its very significant commodity uses it continues to trade like a currency. Despite it being demonetized in recent years, Milton Friedman has said of silver “The major monetary metal in history is silver, not gold.” Gold and silver both – but silver to a larger extent than gold – have been used as money in more regions and countries and for longer periods of time than the relatively modern use of paper currencies.
Gold’s record high in March 2008 was just over $1,000/oz and today it is trading at over $1,175/oz. Silver is in effect playing catch up with gold. Silver remains very undervalued versus gold on a historical basis. The chart above shows how silver has underperformed gold historically and in recent years.
Gold / Silver Ratio – 1960 to Today (Quarterly). Click on image to view full size
Silver remains very undervalued on a historical basis vis-à-vis commodities, gold and other precious metals. The gold/silver ratio remains favourable to silver at 63 ($1,175/oz divided by $18.63/oz) and the ratio is falling. The “poor man’s gold” remains far from recent record highs and long term record (nominal) highs near $50/oz in 1980 (see chart below).
Silver could be the surprise outperformer in 2010 as it was in 2009. Silver’s industrial uses should mean that the gold/silver ratio will likely gradually regress to the average in the last 100 hundred years – around 45:1. If the tiny silver market was to see real funds enter it, the ratio could return closer to the historical average of 15:1. This occurred as recently as in 1968 and in 1980 and this time around could result in silver surpassing its 1980 nominal high at $50/oz.
Click on image to view full size
Silver reached $50/oz briefly in 1980 when just one billionaire Bunker Hunt (one of a handful of billionaires in the 1970s) attempted to corner the silver market causing the price to surge (in conjunction with many investors seeking to hedge themselves from the stagflation of the 1970s). Today there are hundreds of billionaires throughout the world. A lot of technically orientated analysts, investors and hedge funds are looking at this figure and as nearly all other asset classes and commodities are at, or have recently reached, all time record highs, there is every reason to believe that silver may do likewise in the coming years.
Silver is priced at some $18.70/oz today. The average nominal price of silver in 1979 and 1980 was $21.80/oz and $16.39/oz respectively. In today’s dollars and adjusted for inflation (government historically adjusted CPI) that would equate to an inflation adjusted average price of some $60/os and $44/os. It is for this reason that we believe silver will be valued at well over $50/oz in the next 2 to 3 years.
Silver remains very undervalued vis-à-vis gold and remains a contrarian play with little or no media coverage and little or no retail investors having any allocation to silver whatsoever. A close above $21/oz could see silver quickly rise to $25 or $30 per ounce.
Platinum Group Metals
Platinum is trading at $1,742/oz and palladium is currently trading at $558/oz. Rhodium is at $2,850/oz.
Disclosure: No positions
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Is Silver Coming Into Its Own?
April 30th, 2010 | Posted by goldBy Lara Crigger
When it comes to precious metals, silver frequently gets short shrift. The metal is often seen as the “poor man’s gold” —a cheap entry point into precious metals investing for those who can’t afford to buy its posher yellow cousin.
But silver’s hybrid personality — half precious metal, half industrial workhorse — means it can be used in a much wider array of applications. And it’s silver’s increasing use as a biocide and antimicrobial agent that may be the most promising demand sector of all, says Jessica Cross, CEO of VM Group. Working in conjunction with Fortis Bank Nederland, VM Group provides research and analysis of the metals and broader commodities markets, including precious and base metals, energy, agribusiness and renewables.
In this second of two interviews, HAI Associate Editor Lara Crigger sat down with Cross to discuss the outlook for silver, including whether faith in the gold/silver ratio is well-founded, why silver recycling is set to decline and how silver’s being used to purify water and gym clothes alike.
Crigger: In a recent speech to the London Bullion Market Association, you said silver had been “typecast” by investors. What did you mean by that?
Cross: I think it’s been typecast by two completely separate markets. In India, you have a large population of rural-based people, who aren’t very high on the income ladder. They’ll tend to invest in silver, as far as they can invest in anything, and when they get more wealthy and affluent, they then tend to “trade up” into gold. So silver is the first point of entry, but gold is what they really aspire to, when their income allows them. But you see this in the US as well. There, I think you have a sector of investors who say, “Well, we can’t really afford gold, but we will take silver.” So silver is seen as the poor man’s gold — which I think is completely wrong, as silver has a huge role to play as part of an investment portfolio.
But apart from that, people also watch the gold/silver ratio. And when the ratio deteriorates out of silver’s favor, it’s used as sort of a secondary investment opportunity. A lot of people put a lot of faith in the gold/silver ratio.
Crigger: Is that faith well-placed?
Cross: Over time, I think there’s certainly been a place for that perception. I much prefer to look at them as completely different, even though they’re both precious metals. Gold has very limited industrial end use, while silver offers an array of end uses, which are becoming increasingly more interesting. At the end of the day, that silver supply/demand balance is going to get increasingly healthier. So although the prices will sometimes move in tandem, they’re really very different.
Crigger: What are some of the more interesting new end uses for silver, now that silver-based photography is on its way out?
Cross: There are a number of them, but I think the one that’s most going to benefit is using silver as a biocide. So then you’re looking at a lot of medical issues, water purification; using silver in food containers to keep things hygienic, and in fabrics, not just for the sporting field but also the leisurewear field. Silver could be used in bandages for hospitals. So there’s a huge range of diverse applications for use, just on the biocidal side. I think these are going to be coming into their own soon.
The beauty is, of course, that you eventually throw these items away. And even though the silver in that product that’s going into the dustbin is only there in minute quantities, you’re still not recycling it.
Crigger: That’s very different than in the past, where photography led to a lot of recycling of silver.
Cross: It’s interesting — silver for photography has dropped quite sharply, of course, because everyone’s going to digital. Digital, of course, tends not to use silver in its process. But where you do still see silver used in photographic is for medical and industrial X-rays. That really is a firm growth area.
Still, that means the whole nature of silver going into the photographic industry is changing. You’re not seeing 35 mm film being the predominant product in that sector. You now have more silver going toward medical and industrial X-rays instead, and that means less generation of recycling. If you’re not using 35 mm film, you’re not sending it out for processing; that silver’s not coming out in the wash as they develop it, and so there’s no silver being generated for recycling.
So it’s a double-edged sword: There’s less silver going into photography in the first place, but there’s also less recycling going on as a consequence. There’s obviously a time lag in there, though.
Crigger: Many people think finding potable water will be the next big issue we as a world will need to confront. How will silver’s antimicrobial properties play a role in this?
Cross: Silver, as a biocide, can help purify water containers, or act as a purifier. So you can buy a portable water purifier and lo and behold, there’s silver in it. Yes, I do think clean water’s going to be an issue. Our water system is a closed one, throughout the globe, and we’re seeing our quality of water decline, as we pollute it and reuse it. I’m horrified to hear that if you drink water in central London, it’s actually been through seven people before it goes through your kidneys.
Crigger: That’s kind of gross.
Cross: This is the problem. Our water is declining in quality, and silver can play a role in improving that quality throughout the world. I think it’s an extremely important usage that will come into its own quite quickly.
Disclosure: No positions
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There’s been plenty of good news from the gold fields this week.
The yellow metal is up this week on worries about Greece’s teetering debt and what might happen to Europe and the euro (not to mention other paper currencies) if this is just the first act of an epic fiscal tragedy co-starring Spain, Ireland, etc.
And the miners are looking up as well.
Both Barrick (ABX) and Newmont (NEM), two of the three largest gold miners in the world, reported a doubling of their quarterly earnings this week. The results were driven by higher gold prices, increased production, strong demand from investors and jewelry producers, buoyant copper prices, and in Barrick’s case, the impact of dehedging and lower cash costs. (See ABX’s conference call transcript here and NEM’s transcript here.)
(Click to enlarge)
The chart above is from our Investor Alert last week and it shows an interesting trend since the beginning of 2009. The price of copper, driven largely by China demand, has climbed at a much brisker pace than that of gold. But at the same time, the stock appreciation for the pure-play gold miners has been significantly greater than that of gold companies with base metal byproducts.
This might not be intuitive – after all, a company mining gold and another resource with strong prices might be expected to be in an advantageous position compared to one reliant on gold alone. It seemed to work for Barrick and Newmont in the latest quarter.
But the price tag for developing a copper-gold project can be many times greater than that of a pure-gold project – this can add a lot of weight to the company’s cost structure. On top of that, copper and other base metals tend to see more price volatility than gold, and that can affect valuation.
A number of large gold companies have recently signaled that they plan to build copper mines that have byproduct gold potential. These projects require $3 billion to $4 billion each, so there won’t be many of them.
But still it brings up an interesting question: Will the copper miners allow their markets to be disrupted by gold miners? These byproduct producers would look to sell all the copper they can to subsidize (at least on paper) their gold production costs. This scenario carries its risks – efficient copper miners could crush these marginal projects during periods of price weakness.
Disclosure: Author long ABX and NEM
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