Silver - "the Devil's metal - like gold on crack"

Top HSBC metals trader John Levin on his love-hate relationship with silver in his day to day business and some fascinating insights into the current views of major asset managers.

Author: Lawrence Williams
Posted: Thursday , 10 Jun 2010

LONDON -

In opening his presentation to the FT's first Silver Conference, held at the London Stock Exchange yesterday, HSBC's Managing Director of Global Metals and Trading, John Levin, apologised for just being a trader - not an analyst - and proceeded to give some fascinating insights of views on silver trading from the sharp end. He started by describing silver as "the Devil's metal" as far as a trader is concerned based on how difficult it is to trade poor man's gold in normal market conditions. But then in an answer to a question at the end he described silver as "like gold on crack" which was primarily a reference to the volatility which can be seen in the silver price, and a reflection on the attitudes of many silver investors.

When he started trading silver, Levin said it was referred to as the $5 commodity in the markets - when it fell to $4 it was too cheap and when it reached $6 was too expensive - and it sat at around the $5 level for many years, before starting to take off alongside the rising gold price around 10 years ago. Since then he says he has had a love-hate relationship with the metal because of the difficulty in trading it - but recently HSBC has big investment positions being taken in precious metals.

After the huge crash in the silver price in 2008 due to deleveraging and de-stocking, which brought the price down from over $20 to below $9, the bank started seeing a pick up at the end of that year due to very strong buying from India in particular - indeed HSBC shipped over 2,000 tonnes of silver to India in the space of 2 months and needed to charter special aeroplanes to do so!

Overall, Levin reckons the silver ETFs have been to an extent the saviour of the maetal price over the past year and have been a large contributor to growth - and what's ore he feels that the ETF holdings are "sticky money". The holdings have been tested in some pretty severe price regimes but have eld up well. In Europe in particular his conversations with asset managers in Switzerland and Germany suggest continuing worries about wealth preservation. One major Swiss asset manager, for example, told him that the average age of his clients was 62 and were only interested in insuring against a big downturn in markets in general and that silver and gold in particular had been gaining legitimacy and were now a key part of their investment strategy. "People are really worried about their money" he said.

He also said asset managers are surprised there hasn't yet been more emphasis on internal economic problems in the U.S. A lot of the recent market movement has been related to Eurozone debt problems, but with the Greek economy, the recent main focus of the worries, smaller than that of many U.S. states, financial problems with the latter should not be ignored. We have already commented in these pages about U.S. asset managers' fears about possible confiscation of precious metals by the state - see U.S. asset managers worried Obama could confiscate gold - but the fears go much deeper than that and are similar to those of the Europeans in terms of wealth preservation in the face of extreme nervousness about the direction of markets. Overall, Levin feels that those controlling the wealth see no end to the global economic crisis soon.

Overall though inflation does not scare the financial sector for the moment. The outlook is seen as benign in this respect. Deflation is seen as more of a risk and precious metals have, historically, performed well in a deflationary environment too - again in terms of preserving wealth.

Regarding Central Banks and silver, Levin reckons their interest in holding silver is zero, although the appetite for gold is probably somewhat different. In terms of Central Bank silver holdings, these have declined over the years to the extent they are almost gone.

Overall Levin observes that the universe of people interested in silver is continuing to grow, despite its perceived, and actual, volatility and big investment positions are being taken in both gold and silver. Overall this probably bodes well for silver as long as financial fear continues to stalk the markets.

What was fascinating about Levin's presentation was that rather than analysis of trends and possible future scenarios built by analysts, who often let their own inbuilt opinions and prejudices colour their analyses, this was a presentation from the trading floor, expressing the day to day views of people trading in the real world. Refreshing!