Alan's Finance Blog

Keith Neumeyer: The Silver Market Lacks Integrity

The Hera Research Newsletter (HRN) is pleased to present an incredibly powerful interview with Keith Neumeyer, Chief Executive Officer, President and Director of First Majestic Silver Corp. (TSX:FR / NYSE:AG).  Mr. Neumeyer began his career at the Vancouver Stock Exchange and worked in the investment community for 26 years beginning his career in a series of Canadian national brokerage firms including McLeod Young Weir (now Scotia McLeod), then Richardson Greenshields and then Walwyn Stogell McCuthchen (which became Midland Walwyn).

Mr. Neumeyer moved on to work with several publically traded companies in the natural resource and high technology sectors.  His roles have included senior management positions and directorships in the areas of finance, business development, strategic planning and corporate restructuring.  Mr. Neumeyer, who has listed a number of companies on the Toronto Stock Exchange, has extensive experience dealing with financial, regulatory, legal and accounting issues.

Hera Research Newsletter (HRN): Thank you for joining us today.  Let’s begin by talking about silver supply and demand.

Keith Neumeyer: Silver mine production was around 736 million ounces in 2010.  Demand was around 1 billion ounces.  Scrap silver recycling and some government sales filled the gap.  We’re at historic lows in terms of above ground silver.  Eric Sprott recently said there are 1 billion ounces of triple nine silver left aboveground.  Unlike gold, silver gets used.  We’re at historic highs in supply when it comes to gold, but the exact opposite is true for silver.

HRN: Is there a deficit in terms of mine supply?

Keith Neumeyer: We’ve had a supply deficit for the past 13 years.  2009 was the first year we created equilibrium.  We only went into a surplus in 2010, in terms of industrial and jewelry fabrication demand.  The surplus mine supply was purchased by investors, obviously.  A lot of mining companies are showing lower production because a lot of silver comes from base metals and, with lower base metals prices, it’s becoming more difficult.  I don’t see any major supply drivers for silver in the next several years.

HRN: Do you expect more scrap silver to enter the market?

Keith Neumeyer: That’s what happened in 2009 when gold rallied over $1,200 and then corrected to below $1,100.  It was primarily caused by scrap gold entering the market.  I believe the same thing was happening for silver.  We’ll see that again as the metals make new highs.  It’s the same as a stock.  You replace part of the shareholder base at different levels.

HRN: Are you optimistic about future demand?

Keith Neumeyer: Yes, I’ve been optimistic about silver since 2002 because silver is a strategic metal.  I think it’s more important than gold.

HRN: Are there new applications that could increase demand?

Keith Neumeyer: We’re seeing all kinds of new applications.  A recent report by Barclays forecast that 120 million ounces of silver will be used for solar power generation in 2012 versus 40 million ounces in 2009.  The battery industry is growing as well.  Zinc-silver batteries provide very stable capacity—their output doesn’t degrade like lithium batteries—and they deliver 40% more energy compared to nickel metal-hydride batteries.  They’re safer than water-based chemical batteries because they don’t heat up or explode.  They’re also mercury free and 95% recyclable.  Lithium-ion batteries in cell phones, for example, need to be replaced after 12 to 18 months.  I’m very optimistic about battery technology.  There are also robotics and other applications on the horizon.

HRN: What’s your long term price target for silver?

Keith Neumeyer: Silver will reach a value based on its natural ratio of 15:1 with gold.  I expect to see at least $2,000 gold and most likely $3,000 in the next 3 to 5 years, so silver will be between $130 and $200.  It’s a big number from where we are today but that’s where I think we’re headed.  We’re dealing with a market that needs to be corrected.

HRN: Isn’t the price of silver set by supply and demand?

Keith Neumeyer: I don’t think supply and demand has anything to do with the price, unfortunately.  The world we live in today is a paper environment where silver is priced by financial circumstances.  Banks, traders and investors around the world move markets to where they want them to be.  Governments and commercials—big banks like HSBC and JP Morgan—all have a piece of the action.  They alternately work together or sometimes against each other.  All these forces price the metal.  That’s one reason we’re seeing the volatility that we’re seeing today.

HRN: How can supply and demand be irrelevant?

Keith Neumeyer: In short term trading, the price is financially driven.  Eventually, markets do correct themselves over time.  In the long run, supply and demand does have influence.  That’s why the price will ultimately return to its natural ratio of 15:1.

HRN: How is the price of silver financially driven?

Keith Neumeyer: It has to do with the financial instruments that we trade in and with the fact that silver trades a billion ounces per day on the COMEX alone when there are 26 to 30 million ounces of silver available for delivery.  With that kind of leverage, you just don’t have a proper market.

HRN: It has been reported that there are 100 ounces under contract for every ounce in the COMEX warehouse.

Keith Neumeyer: The governments, regulators and bullion banks have let the silver market get more and more leveraged.  We’ve seen a lot of wealth destruction as a result of this leverage and we’re going to see a lot more until, finally, the governments decide to change the system.

HRN: Isn’t the COMEX guaranteeing market integrity, by raising margins, for example?

Keith Neumeyer: I don’t buy the argument on margin hikes at all.

HRN: Don’t margin hikes prevent dangerous asset price bubbles?

Keith Neumeyer: It’s not up to them to decide what is parabolic.  They’re not investors themselves.  They don’t have money in the market.  They decide a bubble is going to happen if they don’t raise margins but no one knows when a bubble is forming.  It is only apparent after it’s already happened.  By hiking the margins, they create the appearance of a bubble bursting.  They create the bubble.  They create the proof that it was a bubble.  If they let it alone, the market would stabilize by itself.

HRN: What should the Commodities and Futures Trading Commission (CFTC) do?

Keith Neumeyer: The job of the regulators is to protect the retail investor.  That’s their only job.  It’s not to protect the banks or the brokerage firms.  The little guy is the primary taxpayer.  Why were the Securities and Exchange Commission (SEC) and the CFTC put in place?  They were put in place to protect retail investors.  Prior to regulation, the banks controlled the market.  Today, the banks control the market again.  Who should control the market?  Retail investors.  Who’s protecting them?  No one.

HRN: Are you saying that the CFTC does nothing while the COMEX caters to banks and brokerage firms?

Keith Neumeyer: Yes.

HRN: And the COMEX doesn’t serve retail investors?

Keith Neumeyer: No.  Absolutely not.

HRN: Do you foresee a return to a free market in the future?

Keith Neumeyer: I’m an optimist.  I believe one day that governments will rewrite the rules and force the regulators to protect investors.  That’s where we were back in the ‘70s and that’s where I think we have to be again to correct the problems that have arisen over the past 40 years.  Silver is being revalued.  It’s going to affect a lot of people along the way and it will change the financial system.  Ultimately, we’re going to have a new financial system and, hopefully, we’ll go back to natural markets, completely driven by supply and demand.  It may take another 20 years but I think it will happen.

HRN: A new financial system?

Keith Neumeyer: If I’m wrong, the banks will run the world, even more so than they do today, 10 or 20 years from now.  God forbid that we ever get there because that’s a one currency, one government world that would absolutely be a disaster for the human race.  There would be no freedoms at all to move or to invest.  It would be like having shackles on our ankles.  There is a movement to go in that direction, unfortunately.  There are a number of very wealthy people that want to see that.  I hope that we can find the politicians to prevent that type of world from coming to pass.

HRN: Thank you for your time and for your candor.

Keith Neumeyer: It was a pleasure.

After Words

Keith Neumeyer, Chief Executive Officer, President and Director of First Majestic Silver Corp. (TSX:FR / NYSE:AG) is an industry leader who analyzes the silver market with the gloves off.  In the wake of the failure of commodities trading firm MF Global, Mr. Neumeyer’s lack of confidence in the CFTC and in the integrity of the COMEX appears to be justified.

First Majestic Silver, which is one of a small number of primary silver producers, has consistently increased its production, cash margins and mineral resources while lowering production costs.  With three operating mines and a fourth mine under construction, the company is growing steadily from a junior producer to a mid-tier producer that expects to produce 10 million ounces of silver in 2012.

Editor’s Note: Hera Research, LLC or its Directors are shareholders in First Majestic Silver Corp.

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Hera Research, LLC, provides deeply researched analysis to help investors profit from changing economic and market conditions.  Hera Research focuses on relationships between macroeconomics, government, banking, and financial markets in order to identify and analyze investment opportunities with extraordinary upside potential. Hera Research is currently researching mining and metals including precious metals, oil and energy including green energy, agriculture, and other natural resources.  The Hera Research Newsletter covers key economic data, trends and analysis including reviews of companies with extraordinary value and upside potential.

EWI’s Newest Service Picks ETFs: Interview with the Editor

EWI’s Wayne Stough adds another Flash opportunity service to the line-up: ETFs

By Elliott Wave International

Every trader or active investor at times wishes they could pick the brain of a pro that has “pulled the trigger” on real-money trades before.

EWI Director of Analysis Wayne Stough is one of these pros. For several years, several times per month, he’s been alerting his Flash service subscribers to opportunities in futures markets.

And now, there is a new addition to the Flash service line-up: ETF Opportunity Flash. We caught up with Wayne in his office and asked him a few questions:

Q: What method do you use when looking for high-probability trade set-ups?

Wayne Stough: My main approach is The Elliott Wave Principle. I look for clean, precise wave counts — usually ones that other analysts can confirm, so there is a general consensus on market direction. Once the market meets my other criteria for a high-confidence trade, I send out a Flash recommendation to my subscribers.

Q: How do you define a “high-confidence” trade?

WS: That’s a good question, because no market forecast is ever guaranteed, whether you use Elliott or some other forecasting method. Having said that, there are definitely moments when probabilities (or odds, if you will) strongly suggest a particular move. For example — and this is just basic Elliott — the Wave Principle says that markets move in a series of five waves in the direction of the larger trend (labeled on a chart 1, 2, 3, 4, 5) and three waves against the trend (labeled A, B, C). Also, there are certain proportions between these waves that markets often adhere to. So whether I’m counting a 1, 2, 3, 4, 5 pattern in a rally or a decline (i.e., in a bull or bear market), I focus on where the fifth wave should end, according to Elliott wave guidelines.

Once I’ve identified that price termination point, it becomes a matter of waiting for the market to get there. Fifth waves come at the end of the pattern and are usually weaker than third waves. So once I see certain technical indicators diverging (e.g. the RSI), my confidence grows: We are near the end of the pattern, and prices are about to reverse. That’s just one example of a high-confidence situation. But I do suggest a protective stop with every new Flash alert, in case the forecast doesn’t come true.

Q: Are you aiming for a particular percentage gain?

WS: Absolutely. When I send a Flash alert, I’m typically looking for a 3-to-1 ratio, at a minimum.

Q: Does that always work out?

WS: No. I monitor the recommendation for warning signals that let me know when a different scenario is unfolding in the charts. In those cases, I send out another Flash alert suggesting to lower or raise the stop-loss level, or exit the recommendation entirely.

Q: They say you love the S&P Mini as a trading vehicle. Why?

WS: I’d put it differently. I have traded the S&P for a long time, I understand that market’s nuances, and I like the leverage and volatility. But while the S&P comes naturally to me, I’ve also made many Flash recommendations on other markets, like gold and currencies. So, a better way would be to say that I love any market that gives me the desired risk-reward ratio. Now I’m also “looking for love” among various ETFs.

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Q: If traders expect a bear market, should they still consider Flash Services?

WS: Absolutely. I think we’re at the cusp of something very big in the stock market. And this is the time to act. Just keep in mind that speculating in severe bear markets (or during extreme volatility) carries additional risks. So be sure you do your research and know how your financial instruments behave under these conditions. And anyone who chooses to trade in this environment must only risk the money they absolutely can afford to lose.

Q: Who do you think should consider subscribing to EWI’s Flash Services — including the newest addition, the ETF Flash?

WS: Anyone who has some risk capital but not enough time or experience to find their own opportunities. Anyone who understands and accepts the fact that when you bet your money, there will be winners and losers. (Sometimes more of one than the other.) Anyone who knows better than to risk all their capital on a single recommendation; the old “all eggs in one basket” situation. I think in terms of quarters: I want all my subscribers smiling at the end of a quarter.

EWI ETF Opportunity Flash service now brings you potential high-probability opportunities in exchange-traded funds (ETFs). Don’t miss this special offer.

Q&A With Robert Prechter: Why Technical Analysis Beats Out Fundamental Analysis

By Elliott Wave International

As the major stock markets turned down in late 2007 and then started to rally in March 2009, many people who believed in fundamental analysis have begun to question its validity.

Famed technical analyst and Elliott wave expert Robert Prechter has long called for the bear market we are now in the midst of. (He views the rally of 2009 to be a bear-market rally not the beginning of a new bull market.) But over the years, his methods of technical analysis have been criticized. Here are his most succinct arguments as to why wave analysis outdoes competing forms of analysis.

Learn the Wave Principle and Other Forms of Technical Analysis. Elliott Wave International has just released The Ultimate Technical Analysis Handbook. This FREE 50-page ebook is dedicated solely to teaching reformed fundamentals followers to incorporate technical analysis into their own investing decisions. Learn more and download your free copy here.

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Excerpted from Prechter’s Perspective, re-issued 2004

Question: Suppose everyone agreed, “The Wave Principle is not always right, but it really is the answer”?

Robert Prechter: Well, let me begin my answer with a quote from a national financial magazine dated October 1977. “Over the last few years, the Wave Principle has gathered too much of a following and, therefore, it has less value today. Almost invariably, you can write off a technique when it gets too much of a following.” How does this statement look in light of the decade that followed it? “Elliott” had one of its greatest successes. Like the Energizer Bunny, it keeps going and going. And I believe its next success will be its biggest ever. The Principle itself is undoubtedly on an upward spiral of acceptance: three steps forward and two steps back.

Now let’s suppose that a large number of educated people accepted the Wave Principle, which is not an impossible idea for, say, a thousand years from now. There would still be room for differences of opinion on the market and the future. And there are countless other factors. Even people who practice the craft don’t necessarily take action when they get a signal. Unconscious doubt and worry often foil people’s actions. Very few traders have the emotional strength to turn even good analysis into profits.

Q: The Wave Principle is intrinsically contrarian. Does it have some built-in defense against becoming the consensus?

RP: I think so. The Wave Principle is a description of natural human behavior. This is what human beings are; this is part of their nature — how they behave. In order for markets to continue to go through these stages, a part of human nature must be to believe that such theories of mass psychology are incapable of being true — that is, something not worth examining. They must be primed to accept bullish arguments at tops and bearish arguments at bottoms. That means they have to be ever open to bogus theories of market behavior. How else will they create the patterns that fear, greed and hope produce?

Q:  How big is the pool of analysts who rely on the Wave Principle?

RP: I think there are quite a few people who are proficient in applying Elliott to past and present markets, say, perhaps 1% of all technical analysts, which is a pretty good number of people, I suppose. A lot of those are my subscribers, and they learned it through studying the Theorist. However, as far as the number of people proficient at applying the Wave Principle for forecasting market turns, which is significantly more difficult than applying it in real time, I think there are very few.

Q: This has been the basis of some criticism. To quote one critic, “relying on arcane methods does have one advantage. Interpreting the linear squiggles is left in the hands of the major heir to Elliott’s work.” How do you respond to those who contend that the complexity of the theory is a cover that allows you to retain the Wave Principle as your personal theory?

RP: With regard to any supposed self-serving secrecy, not only did I co-author a book on how to apply the Wave Principle, as well as reprint Elliott’s writings against protest from practitioners, but also I continually go into great — some might say excruciating — detail in each issue of The Elliott Wave Theorist explaining exactly what I think the market has done and will do, and why I think it. If there is any market letter that has educated potential competitors, it is mine. The reason is that the study of markets is more important to me than exclusivity, secrecy or power.

Q: Another common approach critics take when they try to dismiss Elliott as bunk is to refer to you as a mystic or a numerologist.

RP: A mystic believe in things for which there is no evidence, only desire. I do not consider myself to be a mystic at all. My approach is objective. The empirical basis of Elliott’s discovery speaks to that fact. So do the results of the trading competition [Editor's note: Bob Prechter won the Trading Championship in options in 1984 with a stunning 444% gain. The next closest competitor showed an 84% gain.] Not once during any month since the independent rating services have been following market timers has a timer using a numerological approach such as “Gann” analysis ever placed in the top 10 rankings. Just as would be expected, such methods don’t work!

The true mystics are those who believe, for instance, that current economic performance is a basis upon which to predict stock market prices. There is no evidence for it. They just feel comfortable with the idea, so they espouse it.

Q: So you say that the challenge to validity is on the other side?

RP: You’re darn right, it is. I am no longer at the point where I feel that I have to justify the objectivity of the Wave Principle. I think the results have done that. Technical analysis is entirely rational and has proved itself. If someone goes back and looks at the record of Elliott wave writers over the decades, he will find a track record of forecasting success that is well beyond a random result of chance. If you can do that, the ball is in the other guy’s court. It’s up to him to show that this is luck or something. What’s more, the only challenge to a theory is a better theory, and I haven’t seen a contender yet.

Q: You don’t feel that you have been effectively challenged by any fundamental approaches?

RP: I think there’s a place for fundamental analysis of individual companies, but I am firmly convinced that you can make a very rational argument showing that fundamental analysis applied to overall market timing is like reading the entrails of goats. In fact, I presented such a critique in The Wave Principle of Human Social Behavior. If you think my ideas as presented here are controversial, just read Chapter 19 of that book.

Learn the Wave Principle and Other Forms of Technical Analysis. Elliott Wave International has just released The Ultimate Technical Analysis Handbook. This FREE 50-page ebook is dedicated solely to teaching reformed fundamentals followers to incorporate technical analysis into their own investing decisions. Learn more and download your free copy here.