bron suchecki said:
HeavyMetal said:
I agree that product forecasting and inventory management is not an exact science. It is subject to continuously varying economic sentiment, or "animal spirits", but this is not an issue restricted to the precious metals industry alone. It is an issue for almost every business sector, outside of those with high levels of government regulation and interference.
So it's not easy. Never said it was. But that's why Managing Directors and CEOs get the big bucks. They are supposed to be good at their jobs within their area of expertise. They also have access to more industry information and analysis than outsiders. If anybody can do their jobs just as well, why are they paid so much more than the rest of us lessor mortals? Nobody can be expected to get it right all of the time, but industry experts should get it right more often than not.
"Every business sector" does not face the rapid demand changes precious metals does. Bread makers don't suddenly find that this month's demand for bread has doubled. Do you think Holden's market share in the large car segment dropping in half in a few months?
You have ignored my point which is that demand is related to precious metal prices. These are not forecastable in the short or long term. There is no secrete industry information that can help with this. If I could produce a model that forecasted our sales within +/-20% accuracy I'd have left by now because I'd be able to make a fortune trading gold.
There are plenty of business sectors that have rapid changes in demand. In fact just about every commodities miner is subject to major demand volatility, and they have much longer infrastructure development timeframes and much greater capital costs than Perth Mint. There is nothing unique about precious metal demand volatility. No mining company can accurately predict commodity prices years into the future either, but they still manage to make demand forecasts.
The Perth Mint has it better than other industries in many ways, as their product does not have a limited shelf life and it is not perishable. Unlike bakers and vehicle manufacturers, who have more problems to worry about with their inventory.
The point that you have actually made is that demand is NOT related to precious metals prices. You have said that demand has increased recently with lower prices, whilst in the past demand and price have moved in the same direction. When a premise sometimes predicts economic behaviour and sometimes doesn't, then it is invalidated. It is particularly useless if the proposed relationship breaks down at the "stress points", when the predictive ability is most needed.
Economic theory also states that prices are set at a point where supply meets demand, as agreed by a willing seller and a willing buyer. Demand is not directly determined by price, on the contrary, it is price that is determined by demand.
In other words, predicting demand is not the same thing as predicting price. If price did predict demand, then no drinks would be sold at nightclubs and no pies would be sold at football matches, when people could buy them elsewhere at much lower prices.
bron suchecki said:
HeavyMetal said:
In particular, they should be able to build in some contingency into their infrastructure capacity upgrades, so that capacity is not exhausted within a few months after commissioning.
It was not a major upgrade. We had to do an extension for other reasons and this gave us some more space to put in a dedicated silver bar line. We are now at the point where we don't have much space left at our Refinery or Mint. The only way to really ramp up production is to acquire a new site, and that is a big dollar commitment you don't take if the bull market is all over in 2 years.
Not a major upgrade? That's not what the Perth Mint said in its website blog entry of 21 April:
"By July we will have effectively doubled our manufacturing capacity, ensuring that we are able to meet the tremendous interest in our 10oz, 20oz, 1kg and 100oz cast silver bars."
No mention that they would only be able to meet the tremendous interest for 3 months, when the silver price dropped, and all bar sizes were made unavailable for sale.
So what will it take for the Perth Mint to make a major upgrade? And if not now, then when? Does the mint need 10 years of guaranteed high demand before it will fund an upgrade? How can this ever happen, given the mint's admitted inability to forecast demand?
And why is the Perth Mint so afraid of making a decision? In the worst case scenario, maybe the mint could expand production, and bring it online just as demand drops. So what? The decision could still be justified based upon the information available at the time. The investment can still be written down.
Do you really expect WA taxpayers to riot in the streets? Over a written down investment and the possibility of a reduced dividend to the WA government? When governments already waste millions more themselves, and bail out private banks who don't ever pay them a dividend?
bron suchecki said:
HeavyMetal said:
I was also surprised by the comment "The normal relationship is if the price is up, demand is up because people are optimistic and think prices will continue to rise. However, this recent increase in demand coincided with a fall in the silver price."
It seems fairly obvious, to me at least, that demand that increases dramatically with price is an early warning sign of an unsustainable bubble, whereas increased demand in response to a falling price is indicative of a healthly and ongoing bull market.
The former situation indicates that future demand is being brought forward to the present, which means that the current levels of demand are not likely to be sustained in the medium or longer term, and conservative forecasts and infrastructure investments are justified. The latter situation indicates the opposite.
It's not rocket science. Demand increased on falling prices in 2008, and back in April, and again now. We are still in a healthy bull market that has years left to run.
Guess what, up until this last silver price correction, the only relationship was if price up demand up, if price down demand down. According to your criteria that is an unsustainable bubble, yet the bull market has continued for a decade.
The price fall, demand up we recently experienced is actually an anomaly and the first time I've seen it. It could signal a shift into a new phase in the market because before people were discouraged by price falls. Now we may have stronger hands in the market.
That is why we have had "conservative forecasts and infrastructure investments". The question I have is, is this demand increase in the face of a price fall just a one off?
What I'm trying to say is that the demand we see is very erratic, even though the general trend is upwards. That makes us unsure. I'm pretty sure if I showed any engineer our erratic and oscillating demand figures without indicating what is, they would conclude it is an unstable system.
It is not as "fairly obvious" as you think. I mean, even amongst the goldbugs there is no agreement as to how high or when the market will peak - $3000, $5000, $10000? Each of those price predictions means a completely different decision to ensure that "capacity is not exhausted".
The premise that price and demand were fully correlated (until recently at least) was yours not mine. I said "that demand that increases dramatically with price is an early warning sign of an unsustainable bubble", and I stand by that.
Bull markets often have lots of mini-bubbles, which become unsustainable, and are followed by a correction. These mini-bubbles don't have to end a bull market. It is usually one final mega-bubble that does that.
But I am again surprised that the current situation is the first time that you have seen high demand with lower prices. Almost everybody I know in the precious metal community was complaining that they could not source silver during the 2008 price correction. Did the Perth Mint have huge stocks for sale that nobody knew about?
Conversely, I don't remember the Perth Mint making silver unavailable for sale when during the mini-bubble in April this year, despite your claim that demand increases with price. I do however remember that silver was made unavailable when the prices dropped in the subsequent correction in May and June. Of course, PM advised that that was a supply issue and not a demand issue, given the pending commissioned of new production equipment.
http://www.perthmintbullion.com/blo...ng_Our_Silver_Bar_Manufacturing_Capacity.aspx
Nevertheless, the effect on customers was the same: no silver is available whenever the price drops.
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