We first brought the world's attention to Noble Group in 2015, as commodity markets crashed and what was Asia's largest commodity trader faced near-bankrutpcy as trading partners lost faith, bonds were dumped, and CDS protection was bid. In the months since, panic subsided and everything - as it always seems to have been - was fine... until last week!!
Which brings us to the recent price action in Silver (as well as various other commodities). As The Macro Tourist's Kevin Muir asks (and answers) -
I don’t want to goocher it, but it looks like I might have fluked into picking up some silver last week near the bottom (Wallace prepares to buy some silver). That post is just proof that some of us were lucky enough to be born smart, while others, were smart enough to be born lucky. I count myself firmly in the latter camp, just without the foresight to chose that group. But rather than focusing on trying to time the short term squiggles, I would like to discuss the cause of the absolute drubbing the commodity markets took over the past month.
The easiest, and most obvious, explanation centers around the rise in US dollar real yields. A month ago, the US 5 year real yield (as measured by the TIPs market) was almost negative 30 basis points. Last week, at its worst, the real yield had pushed up to just a hair under positive 20 basis points. That’s almost 50 basis points of real tightening.
This occurred during a period of US economic underperformance versus expectations.
I am unsure if the poor economic performance was coincidental or causal, but it doesn’t really matter. Higher real rates, combined with an economy rolling over, are a poor environment for commodities.
The cause of the rise in real rates is more difficult to ascertain (whether it is an overly tight Fed, or Chinese withdrawal of liquidity, is up in the air), but its effect on our precious metal friends cannot be argued. Precious metals hate rising real yields. In fact, given the backup in real yields, gold actually hung in there pretty well.
But, silver traded tick for tick with the US 5 year real yield.
It could be there is nothing more to this story. Real rates rose (for whatever reason), and commodities sold off. Nothing more, nothing less.
Yet when I look at the silver chart, it seems less than random. For the period of mid-April until last week, the trading action consisted of a persistent, steady decline.
The selling was relentless, and much too uniformed. Although I know fundamentals were helping the decline, I contend there might be more lurking behind the scenes.
I am late to this news, but over the past couple of weeks, Hong Kong based commodity conglomerate, Noble Group, has gotten themselves into some serious trouble. Actually, serious trouble is probably understating the situation. It’s more like grave danger (like there is any other kind?)
First up, let’s have a look at the equity price of Noble Group:
Strangely, the decline in Noble’s stock price started the same time as silver, almost to the day.
And lest you think Noble is simply experiencing a share price decline that might be recouped, have a look at their most liquid bond issue:
At the beginning of May, this bond was still trading at slightly under par. Over the past week, it has declined to just over 50 cents on the dollar.
The bond market has abandoned Noble. Something’s wrong. Really, really, wrong.
When I was researching this situation, I stumbled upon this great blog from Iceberg Research. In their research, they outline the short thesis for Noble. I am not judging the merits of their case, but I trust the bond market. And the bond market is screaming that Noble is in trouble.
And what do you trading companies do when they are in trouble? They sell stuff to get liquidity. Inevitably they don’t sell the stuff they should, they sell the stuff they can. It’s a tale as old as time. We saw it with Long Term Capital Management, with the Bear Stearns real estate credit hedge funds, and even with Lehman.
In Iceberg’s research, they outline a whole host of illiquid commodity assets they claim Noble is marking too high. If this analysis is correct, then these assets will be the last thing Noble pitches. Instead, liquid commodities, like say, silver, will be given the boot…
I could be whistling in the wind, but I wonder if silver’s decline over the past month has been a desperate attempt to shore up some liquidity at Noble. Although we probably will never know for sure, I take solace in the fact that if I am correct, then most likely Noble will have no more silver to sell. If the grim reaper of bankruptcy comes for Noble in the coming weeks, then all the good positions will have most likely already been sold. Don’t get too bearish on any Noble Group bad news, it’s most likely already in the price of all but the most illiquid commodities.