Is The Narrative More Powerful Than The Truth?

The Real Estate Espresso Podcast

Is The Narrative More Powerful Than The Truth?

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Is The Narrative More Powerful Than The Truth?

Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re talking about the narratives that impact market movement. Throughout history, there’ve always been two truths. There’s, number one, what actually happened, and then number two, the story about what happened. It’s that narrative that can powerfully influence a perception of what happened and the way investors view the market.

I’m going to use silver as an example. Yes, this process applies to real estate and to any investment vehicle.

Now last week, I commented on the meteoric rise of the price of silver over the last couple of years. My own last purchase of silver was around $26. Today, the metal is proving extremely volatile. On Sunday, silver peaked at $84 an ounce, then fell to $71 an ounce on Monday before rebounding back to $78 an ounce today.

So what happened?

From what I can tell, prices have been rising in anticipation of supply constraints and in the face of rising demand. Now, silver, in many cases, is not mined directly; it’s a byproduct of the mining process for other things like copper.

Now on Monday, the Chicago Mercantile Exchange instituted a change in the margin requirements for silver. That caused a wave of selling as traders worked to cover their positions. The result was the single largest drop in the price of silver in history. That margin correction was a short-term effect. Prices are back up today.

The other narrative is that China is about to institute export licensing for silver on January 1. Today, China controls between 70 to 80 percent of the world’s supply of refined silver for use in microelectronics. An opinion piece in MarketWatch magazine describes China as being in the position to weaponize the availability of silver on a global basis, simply by being slow to license exports.

China exports about 121 million ounces of silver a year, roughly equivalent to its own domestic mining production of about 3,300 metric tons. According to the MarketWatch article, China just weaponized silver.

Now if this feels familiar, it should. This is, according to the article, China doesn’t invent new trade tricks; it just runs old ones on new commodities.

In 2010, Beijing started licensing rare earth exports—not banning them, just requiring a lot of extra paperwork, approvals, quotas that somehow were never quite met. The effect was surgical, and prices spiked up to 4,500%. Western manufacturers discovered they couldn’t build smartphones or missiles without Chinese permission, and a generation of supply chain executives learned Mandarin the hard way. The rare earth squeeze wasn’t dramatic, it was bureaucratic—death by a thousand forms filed in triplicate.

Now you can tell there’s a lot of hyperbole in this MarketWatch article. Silver, they’re saying, is going to see the same treatment on January 1st. Chinese refiners will need government approval to export.

The article goes on to say that much of the silver is a byproduct of mining for copper, so you just can’t open another silver mine. It gets worse. New mine development takes 10 to 20 years from discovery to production. Even if some intrepid geologist found a massive silver deposit tomorrow, the first you’d see an ounce of silver is in the year 2040, maybe.

But here is where what sounds like a convincing narrative deviates from the truth. No doubt, thousands of traders—maybe even millions—will read the article and make trading decisions accordingly. The real question is where the mining capacity is distributed globally.

China is not the top producer of silver. They may be the top refiner of silver for the semiconductor industry, but they’re not the top producer. It does not take 10 to 15 years to spin up silver refining capacity.

These are the top five silver-producing countries. The top of this list is Mexico, by far the world’s largest, consistently, with about 6,300 metric tons of silver mined last year. China is number two, with 3,300 metric tons last year. Peru is number three at 3,100 metric tons. Bolivia and Poland are tied for fourth at 1,300 metric tons, and the U.S. is in a distant eighth position with 1,100 metric tons.

Now a large-scale refinery would not be a cheap endeavor. It would take about three years to build and maybe about 500 million dollars. With some political will and some urgency, it could be done in 24 months. So while it’s not cheap, it’s not an insurmountable number.

When you consider that China’s exports amount to about 10 billion dollars’ worth of materials at today’s prices, the problem doesn’t seem out of the question. So China could squeeze the silver industry for a period of time, and it would have a material short-term impact on silver prices. But refining capacity is not the same as mining capacity. China will not be able to strangle the world’s supply for the next 20 years, as the article states.

The perspective that investors take on the metal is a function of the narrative. Would new refining capacity be built in response to Chinese trade action? Absolutely. Would the U.S. buy its silver from Mexico instead? Most likely, yes.

You see, when all of the facts and perspectives come into the picture, the narrative fades into the background. When I first read this story in MarketWatch magazine, I had a “holy shit” reaction. But I knew this was just an opinion piece. My response was not to react to the narrative, but to do more research.

These narratives exist in all forms of investment. So when you hear them, don’t just take them at face value; do some additional research.

As you think about that, have an awesome rest of your day. Go make some great things happen, and we’ll talk again tomorrow.

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