In my day-to-day dealings with electronics and solar, there is a recent common question surrounding “where does silver go?” Mind you, the questions are never as direct as that, but as the conversation is dissected we frequently come to the conclusion we need to determine the direction of silver prices to solve the original question. Now, as much as I would love to simply repeat Sir Gint’s words as my own, I am worried doing so would expose two things. The first and most important is the number of Sir Gint’s out of work Alaskan fisherman friends, and that is never a good situation for those on the other end of the resolved work issue. Second is that I might come off as a total crackpot. (I prefer to define my own version of crackpot, thank you very much.)

Whatever, the point is that the direction of silver prices is out of the realm of normal electronics or solar analysis. Sadly, we see a number of armchair quarterbacks coming in “stating the obvious” that silver must reverse and and go significantly lower. We see an equal number of armchair quarterbacks saying silver is joining Alice on the moon.

There is a far better answer. A much more sober answer. The most realistic answer.

If you have no real insight into what moves the price of silver…straight line it. That’s right, take today’s price and assume it never changes from this day forth. When silver goes up 10% tomorrow, adjust your model for the new higher silver price AND STRAIGHT LINE IT.

On one hand this is a total cop out. “Look, Analyst Boy,” you say, “this is what we pay you for.” And it is true. This what you pay analysts to do. Unfortunately, the standard semi analyst unused to volatility in silver has no clue what to do with climbing silver cost. In the short term it gives him/her something to chase down for a note, but there is no depth or history involved so buy-siders wave away any analysis along these lines as cute.

So straight line it and avoid the issue.

Next we come to the companies. They are even more clueless than analysts. Imagine going to a company and saying “Sorry, we now need to charge you for the nitrogen your employees are inhaling as part of the air they breathe.” Rising silver cost starting in Q3 of last year is very similar from their perspective. “What do you mean silver prices are increasing faster than inflation? Surely you must be talking of something else.”

So they get a host of bankers knock, knock, knocking on their door screaming “Hedge it! Hedge it!” Oddly, the bankers are right this time. If it is outside your realm of expertise to control it or trade it, you should hedge it. Period.

And if they hedge it, what do you do with the final cost assumption? You straight line it.

Of course, this whole philosophy of hedging or not hedging is based upon an original view that there will or will not be volatility in the price of the object hedged or not hedged. There are entire books about the subject. The funniest thing is when a company decides to hedge and then also decides to tell the analyst community the size and price point of the hedge. Has volatility really been conquered, or is the new assumption that prices will no longer change and from here on you can simply STRAIGHT LINE IT? When you think a little about it, unless you are actively trading the object in question, hedging is a little stupid from the point at which you expect stable prices.

Enough philosophy. Consider a company’s viewpoint before banging on it for hedges. Heck, there might even be some stupid debt covenant requiring hedges…conveniently arranged for by the debt issuer, of course. But once that hedge is in place, you know what you do with cost assumptions, right?

You straight line it.

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