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Gold and Silver on the Move - Is it China or ETF's? ~ Lisa Reisman (MetalMiner Report)
Gold and Silver on the Move - Is it China or ETF's?
-Lisa Reisman (MetalMiner Report)
September 10th, 2009
Earlier this week we reported that China has been on a public relations campaign to encourage its citizens to buy gold and silver (with a slight preference for the later). We'll talk about what that means for gold prices and the rest of the precious metals in a moment. But first, a small digression…one lesson we have learned here at MetalMiner since we launched this blog back in December 2007 is this: China moves world markets. Any slight uptick or downtick in demand in China causes global markets to move. This was certainly not the case when Stuart and I first met back in 1994. We joke about how "the new dynamics" (meaning last 5 years) of China have changed the way we, for example, discuss metal price trends in general as well as specific metals in particular.
But let's return to gold and silver. BMO Capital Markets are calling for gold to reach $1300/oz in 2011 in the case of a bull market and $750/oz in the case of a bear market. It's rare to see both a bull and bear case presented in one piece of analysis. So what are the factors supporting the gold price? Undoubtedly, one of the largest drivers involves ETF investments. According to Standard Bank, ETF gold holdings increased by 372 tons during the first two months of the year though they have slowed in August, growing by 33 tons. We would also suggest that the value of the US dollar remains one of the largest drivers. Inflation concerns also drive the price of gold but in this instance, we feel gold may get a boost due to the new China policies.
According to our own manager on the ground in China, "in 2008, total consumption of gold metal was 400 mt, including 70 mt as investment (gold bullion). In the first half of this year, total consumption of gold is 200 mt, but gold for investment increased by 35%, which means gold for investment increased faster." He calculated that based on this information the gold for investment in the first half of the year could be around 47 mt.
As Stuart covered in his earlier post about China encouraging the purchase of gold and silver others have speculated that the move is designed to help Central Banks diversify away from the dollar. And although China's advertising campaign to its citizens will not support that particular agenda (after all, the Chinese will pay for gold and silver bars with RMBs), any purchases made by China's central banks particularly for imported gold would certainly support that theory.
Moreover, some believe China's drive toward precious metals stems from its losses on commodity related derivatives contracts as reported in this Economist article. China's SASAC (State-owned Assets Supervision and Administration Commission) may allow state controlled enterprises to break derivative contracts established with NY and London banks. (The derivatives were purchased as a hedge against rising commodity prices). Others argue that the dollar is the currency used for counter party risk. If China backs out of these derivative contracts, where will the dollar go?

All of this leads us to the question of price. Our feeling is that gold and silver are poised to increase. And though this entire post mostly covered China and its "new" demand for gold and silver, we can't ignore the impact ETF's have on the price of gold. Yet on the flip side, both scrap and physical metal have found their way into the most recent gold market rally, which could have the effect of tempering the price rise, according to Standard Bank, though the bank suggests that might not be the case this time around.
Therefore, we believe gold may increase to perhaps up to $1100/oz and silver to $20/oz (mind you we are not technical chartists). In as much as ETF's and other speculators invest in these markets, the entire precious metals complex is poised to increase but we don't see any major changes in terms of platinum or palladium demand in particular to support a price rise yet it's clear that the money pouring in alone will likely push metal prices higher.
The Case for Buying Silver: A History of Paper ~ Howard Ruff
The Case for Buying Silver: A History of Paper
Howard Ruff
July 19, 2007 - The Daily Reckoning
History tells us that the first paper currencies were notes payable (redeemable) in gold or silver, or, mere warehouse receipts for stored gold. Over the years, it became obvious that it was easier to simply exchange the receipts after a transaction than go to the warehouse with the receipts to get the gold and silver. The receipts became currency in common usage, and the people began to think of the receipts (currency) as money all by itself, completely detached from any stored gold.
Then, as governments began to buy votes or finance wars, they yielded to the temptation to simply print more "receipts" than there was gold and silver to back them up (who would know?), each time triggering more and more inflation. The foundation for inflationary tactics was laid in America when Roosevelt created the New Deal, then Lyndon Johnson financed the War on Poverty and the Vietnam War at the same time (guns and butter), and the printing presses have had to step up the pace ever since (poverty won and so did North Vietnam, but that's another story).
The process of currency destruction has been accelerating, with advances punctuated by retreats, since the '30s. Throughout history, this has been the case over and over again ever since the birth of paper money. The critical moment in this era came when Nixon "closed the gold window" (no longer allowing dollars to be exchanged for gold or silver) at the Federal Reserve. This move finally admitted America's irresponsible reality and permanently detached the paper dollars from gold or silver, and the money printers were off to the races. Then Uncle Sam hammered the last nail into the coffin in 1965 by no longer making 90 percent silver coins.
In the last ten years, the Fed has manufactured trillions of dollars out of nothing at the fastest pace in history by far, and it's now accelerating. The Fed has then loaned the dollars into circulation, or given them to politicians to spend. Since then, Congress has been spending like a drunken sailor. (What is the difference between Congress and a drunken sailor? A drunken sailor spends his own money!) This money expansion now dwarfs the monetary explosion which led to that historic metals bull market in the '70s. Gold and silver have been rising recently in response, driving gold from US$252 to US$560 (TP Note: 10/12/00- $1058) , and silver from US$4 to more than US$15.50 (TP Note: 10/12/09 - $17.75).
It's hard for me to exaggerate or overstate what is happening. Economists call this monetary-expansion process "inflation". It really should be called "dilution", that is, dilution of the money supply, and consequently its value. Inevitably, this sooner or later causes rising consumer prices, which laymen, and the media, and even Wall Street, will still mistakenly call "inflation". Calling rising prices "inflation" is like calling falling trees "hurricanes"! Or as Jim Dines says, "it's like calling wet sidewalks rain".

When will the masses catch on to this steadily progressing fact of life? Gold and silver prices are the true measure of public awareness. Sooner or later, awareness reaches critical mass, and the metals go through the stratosphere.
One early-warning harbinger of inflation is the dollar losing exchange value against foreign currencies, which began in earnest in 2002 and 2003. The dollar, with fits and starts, has been in a long-term bear market against other currencies for a few years. A falling dollar is inflationary, as it takes more and more dollars to buy the increasing amounts of foreign-produced goods we are now buying. Wal-Mart's soaring sales are a telling indicator, as they are Asia's biggest customer. Gold and oil are quoted in dollars, so up they go. And now the metals are rising, not just against the dollar, but against nearly all currencies as the metals grow in strength, and virtually every country on Earth is inflating its currency. It's actually more accurate to say the dollar is falling in relation to gold, than to say gold is rising in relation to the dollar.
The falling dollar-exchange value explains the early strength of the metals, and there is a lot more to come, as we continue to flood the international money markets with dollars. We now don't even have to print them. This is the age of cyber-money, when less than five percent of the dollars are minted or printed, and most are only computer entries at banks. We don't even know how many dollars there are!
There is a serious supply problem. Twenty-two years of low or falling gold and silver prices gave us a drop in production and exploration of epic proportions, as miners pulled in their horns to preserve their capital. This set the scene for a great supply/demand problem. Now that prices are high enough to make gold and silver mining profitable, it will take as long as seven to ten years to develop new mining and production, and falling supply and rising demand have made higher prices inevitable for the imminent future.
Also, remember that most of the easy shallow silver has been mined over the centuries, even with primitive methods, and the silver deposits are still being depleted. For example, during the Roman millennium, silver coins were used for currency, so the Romans, after they conquered Spain, expropriated the large Spanish silver mines so they could use the silver for their own coins. They soon depleted the shallow mines, so they began to counterfeit their own currency, mixing silver with base metals, making the coins thinner, or clipping the corners.
As the mines were further depleted, it got worse and worse until the citizens began to distrust the currency, demanding more and more of it in exchange for their goods and services, causing a great inflation. Soon, the far-flung Roman Legions refused to accept the less-and-less valuable coins at face value for their pay, and began deserting in droves. This inflation was one of the root causes of the fall of the Roman Empire-all because they counterfeited the currency.
Now, silver industrial applications have soared into the thousands, and there are few satisfactory substitutes in sight. New silver mines are getting harder and more expensive to find, and supply is falling farther and farther short of demand. One expert claims that the deeper you go into the ground, the less silver there is.
Both metals are far rarer than most people know. All the gold ever mined since the dawn of history, including that in central banks, gold fillings and sunken shipwrecks in the Caribbean, would cover a football field about four feet deep. And, demand is now leaping past new supplies.
China and India are enjoying a historic burst of capitalist prosperity, and their booming new middle class is enthusiastically buying silver and gold jewelry, creating soaring new demand! Silver use is incredible and rising! The thousands of irreplaceable silver industrial uses, partially accounts for the shrinking inventory. Government silver warehouses are now all empty, and COMEX futures positions, much of which must be covered eventually by deliveries or purchases, are estimated to be equal to or greater than all new production!
Silver is the poor man's gold. Think of gold as large denomination money, and silver as small change. A one-ounce gold coin now costs only about US$650, and you can buy a roll of pre-1965, 90 percent-silver dimes for close to US$50 a roll. Partly because it is so much cheaper that the potential buying pool is much larger, and industrial use is so much greater, silver will be more profitable than gold by at least 100 percent!
And there's more to come.
Beginner's Guide To Silver Investing
Beginner's Guide To Silver Investing
So, why invest in silver and not gold? Good Question. Nothing is really wrong with gold or other precious metals at all.
Because it is more expensive, gold is a very compact "store" of wealth. I mean, you could have the entire value of your house, simply stored at the bottom of your sock drawer, or better yet, a small floor safe.
Silver retains its value as a store of wealth too, and is still pretty compact, so you don't have to have a warehouse to store it in.
Silver has been called the "poor man's gold" for centuries. This was primarily because it was easier to purchase in smaller quantities, yet still provided a solid, stable currency base. The common phrase "to make change" probably originates from the fact that silver was used to "make change" for gold - in other words, you changed one metal for the same value of another metal.
Silver, in fact, was the standard used for most currencies up until about 150-200 years ago…That's a really long time when you consider that goes back all the way to Ancient Greece! Silver has been the "store of wealth" for massive empires and was the money of choice for merchants around the world.
Getting Started As A Silver Investor
Generally, silver is easier to get started with as an investment. This stems from the lower cost of entry (you can get started with literally just a few dollars).
Moreover, silver has been somewhat overlooked as a modern investment and store of wealth for quite a long time. People tend to focus on gold or other precious metals. Meanwhile, silver stays steady and true. Sure, the price of silver moves with the markets, along with gold and other precious metals, but because it is less expensive, the smaller movements can amount to strong percentage gains.
Many people don't know how well silver has done as an investment over the past few years. Since 2001, silver has seen an increase in value of around 400%! Of course, gold has increased as well, but not as much as silver has. Because of this historical trend, many people feel that silver is the best possible precious metal to invest in.
Because silver is less expensive, you as an investor can see faster and more dramatic increases. If heavy investment hitters like Warren Buffet buy silver to hedge against inflation, then why wouldn't you follow suit. You don't have to invest millions and you can get the same benefits from buying smaller quantities of silver bullion or silver coins.
It takes more money up front to get started with gold. And for you to make some impressive gains on your investment, gold would have to go up to a few thousand dollars an ounce. While this makes gold nice to get later, it makes it unattractive for a starter investment.
So for beginners, it's best to set gold on the back burner for a while. Instead focus on silver bullion to store your wealth and protect your assets against the rising tide of inflation.
Ten Reasons To Buy Silver Now ~ Ted Butler
Ten Reasons To Buy Silver Now
Theodore Butler
April 20, 2009
Amid all the recent attention I've placed on the continued manipulation in silver, some may mistakenly assume that diminishes the case for silver. Nothing could be further from the truth. I'm convinced that silver is a better buy than ever before. Here are detailed reasons why I believe that is the case.
One, the near-term emotional temperature of the market is low. There is no bullish "fever" where uninformed investors are driven to buy silver because of a sharply rising price. That will happen, but it's not true now. While silver is still above the price lows of last fall and higher than year-end prices, the recent price action is nothing to write home about. The price has been below most of the important moving averages, causing silver to be "oversold." This is a much better time to buy than when prices have already climbed and many are buying just because prices are rising. At those times the risk of a sharp sell-off is high. Now the risk of a prolonged price decline is much lower. Now is the time to buy low.
Two, leveraged speculators who normally buy COMEX futures contracts and Over The Counter (OTC) derivatives do not hold a historically significant number of long contracts. The big dealers have been so successful at forcing long speculators out of the market, that the speculative long position is at important low levels. This means that long speculators have already been forced to sell and no big selling from them appears probable. On any rise in price, they are likely to buy, adding a force to rising prices. Buy before they turn into buyers.
Three, available wholesale silver inventories appear to be tight. These physical silver inventories are falling into stronger hands. For decades the world's largest stockpiles of silver were the COMEX warehouse inventories. These COMEX inventories were considered mostly commercial in nature with some portion being held for investment purposes. The COMEX inventories peaked at around 280 million ounces in the early 1990's, and accounted for 90% of all visible silver inventories. After the introduction of silver Exchange Traded Funds (ETFs), there was a profound shift in the location and structure of world visible silver inventories.
Now, the combined inventories in the ETFs and other investment vehicles tower over the holdings in the COMEX by almost 4 to 1. (Over 400 million ounces in the ETFs compared to 120 million oz in COMEX inventories). Given the long-term nature of ETF investment holdings, this massive and historic shift in inventory composition means much less silver is now available to the market. This will exert a strong upward influence on price.
Four, all signs indicate that physical investment demand for silver on both a retail and wholesale basis is strong and could surge further. Until a few years ago, there was no net silver investment buying for decades. That pattern has changed with a vengeance. Clearly, the introduction of the ETFs have played a major role in this investment transformation.
The strong buying that we have seen does not appear to be "hot" money, but sober and determined accumulation. It wasn't surging prices prompting buyers over the last six months. It's due to a growing awareness and conviction about silver's real supply and demand fundamentals. Importantly, there has been practically no buying of silver on a leveraged or margin basis. It's mostly been cash on the barrel. These strong silver buyers will wait for significantly higher prices before selling. With higher prices inevitable at some point, the hot-money crowd should come in and blow the doors off the price.
Five, silver production is tightening, given the byproduct-nature of silver mining. As I have written recently, base metals production like copper, lead and zinc appears to have fallen significantly, also reducing the production of silver as a byproduct.
Six, world economic and financial conditions appear lined up to favor higher silver prices, no matter what occurs. If financial conditions remain unsettled, flight to quality buying in silver appears likely. If the world does return to better economic growth patterns, silver will benefit as a result of increased industrial consumption. Heads silver benefits, tails it also benefits.
Seven, more investors than ever have come to realize that the silver market has been manipulated and the government regulators and exchange officials are unable to persuasively address the growing evidence of a silver manipulation. The manipulation debate has become widespread in metal circles. It isn't going away. The best the regulators have been able to do is to stall and pretend to be investigating. Fewer people are being fooled by such actions. A scam like the silver manipulation can't continue when so many know about it. This scam will end suddenly and sharply in a price jump to the upside.
Eight, industrial demand for silver will continue to grow in the years ahead. New uses for silver appear regularly. A robust worldwide economy will initiate a new phase of silver demand. Higher prices will not diminish this demand because small amounts of silver are used in each industrial application.
Reasons nine and ten, silver prices are cheap on several important objective measurements. Silver is cheap compared to its own recent price. It is down more than 40% from its highs of one year ago, in spite of the strongest physical demand in history. More investment silver has been purchased over the past year than at any other period in history. At precisely the same time that prices have declined so sharply, more ETF-type buying has occurred than ever before and more Silver Eagles have been sold by the US Mint than ever before. We have witnessed the highest premiums on all retail forms of silver in history. This isn't just me saying silver is cheap, this is the investment world voting with its collective wallet. Clearly, there is something wrong with this picture that can only be explained by manipulation on the COMEX and the OTC market by a few giant financial institutions, led by JPMorgan.
Silver is cheap on a cost of production basis. Never have the net operating results of so many different silver miners been so poor. The common denominator is too low a price for their main product. Silver is up three-fold from the lows of a few years ago, yet the silver mining industry still suffers. That's because the cost of production has risen faster than the price of silver. That must be rectified.
Silver is dirt cheap relative to gold. While there is less above ground silver than gold, silver's price has rarely been this low compared to gold.
The manipulation that explains why silver is so cheap cannot exist in a bona fide physical shortage. If the price stays low, growing numbers of investors buy real silver. That makes it harder for the manipulators to keep the price contained with paper derivatives. Some fret the scam can be continued indefinitely. If it were just a question of printing more money or more paper derivatives, perhaps that might be true. But it's not about an unlimited supply of paper silver, it's about a limited supply that guarantees the manipulation will end soon. The termination of controls on the price of silver will be something we look back upon and marvel over how long it existed. Just make sure you are looking back while holding as much real silver as you can.
Gold Prices Must Go Up! A lot! Why? ~ Jason Hommel
Gold Prices Must Go Up! A lot! Why?
By Jason Hommel
Paper money is fraud, and paper money growth has been tremendous. In the Spring of 2006, the Fed stopped publishing numbers for M3 (M3 is the best measure of money in the banks) when M3 was about $10.3 trillion.
The dollar, which is said to be a "unit of account", no longer has any accounting!
But a private company is keeping track of M3, and M3 is soaring past $14 trillion, over a 20% increase per year.
True inflation, which is the rate of money creation, is over 25% per year!
The Federal Reserve is accountable to you, but only if you do something about it, such as buy silver and gold!
Central banks are running short on gold, and are starting to buy gold again. Currently, the U.S. "officially" has 261 million ounces of gold. (If they have the gold!)
If U.S. money - $14 trillion in M3 - were backed by "U.S. gold", there would be over $53,639 dollars for every one ounce of gold!
The total value of all the paper money and bonds in the world is about $100 trillion, and all the gold ever mined in all of human history is just under about 5 billion ounces. So, world money, divided by world gold, gives a figure of $20,000 per ounce!
World central banks are running out of gold, and some are starting to buy gold, such as Russia, China, South Africa, South Korea, and more! The central banks claim to have about 30,000 tonnes of gold, but they may have less than half of that, as most has been lent or leased into the market over the past ten years.
In sum, at $1000/oz., there is about $5 trillion dollars worth of gold in the world, but there is: $500 trillion in derivatives, $100 trillion worth of bonds and $40 trillion worth of paper money! Therefore, bonds and paper money must go down, and gold must go up!

Why does gold matter? Especially if we are no longer on a gold standard?
Even though the U.S. dollar is no longer backed by gold, any holder of dollars could wise up at any time and start buying silver or gold. China, for example, could spend their $1.9 trillion U.S. dollars in bonds and buy gold anywhere in the world, such as Switzerland, Dubai, Tokyo. They could even send agents to buy gold at any of the 4,000 or more coin shops in the U.S. The dollar could drop 50% or more overnight, and there's not a single thing the U.S. government, you or I could do about it.
Annual gold supply from mining is about 2500 tonnes, or 80 million ounces. With 32,151 troy ounces per metric tonne, that's 80,377,500 ounces of gold. I estimate that if China bought that much gold, the price of gold would jump up to about $2,000/oz. At $2000/oz., that would cost about $160 billion, which is just under 10% of China's U.S. dollar bond holdings. A prudent diversification into Gold on China's part could cause the dollar to lose 50% of its value overnight.
When France redeemed U.S. dollars for gold in 1971, it ended the gold standard. This was not the fault of France, it was the fault of the U.S. for printing too much paper money, and the U.S. general public and politicians have not yet learned our lesson.

Gold is money, because of its fundamental nature
Gold is the perfect commodity for exchange for the following reasons:
Gold is liquid and easily traded, with a narrow spread between the prices to buy and sell (about 3-5%).

Gold is easily transportable, because it has a high value for its weight.

Gold is money because it is divisible, you can divide it into coins, or re-melt it into bars, without destroying it.
Also, gold is interchangeable. It can be substituted for another piece of gold with no hassle.

Gold is also nearly impossible to counterfeit, as genuine gold is easily recognizable.

When measured by weight, gold is easily countable, and verifiable.

Gold is money because it is a great store of value. It is not subject to decay, rot, or rust.

Gold has an intrinsic value, because it is rare, highly desired by the world over, and is a luxury item.
There is not a single other commodity with those attributes, except, perhaps, for silver. Since gold is too valuable to be used for small transactions, there is potentially more monetary demand for silver. When gold becomes money again, silver will be desperately needed to make change.
About 10 years ago, M3 was about $4 trillion, and silver was at $5/oz. By the spring of 2009, M3 is exceeding $14 trillion, and silver is at $13/oz. Relative to the recent increase in money supply, silver is cheaper now than it was at $5/oz.!
Here's why silver is a better investment than gold:
Silver has all the same monetary properties of gold, and more!

The historic price ratio of silver to gold shows that about 10 ounces of silver would buy one ounce of gold, a 10:1 ratio. Recently, the ratio is about a 70:1 ratio (with silver at $13/oz., and gold at $1000/oz.) As the silver to gold ratio returns to historic values, from 70:1 to 10:1, you may make over 7 times more money investing in silver, than gold!
Silver prices may rise to exceed the 10:1 ratio, for the following reasons:
More than all of the silver produced by the mines each year is consumed by industry, which leaves little to no room for substantial investment demand. Investment demand for silver is a tiny $1 billion per year. A small increase in investment demand will drive prices sky high.
Most silver is produced as a by-product of mining gold, copper, zinc, or lead. Higher silver prices might not substantially increase the amount of silver mined each year. Consider, in 1980, when silver prices went up to $50/oz., less silver was mined than in 1979!
Higher silver prices may not cause much reduced demand. Why? Because most silver consumed by industry is used in tiny quantities in each application, such as in film or electrical contacts, therefore, rising silver prices will not easily slow down growing industrial demand.
Additionally, as paper money continues to falter, people will buy silver and gold without regard to price, or they will buy simply because prices are going up! Because many investors today are momentum investors, and won't be able to ignore the gains!
Each year, silver mines produce about 650 million ounces of silver. 200 million ounces come from recycling and about 100 million ounces come from investor or government sales. That's a total of about 1000 million ounces. Of that total:
about 42% is consumed by industrial use

about 28% consumed by jewelry

about 20% consumed by photography

about 5% consumed in coins and medallions

That's 95% of total available silver each year! This implies either a "surplus", or "investment demand", of about 5% total. At $20/oz., that's only $1 billion per year of net investment demand.
Since the 1950's, silver use and consumption, has made silver more rare than gold, in above ground, refined and deliverable forms. Estimates suggest there are 200-300 million ounces of refined, above ground silver available to the market at the present time. There are about 125 million ounces of silver at the NYMEX, the big commodity exchange in New York. The ETF SLV has about 180 million ounces.
Each silver contract at the NYMEX is a promise. There are too many contracts, too many promises to deliver silver that may not exist. Each contract is for 5000 ounces. There are often over 200,000 contracts for 5000 ounces, that's a total of 1000 million ounces of silver promised to be delivered. With recent market trends of defaults and bankruptcies, these contracts are at risk of default. Yet the exchange has only about a third of that in real silver. How can they promise to deliver more silver than exists? If they fail to deliver silver, then confidence in the world's entire financial system may collapse. Industrial users of silver may have to shut down their factories. To prevent this, users will bid silver prices much higher.
Due to the risk of default in silver futures contracts, I suggest that you avoid buying futures contracts, avoid options, and avoid storing your silver with anyone else! Take delivery of your silver, and put your silver in your own safe!
Despite silver's intrinsic properties as money, silver began to lose its status as money starting in the late 1800's, as nations stopped using silver, and started using only gold as money. Over 100 years of this "demonetization" has caused a serious drop in silver's value, and this trend is about to be reversed as investors re-learn that silver is a great store of value because of its intrinsic properties.
As paper money continues to waver, the neglect of silver's use as money will end. Once again, silver will be valued based on other measures of value, such as a day's wage, or a ratio to gold. If silver exceeds its historic value - as I expect it will - due to the scarcity - from its importance in electronics and photography - then perhaps a silver dime, a silver quarter, or a silver dollar will be worth far more than a day's wage, as it once was.
How high will silver prices go? You do the math on what a day's wage should be, and you tell me!
Will you be hurt if silver and gold prices rise? Not if you own some! Remember, honest weights and measures in commerce produce prosperity.
But you must act to benefit from this information.
Don't wait for silver to rise before buying it. Silver prices could rise by over $20/day to exceed $100/ounce at any time if large funds or billionaires buy with desperation.
Nervous or Knowing? Paper Gold Changed to Real Deal ~ Patrick A Heller, Market Update
Nervous or Knowing? Paper Gold Changed to Real Deal
By Patrick A. Heller, Market Update
July 21, 2009

Other News & Articles:
On July 14, Greenlight Capital, the hedge fund that had been the largest shareholder in GLD (the largest gold exchange traded fund), revealed that it had disposed of its entire holding of 4.2 million shares of GLD (effectively about 420,000 ounces of gold worth almost $400 million) and replaced it all with physical gold.
This is an extraordinary move for any financial company. You can be sure that other hedge funds are studying this move to understand the profit motive behind such a strategy. They are probably poring over all the loopholes in the prospectuses of the various gold exchange traded funds looking for what they may have missed or not given serious consideration. If, and it is only if right now, any other hedge funds take a similar step, we could well see the floodgates open for the demand for physical gold.
CIT Group, which provides loans to almost a million small and medium size businesses, has to make a debt payment of $1 billion on Aug. 15. It doesn't have the resources to do so and has retained a major law firm to prepare for possible bankruptcy. Last Friday it was announced that Goldman Sachs and JPMorgan Chase had been appointed by the U.S. government to try to come up with a rescue package for CIT Group.
Why Goldman Sachs and JPMorgan Chase? Simple - the Federal Deposit Insurance Corporation may not have enough assets to bail out CIT. In fact, whether or not CIT goes under, several analysts now expect there will be enough bank failures over the next few weeks (added to the 53 bank failures in 2009 through July 10) that the FDIC will run out of assets by the end of August. Should this occur, I'm confident the federal government will find some way to shore up FDIC, since the alternative is to risk instant catastrophic bank runs in the United States.
Actually, before the end of September, there is a growing risk of a "bank holiday" similar to what was imposed by President Roosevelt in 1933. I cannot give a probability for this event, but it is not zero. Should there be a "bank holiday," account holders would not be able to access the funds in any of their accounts for an indefinite period. Even worse, there would be no access to safe deposit boxes. Any cash or precious metals stored in bank vaults would, therefore, also be out of reach for an indefinite period.
Two weeks ago, HSBC, a bank with one of the largest depositories of precious metals in the United States, notified its customers for whom it is providing gold and silver custodial services that it is getting out of that business. According to some of my company's customers, they have been told by HSBC that they must arrange to either quickly remove their holdings or to sell them. It does not make sense for a bank to abandon such a profitable activity. There are multiple reports that investors who purchased COMEX April 2009 silver contracts and asked for delivery are still waiting for delivery from HSBC. Such contracts were all to have been delivered by May 29. I don't know the whole story of what is happening at HSBC, but whatever is going on worries me.
On Friday, Citigroup reported a supposed second quarterly profit of $4.3 billion. Actually, the figure included a $6.7 billion after tax profit from its sale of Smith Barney and also a $1 billion paper write-up of the value of impaired assets. If you exclude these one-time events, which are not part of operating activities, the bank lost $3.4 billion for the quarter. But that is not the news people saw in the headlines.
Similarly, Bank of America on Friday reported second quarter profits of $2.42 billion. However, this figure included the one-time pre-tax profit of $5.3 billion from its sale of shares of China Construction Bank. Absent this event, Bank of America also would have reported a quarterly operating loss.
In a statement released last Friday, Bank of America CEO Ken Lewis said, "Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010." This is absolutely not a prediction of good news over the next several quarters.
Last Thursday, former Treasury Secretary Henry Paulson testified before the House Oversight and Government Reform Committee. He admitted that he had threatened Ken Lewis last December about Lewis's intention to back out of Bank of America's acquisition of Merrill Lynch. "I further explained to him that, under such circumstances, the Federal Reserve could exercise its authority to remove management and the board of Bank of America. By referring to the Federal Reserve's supervisory powers, I intended to deliver a strong message."
The Commodity Futures Trading Commission announced that it may consider limiting the size of commodity trades that are not done as legitimate hedging by, for instance, mines and agricultural producers. At first glance, this measure appears to strike against the two or three large U.S. banks that have huge COMEX short positions in gold and silver. However, other analysts have pointed out that such limits could prevent the Chinese and Japanese central banks from buying up so many COMEX gold and silver contracts that they could demand delivery and force the COMEX into failure.
As time goes on, it becomes more likely that we will see major drops in the values of paper assets, including those purporting to represent ownership in the value of gold and silver. I think time is running out to readily acquire physical precious metals, either by an outright purchase, or by conversion of gold or silver certificates or ETF shares or commodity contracts. In the past week, my company enjoyed a major surge in customers (especially first time buyers) purchasing physical gold and silver. We have heard similar stories from other coin and bullion dealers. Some premiums have even increased slightly. It may be prudent to take action sooner than later.
Additional notes:
The pending legislation to audit the Federal Reserve, which if enacted, would likely disclose exactly how much gold the U.S. government still actually owns versus the amount it claims to own is touching a nerve with the public. The section of my NumisMaster essay last week that discussed the "dirty trick" used to block passage of this legislation appeared in a slightly modified form as a Viewpoint in the July 20 issue of the Lansing State Journal ( Within hours, reader comments were being posted online.
On July 21, look for the debut of the Liberty Gold Card. This is a major credit card (either VISA or Mastercard, I don't remember which) where charges to it are paid to the merchant from gold stored in a Swiss vault. For the merchants, the cards will work the same as any other charge card. When the charge is processed, the amount will be converted into a claim against the customer's gold holdings at the bank.
History of Silver, Part III: Inventories Gone! ~ Jeff Nielson
History of Silver, Part III: Inventories Gone!
by Jeff Nielson June 17, 2009
For nearly 5,000 years, the price ratio between gold and silver has averaged approximately 15:1. This number is very close to the 17:1 ratio which represents the natural occurrence of the two elements in the Earth's crust. It is interesting to note, however, that through most of history the price ratio has favored silver.
In the last century, that ratio has rapidly, if unevenly risen. As of this moment, the gold:silver price ratio is once again nearing 70:1. Given the historical data, the natural assumption to make is that the world must be practically overflowing with silver for the price ratio to have gotten this skewed. In fact, this couldn't be further from the truth.
In the modern era of silver production, annual mine production now amounts to more than 600 million ounces per year. However, while industrial and investment demand for silver are soaring, production is leveling off. Annual production in 2008 only increased by roughly 2%, despite the price of silver reaching its highest level in nearly thirty years.
Annual production is almost certain to decline this year. While the ratio varies year-to-year, roughly 2/3 of the silver that is mined is a "by-product" of the mining for other metals - such as copper, lead and zinc. With base metals production dramatically reduced this year due to a temporary plunge in demand, it is virtually impossible for silver production to increase.
One of the unique aspects of gold, as a commodity, is that almost no gold is "consumed" (i.e. used up) in any of the applications we have for gold - either now, or throughout history. As a result, if a concerted effort were made, almost all the gold that has ever been mined could be collected, and melted down into bullion.
This is not the case with silver. Silver is not simply a much more versatile metal than gold, it is the most versatile of all metals (see "Increasing demand for Silver comes from MANY sources"). In recent years, there have been more new patents issued for products containing or using silver than with any other metal. Because of this amazing versatility, most of the so-called market "experts" (especially in North America) have branded silver an "industrial" metal.
In a follow-up commentary ("Silver's WIDE range of uses continues to push demand higher"), I discussed one of those new industrial applications: in polyester sportswear. The popularity of this material is soaring because silver's anti-bacterial properties dramatically reduce bacteria build-up on the skin - which dramatically reduces odor, since it is bacteria which actually create the odor when we sweat.

There is another aspect of silver which separates it from virtually every other commodity: in most of the countless "industrial" applications of silver, silver is used in trace amounts - amounts too small to be recovered. Referring to the previous example, 1,200 tons of silver (each year) are used to fabricate 20 million tons of polyester sportswear. There are two hugely important economic implications to be drawn from this fact.

One of these implications has been discussed by numerous, precious metals commentators (myself included). Silver is "consumed", literally. Thus, every year, we permanently lose large amounts of silver, and permanently alter the supply ratio between gold and silver.
Polyester sportswear already consumes 1,200 TONS of silver per year, which (at 32,000 ounces per ton) works out to over 38 million ounces of silver permanently consumed every year - in just one application. To put this into context, there are supposedly only 600 million ounces in total, global inventories at the moment.
However, as I pointed out in "Silver market fundamentals distorted by bullion-ETF's", there is every reason to believe that this number grossly exaggerates actual inventories. As will be evident by the end of this commentary, silver's amazing versatility has not made it less "precious", but rather more so.
No one is more tireless in his research into silver than Ted Butler. I have cited him often, in my own previous commentaries, and do so again. In Part II, I noted that Butler had made a comparison between current silver inventories today and those of 50 years earlier (thanks to "Bullion Bulls Canada" contributor, Claude, for bringing this to my attention).
In 1959 there were 9 BILLION ounces of known, global stockpiles (at a time when our planet had less than half the current population). Butler observes that 90% of that silver is now gone - even making a generous allowance for 100's of millions of ounces of "scrap" silver which could appear on the market (given a significant increase in price).
Thus in a world with twice as many people, and with an ever-increasing number of uses for silver, we have 90% less silver to divide among us. How can this possibly make silver "less precious"?
Just ask the "experts". Because silver is an "industrial metal" this means it's no longer a "precious metal". This is nonsense. If we discovered a cure for cancer tomorrow which required gold as an input, would anyone suggest this made gold less of a "precious metal"? Obviously not.

Beyond that, is the even less-intelligent 'wisdom' of the market: silver is no longer deemed to be a "precious metal" because "people don't think of it as a precious metal, any longer". Who are these people?
Certainly not the people of China and India, who make up nearly 1/3rd of the global population, between them. Yes, in India, rising incomes fueled a greater level of demand for gold for several years, because people could afford it. However, now, with the price of gold having risen rapidly, and the price ratio with silver so extremely warped, the pendulum is swinging back in India - with silver demand rising while gold demand is stagnant.
It's certainly not the people of Germany who no longer see silver as a precious metal. Silver developed deep cultural significance to Germans when they experienced the hyperinflation of the Weimar Republic - and silver became a crucial store of wealth and real money for an entire population.
It's not the people of Mexico, where only a couple of years ago the government openly contemplated the possibility of reintroducing a silver currency to replace the peso.
In the United States, the Constitution still defines the U.S dollar as a measurement of silver. Of course, many deem this an archaic document which hardly anyone pays attention to any more.
The fact is that apart from a lot of "experts", it's hard to find any significant group of people who don't think of silver as a precious metal. Yet, with the price ratio of gold and silver currently nearing 70:1 the actual amount of available silver and gold in the world is likely no more than 6:1 - with many actual experts (including Ted Butler) convinced that this ratio is even lower.
This brings me back to the second, huge implication derived from the fact that silver is consumed (in most applications) in trace amounts. This is something which (to the best of my knowledge) has not yet been discussed by anyone else.
It is basic economics that when an input of production is used in small amounts, then the price of this input is very "inelastic". To explain this without the economic jargon, I'll refer one more time to the example of polyester sportswear. As I pointed out earlier, 1,200 tons of silver is enough to fabricate 20 million tons of polyester.
This means that (by weight) silver only represents a little more than 1/20,000th of the inputs in this product. Thus, if the price of silver were to double, this would have such a tiny impact on the final price of sportswear that demand would not change at all. In reality, the price of silver could likely increase 1000% with little to no effect on demand.
Obviously not all applications of silver use such tiny amounts of silver, but with the rapidly increasing use of silver in nanotechnology, many of these new applications will use even smaller amounts of silver.
Therefore, unlike almost any other commodity on Earth, even with an extremely large and rapid increase in price there will be a relatively small decline in demand.
The world is currently facing the largest silver-shortage in centuries. Meanwhile, the Manipulators have deceived the market into believing that global silver inventories have tripled in a little more than three years - because the phony, "paper promises" of (so-called) "bullion-ETF's" are included in those inventories!
Intelligent people will soon begin to realize (in growing numbers) that with the current dynamics of the global silver market, it is totally absurd to even suggest that current inventories could have increased by 200% in 3 years. As this realization grows in size (and vehemence), several events are certain to occur.
First of all, large investors are going to start hoarding silver again. Think: "Hunt Brothers" except that now there is hundreds of times as much capital floating around - and 90% less silver.
Secondly, pressure will mount on the various forms of silver fraud currently taking place. Consider this: it is the Manipulators (the fraudulent, bullion-banks), themselves who are telling us that 2/3 of global silver inventories are held in bullion-ETF's.
Meanwhile, these same criminals are holding a short-position in the Comex market somewhere greater than half of global inventories (based upon the Comex "Commitment of Traders" report). This raises the obvious question: what is backing this short position? Obviously (by definition), the Manipulators cannot hold more than 100% of all silver.
If they could somehow manage to cover their own short positions, there assuredly would be little or nothing left for the bullion-ETF's - sitting there with their paper promises.
When the current surge in demand for silver turns into a frantic rush to grab as much bullion as possible while it is priced at no more than ¼ of its current value, that will be the end of the Manipulators - and the end of all those "bullion-ETF's" who don't physically possess their own bullion.
The only remaining question is whether this will occur next decade, next year, next month, or next week. Got silver?

[Disclosure: I hold no position in bullion-ETF's. I do hold "physical" silver.]
History of Silver, Part II: The Great Build ~ Jeff Nielson

History of Silver, Part II: The Great "Build"
by Jeff Nielson June 14, 2009
In Part I of this series, I provided a brief exposition on the birth of silver mining, and explained how and why silver came to be universally considered a "precious metal" (and "money") by humanity.
In Part II, I will provide an outline of the development of silver mining, and the huge growth of global, silver stockpiles which accompanied such production-growth - and which ended in the last century, when modern technology came up with an endless list of new applications for silver.
As humanity entered the "Middle Ages", production of silver had been hampered by two constraints: the lack of new deposits/mines to offset the depleted reserves of older "First World" mines, and the primitive technology of that era - which made only rich, near-surface deposits feasible to mine.
Concurrently, two changes occurred, which allowed a dramatic increase in the amount of silver produced in the world. First, in the 15th century, the Americas were "discovered" (a very large historical "slight" to the indigenous peoples of these continents, along with the Nordic explorers who had reached North America centuries earlier).
Nevertheless, it was the highly-publicized expeditions of 15th century explorers (and those who came after them) which allowed the economic "development" of the Americas (i.e. the exploitation of their vast wealth of natural resources). Among the most-highly prized resources of the "New World" were precious metals.
Meanwhile, with science emerging from the Dark Ages, improvements in mining technology allowed a vast expansion in the production of silver and other metals. Bolivia was the first New World target for silver mining. According to data from the Silver Institute, between 1500 - 1800 A.D. Somewhere around 1 billion ounces of silver were extracted there.
However, while Bolivia was the initial destination in the Americas for silver mining, Mexico soon became the largest silver producer. Over the same time frame, there was an estimated 1.5 billion ounces of silver produced in Mexico, with the majority of that production occurring in a single century: from 1700 - 1800.
The third, principal producer in the New World was Peru. Silver mining in Peru did not commence until significantly later than in Bolivia or Mexico. However, by 1600 it is estimated that annual production in Peru had reached roughly 3 million ounces per year, with more than half a billion ounces extracted by 1800.
To provide some perspective as to how important these new centers of silver production were, from a global perspective, between 1500 and 1800 these three New World producers accounted for roughly 85% of the global silver trade - despite the fact that in 1500, silver production was just beginning there.
By 1800, silver production was moving north - into the United States. Large deposits were discovered in the United States, most notably the "Comstock Lode" in Nevada. With these new mining capitals providing vast quantities of ore for miners, and with the steady improvement in mining methods and technologies, global production continued to rise. By the latter half of the 1800's, annual production fell somewhere between 40 to 80 million ounces per year.
Naturally, gold mining and the global production of gold followed a similar trajectory to that of silver mining (but that's a whole story unto itself), and large stockpiles of gold and silver were accumulated in the form of jewelry and other ornamental applications (in the hands of private entities), and large inventories of bullion (held by governments) - which formed the basis of our global monetary system (in an era when people actually possessed real "money").
Throughout this era, the amount of mined and refined metal continued to increase even faster than global population growth. This continued on into the early part of the 20th century. And then things changed!!
In our own modern era, rapidly evolving technology and mass-production of an enormous array of goods altered silver's value in our society from being only a precious metal (and "money") to becoming an ever more important "industrial metal".
Noted silver researcher and commentator, Ted Butler, provides us with some information as to how huge those global stockpiles were, at their peak (in "A good time to buy Silver"): "In 1959, there were about 9 billion ounces of silver bullion-equivalent in the world population of 3 billion...a per capita amount of 3 ounces for each of the world's citizens..."
In just 50 years since then, these numbers have changed enormously. The paradigm where silver production produced global stockpiles of silver which continually rose faster than our global population ended - permanently. This was a market trend which had been intact for over 2,000 years.

To find out how dramatically this trend has been altered (and reversed), you will have to read Part III (or do your own research!). In the conclusion of this series, you will see why "silver bulls" are so rabidly enthusiastic about the future - for those who are buying silver bullion products (real bullion - not "paper promises"), and accumulating positions in quality silver miners now.
Gold may seem to shine brighter for most people looking at precious metals investments today. However, the Metal of the Moon is poised to "eclipse" the Metal of the Sun in the future, and most likely, the very near future. When that day arrives, silver will completely shed its label as "poor man's gold".
[Author's Disclosure: I hold "physical" silver, and shares in several silver mines.]
History of Silver, Part I: the Metal of the Moon ~ Jeff Nielson
History of Silver, Part I: the Metal of the Moon
Written by Jeff Nielson
Wednesday, 10 June 2009 09:02
This is the start of a three-part series.
Part I discusses the dawn of silver mining and the recognition of silver as a precious metal - and "money".
Part II looks at the gradual build-up of global silver stockpiles over a period of centuries
Part III looks at the rapid depletion of those stockpiles.
Somewhere around 5,000 years ago, humanity began to master the process of extracting "precious" metals from ore. According to the Silver Institute, the first "sophisticated processing" of silver occurred with an ancient tribe known as the Chaldeans - at approximately 2500 B.C.
There were several properties of gold and silver which attracted our primitive ancestors. First, there was the aesthetic beauty of these metals. Secondly, these two metals were particularly malleable - making them ideally suited for a wide range of artistic and ornamental uses.
Finally, these two metals were scarce (or "precious"), but not so scarce that it was impossible to amass large quantities of these metals. It was these considerations which soon led to gold and silver becoming the first universally accepted "money" to have been devised by our species (and today they stand out as being the best forms of money ever devised by humanity).
Glittering gold was equated with being "the metal of the Sun", while shining silver was considered "the metal of the Moon". Thus, our "primitive" ancestors quickly established the first gold/silver price ratio. Each year, there were thirteen cycles of the moon for each full, cycle of the sun, thus the original price ratio between these two, precious metals was 13:1.
Science has subsequently determined that silver is approximately 17 times as plentiful in the Earth's crust. Therefore, our early ancestors either stumbled upon a ratio that just happened to coincide very closely with the natural abundance of these metals, or they had a much more sophisticated understanding of geology than we give them credit for. For roughly 4,000 years, the average gold/silver ratio was 15:1. These ratios are especially interesting today, given that the price ratio is currently, extremely skewed in gold's favor - at more than 60:1.
For roughly two thousand years, the center of silver production was the "Cradle of Civilization": the various ascending (and descending) cultures which were located around the perimeter of the Mediterranean Sea.
A thriving, silver trade among these tribes developed, reaching its zenith some time after the 8th century, B.C. Most of this early, silver production came from the Larium mines - located near the ancient capital of Athens. Annual silver production in this era was estimated at about one million ounces per year.
As the mines of Larium were gradually depleted, ancient production shifted its focus to newly-discovered silver deposits in Spain. For the next 1,000 years (until roughly 800 A.D.), Spain became the leading source of silver in the world.
With production of the earlier mines steadily declining, the production from Spain did little more than offset lower production from the Larium mines, and the handful of other, early sources of silver. Thus, total production leveled off at a plateau of approximately 1.5 million ounces per year.
While silver was never equated with gold in value (due to its greater abundance), throughout the first 2500 years of silver production its status as "money" never diminished. This is yet another piece of data to "file away", given that the majority of market commentators today (especially in North America) disparagingly refer to silver as simply an "industrial metal".
The "logic" of these neo-"experts" is that because silver also has superior chemical and metallurgical properties in countless applications (in addition to its aesthetic beauty) that this somehow makes silver less "precious".
Such infantile reasoning would never have fooled our ancestors who lived a thousand years ago (or 2,000 years ago, or 3,000 years ago, or 4,000 years ago...). In fact, with most of the global stockpiles accumulated over a period of 4,000 years now consumed (literally) in various "industrial" applications, silver has literally never been more "precious" than it is today.
An Answer to the Biggest Question Investors Face Right Now ~ Chris Weber
An Answer to the Biggest Question Investors Face Right Now
By Chris Weber, editor, The Weber Global Opportunities Report
October 8, 2009
One year ago, in the October 1, 2008 issue of the Weber Global Opportunities Report, I used as a title "The Immediate Danger is Deflation."

My view was, to put it briefly, that the world's central banks can try to inflate as much as they can, by creating money and supplying it to banks. But if banks are afraid to lend it out, or are rebuilding their capital base, and if businesses and consumers are afraid to borrow - and rebuilding their own balance sheets, meaning saving more and spending less - then there is not much that central banks can do.
One year later, I am sorry to see no real evidence that things have changed. If anything, consumers are even more afraid to borrow and spend now than they were a year ago. The heightened threat of becoming jobless may have a lot to do with this. Those who borrowed madly in the past are now in a kind of hangover. They are now trying to save more.
The markets themselves are bearing witness to this. If they feared inflation, interest rates would be much higher than they were a year ago. Instead, they are lower. A year ago, the US 10 year T-note yielded almost 4%. Today it yields just 3.17%.

The Commodities Index, CRB, has fallen from 325 to 259 in the same year. Though the Dow Jones has risen sharply since last March, remember that last October 1 it was close to 11,000, not the 9,700 area it is now. London's FTSE is up a bit: from 5,000 to 5,100. But that's just 2%. Japan has fallen from over 11,000 to 9,800.

Nearly every piece of real estate can be purchased for less money today than was the case one year ago. In other words, cash has been king this past year. And that is another way of saying that deflation dangers have still not gone away.

But one area has done better than the rest. Let's turn to precious metals.

One year ago, gold was $860. Now it is $1,042. Silver was $12.30 last September 30. Today it is $17.43.

For my readers who have been with me for years, I know I have been repeating the same mantra for all that time: Have the core of your net worth in a mix of cash and precious metals.

For my new readers, I repeat this, and point out that this approach has saved a lot of money that would otherwise have been lost. Both cash and precious metals buy more than they did one year ago, two years ago, and even farther back. I meant it as a cautious method to conserve money in perilous times, but it has turned out to be pretty much the best approach one could have.

There are those who are absolutely certain that the future will be high and even hyperinflation. There are others equally certain that deflation will be our eventual outcome. To me, it seems like nothing has changed in the 35-plus years I've been in this business. Back when I started out, there were the same arguments, the same certainty on both sides. Only the names of the combatants have changed.

For me, let's just say I'm not smart enough to know what the outcome will be. The only thing on earth that I am absolutely certain of is that I will die; that indeed everyone alive today will one day die. Speaking only for myself, I may die tonight or I may live 50 more years.

Beyond that, I am reasonably certain that history shows that paper money not backed by gold or silver loses value over time. One million dollars 50 years ago was a lot of money. It was even more money 100 years ago. Today, well, it's not chicken feed, but let's say it doesn't buy what it did 50 years ago, or even 20 years ago.

But in terms of assets like stock and property, one million dollars (or euros, etc.) buys more than it did one year ago.

This may just be a temporary development; it may be the start of a new trend. I am not going to bet everything I have on either one or the other. Instead, I've been protecting myself from both. And that's why I have been owning and building cash right along with the precious metals I own.

I have cash in case I am wrong about inflation vaulting the price of gold and silver higher. I have gold and silver in case I am wrong about the value of holding cash. I have tried to protect myself against both inflation and deflation. I own some real estate in case that goes up. It would make sense for me to own some general stocks that would do well if the world economy does well too.

In other words, my watchword has been to protect yourself in case you are wrong: to protect yourself against being hurt by any eventuality. This was my view one year ago, and it remains my view today.
To me, the future is unclear right now. We stand on a kind of knife edge. On one side lies deflation, and on the other inflation. I have tried to hedge myself against both, and yet not be hurt if either happens. The recommended combination of cash and precious metals has not only done well in the past year. It has done well since 2000.

And while I am watching developments every day, I see no reason to change my approach, which has worked so well. Of course, it has worked in the sense that it has given me more money in my net worth than a decade ago. But more important, it has enabled me to sleep well during all that time - a decade which has been very turbulent and disappointing for many if not most. And to me, this gift is priceless.

Good investing,
Chris Weber
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