SilverAndGoldShop.com - News
Note from SG&S:
I've compiled a couple of articles together from this source this week because I felt they were both informative and apropos to the rise/fall/rise of silver spot we've seen in the last week. Many of you have commented on this; and, as investors, we all scratch our heads and say, "What's going on here?".
From my readings, it's clear the volatility is a reflection of 1) what's happening with US currency devaluation 2) what's going on in Asia, and more specifically, China and 3) what's happening with the manipulators (short-sellers) of precious metals in this country. (I will provide more info about this manipulation next time).
Without going into a lot of detail, let me summarize most expert writings of the last week: gold and silver are showing a lot of volatility, which is to be expected due to the issues of destabilization & devaluation of US currency, and we may still see some downward trend for the short term. However, longer term, there will be an upturn of price again and a climb to new heights… hang on for the ride! Silver will follow Gold… and often out-perform it.
As for my observations since I've been in this business: People tend to purchase NOT when price is low but when price rises. I find this inexplicable and counter to what conventional wisdom would dictate. Let me speak frankly when spot rises, Tea Party Silver will be forced to increase our prices as well. (We've had to do this in the past week, but have dropped prices back to previous rates now as spot has dropped back). The prudent thing to do would be to purchase on these down-turns… and on upcoming sales and introductory rates.
China: The World of Gold and Silver Demand Is Changing
Aug. 31, 2009
When the Chinese decide to invest, it causes ripples across the world...
TWO YEARS AGO on August 21 2007, China's government allowed its citizens to invest in an entirely new asset. It allowed them to invest in Hong Kong-listed stocks.
Hong Kong is a special region of China. It's one of the most dynamic, capitalistic places on Earth. The move from the government was a move toward "investment freedom" for the Chinese people.
On that day, Hong Kong's benchmark stock index rose 8.74%. Over the next two and a half months, it skyrocketed from 11,000 to over 20,000. It was a chapter in a story that you should get used to over the coming years; when the Chinese decide to invest in something, it causes giant ripples across the world. And this sort of situation is starting to happen again, this time in Precious Metals, and especially Silver.
The Chinese have a centuries-old affinity with Silver. It began in the 1500s with the explosion of trade with Mexico via the Spanish galleons. These sailing ships were the super-tankers of their age. They made one voyage per year, carrying tea, silks, and spices from Asia to Mexico. The ships returned to Asia with Gold and Silver. After the Chinese threw off imperial rule in 1912, the country used Silver money. Today, the Chinese word for "bank" (Yin Hang) means "Silver Okay". And now that China is becoming one of the richest, most dynamic capitalistic countries on Earth, this story is about to take a modern twist. The Chinese want Silver again.
Thanks to a decade of wealth accumulated by regular Chinese citizens, there is plenty of cash to chase good investments. As the famed global investor Jim Rogers points out, these people are the best capitalists in the world. They are great savers. Chinese people want their money to work for them...so they invest.
I recently watched a China Central Television piece on Gold investing. According to the program, there are some 400 million households in China, with an average ownership of about 0.1 ounces of Gold. The average Gold ownership in most emerging countries works out to about 1 ounce per household. The Chinese are beginning to make up that gap. From 2006 to 2007, domestic demand for Gold rose 60% to around 700,000 ounces. Experts continue to urge citizens to put 3% to 5% of their net worth in Precious Metals; and that is a conservative suggestion. Chinese government statistics show the average urban Chinese household has about $1,300 in disposable income to invest. While that doesn't seem like much, when you add up all those households, there's about $36 billion that could move into the next big investment opportunity - Precious Metals.
The government is now actively encouraging its citizens to Buy Gold and Silver. They recently unveiled Silver bullion for investing. The premise is that Gold was approximately 50 times more expensive than Silver in 2007...but is now 65 times more expensive. Silver is a bargain. The government is promoting Silver bullion as an investment for regular citizens. And remember, a bunch of Chinese students laughed at US Treasury Secretary Tim Geithner this year when he claimed the dollar was safe. The Chinese know the value of real assets...real money like Gold and Silver.
What does this mean for Silver prices? It's impossible to say. But here's a little math that interests me. According to the Silver Institute, demand for Silver in 2008 (for industry, jewelry, and investing) was 832 million ounces. At today's price, that's an $11.5 billion market...or about one-third the annual discretionary capital available in China alone.
The most important thing to understand about this situation is the Chinese people become freer every time the government loosens up a restriction. These people couldn't legally buy Silver bars before. Now, they can. They're becoming richer...and they will continue to do so for decades.
Add this to a world already waking up to the grand currency debasement of the West, and you have a recipe for the continuation of the big bull market in Silver and other Precious Metals.
Don't Take Our Advice …
Sept. 21, 2009
The last time I signaled a major move pending, short-term technical indicators pointed downward, entirely contrary to a long-term bullish fundamental outlook that has only gathered strength in the meantime. After dipping to $870 per ounce in the weeks that followed, Gold held the $900 line throughout the notoriously weak summer months, and now has forged ahead to over $1000 Oz testing it all time highs while Silver has delightfully moved up some 20% plus in the same period of time. Both metals are well positioned to forge new all-time highs.
Precious-metal investors are tracking a hurricane, with a deteriorating U.S. dollar as its eye, a destructive wind of toxic derivatives swirling about, and a downpour of continuing reverberations for the economies in its path. It doesn't look so good from our perspective for the more traditional markets.
While the degree of certainty over a hurricane's track decreases as one projects further into the future, I believe the opposite holds true for Gold and Silver. I claim no prescience over tomorrow's Gold or Silver price, but my research continues to support an expectation that gold will surpass the $2,000 mark before this storm subsides and Silver will reach its all time high, well over $50 Oz.
I could point to technical analysis of Gold and Silver's contracting Bollinger bands and inverse head-and-shoulders formation, or the fascinating discussions and Elliott wave analysis that suggest an imminent breakout for both, but in truth Gold and Silver are about as predictable in the near term as Robin Williams with a movie script. Still, the irreverent speculator inside me can't help agreeing with John Embry, chief investment strategist for Sprott Asset Management:
"I think there is a very small probability that Gold will fall below $900 in the very near term. Monetary debasement is driving investment demand, western central banks are running out of available supply, eastern central banks, who are awash in dollars, want to buy and mine supply is cratering. We are close to lift off and the Gold price at worst will trade at several multiples of the current price."
Seasoned precious-metal investors maintain a staunchly long-term focus, and constantly hone their fundamental understanding to inform and tweak price expectations as the bull market roars onward. Choosing price targets will always be an exercise in speculation, and as with any storm those forecasts will remain subject to change, but that long-term focus is instrumental to success the way satellites are indispensible to meteorologists.
The truth is folks that you just 'gotta' step up to the plate and get involved. Buy into this market and create yourself a little sense of urgency. Fire all the guns up and begin to get motivated about the transfer of wealth that is occurring right now in front of your eyes. Silver and Gold are at the forefront of that transfer of wealth and I want you to take advantage of that.
Another feature that enhances the value of silver as an industrial metal is its increasing scarcity. We are not seeing this visibly yet in the investor marketplace, but the experts are watching this and commenting on it with increasing frequency.
The following information from The Silver Institute details the many ways in which silver is valuable as an industrial metal. As an investor, you may draw your own conclusions.
The Many Uses of Silver
Silver is leading a revolution in technology and medicine. The white metal's unique bacteria-fighting qualities are becoming more and more critical in healing conditions ranging from severe burns to Legionnaires Disease. In fact, the most powerful treatment for burns is silver sulfadiazine, which is used in every hospital in North America to promote healing and reduce infection. Everything from surgical threads to bandages and dressings to doctors' coats and catheters are utilizing silver. In hospitals and homes, silver in ductwork provides maximum sterile atmosphere.
Silver is the best electrical conductor of all metals. Because it does not corrode, its use in electrical and motor control switches is universal. A fully-equipped automobile may have over 40 silver-tipped switches to start the engine, activate power steering, brakes, windows, mirrors, locks and other electrical accessories
Silver is also one of the few elements that improve the efficiency of chemical reactions. It is the only catalyst that will oxidize ethylene gas into ethylene oxide, the building block for polyester textiles used for clothing and specialty fabrics, and melded items like computer keyboards, electrical control knobs, domestic appliance components and Mylar tape used for all audio, VCR and recording tapes. Nanotechnology applications using silver are growing -- in computers, communications, miniature motors and switches.
Silvered windshields in homes, cars and office buildings reflect away some 70% of the solar energy that would otherwise pass through, thus reducing the load on air conditioners. The U.S. Department of Energy's Energy Star Program has spurred 50% increase in silver-coated glass in past six years, translating to 350 million square feet of glass, or five million ounces of silver per year.
Silver is the ideal industrial material. No other metal has silver's combined strength, malleability and ductility, or facilitates electrical and thermal conductivity as well, or can reflect light and endure such extreme temperature changes. Jet engines of today and tomorrow can depend on silver-coated bearings for their performance and safety. All major jet engine manufacturers utilize these high-performance silver bearings, which provide critical fail-safe lubrication required by the Federal Aviation Administration.
Printed circuit boards (PCBs) use silver for connecting paths of electronic circuitry. PCBs are essential to the electronics that control the operation of aircraft, automobile engines, electrical appliances, security systems, telecommunication networks, mobile telephones, television receivers. Most computer keyboards use silver membrane switches.
These low-current switches are also found in control panels of cable television, telephones, and devices using digital electronics. Superconductivity is the power transmission of the future and silver makes it faster and more effective. Silver-jacketed superconducting oxide wires can carry more than 140 times the electric load of copper wire with less than 1 percent of the weight. This wire utilizes about 1,000 ounces of silver per mile. Silver already improves performance at lighter weights and size in cables, motors, generators and transformers. Silver oxide-zinc batteries provide higher voltages and longer life for such consumer goods as quartz watches, cameras, and electronic tools.
The ease of electrodeposition of silver accounts for silver's widespread use in coating. The plating thickness of some items, such as fuse caps, is less than one micron although the silver then tarnishes more easily. Coatings of two to seven microns are normal for heavy duty electrical equipment. Silver plating is used in a wide variety of applications from Christmas Tree ornaments to cutlery and hollowware.
Brazing & Soldering
Silver facilitates the joining of materials (called brazing when done at temperatures above 600oCelsius and soldering when below) and produces naturally smooth, leak-tight and corrosion-resistant joints. Silver brazing alloys are used widely in applications ranging from air-conditioning and refrigeration equipment to power distribution equipment in the electrical engineering sector. It is also used in the automobile and aerospace industries.
Silver, being a rare and noble metal, was a more desirable medium of exchange than beads, feathers, shells, and the like. Its use as a medium of exchange is known throughout all recorded history. Coins, in the sense of having an authenticating stamp on them, began to appear in the eastern Mediterranean during 550 B.C. By 269 B.C. Rome adopted silver as part of its standard coinage. Silver became the trading medium for merchants throughout the civilized world. (Gold being reserved for governments and the wealthy.) Today silver coins continue to be the medium of exchange wherever paper is not acceptable, for example, in parts of Africa and the Middle East. One example of a trade coin is the Empress Maria Theresia Taler, first minted in Austria in 1741. It was standardized in 1780 as 28 grams and 833/1000 silver (the remainder copper). Some 370 million of these 1780 dated coins have been minted up to 1996 and a large proportion remain in circulation today.
Although a wide variety of other technology is available, silver-based photography will retain its pre-eminence due to its superior definition and low cost. From it's very outset, silver halide has been the material that records what is to be seen in the photograph. As little as 4 photons of light activate silver halides which amplify that incident light by a factor of one billion times. In today's photography, silver halides are coupled with dyes that bring the color of the world around us into permanent record. An estimated 196 million troy ounces of silver were used worldwide in 2003 for photographic purpose.
Silverware & Jewelry
Silver possesses working qualities similar to gold but enjoys greater reflectivity and can achieve the most brilliant polish of any metal. To make it durable for jewelry, however, pure silver (999 fineness) is often alloyed with small quantities of copper. In many countries, Sterling Silver (92.5% silver, 7.5% copper) is the standard for silverware and has been since the 14th century.
Mirrors & Coatings
Silver's unique optical reflectivity, and its property of being virtually 100% reflective after polishing, allows it to be used both in mirrors and in coatings for glass, cellophane or metals. Everyone is accustomed to silvered mirrors. What is new is invisible silver, a transparent coating of silver on double pane thermal windows. This coating not only rejects the hot summer sun, but also reflects inward internal house heat. A new double layer of silver on glass marketed as "low E squared" is sweeping the window market as it reflects away almost 95% of the hot rays of the sun, creating a new level of household energy savings. Over 250 million square feet of silver- coated glass is used for domestic windows in the U.S. yearly and much more for silver coated polyester sheet for retrofitting windows.
Silver paste is used in 90 percent of all crystalline silicon photovoltaic cells, which are the most common solar cell, according to the Photovoltaic Technology Division of the U.S. Department of Energy. And all silicon cells used in space to power satellites use silver in the form of evaporated metal to make the electrical contact. The electricity generated by photovoltaic cells is highly reliable. As soon as sunlight strikes, power begins to flow. Sunlight striking silicon cells generates electrons, which the silver conductors collect to become a useful electric current. The conductive silver, which also enhances reflection of the sunlight, is applied in the form of a glass paste with a minimum of 90 percent silver along the top and across the bottom of the silicon crystal. When fired, the silver forms a complete circuit collecting solar energy and conducting it to the power supply line. A group of roofing-tile solar cells can generate sufficient power to provide a house and also fill batteries to supply power after dark. Silver plays yet another role in the collection of solar energy: efficient reflection of solar heat. Silver is the best reflector of thermal energy (after gold).
An increasing trend is the millions of on-the-counter and under-the-counter water purifiers that are sold each year in the United States to rid drinking water of bacteria, chlorine, trihalomethanes, lead, particulates, and odor. Here silver is used to prevent the buildup of bacteria and algae in the filters. Of the billions of dollars spent yearly in the U.S. for drinking water purification systems, over half make advantageous use of the bactericidal properties of silver. New research has shown that the catalytic action of silver, in concert with oxygen, provides a powerful sanitizer, virtually eliminating the need for the use of corrosive chlorine
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
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.
Silver: Past, Present & Future Part II
THEODORE BUTLER'S SPEECH AT THE PHOENIX SILVER SUMMIT 2009
Early March 2009
I want you to do me a favor. I want you to play a little game of imagination with me. It may sound silly at first, but try to play along, as I want to make the central point of the day. I want you to imagine that in this room, right there, in the space between you and me, is a giant elephant. Not a regular elephant, mind you, but the biggest elephant ever documented. A 26,000 pound African Bush Elephant, 14 feet tall in the shoulders, with absolutely massive tusks. I looked this up, so I'm not misstating the dimensions. Not only is this the biggest elephant ever recorded, it's loud, agitated and it stinks to high heaven, flapping its ears and swinging its giant trunk. And it's right there and has been right there the whole time. I want you to imagine that you've been sitting there, listening to me talk about silver with this 13 ton elephant right there, interrupting my speech all along and scaring the dickens out of you. And the kicker is that we're all trying our best to ignore the elephant. Pretending it's not there, speaking around it. We're all trying to act like it's perfectly normal to be in a room speaking about silver with this giant elephant and trying to act like it's not there, when it clearly is there.
The African Bush Elephant in the room is the silver manipulation. But whereas the elephant is imaginary, the silver manipulation is as real as rain. But like the imaginary elephant, most are doing their best to pretend that the silver manipulation doesn't exist. Not me, of course, as the manipulation is the most important pricing factor in silver, and I write on it continuously. I sense I have convinced many thousands of readers that silver is manipulated and maybe many in this room. But it is absolutely amazing to me how so few analysts and industry people publicly speak out on the manipulation.
I'm talking of people working for the financial firms and banks whose job it is to follow and write about silver. I'm speaking of those in the mining industry and in particular the Silver Institute. I'm not complaining about this lack of manipulation talk. Maybe at one time it upset me to be so alone, but not anymore. Now it's just amusing. I read everything there is to read on silver and 95% of what I read never refers to the manipulation in any way. I find that bizarre. I find that to be the real life equivalent to my previous imaginary exercise of the elephant and pretending it's not in the room.
I'm not demanding that anyone agree with me about silver being manipulated. I'm human and I reserve the right to be wrong. Besides, it's better for me to be the only one making this the main issue. In the past, many did challenge and attempt to refute my allegations of manipulation, especially those in the mining industry, which never made much sense. But as the issue has become so specific as to the documented facts about the concentration, I'm not even hearing lately anyone explaining why I am wrong or answering simple questions, even on the Internet. If there is one thing I have learned about the Internet, because of its shield of anonymity, many love to tell you why you are wrong and they are right, and in generally a rude manner to boot. But I've asked the question for 6 months for how can one or two U.S. banks being short 25% of the world silver production not be manipulative, with no response. I was seriously considering running a contest with a reward for every legitimate answer.
Stranger still in the collective avoidance of even talking about a potential market manipulation is that the prime regulator, the CFTC, has initiated a formal investigation into my allegations of manipulation in silver. This is the third silver investigation in less than five years, and the first by their Enforcement Division. This has never occurred in any other commodity. Regardless of the outcome of the investigation, the fact that there is another investigation is extraordinary, in and of itself. Nothing could be a more important issue than whether any market is manipulated or free. You would think that there would be wide discussion on the potential outcome or the merits, pro and con, on the investigation itself. Instead, mum's the word. That so many establishment analysts and mining and industry people can pretend that everything has been completely aboveboard in silver is more bizarre than my elephant in the room example. Especially now that the CFTC has stated that they are investigating.
Like all manipulations, the silver manipulation has resulted in an artificial price level. Unlike most manipulations, the one in silver is a downward price manipulation. Admittedly, that does make it harder for folks to grasp the issue. But the saving grace to this manipulation is that those not involved in the manipulation can take advantage of the artificially depressed price. The special essence of this manipulation is that outsiders can profit from it in a simple and easy manner. All you have to do is buy and wait.
Like all manipulations, the silver manipulation will end suddenly and the price must move sharply in the opposite direction of the manipulation. In this case, the price of silver will explode upwards, once the manipulation is terminated. Those holding silver when that occurs will be rewarded. This is not complicated.
But what happens if the CFTC's investigation ends with them, once again, finding that no manipulation exists in silver? It doesn't matter. The silver manipulation must end, suddenly and violently, to the upside, no matter what the CFTC says or does. I wouldn't be so naïve as to depend on the CFTC for doing the right thing. The price, having been depressed so low and for so long, must result in a shortage. The shortage has been clearly evident in the retail market for more than a year. Not as clearly, but present nevertheless, are strong signs of a wholesale shortage in the unreported shorting of SLV shares and other wholesale indications. When this shortage hits in earnest, no one will be able to stop the sudden demise of the silver manipulation.
You might further ask, "If the manipulation in silver will end regardless of what the CFTC may or may not do, why do you (meaning me) persist in focusing on this issue? Why not just sit back and let it happen? Well, I have no choice in waiting to let it happen, so I guess the question is whether to keep quiet about it. The answer to that is while the manipulation presents the strongest reason for buying silver, it is a market crime of the highest order. There is no more serious market crime than manipulation. It is the equivalent to Murder One, Treason or kidnapping.
In addition to providing the most compelling reason for buying silver, the manipulation is a crime in progress. As such it offends my sense of what is right and wrong. Being the best reason for buying silver and being a crime in progress are not mutually exclusive. Just like recommending that people buy silver and write to the regulators and lawmakers complaining about the manipulation is mutually exclusive. And I am gratified that so many have taken the time to contact the regulators, as it has really made all the difference in the world.
In conclusion, the supply/demand set up in silver, which has evolved over an incredibly long period of time, has been one continuous process promising to culminate in an explosion in price at some point. Quite simply, we are rapidly approaching that defining moment when there just won't be enough physical material to go around at anything but rapidly escalating prices. Those escalating prices will encourage and drive others, including industrial consumers, to enter what should become a buying frenzy. Superimpose upon that the sudden destruction of a decades-old downward price manipulation and you have all the necessary ingredients for price event that will be referred to forever.
Thank you and I'd be happy to take any questions you might have.
S&GS Notes: As promised, this article delves into the short positions in precious metals. Ted Butler is probably THE most prolific author / expert on this subject. I try to provide articles from a variety of sources, but I've sent out several of his articles, simply because he is so knowledgeable and articulate about this subject, a key source in silver investing.
By: Theodore Butler
4 September, 2009
Trouble with you is the trouble with me,
Got two good eyes but you still don't see.
Trouble ahead, trouble behind,
And you know that notion just crossed my mind.
Casey Jones Grateful Dead
A remarkable story recently appeared in a leading Chinese business publication that threatens to upend the world of commodities. It seems that the government of China may be preparing the way for state-owned investment funds to walk away or default on OTC commodity derivatives contracts held with foreign banks if those contracts cause loss to the funds. A good discussion of this issue can be found here, along with links to the original story and a related Reuters article.
Even more amazing is that the obligatory follow-up story, in which the threat of default is invariably denied, actually confirms that China is seriously considering defaulting on selected OTC commodity derivatives contracts. Click here. If there is going to be a default by China in select OTC commodity derivatives, silver is a prime candidate.
What makes the China story so remarkable to me is that it ties together and confirms much of the silver analyses I have published over the years. In addition, it points to the extraordinary situation that presently exists in silver, not just from an investment and regulatory perspective, but also from a view that impacts the strategic interests of nations, including, but not limited to, the US and China. As always, I ask you to decide for yourself based upon the facts and my speculation.
Here are the facts. There is an unusually large concentrated net short position in COMEX silver futures held by 4 or fewer traders, documented by CFTC data. There is no unusually large concentrated position on the long side. Other CFTC data indicate the concentrated silver short position is largely held by one or two US banks, at times reaching 25% of world production. This degree of concentration is unprecedented and not seen in any other commodity. Correspondence from the CFTC to elected officials identifies JPMorgan as the prime holder of the short position, with Morgan having inherited the position in its takeover of Bear Stearns. Requests to the CEO of JPMorgan to deny it holds the large silver short position on the COMEX have gone unanswered.
For years, the CFTC has investigated my allegations of manipulation in silver, and in 2004 and 2008, they denied such a manipulation exists. It is thought they will comment soon on the third investigation, begun a year ago. In none of the three investigations have they contacted me, although I was the impetus behind each investigation. Over the past five years, the silver short position has grown more concentrated. About six years ago, based upon input from my friend and mentor, Izzy Friedman, I first speculated that China was the big short behind the COMEX silver short position.
More recently, in December 2007, I publicly and privately warned the CFTC and Commissioner Bart Chilton of what a disaster it would be if the foreign backers to the short position in COMEX silver decided to walk away from their obligations. In that letter, I wrote;
"…these giant foreign silver shorts represent a grave and unique danger to our country, not just because they hold a controlling position in COMEX silver futures, but also because of the nature of that position.
In its own words, the New York Mercantile Exchange, Inc., (which owns the COMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals. As such, the NYMEX/COMEX is a financial institution important to the interests of our country. The highest regulatory attention should be placed on anything that threatened its existence. The 4 large foreign silver shorts represent such a threat.
If and when these four large traders decide they have had enough of the short side of silver, instead of covering their short positions or delivering actual silver, they could declare force majeure and simply walk away and leave the regulators and NYMEX clearing members holding the bag. Since they are outside the jurisdiction of the Commission, there is, currently, little to prevent this."
I don't know how I could have been clearer in my warning. I don't know how the stories coming from China could highlight those dangers any clearer. Not only is the concentrated short position clearly manipulative to the price of silver, the danger of a default has never loomed larger. Perhaps the recent price action is reflecting that growing awareness. In spite of this clear warning, the CFTC concluded, in May 2008, that there was nothing wrong in silver.
It is important to put the current situation into proper perspective. Here's my take. Sometime around ten years ago, the now-disgraced derivatives powerhouse AIG, through their China connections, convinced certain state-owned companies of that country to enter into massive OTC short contracts on silver. China's growing share of silver refining production was the cover story. The real purpose, however, was to give AIG backing for selling short silver contracts on the COMEX for the purpose of hoodwinking the technical funds into and out of paper positions on the COMEX. This worked like clockwork for years. Pressure from me and many readers, through then-New York Attorney General Eliot Spitzer quietly forced AIG to abandon and transfer their COMEX silver (and probably gold) short position to Bear Stearns, another large clearing firm, like AIG. The Chinese OTC silver short position was assumed by Bear Stearns as a counter-party and Bear Stearns then continued the COMEX manipulation and fleecing of the technical funds and other speculative traders.
The frequent complaints to the CFTC about the outsized short position and obvious manipulative trading activities on the COMEX were rebuffed by the Commission because Bear Stearns, like AIG before them, could show on paper that they had existing OTC offsets with China that "backed" the COMEX short positions. As has been shown in other financial scandals, like the Madoff swindle, bureaucrat regulators are often no match for well-connected and persuasive Wall Street power brokers.
When Bear Stearns collapsed in March 2008 (incidentally at the then-highest price for silver in decades - $21), there was no one willing to take over their giant COMEX silver short position and the offsetting Chinese OTC contracts. Enter JPMorgan Chase. Remember, this was a time of great stress to the financial system and all efforts were directed to quickly fixing problems that arose. The giant silver short position at Bear Stearns was one such problem. With federal government guarantees against loss and criminal prosecution, JPMorgan did assume the role of master of the silver market. All this was revealed in subsequent Bank Participation Reports and in correspondence from the CFTC to various lawmakers. Since that time, JPMorgan has managed the giant silver short position. My speculation includes that Morgan has quietly offset its COMEX short position over the past year and a half with other unsuspecting parties in the OTC market.
What does this all mean and where do we go from here? Get ready for great and growing price volatility. I'll have specific market comments for subscribers over the next couple of days, once the new COT and Bank Participation Reports are released. But this much is clear - the long anticipated default of the massive OTC silver derivatives position by China appears to be at hand. It's hard to imagine a more profound event. All at once, the backing and excuse for the concentrated short position on the COMEX is exposed for the fraud it has always been. No longer can the CFTC pretend that the COMEX silver short position is backed by anything legitimate. Not when China, itself, is saying it may default. So many game changes have emerged in silver over the past few months that it is hard to appreciate them all. These recent announcements by China concerning its future intentions on select OTC commodity derivatives could be the most important of all.
I still have great faith that the new chairman of the CFTC, Gary Gensler, has every intention of doing the right thing and will adjust and enforce legitimate speculative position limits in COMEX silver. The new reports out of China make it more imperative that he do so quickly. The threat from China that it may default on contracts that back the concentrated COMEX short position raises the stakes immensely. Unlike his predecessors, and for the good of the country and market integrity, Chairman Gensler must not ignore these warnings.