Silver, the trade that was easy to see

Posted by Ray on November 4, 2010 under Main | Be the First to Comment

There have been lots of things happening in the silver market lately all of which reinforce my bull case for being long. Long time readers know I have been pounding the table of silver for the better part of 2 years now.  The one aspect of the market that I have concentrated on is the supply/demand side of the equation. It stands to reason that with some 2 billion souls entering the middle class they will all want cell phones and other modern toys. All of these toys involve silver to some extent in their production.

The supply of silver is not unlimited and very few miners solely look for the shiny metal, it is typically a byproduct of copper and gold mines. Silver is also not recycled the way many other metals are which means it is used once and never again and that is unlike many other metals that are usually recycled. I believe that the reason people believed silver had an unlimited supply is because it was so cheap, but now we find out, I have known for awhile, that the prices were manipulated by 2 big banks, HSBC and JPM. This is not conspiracy talk anymore as 2 lawsuits have been filed and Bart Chilton has admitted the manipulation.

Moving forward I believe we will continue to see higher prices as the shorts cover in the silver market. I also think that COMEX does not have enough supply to meet physical demand for the metal if investors want to take possession, which they will eventually. That means there may not be enough silver at any price to meet demand. It sounds unbelievable, but it could happen. I would not bet the farm on the COMEX thing being the driver, but I would bet the farm on Asia and India driving demand well into the future.

The other very obvious factor in the recent rise in silver prices is the dollar. In the US we have to ask if silver is really climbing or is the dollar just tanking so hard making it more expensive to us. Frankly, it is both things happening at once which should worry my fellow dollar bulls out there. I think the dollar will break its all-time low in the near future thanks to Mr. Bernanke. You cannot print as much money as you want without repercussions and the repercussions of massive printing are the dollar losing much of its value. Out of everything happening out there right now the dollar’s slide is what scares me the most and it should scare you too.

Silver is the barometer of inflation, in my book at least, and the rise in price is signaling trouble ahead. Everyone believes the dollar will always be there in its current form and nothing like Zimbabwe or Argentina can happen in the good ole US of A, but bad things can and do happen here all the time and with an obscene monetary policy that Brazil, Russia, China and now Germany are criticizing bad things are sure to happen here. I would be a buyer of silver not just to profit from it, but to hedge my wealth with it. That means owning it physically, not in a brokerage account or in storage somewhere, but where I can see it. If the dollar breaks its all-time low things may get ugly and as we buy up our locally produced products we will see what the inflationary pressure is like when we are forced to buy, suddenly, very expensive Chinese goods.

Doom and gloom you are thinking, maybe, but I prefer to say this is a realistic situation now. I know I would rather be prepared instead of just hoping things will work out. In my experience hope is a wonderful thing, but hope isn’t reality. Reality is that thing outside your window and our reality may just turn into a nightmare and suddenly moving from the city to the country, farmland specifically, with a shot gun and you silver and gold hoard may suddenly make sense. After all, this is the advice some hedge fund managers gave their wealthier clients in recent years.

Buy silver on any dip and I am sure that in 5 years, or much sooner, you will be extremely happy. As for equities, well, if you think these gains are real you are delusional. Ben is simply propping up prices to make people think they are wealthy, but if the dollar keeps falling at some point the rise in equity prices will not offset the loss of purchasing power of your dollars, just ask any Zimbabwean about that. They had the best performing market over the last 10 years, but would you be holding their currency? I think not. Silver, gold or other commodities are your hedge, not stocks and not TIPS.

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Are precious metals being manipulated?

Posted by Ray on March 30, 2010 under Main | Be the First to Comment

I am what some would lovingly, or not lovingly, call a gold bug, but I find that term somewhat offensive. I simply believe in precious metals based on supply, demand and the Federal Reserve’s horrible track record of continually printing money. Essentially, if precious metals guard against inflation and the Fed tries to keep inflation at +2-3% a year it just makes sense to have some money in precious metals under normal circumstances, but add in a little financial crisis and demand far exceeding actual supply and metals are a sure thing, in my opinion.

Ever since I first decided to research gold and silver, those were the first metals I ever bought, I found countless threads and blog posts about the price being manipulated by the Fed and major banks. I figured that most of this was just rhetoric by my fellow bugs, but after awhile it started to make sense. Of course, there was never any real proof, just USGA reports showing the U.S. exporting way more gold than it imported and COMEX inventory reports showing far more metal being traded than could ever be delivered. There was also some obscure Federal Reserve minutes, from the 1970’s, talking about selling gold on the open market to suppress the price. Finally, there was Greenspan saying that the Fed was ready to sell as much gold as it could to drive the price down, which makes sense since gold did poorly in the 1990’s while money supply grew at an unprecedented rate.

It was all very interesting, but there was no actual proof. Sure, we had GATA with their data points and going to the CFTC to lodge complaints, but nothing ever was done. It finally appears that the rumors and conspiracy theories may have been right after all. Last week GATA dropped a bomb on the public by announcing it had a whistleblower that proves JP Morgan and other banks are suppressing the price of gold and silver.

Andrew Maguire, the whistleblower or Exhibit A, sent a few emails to the CFTC shortly before the non-farm payroll data was released a couple months ago. Mr. Maguire clearly outlined, 2 days in advance, that JP Morgan (JPM) was shorting silver in the thinly traded after hours market driving the price down. He told the CFTC that there were 2 possible outcomes, the payroll numbers would be good and silver would go down or the payroll numbers would be bad (which is bullish for metals) and the price of silver would go down. Sure enough, 2 days later, the price plummeted and Mr. Maguire traded emails again to ensure the regulator received them, he did.

It appears that an investigation is being started which would be the first manipulation investigation since the Hunt brothers 3 decades ago. What is striking is that one of the largest banks in the world has been implicated in what could turn out to be the manipulation case of the century, if the claims are true, and no media source has picked it up. I even brought it to a reporter friend of mine for a lead, after days of not hearing anything, not even from CNBC, but nothing yet. If this is true there are large implications for the precious metals market and it is very bullish.

I always figured that if the price was being suppressed, more sellers than buyers, eventually the gig would be up because you cannot sell more than you have forever. Eventually someone will want their metal along the way which means the banks would have to deliver and buy it in the open market. If that happened the price would go through the roof, but, again, this was all speculation until the whistleblower came forward. Somehow, I know this might be hard to believe, I am sure the CFTC will find no wrong doing anywhere and everything will continue back to the way it was, dysfunctional, but if the allegations are true prices will surely rise rapidly.

It is crazy to think that silver, especially silver, would be trading so low considering it is rarely recycled and silver is used in everything from the common mirror to your cell phone. By all accounts most of the easy silver has already been mined and new mines are just coming online now, but they take a long time to get into full production. Let us not forget that silver is usually mined s a secondary metal to begin with, usually gold or copper is the primary metal being looked for. I have seen some estimates that silver reserves will be depleted in 5 years, but no one really knows and that is an aggressive figure to say the least. What I do know is that silver is in high demand, above ground reserves are declining and governments used to be net sellers of the metal, but now are net buyers of it, all of this is very bullish. My point being is prices are cheap and regardless of whether these accusations are true or not one should hold some precious metals in their portfolio, silver being a core holding.

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