Part II: Look for the Silver Lining: The Coming Bull Market in Silver
C. SILVER LEASING: MANIUPULATION IN THE SILVER MARKET
QUESTION - With a 10-year supply/demand shortfall, declining silver production, and evaporating above-ground supplies of silver, what has kept the silver price from rising sharply over the past year or so - along with oil, platinum, palladium, and a large group of other global raw materials?
ANSWER - Manipulation via a powerful group of financial institutions and central banks which have leased huge quantities of silver to mining companies and speculators such as hedge funds. Central banks earn interest by leasing their silver (via large bullion banks such as Goldman Sachs and Chase Manhattan, who act as broker/intermediaries) at low interest rates to silver mine producers (or speculators).
These entities sell the silver to raise funds for operations (or speculation) putting downward pressure on the price of silver. Their plan is to pay off the loan out of their silver production, or, in the case of the speculators (such as a hedge fund) by repurchasing at what they hope will be a lower price. These lease/sale arrangements (promoted by some of New York's biggest bullion banks) initially put temporary downward pressure on the price of silver, but are in effect creating a huge short position in silver - held by silver producers or the large speculators. Eventually these positions must be covered, creating huge future upward pressure on the silver price.
[ED. NOTE: This is almost exactly what the central banks, bullion banks, gold mining producers, and large speculators have been doing in the gold market the past few years to hold the price down. (See the January '98 and June '99 issues of MIA for a detailed explanation of this manipulation technique. If you have not seen these reports, you may call 800-525-9556 and obtain a free copy of same.
In both the silver and gold "bear operations," derivatives are utilized. The silver leases, however, are far more dangerous to both the lender (the central bank) and the borrower (the mining company or speculator) because the available supply of silver to repay the loans is so much smaller than that for gold.]
The size and scope of these lease/sales of silver are huge compared to production and must be paid back from an inventory which is virtually non-existent. If (or when) the central bank lenders call in their silver (or gold), the silver (or gold) market will explode because the mining companies cannot produce enough silver (or gold) in one year to cover their multiyear "shorts." In effect, there is too much paper and too little silver, and in effect, there is the biggest short position in silver in world history. Eventually this will trigger the biggest price explosion in silver in world history - probably even larger than in the 1970s.
It should be remembered that when you are short a stock, a bond, a commodity, etc. you have to purchase (or buy back in) the item to "cover" or close out your short position. If the price is higher than where you shorted it, you purchase at the higher price (i.e., at a loss).One of these days, a Buffett, a Soros, a Bill Gates, an Arab oil producer (or group of same), a Red China, etc. is going to start buying silver, and buying, and buying. As the price begins to rise it will drive the shorts to the wall, they will be forced to buy into a rising market to cover their positions and the silver price will explode.
Today, silver mines (and large speculators) have sold over a billion ounces short in leasing deals. There is another 750,000 ounces (or more) short in silver futures. That's about 2 billion ounces of a commodity that is already in short supply that has been shorted. There are about 993 million ounces (less than 1 billion ounces in above-ground supplies) and those are being eaten up by industrial consumption and are held in part bylong-term holders. In other words, they are not readily available for covering shorts and even if they were, 993 million ounces couldn't cover almost 2 billion ounces in short positions.
It is bizarre for the size of the silver derivative position to be larger than the "real" silver market (i.e., twice as large as all above-ground supplies and four times annual global production). It is worth repeating: There is a bigger short position than all the silver that exists in the world - twice as big! A huge squeeze (perhaps the biggest in world financial history) is in the making!
A classic example of a mining producer that has been shorting both gold and silver is Barrick. As of mid-2000, it was short 12 million ounces of gold and 14 million ounces of silver. Putting these gold shorts in perspective, the Bank of England sells 800,000 ounces of gold at their auctions. Barrick's gold short position is 15 times greater.
In both gold and silver, demand has been rising, production has been falling, and the price has been dropping. That is impossible in a "free market"! If this lease/sale bear operation were not underway, experts this writer respects believe that gold would be $500 to $600 per ounce today and silver would be $20 to $30 per ounce.
However, by artificially suppressing the price of both metals, the upside explosion will be far greater when free market forces finally overwhelm the gold/silver bears (as they did in the 1970s, followed by a 25-fold upmove). Some metals experts believe that the silver squeeze (which will be far more severe for silver than gold - because the above-ground supplies to manage or negate the squeeze are not available in silver) will ultimately propel silver to $50 to $100 per ounce.
[ED. NOTE: While that seems preposterous looking at today's $5 silver and recent price inactivity, the idea of $52 silver in 1970 (when silver was trading near $2) seemed even more preposterous. It became a reality by 1980. Similarly, 18 months ago, when oil was trading near $10 per barrel, who would have ever thought that by late 2000 it would have risen to almost $40 per barrel. We live in extreme times, as the meteoric rise and cataclysmic fall of the Internet stocks have recently proven.]
ECONOMIC IMPLICATIONS OF A SILVER SQUEEZE - There are severe economic implications of a silver squeeze. Industry is already running short of silver with most industrial users only having a few days of silver inventories on hand. Businesses totally dependent on silver for product production could shut down. Huge users like Eastman Kodak, the auto or aerospace companies will simply have to pay any price and pass it on to their customers.
[ED. NOTE: Information in this report was compiled from a number of excellent sources, which we believe to be reliable, including The Silver Institute, Franklin Sanders Money Changer, James R. Cook and Ted Butler. Ted Butler is a contributing writer on www.gold-eagle.com. For further research by Mr. Butler see www.butlerresearch.com]
A supply/demand shortfall of epic proportions has developed in silver - far greater than in the early 1970s just before the 25-fold rise in silver. However, unlike the 1970s, the above-ground supplies of silver are miniscule today and will for all practical purposes evaporate over the next year or so.
The silver price, like gold, has been artificially suppressed by central bank/bullion bank/mine producer/big speculator bear operators, via a complex series of leases, silver sales, use of derivatives, etc. - effectively creating a 2 billion ounce global short position. This is in a world with less than 1 billion ounces in silver inventory and only a little over a half billion ounces of annual production - all of which is spoken for by industry (plus another 335 million ounces over and above production).
Without these machinations by greedy market manipulators and desperate mine producers, silver would likely be $20 to $30 per ounce today. When the short squeeze eventuates, these prices are likely to be reached or exceeded; Central Banks will lose their positions in silver (in whole or part); the Wall Street bullion banks will lose heavily; and the heavily leveraged silver mine producers and big Wall Street speculators will go to the wall (i.e., many of these mining companies and hedge funds will go under), just as Long Term Capital Management would have, but for a huge Fed-engineered bailout. Silver is truly the world's most undervalued ("straw hat") investment today - as Bernard Baruch would say today.
WHAT ARE A FEW POTENTIAL TRIGGERS FOR A SHARP UPTURN IN SILVER PRICES - FOLLOWED BY A MASSIVE SHORT SQUEEZE?
1) A continued upturn in global inflation;
2) An oil price explosion that triggers a public run into inflation hedges;
3) A Middle East war (i.e., Israel versus the united Arab states);
4) An oil embargo by OPEC and/or the diversification of petro-dollars (i.e., one to five percent) into gold and silver (all of which happened in the 1970s);
5) Red China or India (both traditionally heavy silver consuming nations) suddenly become aggressive buyers;
6) A few large investor/speculators (i.e., Buffett, Soros, Gates-types) ala Bunker Hunt in the '70s, begin to take large aggressive silver positions;
7) A severe bear market in U.S. stocks, whereby investors begin to look for a diversification from stocks and a safe haven [ED. NOTE: What if one-tenth of one percent of the $13 trillion in stocks and mutual funds went into silver as a safe haven or diversification - it would be explosive!];
8) An accident in the derivatives market which takes down several large players, (such as the LTCM debacle in Sept '98, which almost took out the 13 largest banks and brokerage firms in America).
The very conservative CPM group has forecast that silver will rise 63 percent to $8.35 an ounce by the end of 2001. Do stocks and mutual funds have that potential in 2001? This writer strongly doubts it! From January 1 to October 18, 2000, the S&P 500 was down 8.65%; the Dow Jones Industrials were down 13.24%; the Nasdaq was down 22.8%; and the NIKKEI 225 was down 21%. It should be remembered that precious metals (for about 2/3 of a total cycle) are contra-cyclical to the stock market. [ED. NOTE: Year to date (through 10/17) AT&T was down 52.8%; AOL was down 30.7%; Microsoft was down 56.9%; Lucent was down 68.3%; Motorola was down 54.5%. The list of eConsumer 50 COMPANIES (I.e., Internet stocks) look like the 1929 crash.]
WHAT TO DO:
Silver should be aggressively accumulated at present low prices for the biggest potential rise since the 1970s. One-third of a total portfolio should be in precious metals and 30 percent of that should be in silver. That is about 10 percent of your entire investment portfolio. (The remaining two-thirds of that metals position should be in gold semi-numismatic coins and platinum coins.) And at least 50-60 percent of your total portfolio should be in Treasury bills or other conservative interest bearing investments, such as tax deferred annuities.
At this writing, there are some excellent buys in junk silver coins (pre-1965 bags of 90 percent silver dimes, quarters, or fifty cent pieces), bags of circulated silver dollars, and Morgan silver dollars. Other silver coins will emerge as good investment vehicles as well over the next few months.
A WORD OF WARNING:
With silver prices down, and overall investor interest still quite low, there is nevertheless already a severe shortage in silver coins developing. Many have been melted down and used up in industrial applications, photography or jewelry since the '70s; there are still hundreds of thousands of investors who do understand the times and are holding onto their silver for "the big ride" (including the likes of Warren Buffett); and the investors who are buying silver coins now are soaking up much of the available supply. In 6 to 12 months, most silver coins may not be available at any price - or only at much higher prices.
This writer strongly believes that early 2001 will bring a severe financial crisis in America and abroad that will be very bad for the stock market but very positive for precious metals. Continued high oil prices (or an oil spike), war in the Middle East, or a precipitous drop in U.S. stocks could be the trigger. A U.S. recession is already standing in the wings and will greet the new president. It is time to reposition your assets in a very conservative configuration.
A strong silver position should be part of that equation. Very high silver demand and a severe shortage combined with prices so low that silver mines are shutting down computes to an explosive situation which argues for much higher prices.
For information on silver alternatives, purchasing bags of junk silver or
silver dollars, call International Collectors Associates at 1-800-525-9556
We will send you a free information packet.
[ED. NOTE: If you still have a portion of your assets in the stock market or equity mutual funds (a position this writer feels is very unwise) liquidate a portion of same and place it in silver now! Silver coins can also be used in IRA, Keoghs, SEPS and other retirement funds.]