Silver to Zero Revisited
The first article on silver ever published on the internet by Silver Investor was titled "Silver to Zero". It was devoted to the silver shorts, those bearish on silver. The crux of the article was based upon commodity trading in silver and the perpetual pattern of the short interests willing to sell enormous amounts of paper silver, that significant price appreciation would not exhibit itself until the physical silver supply was clearly nearing zero inventory. Thus, the title of the article is not about when silver will reach a price of zero but rather when will available inventories of silver be gone.
It was explained that being a silver bull has not been easy; in fact it has been one of the most trying experiences of my life. My independent market research verified that something was amiss in the silver market. For several years the logic of an ever dwindling supply coupled with a static price made no sense.
I thanked Mr. Ted Butler for his work that finally shed the much needed light on the topic. Ted's work on the leasing situation provided the piece of the puzzle needed. His work explained how physical silver could enter the marketplace at such a low price and the silver deficit could be fed year after year. His work is extensive and if you do not believe the silver (and gold) leasing "problem" by now you never will. My main point then and still is succinctly stated as "I just do not see silver prices rising until the actual physical bullion supplies reach critically low levels".
Because of my research I was able to predict that the critical time frame would be the summer of 2003. This time frame was first discovered by me over twelve years ago. Of course, each year the new data was studied I performed the calculations again. Year after year it appeared that the critical time frame was the middle of 2003. This gave me the confidence to publish this prediction on the internet so a verifiable record would be established.
Further, it was established that before any significant price run up in silver, the five dollar U.S. level had to become the support area, rather than resistance. Taking these two items together it was then forecast that the five dollar level should be penetrated during the summer of 2003.
The following information was sent out to our paid subscribers in July 2003.
July 23, 2003
An amazing event took place today in the silver market. The downtrend for the last two decades was taken out decisively today. Look back at the May issue and take a look at chart!!
Silver closed at $5.06 in New York on Wednesday, as metal prices moved higher across the board. The 27-cent, 5.6% gain marked a one-year high.
In order to see where we are going it is sometimes a good idea to take a look back. Back in January 2002, I stated that silver would need to break the $5.00 barrier three or four times. This statement was unpopular at the time for several reasons. One, with my extremely bullish stance on silver, it seemed way to conservative at the time, especially in view of the fact, that an article had been published on the gold-eagle website a month earlier stating that silver should be trading for $15.00 the ounce by Christmas 2002.
Today we all witnessed silver moving through the $5.00 resistance area for the third time since I stated my analysis over a year and a half ago. The way we went through the five dollar level brought me great joy. See below:
Notice the strength right from the open of today's market. However, what is really impressive is how the silver market closed. It closed on the high, and was moving up during the last minutes of trading.
OK, let me digress a bit. Last July (2002) silver made the high print for the year at $5.15 so we are still under that level. I do expect to see further strength in the silver market for the next two or three days. Friday's close will be important for silver shorts and it is my best guess that Friday will be the day to watch. The shorts will want to see a poor performance on Friday, but the market may have another idea.
All that have followed my work know that I have predicted that silver would show strength in the summer of 2003. Well here we are, and I would consider today's move as STRONG!
The phone calls and emails were significant today, and the main question most wanted answered is whether this is the move that not only takes us above $5.00 but keeps us above five dollars? Certainly, it is impossible to know.
I do feel that we will test the five dollar level or below one more time. I spoke with Franklin Sanders a few moments ago to check my thinking and we both agreed that these types of moves usually come back to or near to the breakout point. Remember, that is usually not always, bull markets have a tendency to allow as few participants onboard as possible.
Since most readers are in the market already, timing is not an issue. However, there are always new subscribers that are anxious to know what they should do. I will remain consistent. It was in my last update. If you are not in the market yet, stand aside for now, and I will address some prudent strategies in August.
However, if you are not in the physical silver market yet, DO NOT WAIT BUY IMMEDIATELY!!
To be clear, for silver equities or futures, I recommend that you use patience. Stand aside for now, if we see a good pullback you will receive an alert. If I am wrong there are still many opportunities ahead.End of July Alert
At the time it was explained that inventories held by investors, banks, refiners, fabricators, and others have been consistently drawn down over the past decade or so. It is generally recognized that at least 1.2 billion ounces of silver have been used this past decade. The average annual shortfall is approximately ten million ounces per month. So, the most important question is not the trend, but how much silver still exists in inventory
This initial article missed the mark on the "guessed" amount of total silver bullion inventory. In fact in later essays it was explained that the CPM group basically stated that these estimates were educated "guesses" and the true amount of silver bullion world wide was in the range of 300 to 500 million ounces.
The main point then and the main point now, that I want every reader to understand more than any other in this article is a fact that there is actually less silver than gold available, as hard as that may be to comprehend. A large money manager could buy up enough contracts on the COMEX to control all the truly visible silver bullion on a whim. I doubt this will happen because the CFTC rules are extremely favorable to the short side. However the point is not whether it will happen, the issue is this, and a very small amount of capital is required to control the market.
Someone is thinking, what do you mean, there is less silver than gold? Six or seven times as much silver is mined than gold on an annual basis. Yes, indeed more silver is mined per year than gold. However, remember of the 500 million ounces of silver mined in the world per year, all of it is used and a deficit must be met from above ground silver inventory. This condition has existed for fourteen consecutive years now.
I could try and extrapolate when, silver inventories will reach zero, but the fact is, no one knows. Futures' trading has a significant bearing on the price of silver and this has been verified over and over again the past three years since this first essay appeared. This has been taking place for well over a decade, and many efforts have been made to alert the authorities of the fact that a significant amount of silver is held in long contracts that far out weigh the physical amount of silver on the COMEX.
What is so interesting is the longs or buyers of silver have the upper hand but few realize it or know what action is required. The commodity business is a zero sum game for every winner there is a loser. Prior to the recent sell off, the open interest in silver by the non-commercial category was over 51,000 contracts which represents about 255 million ounces of silver. This is against a total inventory of 112 million ounces.
However, the Shorts were able to cover on a big down day in silver, in fact the over 25,000 contracts were closed out on the twenty six cent drop. So, not much has really changed since I penned my first internet article about silver three years ago. The price of silver is set by Futures trading in the silver pit on the NYMEX. The deficit continues few are interested in silver as an investment and the day when silver will truly shine as one of the best investments of the first decade of the new millennium has yet to be verified.
I stated in my first article that action must be taken by the reader. Many are familiar with the phrase that knowledge is power, however in reality, knowledge is knowledge. Applied knowledge is power, and you must apply what you know and believe about the financial markets in order to be successful investor. Thus, I repeat myself.
What is the reader to do with this information? Act of course, buy physical silver and store it where you can go and visit it from time to time. So, go ahead and beat the shorts at their own game, look ahead and buy physical silver for cash now!
David Morgan (Silver-Investor.com) is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here http://www.silver-investor.com/joinfreelist.html