How to Corner the Silver Market

December 21, 2001

It can be an interesting study to plan future action based on known facts of the past -- especially in the financial markets. Hence the warning on documentation for nearly all investment vehicles: "Past performance does not guarantee future results."

This is all well and good -- and every astute investor should consistently bear it in mind. However, any market technician will also affirm that, "The trend is your friend." And, as Mr. James Dines states so succinctly, "A trend in motion continues until it actually stops!"

The trend in the precious metals, especially silver, has been down to neutral until very recently. The past few weeks have seen silver move from around $4.00 an ounce to more than $4.40 as this is written. Ten percent in under a month is not a bad move, especially considering the current yield on T-Bills.

If we focus our attention on the silver market of the recent past, the most significant event in the last few years was the announcement of Warren Buffett's purchase of 129 million ounces. During this period, the price peaked above $7.00 an ounce on the spot market. The futures market was in backwardation -- but, most importantly, the silver lease rates went through the roof, indicating that silver that HAD TO COME TO MARKET NOW was bringing a huge premium.

As Ted Butler has emphasized over and over again, the silver price is an indication of the "paper" value of silver, not the value of the actual physical element Ag. How do we know this? Simply from the fact stated above -- that, in times of high demand, the physical metal itself will trade at a premium. If the "paper" and "physical" silver markets were in true equilibrium (as the ten-year price chart erroneously indicates they are), then a large buyer might change the price slightly -- but not to the extent Buffett's physical purchase did.

So, here we are at the end of 2001 -- and history is starting to repeat. Lease rates for silver are moving higher almost daily. To repeat , this means actual, honest-to-God "silver metal" is being bid up by the market. Simple end of statement.

There have been conjectures as to "Who or Whom" might be entering the silver market and causing the new squeeze, but there's no clear evidence so far. Though it wasn't really discussed much by the financial press, not all the silver purchased by Buffett was delivered at that time. It's thought some was leased into the market., so it might be that Mr. Buffett is just now asking for the silver he bought and paid for a few years ago.

Last quarter, during a conference call for a well-known silver mining company, the following question was asked: "According to one of the most well-recognized studies on silver, over 800 million ounces have been borrowed since 1997. Since this same study indicates that much less than that amount of silver is in existence, how on Earth can these loans be paid back?"

The answer was that this is the major enigma of the current silver market.

This paradox is not only worthy of your careful consideration, but it also gives you an idea of how far this market can run to the upside. Remember, when Mr. Hunt was making his purchases back in 1979-80, there were massive silver supplies to draw upon -- and prices still went above $50.00 an ounce. This just is not the case with today's silver supply picture. For example, since Mr. Buffett's purchase represented 2% of Berkshire Hathaway's holdings, and most major investment firms recommend a 5% diversification into precious metals, he is still under invested. Mr. Buffet knows this. So, suppose he was getting nervous about the U.S. Bond market, the unemployment situation, the dollar and his stock holdings, and wanted to bring his portfolio into balance. He would NOT be able to do so!

In other words, it would be nearly impossible for Warren Buffett to buy enough silver to create a 5% position and achieve proper diversification. Why? Because to do so, he'd need to buy roughly 193 million ounces -- but the COMEX has barely more than 100 million ounces to sell.

Let's look back to the issue of trends. It is important to analyze trends because they can give subtle clues to a market's direction and intensity. The major trend since 1997 is simply this: Less and less "paper silver" has been sold year after year! As the physical supply has shrunk, the derivatives market has been unwilling to sell as much on paper. This is significant because it is a clear indication the powers that be are not willing to manufacture as much silver out of thin air as they've been in prior years. Suggestion: Look at the lease rates again. This is an area the market controls. To get real silver -- or, perhaps, enough "real" silver -- how high would the lease rate need to be?

To answer that, let us regress for a moment. Statements have been made, by me and others, that in a financial contraction, the safety of principal is paramount. Are you going to risk your life savings by loaning it in the junk bond market to obtain a higher yield -- or are you going to loan it to a bank or put it in T-Bills, where the return is guaranteed? This principle applies as well to the silver leasing market. Are you going to loan silver for a fat yield, or are you going to hold on to the principal itself?

Most investors want the actual principal -- and, in the current silver situation, they will have to pay up to hold it.

Excuse my rants, but here are some end-of-the-year squawks about the silver market -- and my responses:

  1. Silver pays no interest. True! But how many of those dot-com stocks you bought provided you with a yield?
  2. Silver is too bulky. Maybe, but one of the best silver analysts from 1970 to 1987, Jerome F. Smith, predicted silver would trade for more than gold in our lifetime. So, all you gold owners out there, look at your stack of gold coins, then look at a stack of silver and imagine that the white is worth more than the gold. Would silver be too bulky then?

[I need to go on record here. I personally do not believe silver will trade for more than gold. In fact, I am already on record as having stated in my most bullish scenario that the price might reach a ratio of 10-to-1. That is, ten ounces of silver would be worth one ounce of gold. Mr. Hunt, in 1980, thought the ratio could reach 5-to-1. It didn't get there, but it did reach what I call the classic ratio of 16-to-1. Before I move on, however, the long-term trend needs to be emphasized. In the book, "Money -- Ye shall have honest weights and measures," by Jim Ewart, page 140 has this to say: "Metals-industry analysts suggest we'll eventually see a sharp and continuing increase in industrial consumption of silver. This would drive the FRT price of silver up, thereby moving the gold-silver ratio back toward 16:1. In fact, increases in industrial consumption, and reductions in availability (as mines begin to peter out), may produce an event which has never occurred before: We may come close to running out of an element of matter -- silver."]

3. There is a hidden supply of silver; China will keep selling silver; there is plenty around. China is predicted to continue its growth. Asia trebled its growth rate in 1999. All of our studies show that increasing prosperity in these Asian countries increases silver demand. The demand is in a way that not many can detect, either. As the Eastern world becomes more Westernized, silver is consumed. Just think of all those TV's, VCR's, computers and throw-away cameras. Oh yes, and what about the potential for silver to have investment demand from the Chinese. Why is that so important? Because the silver bears and silver shorts have been dwelling lately on the increasing silver exports from China. We will not dispute this. However, our contention is that silver demand due to Westernization will require not only their existing silver, but perhaps even imported silver at some time in the future.

In conclusion: Only paper silver derivatives and dangerous silver lending are holding down the current price of silver. That will end. And, when it does, the price of silver might double -- or triple -- just as the price of oil did not too long ago.

The question I'm constantly asked is: What is the best way to buy physical silver? The answer is simple: Off the futures exchange. But, while the answer may be simple, the process can be anything but. First, you need to have a commodity account. Second, you would need to pay for the metal in full, and pay some additional fees to the exchange, pay for insurance and, finally, have the metal delivered. Thus, although this is the best method to obtain an actual price close to spot, the price will be more than spot due to the additional fees.

In the January issue of my private newsletter, one of the biggest bullion dealers in the country will be featured. By simply using this dealer, you will avoid many of the problems associated with the commodity exchanges and take delivery. In my view, this is the best method for nearly anyone seriously wishing to get what they pay for.

So, to move back to the title of this piece, how do you corner the silver market? It could be as simple as asking for delivery.

At this time, let me thank all my subscribers for their support and kind words over the past year. It is not easy being an extreme contrarian -- especially when the market does not immediately vindicate your analysis. Happy Holidays to all, and I wish you a silver lining for any tough spots you may encounter in the coming New Year!

David Morgan
December 21, 2001


Mr. Morgan publishes a private newsletter for serious precious metals investors. He hosts the web site: He has been a private economist for over two decades his background in engineering , with an advanced degree in Economics/Finance. He has been interviewed on Don McAlvany's radio talk show, Financial Sense Newshour, Hard Money Watch, and appeared on television. Mr. Morgan was published in Global Investor regarding ten rules of silver investing. Currently, he is writing a book on silver.

1 cubic foot of silver weighs approx 655 pounds whereas 1 cubic foot of gold weighs more than half a ton.

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