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PLEASE
SEE CURRENT COMMENTS
HERE (CLICK)
JANUARY
27 2009 10:30PM - I don't know how, but somehow
I was able to recover the blog site and get it working
again. Please go to http://silveraxis.com/todayinsilver/
for future comments.
JANUARY
23 2009 10:20AM - Late last night, I posted
the following commentary to the new Editorial Forum
for The Metal Augmentor subscribers. I'm very inclined
to think this is becoming solid evidence that the
basis, at least as I've been interpreting it, has some
predictive abilities. Note that the trades mentioned
have now been invalidated but it may still be worthwhile
to establish new positions near the $888 (spot)
level in gold and $11.74 (spot) in silver with
a stop just slightly below those levels. The monetary
metals will need to hold these respective prices until
the end of next Tuesday in order to maintain upward
momentum.
****
Those who attended the GSUL session in Canberra last November know
that I like to use the gold and silver ETFs, the SPDR Gold Shares (GLD)
and Barclays Silver iShares (SLV), to keep tabs on the basis in gold
and silver. I'll be posting some historical charts and information
later, but for now I wanted to provide a sneek peak at the current
situation.
First, however, I'd like to provide a bit of a background for those who have not seen my work in this area before.
The "ETF Basis", as I call it, is the difference at any moment in
time between the metal ETF price on the stock exchange and the spot
price on the cash exchange where the ETF issues and redeems physical
metal. GLD trades on the New York Stock Exchange big board and SLV on
the NYSE Alternext (formerly AMEX). In the case of both GLD and SLV,
the cash exchange is the London Bullion Market.
The difficulty in calculating the basis has always been capturing
the precise price differentials at each moment in time and that is why
I developed the chart overlay process. I've mentioned and demonstrated
a few of these chart overlays to GSUL attendees as well as on the
SILVERAXIS website. To my knowledge, there are few better ways to get a
visual sense of what is happening with the basis.
The below charts represent the basis of the gold and silver ETFs as of yesterday, January 22, 2009. Click on them to enlarge.
[Charts avaiable only to The Metal Augmentor subscribers --
Sign up here: http://www.metalaugmentor.com/subscriptions.php].
As can be plainly observed, the ETF price is higher than the spot
price for both gold and silver. [Here is a hint. I like to look for
changes in the charts after the London market closes at 11 AM EDT. This
is because arbitrage by Authorized Participants (see below) between the
two markets becomes somewhat more difficult once the London market is
no longer open. Can you spot some differences in these charts after
11AM?]
In effect, the gold and silver ETFs are in backwardation against the
spot market, meaning that there is an apparent excess of ETF demand
over the amount of spot demand. Another way to state this is ETF
investors are willing to pay a premium to spot prices in order to
acquire the shares. This is not necessarily a preference for shares
over the metal but rather represents a preference by both large
investors (especially institutional investors who cannot purchase
bullion) and general equity market participants to gain exposure to the
monetary metals. In any case, the natural result of "ETF backwardation"
should be that the ETF's Authorized Participants (trading arms of
bullion banks authorized to deliver physical metal to, or withdraw
from, the ETF trust in exchange for ETF shares) will create demand in
the spot market. Obviously this tends to be bullish for both gold and
silver prices.
Indeed, it has been quite rare for the gold and silver ETFs to be in
significant backwardation against spot prices since they have been
launched. One of the most prominent instances occurred early last
September in the midst of the credit crisis as AIG was being bailed
out. In that instance, about a week after the ETFs went into
substantial backwardation, the gold price exploded by almost $150 in
less than 2 days. Perhaps not coincidentally, that was the most
spectacular rise in the price of gold during the current bull market.
Silver also did very well, rising more than $2.50 over the same period.
The current ETF backwardation has been sustained for more than a
week, gradually increasing to today's level. Although it is not a
surefire indication of an imminent price rally all by itself, there are
some corroborating factors present. One of these factors is the pattern
of higher highs and higher lows that I discussed last week over at
SILVERAXIS (unfortunately the blog is down at the moment). This is a
recent chart pattern that started in late October and it would become
dominant if gold could surmount $888 and silver $11.74, wiping out a
longer term bearish pattern that goes all the way back to last March.
For the above reasons, I believe there is a substantial chance that
gold and silver could be days or even hours away from an explosive move
higher. In particular, I would look for an acceleration higher should
the aforementioned $888 and $11.74 levels get taken out. On the other
hand, if gold were to break $800 and silver $10.25 on the downside, the
potential would be eliminated.
One way to trade the above scenario would be using your favorite
gold or silver trading instrument whether it be the ETFs or otherwise,
with a stop below $800 for gold and $10.25 for silver. Ideally, a
significant move should materialize by the end of next week at which
point it would be a good idea to take profits. If there is no rally and
especially if $888 proves to be potent resistance, then it would be
time to re-evaluate the trade.
A more speculative play would be to purchase the near expiration
February COMEX or GLD call options. The COMEX options expire next
Tuesday but the 900 strike price seems cheap enough ($150 per option at
the close today). It could get even cheaper Friday should gold drop
below $850. Ideally, I'd look to buy these call options under $100
later today (forget buying them on Monday regardless of how cheap they
might get since there will be less than 48 hours until expiration). The
GLD options, expiring on February 20, appear to be an even better deal
at $135 for the 900 strike. They are still highly speculative but in my
opinion they represent great bang for the buck.
Finally, it may also be worthwhile looking at March COMEX silver
call options although these are likely to be more of a long shot. We've
already been burned by the $18 strikes acquired last October (the
archived report discussing this speculative trade will soon be posted
at www.metalaugmentor.com/updates.php),
which are now nearly worthless, and I am hesitant to add more fuel to a
fire that appears to be pretty well smothered. There might, however, be
some merit in the $15 strike call options especially if they can be
acquired for under $250, as these could appreciate to perhaps $1,500 or
more on a bold move in silver within the next week. Needless to say,
this is very speculative as was the original purchase of the $18 call
options.
JANUARY 22 2009 7:45PM
- Please see important update below.
Just
a couple of days after I was able to get most of the
spam attacks on the site under control, the company
that hosts this website, IPOWER,
was apparently hacked and many accounts including
mine may have been compromised. The passwords for some
700,000 websites had to be changed as a result. I've
thought very hard about changing hosting companies at
least 3 times in the past couple of years but this looks
to be the last straw. Fortunately I noticed the
problem fairly quickly but any site visitors on Tuesday
January 20, 2009 should make sure they are using updated
virus software (I use Bit
Defender which immediately alerted me).
Meanwhile,
IPOWER has apparently implemented some security changes
that are preventing me from updating the blog and blocking
user comments as well. I'm trying to get the blog back
to working but for now it is completely frozen.
In the meantime, I am going to try setting up a different
blog while I decide what to do long term. As a last
resort, I will be posting comments on this page.
One
bit of good news for subscribers of The Metal Augmentor
is that we are finally starting to provide some
updated content for the service although the website
is still not fully functional yet. Please go to www.metalaugmentor.com/updates.php
for the latest information and content. We are going
to try running a blog over there as well, and I don't
expect the same problems as I've had here because we
selected a much more reliable hosting company for
that site.
Fortunately,
the blog itself has been backed up and all posts and
comments are preserved. I'm not sure, however, that
I will be able to fully restore everything. The blog archive content is
not available while this page is displayed but I will
be taking down and putting back up this page over the
next few days so more readers will be able to see it.
For
your reference, here are the links to the current pages
with information:
Main
Site Index Page: http://www.silveraxis.com/index.html
Blog
Page: http://silveraxis.com/todayinsilver/
If
I am not able to get the original blog going again, I will have
to start with a new blog in which case I will be posting the
links to the new blog on this page.
SEPTEMBER
5 2008 1:30PM - Stupid hosting server has
been up and down all day. Silver got crushed today and
it was not just the markets at work. Collapsing copper
prices set the sentiment but this was simply not normal
market action. Heck, gold was up $7 (+1%) while silver
was down 60 cents (-5%). No, not normal at all. It was
three steps back in the two-steps forward, one-step
back bottoming process for silver. I just hope it wasn't
the beginning of a stumble down a long fllight of stairs.
AUGUST
28 2008 6:00PM - I am only posting administrative
comments here since August 13. Please see comments in new
blog format at http://silveraxis.com/todayinsilver/ .
AUGUST
20 2008 8:15PM - The 12 contest winners have
been picked and e-mailed, congratulations to each of
you! We continue to move forward with getting the subscription
service up and running and in the meantime I hope the
new comment/blog format is useful. If you haven't
noticed, it's made it much easier for me to write and
thus the recent prolific outflow. Also, I will be able
to post remotely while out of town.
AUGUST
13 2008 9:14PM - I am making a major change
effective immediately. For over 2 years I have been
writing comments here while refusing to use a blog
even though it would have been so much easier and would
have allowed reader interaction. Why? For one, because
I did not want to be known as a "blogger".
I know, stupid. Also, the blog format didn't allow a
huge amount of flexibility. Or at least not until recently.
Also, I had no reason to "promote" myself
so I didn't need the blog features like easy linking
to articles, tagging or social networking. For obvious
reasons some of those things are going to change as
I launch the subscription service.
Thus,
effective immediately, my comments will now appear at
http://www.silveraxis.com/todayinsilver/.
That location may yet change, but that's it for now.
For a while, I may post brief summaries of my comments
on the homepage here after I have posted them
in the blog but for the most part the comments will
appear there first, and only there. That assumes everything
goes smoothly, of course. I plan to improve the
blog functionality in the days ahead so ignore everything
for now other than the comments themselves. Also, I
would appreciate if you would still come to the homepage
first to check out any "service announcements", posted
commentaries from others, the Silver Alerts, etc., some
of which may or may not be integrated in the blog. I
haven't figured it all out yet, but I'm working on it.
I'd appreciate if you would e-mail
me if you see any major technical glitches, can't access
the blog, etc.
AUGUST
13 2008 8:05PM - Confirmed: As of this afternoon
CNI is sold out of all silver but the 90% bags. Thanks
LC! If anybody knows of a source that still has
inventory, please let me know. Tulving is now sold out
of everything as well except for 90% bags of Half Dollars
(less than 10 left) at 20 cents over spot and they
also have in quantity the 2008 silver Philharmonics,
which is the first true bullion coin in silver with
a face value in Euros. At a premium to spot of $1.89,
the Philharmonic purchased from Tulving with silver
more than 2 dollars below its 200 day moving average
is a very interesting option. Heck, if I was buying
these days I'd pick up 500 of them to go with 500 Maple
Leafs and 500 Eagles. And I'd do that every year. Say,
that's not a bad idea. Unfortunately, the U.S. Mint
is apparently going out as far as Christmas on dealer
allocations of the 2008 silver Eagles, so if you don't
have yours yet you might be out of luck (and you
might be out of luck even if you did already order but
haven't received them). One last thing, many dealers
are also out of a number of gold bullion items
so this time it's not just silver.
AUGUST
13 2008 5:20PM - Good thing I got some of
those September 550 corn call options, even though I
was a bit too early. I planned to bid at 12 ($600),
actually filled at 7 3/4 ($375) and traded down
to 1 ($50). Corn and most of the other grains closed
limit up today and so far corn is up another 13
cents in the Globex session, making the calls worth
about $1,000. This is the bounce I was looking for and
in less than 24 hours it has already gone far enough
to close out at least half of the trade. I'm going
to try using Globex to sell some these corn call options,
something I haven't done before. I guess that's another
blessing for Globex for those who are keeping count
of the score. If it doesn't work, I'll be selling early
in tomorrow's session with the hope corn doesn't
retrace much of the limit up move before then. Oh
yeah, this out-of-nowhere reversal by commodities is
not a bad thing for silver, either.
AUGUST
13 2008 4:15PM - It looks like many of you
have taken my and other stalwart bottomfeeders' advice
and bought silver at these stupid levels, with the result
being that bullion dealers are once again sold out of
just about everything. For example, www.tulving.com
only has 1 oz. generic rounds and 90% pre-1964
junk bags of U.S. coins at the moment. Meanwhile, it
looks like www.APMEX.com
has limited supplies of silver Eagles but the minimum
premium is $4 per coin. More importantly, they just
announced
yesterday that they are seeing a gold and silver shortage
in the secondary retail market. Yet at least one
dealer, CNI (www.golddealer.com),
shows it has inventory with decent premiums. But how
deep is the inventory, I wonder? If some of you aim
to find out, please let me know.
I
take it as quite a positive sign for the continuing
strength of the bull market in silver that both a strong
rally and now a strong correction have left
the retail silver bullion shelves mostly empty. All
within the same year. More proof of my observation from
a few weeks ago that physical silver is being bought
when the price is up, when the price is down, and when
the price is flat. Eventually, that kind of thing will
catch up with overall supply, even if it may have always
been pretty much adequate to meet both industrial and
investment needs in the past. Those idyllic times
may be ending soon!
Meanwhile,
SLV has held true to form, giving up only 3 million
ounces of silver on the slide from $19.50 to $14.00.
Clearly, this selloff was not due to dumping on the
physical market. On the other hand, if there was significant
latent physical demand (such as the need to cover a
naked short position of 15-40 million ounces of
silver owed to SLV), I don't believe prices could have
collapsed the way they did.
So
why did the price collapse so violently that
it was even uncharacteristic for silver? Surprisingly,
it wasn't due to net liquidations in the futures
markets, which is the usual suspect. Open interest in
COMEX silver, unlike COMEX gold, has held steady at
around 130,000 - 140,000 contracts (futures only)
since the crash began. So, if nobody was selling, how
is it that the price could fall so much? Well, I didn't
say nobody was selling, I said there were no net
liquidations. In other words, somebody was selling
at a low price
(likely in a panic) while somebody else was buying at
even a lower price (probably
with a smile). And I doubt there was a lot of commercial
short covering in silver, because that should have reduced
the open interest (we'll know better when the COT report
comes out this Friday afternoon).
Instead,
I believe a trader or group of traders may have goaded the
silver selloff into its extreme state of violence by
attacking obvious support zones where many stop
loss orders are expected to be sitting. This may have
triggered
the domino effect that each time took silver down by about
50 cents absent a similar move by gold or any other
market. Interestingly, several of these 50 cent
selloffs occurred in the after hours Globex
session where trading is already somewhat thin,
which of course made the trick easier to accomplish.
I was personally trading during several of these selling episodes
and very carefully observed in real time exactly what
was happening on both the Globex and CBOT (mini-silver).
Yes,
I know, this sounds a lot like those conspiracy theories
about a cartel whose job is to keep the gold and
silver price suppressed no matter what. Well, I've
already pointed out that COMEX gold has seen substantial
contract liquidation, which is consistent with a capitulation
by speculators just like every other time gold has taken
a big dive. No mystery there. And even if there were a
cartel, we must still put most of the blame on the hot
money A-holes for making every decline so dramatic.
At the same time, we must also credit them for making
every advance so dramatic.
In
any case, what I'm about to point out about silver
is that a relatively small player, perhaps a very wealthy
individual, a descent-size hedge fund or the like --
and not necessarily a cartel with unlimited resources
-- could have played a big hand in the recent blood-letting.
I'm not saying any individual or group was responsible
for the decline itself since silver and gold
had clear reasons to do that, many of which I've already
discussed (including the key failure of September silver
to surmount $17.985 or to hold $16.035). It's just that
the severity of silver's recent fall defies conventional
explanation.
One
of the things I found interesting during the current
episode is that my own stop loss orders never suffered
much slippage. Since a true stop loss is a market order
once the contract has traded through a given stop price,
these orders can sometimes be filled many cents
below the stop, increasing the amount of loss or reducing
the booked profit. This is called slippage (the term
is also used to describe trading losses incurred when
positions are rolled forward to future periods). Yet
almost all of my orders in the past few days were
filled within a cent of the stop price. Even in the
overnight sessions. Normally you don't see these "quality"
fills just above and below obvious areas of support
like the round numbers, moving averages, etc. Especially
in a very fast moving market.
It's
as if someone was literally shaking positions loose
and then snapping them right up. Time and time again.
Now, there are other possible explanations for what
I personally witnessed, but the theory I've come up
with has the advantage of being both plausible and intriguing.
To wit, someone may have been looking to accumulate
a rather large position in silver at a decent price.
Clearly it would have to be someone with deep pockets who
didn't care about the mounting losses on the many positions
already acquired while the plumbing operation continued.
In the end, this trader or traders may have accumulated
as few as several thousand contracts or perhaps
more than 20,000. The upper figure doesn't come cheap--I
calculate the cost including margin might be as high
as $500 million. Still, that amount is entirely within the
reach of many individuals and funds. It also tends to
demonstrate the desire to have the position in place
quickly but to hold it for some time.
The crazy thing
is that the lower end of my theoretical haul--just a few thousand
contracts--could possible account for a dollar or perhaps
even two dollars of silver's decline.
Why
didn't this happen in the gold market? Because it is
too big for something like this. A trader would have
to commit ten times as much capital or more and still could
not move the gold price by a similar amount. Besides,
this trader wanted silver, not gold. What intrigues
me is that I may have stumbled across the first sign
that a 21st century version of the Hunt Brothers might
be active in the silver market right now, quietly accumulating
positions. If so, this is no mere Hunt wannabe judging
by the sophistication of the first confirmed operation.
At
this point, I imagine many of you are shaking your heads,
disappointed to find out that I have a soft side for
conspiracy theories after all. Well, the truth is that
I am actually a big conspiracy theory fanatic. Always
have been. But that doesn't make me any less skeptical
than you. In fact, my disappointment in finding out
that just about every conspiracy theory that I've ever
investigated is a load of crap makes me particularly
pragmatic and circumspect. At the same time, my fascination
does mean that I would absolutely love to be the one
to uncover a real conspiracy, especially if it involved
something else that fascinates me, namely silver. All
I'm trying to say is that you should take these comments
with unusually large grains of salt.
If
my speculation is true -- and again I'd like to emphasize
that it is just speculation -- then does this constitute
illegal market manipulation of the silver market? Not
necessarily. There is nothing inherently illegal about
a trader placing orders in a tactical manner that takes
advantage of known strategies employed by other traders. This
type of thing happens in the stock market all the time.
The problem here is that a lot of the just-concluded "tactical
trading" in silver appears to have taken place when
the market was fairly illiquid. Just how illiquid? Well,
there are certain times in the after hours session when I could
discern (using market depth, trade volume, order size,
etc.) that I was just one of a few live traders
making live trades. Especially in CBOT mini-silver where
I test and refine ideas before trying them out on the big
contracts.
Let
me now repeat again that the "tactical trading" I
observed is
unlikely, in my opinion, to have had anything to do
with the concentrated commercial traders who are net
short. After all, they did not cover in silver as they did in
gold. Also, they don't need an illiquid market to
move prices, they can already move prices with
no trouble in the regular, liquid session. At the same time, I cannot rule
out their complicity. To the extent some of their positions
are not hedging physical metal, they may have a motive.
A while back I pointed out that the U.S. Mint has a
hedging program that their counterparty most likely
would use to gain a commercial designation for their
COMEX trading. To my knowledge, this is the only publicly
disclosed instance where we can clearly see the connection, but
there are likely other instances that have not been
disclosed because the transactions are not material
or they involve private parties. We'll have a better picture when this week's COT report
is released Friday afternoon. If that shows the commercial
shorts decreased their short commitment by an unusual
amount in terms of both net positions and concentration,
that would tend to argue for their participation in
the massacre.
Even
then, I can't recall an episode before where so much
of the damage was done in the after hours session
instead of the main COMEX pit session. Especially since
selling in spot markets (some of which were open
when the selling episodes took place) has by itself never
before been vigorous enough to account for such large
price drops. This should be even more true now
that we can see what the world's biggest confirmed
owner of silver is doing day to day. If SLV was not
a major source of selling, it is hard to believe somebody
else was.
For
now, my only conclusion of merit is to put an asterisk
beside my recent comment that Globex (and CBOT) after
hours trading was a blessing to the small silver
and gold trader. Unfortunately, we may have just witnessed
the flip side of that coin, a curse. Who put that
curse on silver and why remains to be seen, but at least
now we have a new idea.
AUGUST
12 2008 12:25AM - I'm getting lots of questions
asking if I can see how far down the bottom might be.
The answer is no. That said, I am going to point
out something that may turn out to be rather important
in defining the action over the next few days. Last
September, open interest in COMEX gold started to rise
strongly from its typical 300,000 - 400,000 or
so level (futures only) to over 550,000 contracts by
November 2007. Open interest peaked at almost 600,000
in January 2008 and has been declining since. That decline
has accelerated in recent days, and counting today's
action, open interest could perhaps stand under 350,000
contracts again. In other words, the entire speculative
element that was driven by the emergence of the credit
crisis last August may have now been worked completely
out of the gold market. If true, we may be just
about at the point where we can start thinking about
fundamentals again and perhaps even expect some positive
action from bargain hunters. Consequently, au/ag
prices may very well start to stabilize during the remainder
of the week. Perhaps a final rinse might be required.
And while I can't calculate the precise distance, I
am starting to see the bottom. I might, of course,
be totally wrong -- I could just be seeing
a mirage or the top of a cloud.
Nah
. . . it sure looks a lot like the ground to me.
Here
now is some reader mail along with my ruthless
but caring response.
"No.
I am not throwing in the towel. I can't I have so much
invested!
I
am in shock. Nothing makes any sense. Does this mean
we are now in a bear market for precious metals?
How
can the dollar be rallying when we still have massive
CDO and SIV problems, as well as a huge national debt
plus inflation.
I
am sick to my stomach.
If
it ever rallies again at what price should we sell our
silver?"
ME:
You're sick because you "have so much invested"! It's a natural feeling, I
assure you. The only cure is battle-hardened thick skin or getting yourself
less invested.
Yes, this current episode is extraordinary but not
unique. It is important to keep in mind that gold and silver tend to be more
volatile from day to day in both their bull and bear markets than stocks.
Still, even the Nasdaq, in its epic rise from 1995 to 2000, saw its share of
sickening drops. Nothing like this of course but comparable.
It
requires special fortitude, immense patience and deep conviction to ride out
the waves without having your gold and silver shaken loose. And that is
precisely what happens in these swoons--gold and silver being shaken from
the weak grips of the amateurs into the open arms of the pros.
Is this now a bear market in
gold and silver? The Aden sisters say it will be if gold crosses below such
and such moving average. Well, I think it just might cross below their sacred
moving average. Don't worry, it
doesn't make them right about a bear market. Some other guru will always come along and give you a
different threshold for a bear market. Don't listen to any of them. Instead,
think for yourself and ask some questions. What has fundamentally changed?
The Eurozone might slow down? We already knew that. The dollar could rally
for some time? We knew that too. Oil may retreat from its ridiculous $150
level? Not news to you or me.
What price should you sell your silver? It
depends on what your goals are. In my case, I bought a specific quantity of
physical silver that I think will be able to pay off my mortgage before the
bull market is over. I will sell that silver without a second thought as
soon as that price is reached. I have other silver I plan to hold until
death and pass down to my grandkids. Some silver I will sell the next time
we rise 30% above the 200 day moving average. There might be other reasons
to sell silver. Selling because you are afraid or sick is not a reason; it
is the realization of a poor buy decision.
I'm sorry if the above
seems overly harsh or too frank but there isn't much room for sentimentality
or mincing words in this type of situation. This is a brutal market that
preys on the weak. Only the strong survive, and they do
so by holding on for
dear life.
AUGUST
11 2008 5:40PM - Ouch, if these prices get
any better the pain is going to kill us! I wish I could
see the bottom from here but once silver broke $16.035
it was falling on momentum, panic and fear. Neither
technical mumbo jumbo nor anything you might find
on a chart mean anything in these circumstances. The
only thing that matters is silver is still falling and
continues to be a better and better buy every day. The
drop today happened on the back of gold finally breaking
down below $850 which immediately ran literally thousands
of stop loss orders culminating in a very fast decline
of $30+. Silver got no credit for having already fallen
much further than gold and instead got creamed again.
Nothing
matters here to those selling gold and silver, not even
what looks to be the start of a major confrontation
(involving only words and stares, we hope) between
Russia and the U.S. and its allies. And despite what
many PM "experts" will tell you, the selling
isn't being done by central banks or some cartel but
rather by speculators who liked, but now apparently
hate, gold and silver. Not for their inherent
and monetary properties but what they can do for
this quarter's bottom line. I say good riddance to these
jerks. And please don't come back.
So,
what to do? If you are fully loaded, nothing. If you
are leveraged, hopefully you haven't been wiped out
(some traders definitely have been). If you have money
to buy gold and silver, then buy. Just please don't
tell me you are throwing in the towel, it will just
make me sad and prompt me to give you a stern lecture.
AUGUST
10 2008 7:10PM - Geopolitical risk looks
to be building back into the crude oil and PM markets
this Sunday evening (Monday already in the Far East)
as Russia and Georgia hurtle toward each other in a
dangerous escalation of their "Summer Olympics" conflict
over two small corners of The Caucasus. Whether this
becomes all out war or just another flare up that has
yet again claimed the lives of many innocents on
both sides, the situation looks to have serious
short and long term implications for regional security
and the relationship between the great powers. So far
as of 6:45 PM PDT on Sunday night, oil is up a buck,
gold is up 5 bucks and silver is up a dime. In other
words, the early risers don't think much will go
wrong here. But, what "could" go wrong?
On
Christmas Eve, 1979, the Soviet Union invaded Afghanistan.
Gold was trading around $460 that week and silver was
rising strongly through $23. Exactly four weeks later
the prices of silver and gold had doubled in a classic
blow-off peak. And even though gold and silver began
a bear market decline the very next day that wouldn't
end for more than 20 years, gold didn't trade below
its Christmas 1979 price until March 1981. Silver, ever
the volatile one, did decline below its Christmas 1979
price by March 1980 but it briefly surpassed that level
again for a day in September 1980 before finally giving
up the ghost.
Now
mind you, Afghanistan was no close ally of the U.S..
Neither did it seek NATO membership nor had
it been promised future entry into that less-and-less
exclusive club like Georgia has been.
Our
pragmatic side says the odds favor a de-escalation of
hostilities between Georgia and Russia in the days
ahead, perhaps followed by a Chechnya-style low intensity
conflict or a UN-observed peace deal. Our wild, reckless
side says these hostilities might be the prelude to
WWIII, reminiscent of another WW started because of
entangling alliances that dragged nation states into
centuries-old backwoods disagreements.
Be
that as it may, this event has demonstrated very
clearly that we should hold some gold and silver not
only because of what will happen at some point
in the indeterminate future, but what could happen
over a single weekend, even during the Summer
Olympics. Or, of course, the Christmas holidays.
AUGUST
10 2008 4:20PM - Phew, I've finally been
able to catch up with almost all of the e-mails
from the past few days and it looks like there will
be 12 free subscriptions at this point. There's still
a few hours left so perhaps there might even be more.
The "winners" will be hearing from me early
in the week.
A
bit now on what the service is probably going to include
once it is fully implemented. If you don't care, there
is no need to read the rest of this posting.
Please
realize not all of the below features will be functional
on Day 1 of the launch since that would delay
things at least another year! The basic foundations,
however, of the service--exclusive commentaries
about the au/ag market, the resource stock functionality
and the basis early warning system--will be ready to
launch soon.
Of
course, the central foundation of this thing will
be the "babbling and mumbling" from yours
truly, as well as other contributors I deem worthy.
Some of this will be exclusive (meaning it won't appear
on SILVERAXIS or elsewhere), some will appear here on
a delayed basis and some will appear here pretty much
at the same time. The new service will be less specific
about silver as compared to SILVERAXIS mainly because
it will include expanded commentary from people who
are experts in gold, commodities, exploration stocks,
money, or what have you. There will be more overall
content of course and it will be updated more frequently
while SILVERAXIS will maintain at least the current
level of upkeep (which is admittedly pathetic at times).
This will ensure fairness to both (a) those loyal readers
who cannot afford or don't want to pay for the privilege
of listening to (yet another bunch of) blowhards
or windbags and (b) those who recognize value when
they see it and are in a position to take advantage
of it.
Now
for the key planned features:
-
The commentaries in the paid service will sometimes take
different forms to foster interaction with the reader.
Some examples under consideration include conference format
(real time), blog format (where members can post their
own comments and replies), teaching modules (with lesson
plans and problems to solve), etc. Members will
also be able to sign up for an e-mail version of our
exclusive commentaries and perhaps even a printed
version if there is sufficient demand.
-
There will be emphasis as part of this service on explaining
concepts such as the basis, options, ETFs, etc. and
how to apply them. In addition, when I talk about a
particular option or trading strategy on SILVERAXIS,
the paid service will include greater detail including
actual trading symbols, timing, success/failure of
my own personal trades, and follow ups.
-
I will provide my proprietary basis calculations and
update them frequently. The service will include an
early-warning feature that indicates the possible approach
of Professor Antal Fekete's "Last Contango".
There will also be detailed trading ideas using
the basis, including methods for "arbitraging"
between gold and silver. If and when we can generate
sufficient membership fees, we should be able to
acquire data in real time and generate even more powerful
basis trading and early warning tools.
-
All Founding Members will have unlimited (within reason)
chance to ask questions, share ideas and otherwise communicate with
me and my partners. This is the main reason for restricting the
number of Founding Members. Relevant and important excerpts
will be taken from these Founding Member communications
and shared with all members (while maintaining anonymity
of course). Members who are not Founding Members will
have the ability to ask and have their questions and
comments answered in an open format but it will
not always be possible to reply to these in
as much detail or as timely as Founding Members. In
fact, Founding Members will hopefully answer many of
these questions themselves and we might only have to
add that: yes, we agree with the answer provided by
so-and-so Founding Member. Don't worry, this is not
something that we expect Founding Members to do,
but rather something we think a few will very much want
to do. Unfortunately, the potential time commitment
related to this portion of the new service means that
I personally will need to prioritize my communications
and thus I may not have as much time as I've had in
the past to respond to e-mail from SILVERAXIS readers.
I will still try to do so, but it will likely be more
sporadic than it has been in the past.
-
The service will cover the "best" and most
"interesting" silver, gold and metal mining
and exploration companies. We will comment on each of
these companies, provide links and hints that will
help members conduct investor due diligence, cover
what newsletter writers and brokers have to say, and
discuss critical news and developments as they arise.
We will not make official buy and sell recommendations
per se, but it will be easy to figure out where our
preferences lie. We will also disclose whether or not
we have a position in a particular stock. Another planned
feature is to provide in-depth buy and sell ideas for
a very small universe of highly prospective stocks,
which we would follow very diligently using special
reports. This feature would have very restricted first-come,
first-served distribution and be available at an
additional cost to regular members but would be free
to some Founding Members based on total distribution. Since
resource stocks might be the only thing about our
service that really interest some members, we plan to
make sure these features alone justify the price
of admission.
-
We plan to conduct anonymous user surveys, encourage
members to provide country, region and industry "location
reports", and provide other opportunities for
member input that will help all of us gain a better
understanding of the global silver, gold and metal markets.
This type of leveraging for mutual benefit of a motivated
(i.e., paying), non-agendized precious metal investment community
has never been attempted and it's about time.
-
The "user group" we plan to found will
at all times respect (and in fact encourage) anonymity.
For example, Founding Members will be identifiable only
as "FM1", "FM2", etc. Nicknames
can be used by those who prefer a bit of familiarity
especially those who plan to contribute frequently (or,
having been in jail, would prefer not to be known simply
by a number). We feel the most important characteristic
of this community will be to keep an open yet skeptical mind
and to be always eager to learn or teach something new
or from a different perspective. Of course, no
member will be required to do anything or share anything.
Indeed, the emphasis will be on quality, not quantity,
and thus we might actually discourage too much
participation.
- Founding
Members will lock in a low (relative to later members)
introductory rate that is good for life. "Life"
means as long as the Founding Member is a subscriber
and the service is in existence. And Founding Members
willing to spread the word about our service will
be able to get a refund of even this low subscription
fee. Exactly how low will it be? I don't have
the exact figure just yet, but it will definitely be
less than $100 per year if subscribing under an
annual auto-renewal plan. Some of you are probably saying,
"Tom, you're crazy to start out this low with all
of these planned features!" That's probably true.
I've even had credible people in the PM industry tell
me that my SILVERAXIS comments alone are worth $100-200 per
year. But, I'm no salesman and would absolutely cringe
if it turns out the service is not worth what you pay
for it. In fact, if you ever feel that way, please just
let me know and I will simply refund your subscription. Other
than that, we set the Founding Member introductory
rate so low as a Thank You for trusting us with your
hard-earned money and of course also for reading
our "babbling and mumbling" all this time.
Well,
that's most of it but I'm sure there is something else
that I've forgotten. It may seem like a lot but the
truth is that our ability to get all of these features
off the ground will depend in part on the amount of
participation and encouragement we receive as well as
being able to find the help to make it happen. However
far we go, one thing I personally guarantee is
that subscribers will get their money's worth.
AUGUST
8 2008 10:25AM - The word is out there that
central banks are intervening in the currency markets
in support of the dollar. James Turk, in his latest
dispatch, points out that foreign holdings of Treasury
and agency securities in the custody of the Federal
Reserve have been climbing at an accelerated pace in
the past 3 weeks. He says this is direct evidence of
manipulation in favor of the dollar. Oh, were it that
simple! I've reviewed the weekly changes of securities
held in the Fed's custody and there doesn't appear to
be anything particularly unusual in the offing. Absent
statistical modeling that includes correlation analysis,
there is not much substance behind these claims. A few
billion or even tens of billions is not going
to make a squat of difference in the currency markets
and certainly cannot explain the large decline in the
Euro and spirited rally in the dollar. Instead, what
can explain it is a shift in sentiment against
the perverted thinking that the Eurozone was going to
be immune from a global slowdown. I mean, come on, what
was the ECB thinking by raising rates in July? What
we are seeing now is simply the unwinding of unrealistic
expectations.
Yet
again, silver has been one of the biggest victims of
this latest reversal of market wrong-headedness despite
the fact that speculative elements in other markets,
including gold and copper, are much larger. To wit,
gold has now just returned to its bottom of early May
(around $850 spot) whereas silver has collapsed almost
a full dollar below its own (around $16). But don't
despair too much, dear reader, for this is precisely
what makes silver such a great opportunity. I'm convinced you
will feel much better in a few months if you go out
and buy some bullion today.
With
the silver price almost $2 below its 200 day moving
average, which is similar to mid-August 2007 but otherwise
has no precedent during the current bull market, the
idea that there is a wholesale "shortage"
of silver bullion in London or anywhere else can now
be examined in the full light of day and properly assigned
the probability that it deserves: zero. Yet apparently
the detractors are not satisfied with libeling Barclays
and its silver ETF, SLV. They now make the claim
that Central Fund of Canada is experiencing delays in
receiving the silver that it already shows as held
in portfolio. This is truly sad.
But
let us not be sad ourselves. Instead we should relish
the thought that the recent decline in the price of
silver will allow a new wave of investors to join
us in enjoying the white monetary metal for fun
and profit. With that said, I am officially flipping
the "Alert Flag" for the speculative term
to Green,
which represents the first change since last October
when I turned it from Green to Yellow. There is the
possibility of further downside but this is not about
picking exact bottoms, it is about risk and reward.
I think it is fitting that this change (reversal) to
Green gets made right about the same price level as
the previous change to Yellow. Back then, who would
have believed that we would be at the same place 10
months later?
AUGUST
7 2008 11:25PM - It's pretty impressive,
and indicative of just how good a floor $16.035 was,
that silver so far has managed to hold that level despite
the dollar soaring to 75 on the index as the
Euro plunged through 1.5300 on its way to 1.5193, its
lowest print since early March. At the moment September
COMEX silver can be had for $16.05. Alas, the wicked
winds continue to gather strength and may very well
turn out to be even stronger than what the virtual
brick wall of $16.035 can withstand.
Now
keep in mind, all this is happening as Freddie Mac and
Fannie Mae head toward nationalization in the months
ahead. Plus, the Federal Reserve's balance sheet continues
to deteriorate at a seemingly unstoppable pace with the
latest count
showing that a total of $366 billion of Federal
Reserve notes (the funny money featuring the portraits
of dead Presidents) is no longer backed by U.S.
Treasury securities or gold but rather by private sector
credit. That is 46%, which is precisely 46% too high.
What I'm trying to tell you is that if you're heavy
into fiat and financial assets but light into monetary
assets (silver and gold), you'd be crazy not to trade
in some of the former for the latter before
the week is out. Au/ag prices may still get "better"
or they may not, and silver could even go to $10, but
it ain't going to zero. And that means a lot in
these uncertain times.
Bottom
line, if you ask me what one source you should consult
on a regular basis to keep your faith in the eventual
triumph of innocent gold and silver over the evil financial
schemes of men, it would be the Federal
Reserve Statistical Release H.4.1. I'm honored to
have received such positive response to a paid subscription
service, but in truth you don't need anything else than
that report, and the best part is that it's free.
What
isn't free or even cheap is the premiums on bullion
products as Gene Arensberg points
out, but the stuff being hocked on www.tulving.com
and a few other online destinations don't seem that
particularly bad. A premium of $1.75 over spot on silver
Eagles is about the same as it's been the past couple
of years. On the other hand, both the JM/Engelhard 100
oz. bars and 1 oz. generic rounds are about two
bits higher than they have been offered prior to
this year. Meanwhile, junk bags of 90% U.S. silver coins
are selling at spot and so they remain the outstanding
bargains of the PM universe.
AUGUST
7 2008 11:20AM - Well, we have our $16.035!
September COMEX silver bounced from that exact
level at 10:43AM. The question now is, will that hold?
I'm long futures at this point with a stop just below
$16. The opportunity was just too perfect to pass up
even if it turns into a losing trade.
AUGUST
7 2008 10:40AM - Au/ag still seeking bottoms
as the Euro has just about reached 1.53 while the
dollar approaches congestion near 75 on the dollar index.
Silver is within cents of my $16.035 "God forbid"
technical target. Some of my call option trades in COMEX
silver triggered this morning as well as in GLD (the
Sept. 95 call option bid 0.60). This remains a
risky trade but profits in the PM market rarely fall
out of trees. One thing to really watch now is the Euro.
A decline below 1.5280 might mean the next stop is 1.5000
and unless au/ag decouple from the dollar, the monetary
metals would be set to go lower still.
There
continue to be some encouraging signs that an au/ag
bottom might be near, namely the crosswinds that have
utterly confused the market about the present state
of the U.S. economy. The slew of reports out this morning
is illustrative:
*Wal-Mart
July Sales Miss Estimates
*People
Seeking Jobless Benefits Hit 6-year High
*June
Pending Home Sales Up Unexpectedly
*Retailers
Report Mixed Sales Results in July
*AIG's
Posts Huge 2Q Loss, Shares Plunge
These
headlines are contrary to the idea that the business
cycle in America has turned the corner. It's only because
the Eurozone doesn't seem to be faring much better that
the dollar has been rallying. That's a paper-thin excuse,
however, and will easily blow over at the next
strong gust. The key for gold and silver is whether
or not a slowdown in Europe will create a banking and
financial crisis there which drives people to the shelter
of the monetary metals. So far the evidence is
inconclusive.
Alright,
enough suspense, I am officially
announcing another free membership contest for the imminent
subscription service.
I use the term "imminent" lightly because
we are not going to make the mistake of committing to
another launch date until we are absolutely certain
everything will be ready. We have made a personal commitment,
however, to do our darned best to get it going as soon
as possible. And as you can imagine, we have also made
a considerable financial commitment setting things up.
In any case, to be fairer to all of my North American
and international readers, this won't be a fast-fingered
deal where the first X responses win.
Instead,
all e-mail sent to tom@silveraxis.com
with "FREE SUBSCRIPTION" in the subject line
between now and midnight PDT this Sunday, August 10th,
is eligible. The "winners" shall be picked
at random with the number of "prizes" based
on the overall response rate (but will be no less than
10 even if just 10 of you respond). Also, even if you
don't win, a response will place you on the special
list of "Founding Members" who will be entitled
to preferential rates, free goodies and whatever else
we can come up with to entice you to hand over a bit
of your hard-earned cash to hear us blabber and mumble.
And please don't worry about any indiscretion on our
part. We, like you, really hate spam and would
never dream of giving your e-mail or personal details
to anybody else.
A
note of caution to those of you who like to procrastinate
like us: We are planning to strictly limit the number
of Founding Members to just a few hundred and hope to
fill the remaining open spots pretty quickly. Even if
at this point you would never consider paying for anything
we might peddle based on the stuff spewed forth on SILVERAXIS,
it might not be a bad idea to "volunteer"
for Founding Member status just in case we actually
come up with something valuable that blows the field
away (which is exactly our plan and partially explains
the launch delay).
By
the way, the "we" does mean there will be
more to this than just my own conceited commentary.
For now, my partners shall remain incognito but they
will be revealed in due time. Also, I will finally be
putting a personal bio and resume up on SILVERAXIS that
will reveal a lot more about me and probably help explain
how and where I get some of my crazy ideas.
In
closing, I would like to apologize to the several of
you who sent an e-mail last November in response to
a similar pitch but never received as much as a confirmation
from me. Yes, I still have all of your e-mails and I
plan to reply to each of them as part of this new-and-improved
effort. And yes, all of you are already on the super-duper
Founding Member List. Have no fear, I am much better
prepared this go and have set aside the proper time
to make sure I do this right. Just please remember to
put "FREE SUBSCRIPTION" in the subject line
or header of the e-mail to make it a bit easier.
AUGUST
6 2008 8:20AM - Even though the dollar is
climbing, au/ag has caught an updraft as a result of
strong physical buying out of Asia and London as evidenced
by the big shrinkage in basis. This morning, Freddie
Mac reported bigger than expected losses and that also
stoked the fire. Unfortunately, the dollar looks to
break above 74.50 (per the September dollar index futures)
and if it does, there is clear sailing up to at least
75. At the same time, the Euro appears destined for
1.530 before taking a break from its decline. As such,
we may very possibly see new lows in au/ag this week.
I'm out of my futures positions with small gains and
for now will be strictly using call option strategies
like the ones discussed yesterday to fish the coming
bottom.
AUGUST
5 2008 4:05PM - Just following up on my corn
and copper put option trades with some updates for those
who are interested. I have now taken partial profits
on corn but due to some clumsy trading my total gain per
position was a measly 28 cents--$1,400. That may seem
pretty good, but I should point out that I pretty much
picked the top and held the position during a $2 fall
in corn prices. Thus, if using futures contracts the
profit would have been around $10,000 per position.
And had I not messed with it, the option alone should
have generated a profit of 65 cents or $3,250. I know,
shoulda, woulda, coulda . . . but mind you, that's on
a put option that cost $275.
Alas,
all my bids for 2009 corn put options have gone
begging as the bottom pretty much dropped out of corn
prices literally a few hours after I put in my orders
in the middle of July. It is in these far-dated corn
put options where the real money is likely to be
made, but now even the $4.50 puts are too expensive
given the balance of risk and reward. On the other hand,
the September '08 call options have become ridiculously
cheap, even considering they expire in less than 3 weeks.
Assuming corn can hold $5.00, the $5.50 call option
for 12 cents ($600) would seem like a steal. It should
double on even a minor technical bounce from the current
$5.25 corn price. Perhaps such a bounce will also provide another
opportunity to buy some long-dated put options? We'll
see.
I've
had better luck with copper although I'm not quite satisfied
with the size of my position there either. I was
perhaps a bit patient with my bids and only got filled
on about half my orders before the copper price started
to fall. That's probably fine considering just how contrarian
and peculiar this trade really is, making discipline
even more important than usual. I note that copper
continues to hold up relatively well and is practically
the only metal that has been consistently in backwardation.
Of course, the possibility of a reversal in the sentiment
that has made copper's anti-gravity tricks possible is
precisely what makes the trade so powerful.
At
this point, some of you might be wondering why I seem
to be obsessed with copper and corn on a website
"dedicated to investment opportunities in silver".
Well, recall that I previously mentioned that corn and
copper are bellwethers for the commodity sector and
that silver and gold prices are vulnerable in the short
term to a severe correction in commodities. Taking advantage
of such short term vulnerabilities represents one of
the best opportunities to make profits in gold and silver.
It then stands to reason I should actually be trading
commodities to get first hand exposure and a better
feel for these markets, no? Especially since commodities
are in a historic, once-in-an-eon place from both
a fundamental and technical perspective. I only wish
I could have as good a trade in silver or gold to discuss
right now as the $2.50 copper put options. No worries,
I'm sure at some point I will.
AUGUST
5 2008 1:40PM - In the last few hours the
contango has all but disappeared from the silver price
(contango is the premium in COMEX futures price over
the spot price) and has shrunk substantially in the
gold price. This can mean several things but most likely
signals physical buyers stepping in to hunt for bargains.
This could provide some price support but the question
is, for how long?
The
dollar is poised to cross the 74 level on the index
but appears to have some areas of resistance all
the way up to 76. Meanwhile, the Euro has strong
support at 1.530 (currently at 1.546). Crude oil could
fall to the $110 area but put option valuations indicate
that it would face stiff buying demand below that level.
All
in all, we are probably very close here to a temporary
bottom in au/ag timewise. I wouldn't be very surprised
to see silver take a final dive down to $16.035 before
heading back north, especially since the market
seems to be a slave to technicals. Unfortunately, it
is not possible to determine with much certainty whether
$16.035 (or whatever the low print is during the next
several days) turns out to be the final, final bottom.
From a trading perspective, however, we have already
reached an extremely good fishing spot and as I said
yesterday, it may still get "better" (i.e.,
worse for the silver price).
In
fact, the low in silver may very well be put in between
here (around $16.45 in September COMEX silver) and $16.035.
I am in the process of testing this thesis by going long
the futures but I've also identified a couple of option
trades that could do pretty well. The first is the COMEX
silver September 18 call option. I'm putting in a standing
bid at 8 cents ($400) and looking to sell on a
bounce around 20 cents ($1000). The 8 cent bid would
probably get filled if silver were to continue its decline
toward $16 in the next few days. This option expires
in 3 weeks so assuming it gets filled, it will
either work out immediately or go bust. Another option,
with more time, is the COMEX gold October 950 call option.
My standing bid will be at $600 (with a $1500 exit target)
which should hit if gold declines to $850-860.
If
you like stock options, the equivalent trade in GLD
would be the September 95 calls with a bid of 0.60,
target 1.50. A good strategy might be to buy in sets
of 3, selling one at the initial target, one at
double the target (3.00) and holding the last one
'til kingdom come. I hope those poor souls who
bought all those September 100 calls for 2.00 and above
aren't hurting too badly--they can now be had for 0.35
and while a long shot, that's probably not a terrible
bet at this point.
AUGUST
4 2008 11:45PM - The silver price fell so
quickly through 3 of the 4 targets I provided Friday
that there wasn't much of a chance to try going long
at those levels. Technically speaking, this type of
action is discouraging. Both au/ag prices are now back
at the 200 day moving averages and that is normally
an excellent buy point. Yet it looks like the buying
could get even "better" shortly.
In silver, only $16.035 lies below but this target is
valid only for a couple weeks or so. If prices head
to that level quickly, we can expect some sort of bounce
there, or perhaps even a final bottom. By contrast,
if prices hold their current level, rise or grind slowly
down, my crystal ball is too foggy to provide any useful
fortune telling.
I've
just reviewed a fairly compelling technical analysis,
however, that presents the case for gold bottoming
in the $729 range and starting a new rally from there.
Although not addressed in this research, the equivalent
silver price would be a tad under $15. The good
news is these numbers are significantly higher than
my worst case bull market correction to $500 gold and
$10 silver. The bad news is $729 and $15 are quite a
ways down. The other good news is even if these levels
were to be reached, the chart action would probably
look like a steep "V" and the massacre may
be over before you and I knew it. Do I think au/ag are
going down that far? No. But I will sleep at night if
they do.
Okay,
let's put aside the above speculation and talk about
the real deal. If you have not yet, but would like to,
establish a long term position in au/ag and have
some patience, it is never a bad idea to acquire the
monetary metals at or below the 200 day moving
average. Thus, it would be completely foolish to
advise against buying now. Always, of course, buy au/ag with
money you don't need (anytime soon) to pay living or
retirement expenses, much less the kids' college tuition.
Expecting a gain (or even just to hold
value) from au/ag over a short time frame such
as a few months is asking for trouble. On the other
hand, if you were to put together a plan to carefully start
accumulating au/ag right now at or below their 200 day
moving averages with the aim to complete your purchases
by late September, I believe you would be very happy
with the results in a year or two. Same goes for silver
stocks, especially the ones I've recently mentioned.
I note that U.S. bullion dealers seem to have okay inventory of
silver coins and bars at the moment with somewhat high,
but still reasonable, premiums. Given that generic 1
ounce silver rounds can fetch upwards of $1 premium
over the spot price, I would suggest you concentrate
silver purchases on Silver Eagles and 90% pre-1964 junk
bags.
AUGUST
1 2008 2:10PM - Yesterday we got the 2nd
quarter GDP report that came in just shy of expectations
but revised the 4th quarter 2007 down to -0.2% vs. the
previously reported 0.6% growth. Big deal. Yet this
was enough to send the dollar reeling and silver immediately
took the opportunity to dash past the $17.655 level
after a night of struggling to surmount it. Alas, $17.985
held its ground, the dollar soon started to recover
and we are left at the end of the week pretty much where
we started it.
The
technical picture may seem muddled, but buried
deep in the muck I've found four silver prices where
we might expect a significant bounce or even the start
of the next rally. If the first one fails, I expect
silver to fall to the next one. If that fails, the target
becomes the one below, and so on. If I get the chance,
I will be literally fishing these spots for silver with
very, very tight spots. They are: $17.425, $17.090,
$16.990 and (God forbid) $16.035. All basis September
COMEX.
Let's
talk silver explorers and miners for a bit to close
out this typically uneventful summer week.
After trading as low as 28 cents last week, U.S. Silver
finally caught a break as it announced
late last week what could be the start of a major expansion
plan on the East side of their Silver Valley property
where the idled Caladay shaft burrows 5,000+ feet
into the earth. Then this week, more hints of a turnaround
were revealed with news
that silver production has reached its highest level
since Coeur d'Alene Mines sold the property to U.S.
Silver in mid-2006. This one-two punch propelled
the shares to 40 cents yesterday for a rise of more
than 40% in just over a week.
I
didn't personally take advantage of this latest dip
to lower my cost basis because I was busy buying another
PM stock on fire sale, Exeter Resources. After weeks
of bravely holding out, Exeter finally succumbed to
the junior malaise in July as it dropped 50% on the
back of scarcity in news flow. The slide was finally
stopped when the company reported 3.55 meters of 471.9
grams/tonne (13.68 oz./ton) gold at Cerro Moro in Argentina.
Silver grades have not been reported yet as they likely
exceeded the 10,000 grams/tonne (300 oz./ton) limit
for conventional fire assay. This drill hole is 400
meters on strike from the bonanza grades reported in
mid-2007 and firmly places Cerro Moro as one of the
more exciting gold-silver discoveries in the past few
years. Nowhere near Aurelian's Fruta del Norte, of course,
but 99% of explorers would kill to get these assays.
It's hard to be absolutely convinced of anything in
the current environment, but I feel very strongly that
Exeter has the right goods to double, triple, quadruple
and more from current levels even if au/ag go nowhere.
It is one of a select few stocks I plan to hold through
thick and thin (caveat: very bad developments can always
change the best plans). I wouldn't be ashamed to recommend
it to widows and orphans. Of course I own a boatload.
Another
one that falls into the category of "PM stocks
for widows and orphans" is the recently unbeloved
Impact Silver. Impact is about the only junior (or major
for that matter) miner that has operated at a profit
since they have gone into production. The stock is a
victim of lemming behavior that apparently resulted
from a famous newsletter indiscriminately dropping Impact
from its recommended portfolio. Their loss is your gain.
For pennies on the dollar, you can have a profitable 1+
million ounce (soon) silver producer with management
so keen they can probably make money mining silver even
if its price dropped to a penny per ounce. The
company is cashed up but still smart enough to
sell non-core assets in this market (see here).
That is the kind of position most other juniors would
kill to be in (are you seeing a theme developing?)
I'll
close with a roundup of what many would consider a mundane
grouping of silver producers but one I think will be
hard to beat. On a risk-reward basis I'll wager these
gems against any other 5 you might wish to put up: Pan
American, First Majestic, Hecla, Silvercorp, Endeavour
Silver. I admit it, my mouth waters thinking about the
kind of surefire profits this "ultimate silver
stock portfolio" should generate. For
the casual silver investor who is not interested in
the 500% up, 90% down roller coaster ride that most
silver stocks can take you on, plunking down a few grand on each
of the above is the way to go. Do this and you will
save yourself untold aggravation; spend the extra
time with family and friends. Save the subscription
fee of high-priced "newsletter research";
spend the extra money on a few more shares.
Next
week, I hope to run the second official contest
for free subscriptions to the non-existent subscription
service that I will probably never launch, so keep your
eyes peeled. On the other hand, I may be too busy working
on an important project (I do need to pay the bills
you know) to post here at all, so please forgive
me in advance should I leave you for a few days without
something useful (or useless), amusing (or unintentionally
funny), and thought-provoking (or mind-numbingly
stupid). Your potential response to the supposed contest
will go a long way to tell me just how much punishment
you are willing to take and could thus weigh so heavily
on my conscience that I will have no option but to finally
stop talking about it and do something already.
JULY
30 2008 10:15PM - Some of you are asking,
"technical, shmechnical, how does this guy get
precise targets like $17.655 and $17.985?" Actually,
it's quite easy although I don't believe you can find
this kind of thing anywhere else on the Internet (for
free at least). The closest I've seen is Jim Sinclair
and his www.JSMineset.com
which is a great source of information and I encourage
all of you to read it for the big picture, technical
analysis of gold and PM stocks and key fundamentals.
I don't take everything Mr. Sinclair says as gospel
but 95% of his stuff is pure gold, which is about 94.9%
more than everybody else. Below you will find the
chart that reveals where I got these precise numbers.
Unfortunately, I'm not a multi-millionaire bigshot like
Mr. Sinclair so things like this will more often show
up in the subscription service I plan to launch in the
year 2100.
[Click
for Full Size Image]
JULY
30 2008 3:05PM - Very encouraging bounce
by silver and gold today after flirting with the 200DMAs
earlier this morning as predicted a couple of days
ago. Silver in particular is in the midst of a
powerful move up, buoyed by a surprise rise in
oil prices and some of the commodities including corn.
Unfortunately, my trading has really sucked in the past
few days and I've been unable to create a profitable
advantage out of several good setups (including
corn, where I clearly saw--and stated for the record--that a
bounce was coming yet I still made a mess
of my potential trading profits by tinkering too much
instead of letting things ride). The worst example was
today when one of my sell orders to close in Sept. COMEX
silver actually represented the last down tick before
the tempestuous metal went on a furious 60 cent
tear (costing me a potential $3K in gains). I noticed
only later that my stop loss had been placed just a
couple of points ABOVE the 200DMA--about as dumb as
you can get!
Despite
the great action from silver today, the white monetary
metal is not out of the woods until it clears exactly
$17.655 basis the Sept. COMEX contract. If it doesn't,
the pattern of lower highs and lower lows--which
started on July 15 from a high of $19.55--will remain
intact and we should expect another downdraft that may
eventually take silver below today's low of $16.845
basis the Sept. contract. If $17.655 is cleared, the
next obstacle is $17.985. Should that level be cleared
as well, there would exist a very good possibility that
a solid bottom was formed earlier today. In other
words, unless and until these recovery levels are
achieved, there is no big reason to get very excited
despite the appearances otherwise. Indeed, the dollar
looks like it has more room to rally before making its
own peak. Conversely, the Euro appears vulnerable down
to 1.53 (currently just shy of 1.56). At the moment
(3:05PM PDT), silver looks to have just set a lower
high and so there is a good chance that it will
now retrace most of its earlier gains.
Regardless
of the technical chart action, there are some fundamental
reasons to be positive on silver, including the fact
that the iShares silver ETF, SLV, has just passed 200
million ounces with a sizeable addition of almost 5
million ounces yesterday. The total verifiable silver
inventory tracked on my site is now just a smidgeon
shy of 425 million ounces. SLV and its peers seem
to add silver in a down market, up market, sideways
market, and every other type of market. With buying
like this, I think there is an outside shot that the
total silver stockpiles could surpass 500
million ounces by the end of this year.
That
kind of investment demand will create compelling
fundamental support for higher silver prices in the
short to medium term, although it also creates
a dangerous situation should market sentiment make a
complete U-turn. I would define a U-turn
as a major change whether economic or otherwise that
could create persistent selling pressure among
silver investors for several months. We really
haven't had one of these during the current bull market
in au/ag--every correction and consolidation period
so far has resulted from prices going too far and too
fast.
A
severe correction in the commodity sector could possibly
create a U-turn in au/ag sentiment, but that is
not a certainly. In fact, there are circumstances where
au/ag might actually rally should commodities crash.
On the other hand, I don't see any plausible reason
for au/ag sentiment to make a negative shift if the
commodity sector remains strong. In any case, sentiment
can make several U-turns during the remainder of
this bull market and yet it should have absolutely no
bearing on the long term buy-and-hold strategy
most of us are employing for our core metal holdings.
From
a traditional investment standpoint, however, the narrow
circumstances that could lead to a severe decline in
au/ag markets is actually a very, very good
thing that doesn't get as much press as it should. There
are literally dozens of reasons why stocks in general might
crash from here, or bonds, or real estate or just about
everything else. In other words, an investment opportunity
is not only defined by the potential for big gains but
the possibility of big (or bigger) losses. Realizing
and periodically reminding ourselves of this will not
only create a powerful attitude adjustment but also
focus our senses on the very specific circumstances
that deserve the worry. Yes, I'm trying to get there
myself. And yes, this is a corollary to the pragmatic
diatribe from a couple of days ago. Pulling it all together
then, the 'ideal' silver investor will have patience,
confidence and focus. Come to think of it, that pretty
much describes the 'ideal' anything.
JULY
28 2008 7:05PM - I've gotten some flack recently
for being bearish on silver. I'm not sure how that impression
was formed, but it could have resulted from my pragmatic
commentary that weighs the risks and rewards as well
as the ups and downs of PM investing. There will be
some more pragmatism (bearishness?) to follow
in a bit, but first I'd like to defend myself by explaining
again what the Alert Flags at the top of the home page
mean. As you can see, I have "Buy" for three
time horizons--Short Term, Medium Term and Long Term--which
means that I personally (as in, with my own money) believe
an investment in silver made today has a very good chance
of paying off if held for these time periods. The "Caution"
for the Speculative Term of 3 months or less means that
there is little certainty (in my opinion) that silver
will make money next week, next month or next quarter.
Basically, I'm neutral on the immediate prospects for
silver but bullish on anything over 3 months. I've maintained
this general sentiment toward silver since last October
(prior to that, every timeframe was a "Buy").
I blew it and should have turned the Speculative Term
from "Caution" to "Buy" last December
but didn't since these "Alert Flags" reflect
my own investment position and I missed the December
low myself.
I
believe my commentaries in general have supported these
"Alert Flag" sentiments so I'm not sure it
would be fair to label me bearish although this may
be a term of relativity in comparison to the permanent
cheerleaders who proliferate on the web.
Now
for the pragmatism. Stock market pain, geopolitical
worries and firmer oil prices lent a helping hand to
au/ag today but these things tend to be fleeting
supporters nowadays. I don't believe the monetary metals
have completed all required work to the downside but
the final bottom is probably not very far off. The 200
day moving averages continue to rise, with gold's now
at $885 and silver's at $16.70 (on a cash basis). In
the case of silver, assuming the price continues to
meander in the $16.50 - $18.50 range, the 200DMA could
rise to almost $18 in the weeks ahead before finally
flattening out and then turning up once again when the
next rally begins. I would note that silver has rallied
anywhere from 30-50% above the 200DMA at each of its peaks,
so that would place the next one at $23.40 - $27.00
(from $18). Of course, the 200DMA will resume its rise
during a rally so these numbers are probably low.
My
favored scenario for now is that au/ag will trade below
their 200DMAs at some point in the next few weeks but
pricewise they will most likely stay above $16.50 and
$850. Obviously that would be a very attractive buying
opportunity . . . unless au/ag are headed for a major
crash, which seems nearly impossible given all of the
crises out there.
Of
course, failure to heed the 'nearly impossible' has
sunk quite a few ships, lost numerous wars and decimated
both the complex and simple plans of mice and men, so
it would be foolish not to consider the worst case scenario:
a recession-fueled collapse in the commodities
as speculators and 'sector investors' flee with tails
between their legs, accompanied by a strong rally
in the dollar (to 80 and above on the Dollar Index).
Absent some compelling reason to buy au/ag (one that
appeals to an ever growing population base), they could fall
quite far in a scenario where both speculators
and current 'believers' panic and exit COMEX, ETF and
other positions en masse. There is really no way
to determine what the lows might be in such a dire situation
although $500 gold and $10 silver seem nearly impossible.
Oops . . . there's that term again! Interestingly, these
round number levels represent roughly a 60% drop from
au/ag's absolute peak, leaving bull market
to-date gains of about 100%. The 60%/100% formula appears
to be quite a common theme in metals, with nickel, lead
and zinc having already completed that painful
journey. I expect copper to join them soon, even if
there is no wholesale collapse in the commodity sector.
Gold and silver are different, and that is why a wholesale
commodity sector collapse is probably required
before they would be at risk of succumbing to their
own 60%/100% correction.
One
might dismiss the above as blathering by a Chicken Little
or Silver Bear, but I'd answer such a protest by pointing
out that $17 silver and $900 gold are increasingly
seen as 'ordinary' and 'natural' by market participants
in the same sense that $400 gold and $600 gold were
viewed as such. Yet the current $900 gold price has
brought major changes in the structure of the gold market:
among them, the virtual disappearance of cultural demand
in India and the completion of dehedging programs by
major gold producers. These were major, if not 'the'
major, drivers for the gold market in years past but
now represent little more than dried up sources of demand.
So far, these drivers have been more than supplanted
by other sources such as ETFs and possibly central bank
(Russia, etc.) buying. But there are qualitative
differences--for example, demand in India tended to
increase as gold prices fell whereas ETF demand falls
with falling gold prices--that few seem to acknowledge much
less understand. The result is the possibility of big
surprises that can shake the faith of market participants
and create 'nearly impossible' outcomes.
I've
explained here a few days ago how I have personally
decided to 'soothe the pragmatism' from which I suffer
(buying put options in COMEX copper and CBOT corn) although
there are certainly other methods available. If you
don't have the means to protect your portfolio to similar
effect and would be bankrupted (or lose the kids'
college money) if silver goes to $10 or gold to $500,
then you might consider taking a closer look at your
PM exposure to see if it might be excessive. This,
of course, is not an issue for most of you who hold
au/ag for the long term as crisis insurance, a value
play or wealth protection.
Now
for the flip side of pragmatism. We could see a situation
where flight to safety creates huge flows of investment
into both the dollar (Treasuries) and au/ag. That would
result in the fabled decoupling of the dollar and
the monetary metals, and in my mind it's not a question
of "if" it will happen during this bull market
but "when". As the credit crisis gets
worse and the global economy weakens in the months ahead,
the "when" could very well turn out to be
"very soon". The reason behind the decoupling
would be exceedingly simple: economic crisis in the
countries whose currencies are currently strong against
the dollar (Euro, Pound, Yen, Yuan, etc.). Already
we are seeing the cracks in the currencies of many developing
nations--it's only a matter of time before the major
currencies feel the pressure too. Longer term, the dollar
is still toast in the sense that it will very likely
trade at 50 or lower on the Dollar Index (as I mentioned
recently in reference to the Freddie/Fannie nationalization),
but I don't believe that phase will start until the
overseas economies slow down, stabilize and start to
turn back up (possibly in 2010 or 2011). What I'm trying
to say is that au/ag could actually go up--or at least
not go down by very much--as the dollar rallies and
then absolutely catch fire as the dollar makes
its final descent. Whether that descent will end in
doom for the world's reserve currency or merely a severe
mauling is irrelevant because gold and silver will probably
make incredible bull market highs either way, representing
a great opportunity to switch into other assets that
will be extremely undervalued at that point
(I still plan to be around then and hope you will too).
In the final analysis, this is why 'investing' in silver
and gold is a good idea if you want to build wealth
(not only protect it) in spite of the 'pragmatic'
risks.
For
sanity's sake, however, you need to be prepared
to wait a few years for vindication, but be ready for
it today. Love it or hate it, coming to terms with the
capricious nature of au/ag investing will definitely
help you sleep at night. More importantly, it will help
you avoid becoming another bitter, obsessed, conspiracy-minded
windbag.
Signed,
Pragmatic
Windbag
JULY
24 2008 11:05PM - Au/ag were slapped silly
today by a mild rise in the dollar and pretty much any
other reason you or I could think of. In the end, however,
the monetary metals recovered as the stock markets
drove over the edge of another cliff and Iran said "nah"
to the international nuke inspectors. Au/ag prices are
currently in no-man's land with the technicals saying
we haven't reached a final bottom but geopolitics and
market sentiment beg to differ. If I had to guess, I'd
say prices will go up first, then down, then up,
then down. Up first because the Euro has just broken
above some technical peaks and so for now the direction
in au/ag are also up. Of course, that's useless
information unless we know by how much.
For
the first time in a while, we saw something encouraging
in the PM shares today as Kinross agreed to buy Aurelian
in a C$1.2 billion all-stock deal.
I'm a bit surprised by this given that Aurelian's world-class
Fruta del Norte gold deposit is still an inferred resource,
and it's in Ecuador. The same Ecuador that a couple
of months ago suspended all exploration activities in
the country while the government legislates a new mining
law. Nobody knows exactly what the law will look like
in the end, what the tax rates will be, or what types
of restrictions will be placed on mining activity. Yet
Kinross decided to say, "to heck with all the typical
senior gold company caution." I saw bully for them,
and hopefully this also means bully for the better PM
juniors.
JULY
23 2008 5:30PM - My mouth is agape reading
the mortgage rescue bill that is about to be voted into
law by Congress as I realize that the U.S. mortgage
industry has just been effectively nationalized. At
the same time, the national debt ceiling is being
raised by 'only' $800 billion to a mind-boggling $10.8
trillion. My suspicion is they will need much more before
it's over. Against this backdrop, gold and silver are
being pushed around as if financial Armageddon didn't
just knock on the door. The Euro may be overvalued and
the Eurozone might be having their own problems, but
what just happened here with the rescue of Freddie Mac
and Fannie Mae is virtually guaranteed to send the U.S.
dollar to new lows perhaps as far as 50 or below on
the dollar index. This piece of legislation is the new
elephant in the room and will likely be the major driver
for gold and silver prices in the medium term.
JULY
23 2008 12:30PM - I've been watching market
depth during the current au/ag fallout and buyers
are AWAL. They appear to have been scared away as gold
dropped below $950 yesterday and couldn't seem to climb
back above that level by this morning. Fed by a
rally in the dollar and a decline in commodities and crude
oil, we saw the typical but disappointing 'waterfall'
action continue throughout the trading day and into
the afterhours. There isn't much in the way of downside
support until $16.50 silver and $850 gold but I expect
prices to bounce somewhere north of those numbers before
finally bottoming somewhere around there in the next
couple of weeks. As such, I continue to probe for a
good place to get long. Too bad silver couldn't make
use of its relative advantages compared to gold
as I've discussed in the past few days. Maybe someday
there will be enough strong-handed investment demand
to take advantage of such opportunities. Perhaps by
then there will be a 'wholesale shortage' -- in London
and other places -- of silver bullion as well. But clearly
not yet.
A
brief note on the "Commentary" section of
the home page. I'm slowly going through all of the recent
articles that I've flagged over the past few weeks and
will be adding them as I run across those I find relevant
to silver and PMs. I'm putting the most-recently added
articles at the top and that's why the dates are all
jumbled up. I would urge my readers to look over this
section from time to time to make sure they haven't
missed the best articles on the PM market that the web
has to offer (according to me of course).
JULY
22 2008 4:55PM - Central Fund of Canada has
just added over 3 million ounces of silver to its holdings
and the London ETF, PHAG, finally added almost a million
ounces after months of acting comatose. Meanwhile, the
Swiss ETF ZKB keeps plugging along with an addition
of about 0.5 million ounces last week. I expect the
iShares ETF, SLV, to make a big showing in the days
ahead as well. Perhaps it will be substantial enough
to put the question of a silver shortage in London to
rest. I note that the SLV's 10-for-1 share split (and
hopefully improved NAV premium/discount reporting) goes
into effect tomorrow. In any case, the silver stockpiles
that I track on the home page of this website show a
total accumulation of 415 million ounces of silver as
of today. This is a strong testament to the substantial
investment demand that is out there, which is no doubt
a multiple of the visible stockpile.
A
reader has made a valuable suggestion with respect to
these silver inventories. He pointed out that perhaps
some of you might be aware of other publicly-available
information on silver holdings by investment funds or
entities that I have not included in the 'Silver Alerts'
table. He gave the example of a certain mutual fund,
although that fund appears to hold its silver at a COMEX
warehouse (and therefore including these holdings would
be double-counting). If you do know of any verifiable
sources, please let me know especially if the amount
is over 1 million ounces. For now, I am already planning
to add the mintage figures of the silver Eagles produced
by the U.S. Mint since it is highly likely that
99% or more of these coins are still in the possession
of investors and collectors. And while it may be true
that some of these will never be sold near melt
value due to numismatic considerations, it is equally
possible that silver will one day reach such a high price
that the numismatic value all but disappears.
Before
you say 'no way', let me point out that the supply of
Morgan silver dollars took a huge hit in 1979-1980
as a result of the millions of these collectible coins
that were melted down. Morgan dollars basically
traded in 1980 as bullion except for a few rare exceptions,
and I expect the silver Eagles will do the same at some
point--probably even low mintage years like 1996. In
fact, one possible sign of a top in the silver market
might be when even the more collectible silver Eagles
trade at melt value (1996 and proofs included). Obviously,
we are not there right now but it should be instructive
for you to learn that the numismatic premium has
already disappeared for most silver Eagle dates
including the once "rare" 1986 and 1990. Indeed,
back in 2003 you could have bought the 1986 silver Eagle
for around $16 per coin at its cheapest (with silver
trading around $5-6 per ounce). Today, you can have
it for $22-23 on ebay with the dreadful result being
that silver has appreciated in melt value by 300% while the
1986 silver Eagle has only gone up by 50%. The 1996
silver Eagle has done a bit better by doubling in price.
The valuable lesson, often taught but rarely demonstrated
like I've just done, is that you shouldn't pay
much more than melt value for silver acquired for
investment purposes.
Enough
about silver, let's talk gold for a minute. I don't
usually discuss gold inventories because the declared
stockpiles of gold are so large (if you believe government
figures about how much they hold), but an interesting
thing just happened today at the COMEX warehouses
that does warrant some attention. For the first time
since early 2007 (and who knows how far back before
that), the amount of COMEX warehouse gold has exceeded
8 million ounces today. We do have deliveries under
the August contract coming up in a couple of weeks and
a huge open interest in COMEX gold futures, so the increase
itself is not very unusual. Still, the size of the addition
and the overall COMEX holdings do jump out. To me, this
speaks of a possible distribution phase with selling
pressure appearing in August, which I believe supports
my theorizing a couple days ago about the huge
open interest in Sept. 100 GLD call options. Basically,
I view these as troubling developments that may be setting
gold up for a substantial fall regardless of fundamentals
or technicals. Of course, if we get something like Fannie
Mae and Freddie Mac being nationalized or Iran being
attacked by Israel, all bets are off. Short of some
massive systemic shock, however, gold may have some
work to do in overcoming these headwinds starting early
August and lasting perhaps a couple of months. Unless
silver gains too much sympathy for falling commodities,
we could even see it outperform gold on a price decline
for the first time in history.
Flipping back
to SLV, I'm surprised to see Howard Ruff, veteran investment
advisor, buying the theory hook, line and sinker that
SLV is 'naked short'. He is recommending that all of
his flock get out of SLV and GLD gradually over time,
presumably because he believes these ETFs are running
the risk of default. I hope this type of incorrect-though-influential thinking
does not continue to catch on because should SLV or
GLD lose popularity, I can guarantee you that au/ag
prices will get punished really hard. Fortunately, most
of the SLV and GLD shareholders are unlikely to be swayed
by the errant logic of 'naked shorting'. As I've said
many times before, there are plenty of reasons not to
invest in gold or silver ETFs, but the idea that they
don't hold the bullion they claim to hold or that shares
are being sold 'naked short' in huge numbers, is 100%
wrong.
Unfortunately,
the backlash against short selling is increasing with
the ridiculous, selective 'defense' by the SEC
last week of the U.S. financial industry's giants. Thanks
to this encouragement, my mailbox is now overflowing
with messages from 'anti-shorting' crusaders. Meanwhile,
Ted Butler continues to waste valuable space, this
time arguing that all shorting of stocks should stop.
If he would just get off the dead-end road, there is
no telling how much value his relentless efforts could
provide to silver investors.
Here
is the thing. The short selling issue is irrelevant
for 99% of stocks, including the vast majority of juniors
trading in Canada. It has been a factor with respect
to a few companies that are the legitimate victims of
boiling room operations, although most deserved having
their prices pushed lower (because they were outright
frauds or pump-and-dump operations). Indeed, I'm aware
of several PM stocks right now that short
sellers would absolutely love yet I see no evidence
their shares are being shorted to any great extent.
I do see one problem with short selling, and that
is when it comes to large restricted share issuances
and convertible debentures that can be repriced--so
called 'death spiral financings'. Some participants
in a financing may simply be going for arbitrage
profits and as a result they may short sell (in a few
cases even 'naked' short sell) in the open market against
their long position obtained in the financing. These
are case-by-case issues that the SEC and Canadian regulators
should deal with--as they have in the past--using
enforcement actions available under existing securities
laws.
The
ultimate proof that short selling, whether 'naked' or
otherwise, is nowhere near as widespread as alleged
is the fact that it is rarely profitable on
a portfolio basis for even the smartest hedge funds. Most
industry players realized a long time ago that betting
on falling stock prices is done best, if ever, using put
options, written call options, single-stock futures,
or sector plays. Perhaps the 'anti-shorting' crusaders,
if not the SEC too, will realize this eventually.
JULY
22 2008 10:25AM - That attempt at $1,000
by gold didn't last very long as it got cut a bit
short by the commodities getting hammered today.
Nonetheless it provided a clear opportunity for taking
profits. As we speak, gold is struggling to stay above
its support level and silver is grappling with the round
number trading at $18. I'm currently bottom-fishing
with very tight stops.
Looks
like my corn option trade was late. In the past couple
of days, corn has sunk below $6 with not much in
the way of support all the way down to $4. I wish I
had added more $6 puts or had additional time to buy
some of the other options I mentioned last week, but
at this point they've gotten way too expensive given
the risk-reward spread. I still think there will be
a big bounce in the days ahead and I'm actually using
some of my profits on the $6 puts to buy some calls.
I will then hopefully use the profits on the calls to
buy more puts for the next downleg.
As
for copper, it continues to provide an excellent opportunity
to risk a tiny amount to make a huge payday in case
the red metal finally succumbs to a correction in commodities.
Copper may look very strong now with unassailable fundamentals,
but if the facade cracks, we could see a bunch of limit-down
days that quickly take a dollar or two off the price.
It's easy to be put off by the tiny volumes in copper
options, but if you put in a reasonable bid, you will
get filled most of the time. This doesn't mean
you can get an order for 100 options filled, so this
trade is purely for smaller accounts and not hedge funds,
which is just fine by me. I offer up the December
2008 COMEX copper $2.50 put option, which can be had
for $200 and under, against any other speculative trade
for 2008 (disclosure: I own quite a few and plan to
add some more, rolling out to 2009 put options if December
approaches expiration without much underlying movement).
In fact, I think this trade is so good that I wouldn't
feel bad charging $1,000 to reveal it--if I already
had a subscription service. Perhaps this will make me
hurry up and get it started, plus if it turns out as
well as I think it could, some people might actually
take me up on the next offer.
JULY
20 2008 10:35PM - If you think silver has
succumbed to gravity, I say not so fast. As long as
gold is able to hang around the $950 level, things are
okay. So far gold is holding but who knows what the
next hour holds.
Here
is one worrying sign. More than one reader has pointed
out to me that open interest in the Sept. 100 GLD (the
big Gold ETF) call options has grown to a huge
size. This appears to be a rather large
bet that gold will go over $1,000 by September considering
that options on GLD were introduced only one month ago.
165,000 option contracts represent more than 1.5 million
ounces of gold, which is more than 5% of the GLD outstanding
shares. By comparison, the nearest option month for
COMEX gold is October, and there are about 7,000 of
the $1000 strike call options outstanding, for a total
of 700,000 ounces. This is less than 2% of the outstanding
COMEX futures. Also, 1.5 million ounces is about half
of what GLD has added in the past couple of months.
Moreover, the premium on the Sept. GLD call options
is significantly lower than the premium on the Oct.
COMEX gold call options, which expire at about the same
time. That is not the case for the put options, where
the premium on GLD is much higher. Thus, it appears
that the large volume of these Sept. 100 GLD call options
may have resulted not from huge demand but rather huge supply.
In effect, the GLD Sept. 100 call options are being offered
at a price that is too sweet to pass up.
Now,
who would offer these GLD call options so cheap? Well,
I don't think it takes a rocket scientist to draw the
conclusion that these people are one and the same who
acquired some of the GLD shares that resulted in the
ETF adding 3 million ounces to the gold Trust in the
past few weeks. In other words, somebody bought a bunch
of GLD shares and then wrote call options against them.
The GLD purchase appears to have been done mostly under
90 and therefore the call option strike price plus premium
represents an income of more than 10% if the calls expire
in the money and are exercised. Otherwise, the option
writers get to keep the premium which lowers their cost
basis in the GLD shares.
If
you've followed Professor Fekete's writings, you should
recognize at this point that we may have the confirmed
arrival of "bulls in bears' skin" (BIBS for
short) in GLD just one month after options were introduced.
What these BIBS seem to be doing can be boiled
down to the following. They buy a bunch of GLD shares,
driving up demand and causing more gold to be delivered
to the gold Trust, which in turn causes gold prices
to rise. As a result of rising gold prices, there is
growing speculative interest in GLD and the BIBS sell
call options in huge numbers (the BIBS are probably
bullion banks and Authorized Participants, and many
of the buyers are no doubt their own clients). Money
that might have otherwise gone into GLD itself has instead
gone into GLD call options, and because the BIBS have
now lifted their own buying, the net result is
a possible decline in GLD (and gold) demand. This,
in turn, could very well ensure that GLD does not rise
above 100, allowing the BIBS to keep the option premium.
If GLD does rise above 100 by option expiration, the
BIBS aren't concerned because they're still up more
than 10% in a couple of months and they get to repeat
the process again. This is what the Professor means
by 'earning an income' on gold, although this version
appears both more brazen and accessible to the average
investor than do most of the other methods. The telltale
sign that this was overdone the first time around is
the premium on the GLD call option being lower than
the premium on the COMEX gold call option, not just
in the Sept. 100 calls but across the board in calls.
We
should know if I'm wrong that the BIBS are involved
here because assuming GLD does close above 100 at option
expiration, the resulting demand for GLD shares should
drive a lot of new gold into the Trust, perhaps over
1 million ounces. I'm guessing that won't happen because
those 1 million ounces have already been added before
the fact.
The
above theory also explains something that is a bit of
a mystery with respect to SLV, the iShares silver
ETF. Some silver analysts have had free reign in speculating
that perhaps the lack of silver additions to SLV in
contrast to the big additions of gold to GLD is the
result of 'naked' short selling of SLV shares by the
Authorized Participants. To my mind, that type of thinking
is simply not very logical in light of the possible
effect of the new GLD option trading that has created the
very large open interest and low call premiums in the
GLD Sept. 100 calls.
So
what's this all mean? Well, it's possible that some
of gold's (and thus silver's) strength in the past month
has been the result of the accumulation of gold by BIBS
for their new "line of business" (selling
GLD call options) and not fundamental or technical reasons.
With this gold buying removed from the equation going
forward, we may see the price of gold (more so than
silver) drop for unexplainable reasons. I see two
takeaways. One, we can't be too confident about gold
holding $950 in the days and weeks ahead. Two, silver
may very well turn out to be the better bet for the
next little while even if prices drop. In other words,
silver typically falls faster and more than gold but
it might not be the case this time around.
Even
though gold may fail to hold $950 in the near future,
I'm personally betting that in fact it will first make
another run at $1,000. The way I see it is that
crude oil may try another stab at $150, sparking new
but temporary momentum in the commodities and au/ag.
I'm inclined to start taking some trading profits if
that happens, although I will be looking to jump back
in if some fundamental or technical reasons warrant
doing so. Along the way, I would also be looking to
increase my copper and corn put option holdings.
Time
to move on. Last week I discussed that the SEC's
emergency order against 'naked' short selling in certain
financial stocks is really nothing more than a protection
racket resulting in less liquidity and a worse-off market.
Well, here comes confirmation via TradeStation and other
brokers, many of whom are now refusing to allow 'retail'
short sales of any kind (even if the shares are located
and borrowed before the short sale). The TradeStation
notice sums it up nastily:
Due to the industry impact of the recent SEC emergency order on short
selling, TradeStation Securities will not be able to facilitate retail short
sales that are cleared through TradeStation Securities in the following
securities beginning 12:00:01 a.m. on Monday, July 21, 2008, and ending 11:59:59
p.m. on Tuesday, July 29, 2008.
It
then goes on to list the companies (Bank of America,
Morgan Stanley, Goldman Sachs, Citigroup, Freddie Mac,
Fannie Mae, etc., etc.) that have been operated
in such a way that they are both the most critical to
the U.S. and world economy and at the same time the
most vulnerable to unsubstantiated rumors. Simply amazing!
JULY
17 2008 9:15PM - The support levels mentioned
yesterday are being tested as I write this and so far
au/ag are holding up. Crude oil got pummeled again
today and many recent superstar commodities such as
corn are also on the ropes. The commodity indexes are
either sitting right at trendline (Continuous CRB) or
have already broken down (GSCI). If this is the start
of a long-needed correction, it presents some temporary
problems for the monetary metals. Fortunately, they
are in remarkably good shape to deal with any fallout.
But just in case, I'm going to protect my substantial
long exposure with a slightly different strategy
than I've discussed before. This strategy is consistent
with my recent rantings about a possible correction
in commodities. In short, I am buying put options in
corn and copper, two commodities that are bellwethers
in many ways. Both have made some of the most spectacular
moves out of all the exchange-traded commodities during
this bull market and both continue to be supported by
a very bullish consensus. That makes their put
options relatively cheap and also means that
a shift in sentiment could cause their prices to fall
. . . by a lot (fundamentals be damned).
Copper
in particular has some very attractive put options all
along the option chain (Sept @ $3.00 - $3.30, Dec @
$2.80 - $2.50, Mar 2009 @ $2.50, etc.) I especially
like the Dec $2.50 put currently trading under $200
because it offers extreme leverage should copper fall
by a similar amount from its peak (60%) as have
lead, zinc and nickel. At $2.00 copper, each option
would be worth $12,500. At what I think might be the
eventual low of $1.60, each option would be worth over
$20,000 for a legendary 100-to-1 gain. The likelihood
of this happening by late November (when the December
put options expire) isn't very good, however, even
if commodity prices crash and burn, so my strategy involves
buying some $2.50 put options into Mar 2009. If
copper doesn't end up crashing by the time these put
options expire, that probably means gold and silver
will be much higher and the losses on these options
will have served their purpose as portfolio insurance.
In a best case scenario (for this strategy), copper
crashes while gold and silver go up (and I can probably
retire).
Corn
is a bit tougher in that it has already come down by
almost 20% from its peak, but there are still some attractive
put options out there. The $5.50 put option, for example,
seems to be a pretty good bet from Dec 2008 all
the way out to May 2009. On a move down in corn prices
to $4.00, which is not at all implausible, these puts
would be worth around $7,500 each. The $4.50 puts are
cheaper but not a bad way to gamble on lower prices;
I'd consider buying them all the way out to Dec 2009.
Also, I already own some $6.00 puts acquired while corn
was still near its peak, and should there be the inevitable
bounce in the weeks ahead, that would be where
I might look to add more positions.
Let
me emphasize here that the above put options are all
high risk contrarian plays that should involve only
risk capital. In my own case, I am essentially using
them to hedge my long exposure in gold and silver against
a precipitous decline in commodity prices. If some of
these put options should expire worthless, I would look
to replace them with further out options until I see
evidence that a global economic slowdown similar to
what occurred between 1974-76 will not now do the same
thing, or worse, to the price of copper
and corn
that it did back then.
JULY
16 2008 4:05PM - Gold and silver broke out
from the upper end of their trading ranges late last
week and it was off to the races. The reason was that
the financial system took several body blows. First,
there was the emergence of new concerns about Freddie
Mac and Fannie Mae, which led the FED to extend to them
the same borrowing terms available to banks and Wall
Street securities firms. This will no doubt result in
another round of severe deterioration of the Fed's balance
sheet. These mortgage-lending heavyweights will also
continue to make news in the months ahead as loan defaults
continue to eat away at their capital, and this will
provide strong moral support for gold and silver along
the way.
Then
there was the failure of IndyMac Bank, the third (measured
by FDIC-insured deposits) or second (savings and
loan) largest in U.S. history. This past Monday, depositors
actually lined
up at the doors of bank branches hoping to
withdraw funds in a scene reminiscent of the Great Depression
(or more recently, the Northern Rock failure in the
U.K.) It is interesting to note that the failure of
IndyMac was actually the result of accelerating deposit
withdrawals in the past few weeks as realization of
the bank's troubles spread. Thus, we now have the first
confirmed case of a bank run in the current credit crisis,
replete with customers saying they are seriously considering
stuffing their money under a mattress or burying it
in the back yard. It's only a matter of time before
some of these people discover gold and silver.
As
if all this wasn't enough, the SEC just issued an emergency
order that allegedly seeks to protect investors,
but is nothing more than yet another sign that the banking
industry is in grave danger. The SEC order requires
that shares of certain stocks comprising many of the
world's 'money center' banks and credit-issuing entities
(Freddie Mac and Fannie Mae included) must be borrowed
before they can be shorted. This eliminates
the possibility of 'naked' short selling whether it
is done manipulatively or by market makers who are conducting
legitimate operations that have been encouraged by market
regulators for decades. Unfortunately, increased price
volatility could be an unintended consequence of
this SEC intervention given that it now discourages
market making activity. So, why issue the order? Apparently
the SEC fears that false rumors may be responsible
for damaging the credibility of major financial
institutions that rely on the trust of counterparties.
The SEC even trots out Bear Stearns as an example,
insinuating that its failure was the direct result of
false rumors about its dire financial position. Whether
true or not, we should not lose sight of the fact that
the companies listed in the emergency order probably
represent (1) institutions deemed 'too big to fail'
and (2) institutions that can presumably fail based
on some unsubstantiated rumors about their financial
condition. It's a sad but insightful fact that our biggest,
supposedly safest, and most critical institutions have
been structured in such an irresponsible manner that
they need SEC protection against rumor mongering to
keep them safe from ruin.
The
above three events are currently serving as major drivers
for au/ag and they go a long way to explaining last
week's breakout from the trading range established in
March. Had oil not weakened yesterday and the dollar
correspondingly not found its legs, we could have
easily witnessed gold climbing back above $1000 and
silver over $20 today. That would have left both au/ag
in a position to quickly achieve new highs before momentum
started to dry up. So, what's next? I wouldn't be surprised
to see the former resistance at $18.50 silver and $950
gold get tested a few times as support. If these levels
hold relatively firm, the upward trajectory could continue
with renewed vigor. Failure, on the other hand, would
somewhat invalidate the breakout and suggest that we
are still in a bottom-forming process that may involve
further visits to the respective 200 day moving averages
(now at $16.50 for silver and almost $880 for gold,
and still rising fast). In any case, the renewed distress
in the banking and credit sectors should serve to support
au/ag prices even if oil and the commodity sector experience
a major correction as I discussed in past commentaries.
Thus, we may be one step closer to the perfect setup
wherein au/ag become the biggest beneficiaries of anti-dollar,
anti-stock and anti-bond money flows. In such an environment,
we can expect the true gold and silver producers
and explorers to eventually shine as investors
start to view their relative risk in a better light
thanks to the great demand for what these companies (hope
to) produce.
Now
for a quick update on the basis and some other fundamentals.
The basis in gold and silver actually remains in relative
neutral territory on this latest move. There is absolutely
no indication of a move toward backwardation and
thus we must assume that monetary demand is still far
off. In addition, both the gold and silver
basis are nearly identical according to several measures
that I calculate, providing no indication of investment
preference (instead suggesting a 50-50 split).
If I had to generalize, I'd say the basis is telling
us (1) there is approximate balance between upside potential
and downside risk in au/ag, (2) current price action
is mostly technical and (3) physical supply for the
most part is keeping up with fundamental demand.
Number three, of course, argues against a shortage of
silver in London or elsewhere (I note that even silver
Eagles are back in stock at most bullion dealers0.
Moving
on, let's take a look at the silver ETFs. The iShares
SLV has finally added 3 million ounces in the past few
days to reach the 197 million ounce level it had achieved
a month ago today. By my reckoning, it took the Authorized
Participants (the brokers who can exchange physical
silver for ETF shares) quite a while to absorb sufficient
excess demand to warrant these additions. Some of you
may be wondering about where all that SLV trading volume
has gone. My answer is that trading volume figures in
SLV are deceptive in that much of it in the recent
past has occurred right around par to the iShares'
NAV. This means that the Authorized Participants who
normally bridge the gap between the price of SLV and
the cash price of silver have not had a lot of work
to do. Possible reasons for this include (1) the increased
liquidity of SLV as the number of shares outstanding
continues to increase and (2) greater competition
from market participants acting as secondary market
makers whenever a premium or discount to NAV appears.
These secondary market makers probably include brokers
as well as do-it-yourself traders who view the risk
of a persistent premium or discount as remote. In effect,
these traders are anticipating the corrective action
of the Authorized Participants, which makes such action
unnecessary. I would note that the recent proposal by
Barclays to split the silver iShares 10-for-1 should
increase liquidity even further as well as encourage
smaller investors who are put off by the 'high' price
of an individual share. The net result will probably
be even greater pricing efficiency.
There
is another possible reason for this split, although
it is pure speculation on my part. By splitting the
shares 10-for-1, each iShare will be priced roughly
the same as one ounce of silver. This will permit a
more straightforward and timely calculation of differences
between the price of SLV and the cash price of silver
(premium or discount to NAV). As it stands now, individual
investors and even small firms are at a significant
disadvantage in making this calculation compared to
large trading desks. By contrast, GLD publishes NAV
premium and discount indicators on its website with
a very reasonable 5-10 second delay (see "Current
Indicative Intraday Value of GLD" here).
Meanwhile, the SLV website
publishes a NAV figure using the daily London silver
fixing, which occurs sometime after 12 noon London time.
As such, we have a once-a-day "indicative
value" for SLV but we don't even know the exact
time that such value was calculated (the silver
fixing can occur right at 12 noon or several minutes
-- sometimes even hours -- afterwards, depending
on how long it takes to balance buy and sell orders).
Furthermore, the explanation of 'timing discrepancies"
in the NAV calculation as provided by Barclays is not
helpful whatsoever because it makes several inaccurate
or confusing statements. I recently asked Barclays to
look into this, and it is plausible that their review
resulted in a decision to revamp their entire approach
to calculating and reporting NAV, and part of that
decision may have been to split the shares. Again,
this is just speculation on my part but I hope Barclays
does improve the timeliness and relevance of its NAV
calculations as part of this share split.
Here
is my explanation of the current NAV calculation
that I provided to Barclays and what I believe may have
prompted them to consider the change. If you
can tell the difference between what I'm saying
below and what is stated on the Barclays website, you
are probably among a select few who truly understand
the workings of the silver ETF:
The
NAV calculation is made by the iShares Silver Trust
accountants at the end of each trading session using
the London morning price of silver. The London silver
price is fixed shortly after 12 noon GMT but usually
before the iShares open for trading on the AMEX.
The
Market Price of the iShares is calculated as of the
close of trading at 4pm EST
Premium/Discount
is the difference between NAV and Market Price and may
reflect a timing discrepancy, a pricing difference,
or a combination of the two.
A
timing discrepancy may result from silver price movements
after the London morning fixing used to calculate NAV.
While the iShares are open for trading on the AMEX,
silver also trades in London on the afternoon spot market,
in New York on the COMEX futures exchange, and in various
electronic exchanges. A change in the price of silver
traded in these markets may affect the trading price
of the iShares. This would result in a Premium/Discount
to NAV representing a timing discrepancy.
By
contrast, a pricing difference may result from a change
in the price of silver traded in London during the afternoon
session, or on a futures exchange, that is not reflected,
or only partially so, in the price of the iShares. A
pricing difference represents an arbitrage opportunity
for Authorized Participants who will sell the overpriced
item (iShares or silver), use the proceeds to buy the
underpriced item, and pocket the difference as profit.
iShares traders will sometimes anticipate arbitrage
chasing by the Authorized Participants, reducing the
profit opportunity and making action by the Authorized
Participants unnecessary.
It
may not be possible to determine the precise composition
of timing differences and pricing discrepancies in the
Premium/Discount and consequently it should neither
be relied upon as an indicator of the iShares' effectiveness
in tracking the price of silver from day to day nor
of an imminent change in the silver held by the iShares
Silver Trust resulting from Authorized Participants
taking advantage of arbitrage opportunities. The average
or mean of Premium/Discount to NAV over time, however,
may be a good indicator of price-tracking effectiveness
or imminent change in silver holdings.
**********************
Of
course, in my own work I try to use "the average
or mean of Premium/Discount to NAV over time" as
an indicator of balance between ETF share supply and
demand and the resulting overflow effect on the
physical silver market as metal is delivered to, or
withdrawn from, the iShares silver Trust. I also use
a proprietary intraday tracking mechanism that allows
investors to determine at a glance if SLV (or GLD) is
trading at a discount or premium to NAV. I plan to discuss
both these methods in the subscription service that
will be launched this century or next.
Slogging
on to take a peek at the other silver ETFs, we
find that the Swiss ZKB is still busy adding silver
and has now exceeded 22 million ounces while the London
version (PHAG) seems to be struggling to overcome the
decidedly unrounded 11 million ounce threshold.
Who knows, maybe somebody is 'naked' short selling PHAG
as well as SLV?
In
total, the confirmed stockpiles of silver now amount
to over 410 million ounces, which is about what the
best analysis said 3 years ago was out there to be had
in aggregate. The fact that such a quantity of silver
could be assembled at prices almost exclusively south
of $20 can mean only one of two things: (1) the alleged
effort to suppress silver prices has been a tremendous
success to date, but will fail any day now, OR (2) there
is some multiple of this 410 million ounces still hiding
out there, to be accumulated at some higher silver price.
The choice between these two possibilities has some
subjective elements that only time can resolve, and
I'm willing to be patient seeing that both scenarios
favor higher silver prices. Hey, I'd love to be wrong
that #2 is right if it means $100 silver!
In
closing, I will just briefly discuss the very disappointing
July silver deliveries at COMEX, which are running about
4 million ounces behind the pace of last year. There
wasn't that much excitement in the silver market in July
2007, and certainly there was little talk of possible
shortages. Some analysts attribute this year's lower
rate of silver deliveries to a concerted attempt by
the exchange to discourage speculators from taking delivery,
but even if that were true, it would not explain why
commercial users faced with shortages in London are
not drawing down the COMEX facilities. In the next
few days, we should know how much warehouse silver is
actually being withdrawn by commercial users. If it
is not a substantial amount, we can put another nail
(for now) in the silver shortage coffin. If and
when a true shortage does arrive, I have no doubt it
will be discernable in the COMEX figures (not to mention
the basis).
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