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JULY 8 2008 11:45PM - The European Central Bank raised by 25 basis points last week but apparently uttered too-soft words about inflation and so the Euro got smacked while the U.S. dollar found some footing. Then over the weekend we got a (temporary?) winding down of the oil panic as traders recalculated the probability that Israel is about to bomb Iran. It should thus come as no surprise, even to conspiracy lovers, that au/ag topped out and have been declining over the past several days. Currently we are in the upper-middle portion of a wide trading range or channel between $16.50 and $18.50 for silver and $850 and $950 for gold. This trading range has been in place since late March and is now very well established. As a result, it provides a couple of very good opportunities.

The first opportunity is that there are some very solid profit and stop loss targets for speculative traders: buy silver at $16.50 with a tight stop and sell at $18.50 with a tight stop, taking exposure both directions as prices swing back and forth. When I say 'tight stop', I don't mean $16.45 or $18.55 and then being completely out of the trade if the stop is triggered. That's how I used to do it before the 24-hour CME Globex trading became available and I rarely made money that way. The chance of an overnight bust was too great and therefore the only alternative was to use options to control the risk. Now with nearly 24 hour trading via Globex, there is much greater flexibility as you can actually look in real time for the bounce-back in prices that typically occur outside the COMEX pit trading hours. In some ways this has increased overall volatility in PMs, but it has also increased the ability of individual traders to stay with positions by 'stalking' the market live and thus avoid losses caused by fast moves in the bid-ask or overnight gaps up or down.

I seldom hear discussions in the precious metals arena about the emergence of CME Globex trading for COMEX contracts, but in my opinion it is probably one of the most important developments ever for individual and small traders. It has helped level the playing field in futures trading to the point where the metal desks of the bullion banks and large, professional traders with direct floor access have substantially fewer advantages (certainly less than they have in the ETFs). I remember a few years ago, Jim Sinclair was extolling the virtues of his brokers because they could place gold futures orders in the NYMEX after hours electronic platform or directly in overseas markets so he wasn't locked into positions by the restricted trading hours in the COMEX pits. Yet just as the electronic CME Globex platform for COMEX futures was being launched, Mr. Sinclair shifted his emphasis toward 'no leverage for the masses' and thus never fully educated his public about this excellent new opportunity. Of course, it is not necessary to use leverage in futures trading--simply fund your futures account in full for the equivalent of each contract you trade.

In any case, let's get back to the idea of the 'stalking' stop loss. Doing it right usually means observing the market in real time once a stop has been initially hit and then trying to re-establish a position on a promising bounce or fade (again with a tight stop). This could be below or above the original stop, and the only way to learn how and when to do it is by getting trading experience. The concept, however, is simple. If support does hold then a decent bounce will likely follow and should more than pay for a few 5 cent losses made in trying to successfully re-enter the market. On the other hand, if support fails, it usually does so fairly quickly and there will not be many chances to incur those 5 cent losses. There are those times when this type of stop loss strategy is unnecessary because support or resistance is very well defined. But in most cases, I have found that it is very difficult to stay with a position at turning points unless you are willing to look for opportunities to jump back in the saddle after getting thrown off once or twice. For example, I would argue that silver at $16.50 is the top of a somewhat soft zone of support that goes all the way down to $16.00. That ride will cost $2,500 per contract and you start to get into some real big trouble if it doesn't stop there. It would be preferable to take a $250 loss from $16.50 to $16.45 and then wait for an opportunity to re-enter. Sometimes it could be above $16.50, or perhaps well below it. And it could take several tries. But if the 'stalking' stop loss is executed properly, what will not happen is the type of thing that can wipe most traders out: helplessly watching the market move against you in the blink of an eye where one minute you have a nicely funded account and the next minute you are down $5,000 per contract and facing a margin call. By contrast, the zone above $18.50 is much better defined, and I would not advise using the 'stalking' stop loss to try getting short there. Instead, I'd opt to go with a more generous initial stop loss, perhaps 10 cents, and if that is triggered, I'd consider switching tack and looking to go long with the former resistance at $18.50 now considered support. In either case, the successful trader may have to keep some unusual hours for a day or two while the price action is resolved, which is a small price to pay for setting up a trade that can generate dollars of return on pennies of risk.

The second opportunity is probably more up the alley of most investors. A clear breakout of the channel in either direction by au/ag will signal that a significant continuation of the move could occur. Any upside breakout (above $18.50 in silver, $950 in gold) at this point would certainly have sufficient momentum to challenge the record highs from March, and I would expect silver to outperform gold perhaps by a margin of 2:1 (with silver very capable of reaching $25 to gold's $1200). Conversely, a downside break ($16.50 silver, $850 gold) could see prices plunge significantly lower, and here silver would no doubt underperform. How much lower? Maybe near $13 for silver on a 'super' plunge. Interestingly, however, I get a low of only around $800 for gold. So, it might pay to be underweighted silver on a channel breakdown but to be overweighted silver on a breakup. For those not wishing to enter or exit positions outright, an alternate option would be to 'arbitrage' between gold and silver. Of course, there aren't many ways for the average investor to do this with low transaction costs (other than futures), which brings me to the ETFs. I've said before that they have their time and place, and it is precisely in the current market. The simplest strategy would be to go all in SLV as silver moves toward $18.50 and all in GLD as silver moves toward $16.50. The idea being to maintain full exposure to au/ag but pre-position for a possible breakout in either direction and thereby both control risk and enhance returns.

Speaking of SLV, I see that Ted Butler has once again found evidence of unreported naked short sales by looking at reported trading volumes in his latest commentary. This time apparently 10 million more ounces of silver have been naked shorted on top of the 50 million ounces since the middle of April. Hello?!? Any unreported naked short sales will be excluded from trading volume by definition, so how is Mr. Butler able to make these determinations? The only possible way would be to know how much the trading volume should be, and then ascribing the supposed shortfall to unreported naked short selling. It sounds like magic to me, but recently it is my own analysis of the silver market that has been compared to an Oracle who tells the future by examining pigeon entrails. I'll leave it to you to decide whose fingers smell of bird-gut.

Moving right along, I will note with some distaste that the junior miners continue to get splattered in a manner reminiscent of something that gets produced in a bird's gut. The latest culprit, which few people seem to be reporting, is the virtual collapse of zinc, lead and nickel prices. Zinc is now trading under 80 cents per pound after reaching over $2/lb last year. Meanwhile, lead is near 70 cents after hitting a high of $1.75 just a few months ago. Similarly, nickel is under $10 after trading near $25 last year. The timelines are different but in all three cases, the decline represents a drop of about 60% from the highs, leaving these metals 'only' up about 100% for the current bull market to date. An equivalent decline in gold and silver would leave them around $500 and $8, respectively. It's a sobering thought. What about copper? For now it seems to be insulated against the fate that has befallen the other base metals, but it may not take a big change in sentiment to get it going in a downward spiral as well. Something like a 5% decline in demand year-over-year would do it, which is entirely possible if we have a moderate global economic slowdown.

Some of you may remember that I started railing over a year ago about the consequences of a housing collapse that would lead to an economic slowdown, which in turn would drive down industrial demand and reduce the need for base metals just as mine production was on the rise. For this reason, I said stay away from base metal miners and explorers and concentrate on those looking for or digging up gold and silver. In the case of silver, this is especially difficult because most 'silver deposits' are actually lead-zinc deposits with high silver credits. But there are some exceptions, particularly in Mexico and South America where silver is accompanied mostly by gold. And in some places (Idaho, northern Canada) the silver is dominant.

Unfortunately, it now appears that I did not repeat the mantra enough to permanently etch it into my brain and so the pigeons have come home to roost. Specifically, what I stated about base metal exposure back then has indeed become a major contributor to the declining share prices of many exploration and mining companies (some of which I own). There are too many examples to list, but those suffering major hits from the lead/zinc fallout include 'primary silver' companies such as Silvercorp, Hecla, U.S. Silver, Impact, Bear Creek, Excellon, Fortuna, Great Panther, Sabina, Silver Eagle, etc. I should note that I haven't changed my own investment approach toward some of these companies--Hecla, Impact and U.S. Silver in particular--as a result of bringing the base metal risk back into focus, but I am in the process of lowering my expectations. On top of lower lead-zinc prices, each of these company is also dealing with its own form of bad timing. Hecla needs to come up with financing to pay for the Greens Creek Mine (it's got a lot of zinc...) and this is pressuring the share price; U.S. Silver just announced the departure of its President Mark Hartmann which the market took as bad news; Impact is getting no respect for its business model that is dedicated to profits first and the company has even lost its newsletter following. Out of the three, U.S. Silver seems to be getting the biggest bum rap so I actually purchased another 5,000 shares at 34 cents today. The current valuation of the company at around $70 million makes little sense if in fact it can soon produce at a rate of 3.5 million ounces of silver per year. That would be $20 per ounce of annual silver production and is anywhere from 3 to 8 times too low.

The above names are just some of the better companies with real prospects and strong opportunities. One standout exception is Pan American Silver, which actually gets a sizeable by-product credit from zinc and has yet to see its price get whacked. It does have less exposure (zinc grade is typically 2-3%) than many of the others , so that is likely a reason. But generally it gets much uglier from there with the primarily-zinc companies like Apex Silver, Metalline Mining, Canadian Zinc, Strategic Resource Acquisition Co. (a zinc deposit with no silver), etc. getting skewered whether they deserve it or not.

On the other hand, many of the silver companies with little base metal exposure are doing fine by comparison. One of my favorites for a while now--partly because of its nearly pure silver--is First Majestic, which has simply refused to sell off amid the ongoing carnage. Others largely holding their own include Endeavour Silver, Genco, Esperanza Silver, Gammon Gold, Kimber, Minefinders, Orko Silver, Silvercrest, Silverstone, etc. This list is no better or worse than the one above, the only difference is that they are mostly silver-gold plays with low(er) to no base metal (lead-zinc) exposure.

What about Silver Wheaton? It is a pure silver play, so it should ideally be outperforming the rest. Well, it doesn't seem to be doing much of that lately. It is possible the price has discounted the risk that some of the mines that have contracted to sell their silver streams to SLW might actually not survive if lead-zinc prices continue to fall. With only $3.90/oz. to show for the silver by-product, the marginal cost of running these mines is higher than other mines that have not sold forward their silver. I haven't examined all the mines that have contracts with Silver Wheaton, but it does appear several might be in trouble if lead-zinc prices fall substantially further without a corresponding easing in mining costs (energy, labor).

Already there is talk in the industry that some projects look shaky at zinc prices just below current levels, and it is altogether possible that several mine startups or expansions that have used higher price assumptions in their feasibility studies will possibly be shelved. Of course that is good news for future lead-zinc prices as supply gets held back, but perhaps it is even better news for silver given that curtailment of proposed lead-zinc projects would mean that less silver production will be coming online compared to recent estimates. If so, this is actually quite a bullish scenario for silver investors, especially those who are still around because they heeded my warning (even though I myself did not) to stay away from base metal exposure when investing in PM companies.

Now, let me clarify that I don't expect lead-zinc prices to fall much further here, and even if they do fall some more, I think we will see them stabilize around $1/lb in the short to medium term. Longer term, I do expect their prices to rise but not soon enough to save some of the questionable mining projects. At the opposite extreme, there are some very robust projects out there that would not be threatened even if lead-zinc fell another 50%. Those are the keepers. In addition, I would evaluate the prospects of the companies in your portfolio using an assumption of $1/lb or lower lead-zinc prices and see if that still makes them 'extremely undervalued', 'highly prospective' or whatever the reason was that got you to buy the shares. While you're at it, I'd suggest you do the same thing with the copper projects using $2/lb, because I have a suspicion that's where the red metal might be headed in due course.

Finally getting back around to au/ag, what's important is that they are now definitely outperforming (most) other metals and I believe this will continue as mounting monetary and financial problems chase people to the safety of real money. This means au/ag most likely will not join the other metals in the '60% backslide to 100% bull market gains'. Besides, it should be at least a bit encouraging that the brutal mid-1970's correction left silver 'only' about 33% shy of its 1974 peak while gold actually suffered a 45% drop. These percentage declines applied to the highs from past March result in a theoretical low of $14 in silver and $565 in gold. That's pretty bad, so why would I say it was 'encouraging'? Well, $14 is actually pretty close to the 'worst case low' I mentioned for silver earlier. More importantly, the theoretical $565 is way below the low we will get in gold. Why? I suspect one of the reasons gold got so badly trampled in the middle of the 1970's bull market was because Pres. Ford repealed the limitation on private gold ownership effective the end of 1974. You would think that would have created a huge amount of demand, but actually it first created even more supply--a typical case of buy the rumor, sell the fact. Fortunately, we are not faced with any similar situations today, and thus I believe we should look at silver's behavior in the mid-1970's for a clue as to what a bad outcome might look like today.

When we do that, we can see a relatively quick decline of 33% from the highs with range trading for several years during which the bottom is revisited several times. This would essentially mean silver prices trading between $14 or so on the low end and perhaps $19 on the high end until an eventual breakout that precedes the next parabolic run-up. I don't have a big problem with that, especially since I see it as the absolute worst case. Many silver miners and explorers should be very profitable and make their shareholders happy if such a 'bad thing' were to happen to the price of silver.

I'll close this long diatribe down with a somewhat repetitive observation but one that is nonetheless necessary to clarify what might otherwise appear like a muddled position (or worse, pigeon gut research). One 'nice' thing about bull market corrections in the price of au/ag is that while they are furious, they also tend to reach their true bottoms very fast. Thus, it's very possible that the correction from the March top has already had its bottom on May 1 when silver briefly flirted with $16. Even if not, the bottom should be in by September at the latest, and I'm willing to place a wager on that with a side bet that a print below $14 is all but impossible. I view this as the absolute worst case. For example, let's say that oil dumps back down to $60 and copper crashes to $1.60 in the next couple of months. The Dow crashes too, through 8000. I think the low in silver should still be no worse than $14 (gold, $800). In such desperate markets, miners and explorers focusing on gold and silver would be incredible values at present prices, although it might take some time for that value to be appreciated and eventually chased by the market. Basically what I'm saying is that the worst case scenario for au/ag might actually be the best case scenario for au/ag miners (and ironically au/ag themselves given that once the miners get going, that could in turn provide some positive sentiment to au/ag).

JULY 2 2008 1:35PM - Many are calling this a breakout in gold and silver and it may be so from a technical perspective but I really don't like the vulnerable backdrop of parabolic oil prices. Last week I stated that a stock market crash might help au/ag break out of a trading range. And so far, lower stock prices seem to be translating to higher PM and commodity prices. But let me qualify this concept now. There is a risk that, at some point, funds will be withdrawn from both stocks and commodities. This happened on a small scale the middle of last August. Oil was about half its current price then and the dollar was substantially higher. Au/ag had a big one day drop and recovered in about a month as they got support from all corners. There might not be a hand to lend any help this time around should oil fail to move much higher while the dollar digs in its heels. It is possible, of course, that the dollar is about to embark on another leg down and oil on another leg up. But compared to the virtually risk-free scenario of last August, such prospects are much less certain. I have a strong suspicion that the 200 day moving averages will be visited again soon by au/ag and that there will be some base building around or slightly below those levels before we get the next true breakout.

If you bought near the 200 day moving averages of au/ag a couple of weeks ago, you've done very well and should have no worries holding for the long term. Speculators, on the other hand, should be on the lookout to unload long positions unless more supportive fundamental factors start to appear.

Other than high oil prices, there is another situation that might have bearing on the near-term outcome of the supposed au/ag breakout. It is the meeting of the European Central Bank tomorrow. It is widely expected that the ECB will raise its benchmark rate by 25 basis points in order to fight inflation. This would be ironic, given that a major reason for commodity speculation is diversification away from the U.S. dollar, which would likely suffer as a result of an increase in the interest rate differential between it and the Euro. Raising rates is appropriate to control overconsumption, an overheating economy, or excess speculation, but none of these seem to be a big problem in the Eurozone today. Indeed, raising the Euro rate would have the exact opposite effect on commodity speculation by spurring it on. Commodity speculation (or demand) can only be controlled by interest rate policy if it involves the currency in which commodities are priced! So, why would the ECB hike rates? The only plausible explanation, which is widely circulating in the financial media, is to pressure the Fed to do the same. In effect, it's a game of chicken with possibly catastrophic consequences. The most interesting thing about it, though, is that no matter what the ECB does, it could be viewed as fundamentally bullish OR bearish for just about every or any market. The sentiment in advance of the meeting has been very much as I laid out -- bullish for au/ag, bearish for stocks. The reaction to the actual announcement in a few hours should be very instructive.

In the case of both big and small gold and silver stocks, they are yelling "Watch Out!" The fact they have placed their sympathy today with the general markets and not the metals is troubling. One implication is that the current move in au/ag is not specific to any particular set of fundamentals but rather generic in the sense that it might be due primarily to a flow of funds into commodities. Should that flow stop or reverse, it could leave au/ag vulnerable to a price decline regardless of any other consideration.

On a related topic, I'd like to comment on Jim Sinclair and others who have been very vocal that junior exploration investors should support their companies by fighting the good fight against naked short selling. They should do this by urging their favorite companies to join a Chamber of Mines where they will gain strength in numbers and by contacting company presidents to ask about cash position and project quality. As sincere as these efforts might be, they will unfortunately create not a single iota of benefit in terms of share price. The only thing that can do that is actually BUYING shares in the companies. If these companies are so extremely undervalued as a result of naked short selling or whatever, then the best possible thing that investors can do is to buy their stock. Even better, if they simultaneously sell the losers and put that money into those with the best prospects, it will help ensure that at least the most deserving companies in the junior market will survive and thrive. One of my pet projects for a long time has been to help identify these top companies and hopefully I can make some headway in the near future. If so, this will be a feature in the new service that I hope to launch soon.

JUNE 26 2008 11:45AM - The Fed did what was expected yesterday so all markets pretty much did what they were waiting to do: the dollar and equities falling, au/ag, oil, commodities and bonds rising. The action in au/ag was particularly strong given the pointless selloff right before the Fed meeting. In effect, the monetary metals simply regained where they were before the non-event happened. We are now once again at the top of the trading range and it looks like some sort of impetus needs to take place before au/ag will move higher. Perhaps it will be a stock market crash seeing that the Dow and other averages are flirting with bear market territory (down 20% from late 2008 highs).

I am in the process of completing a thorough analysis of the silver ETF SLV in light of the recent fearmongering and misunderstanding that has been spread. For now, I have three relevant comments I'd like to share with you. They will be expanded upon in my analysis. The first is that short selling as reported in the short interest listings maintained by each stock exchange does not create new shares. Ted Butler is simply and spectacularly wrong on this account. Each share that appears on the short interest listing has been legitimately borrowed from someone who has agreed to lend the shares. A lender should have no expectation that the SLV long position listed in his or her stock account actually represents shares backed by 10 ounces of silver each because he or she does not actually possess the shares. If he or she does have such an expectation, it is not the fault of Barclays, the broker or anything else but his or her own ignorance. The fact is that possession is not just 9/10ths of the law when it comes to securities, it is the law. For example, it is the party who possesses the shares that receives interest and dividend distributions (the lender of shares is compensated for the loss of this income as part of the borrowing arrangement but is not legally entitled to it) and gets to vote on shareholder matters.

I am not talking about naked short selling, which does not actually result in the possession of any shares. Which brings us to my second point. The allegation that naked short selling can create possession and therefore result in more shares outstanding than have actually been issued is simply wrong. Let's examine this from two different angles. The first is naked short selling that is the result of a transaction reported to the stock exchange and clearinghouse (in the case of SLV, the AMEX and The Depository Trust Company or DTC, respectively). When such naked short selling exceeds certain minimum thresholds -- currently around 100,000 SLV shares for five consecutive days -- it is reported on the Regulation SHO Threshold List. Going back to last December, SLV has appeared on this list for exactly five trading days, February 28 to March 5, 2008. For every other date, the reported naked short selling did not exceed 100,000 shares for five consecutive days. So, while there is no excuse for SLV appearing on the list at all, clearly the reported naked short selling is minimal. But what's important here is that an investor on the receiving end of a reported naked short sale is never actually credited with shares in his or her account, as even Patrick Byrne of Overstock.com personally found out. Moreover, the investor will not receive interest or dividend distributions or proxy materials. And of course if he or she tries to sell the nonexistent shares, that transaction will too be reported as a naked short sale. Thus, it is possible that the appearance of many securities on the Regulation SHO Threshold List is the result of the snowball effect originating with a single "bad" transaction as opposed to a widespread campaign of driving share prices into the ground through naked short selling.

But what about naked short sales that are never reported? This is the second angle I'd like to look at. Unreported naked short selling involves the broker simply crediting a customer's account with shares that do not exist and taking that customer's money. In effect, it is theft, and to the extent there is an attempt to cover it up, it is also embezzlement. When it involves multiple brokers, it is racketeering. Unlike many securities violations, unreported naked short selling is also a serious criminal matter. As such, prosecutorial jurisdiction extends to several federal and all state agencies, making reliance on poor regulatory oversight a very risky proposition. In addition, the strict record keeping requirements of the brokerage industry mean that unreported naked short selling would be easily revealed by subpoena. Then there is the matter of how the ill-gained proceeds of unreported naked short selling are kept hidden. To avoid detection, they must be funneled to a secret bank account that is subsequently used to return funds to customer accounts when the nonexistent shares are sold. If the customer earns a profit, then the shortfall in the secret account must somehow be augmented without detection. This is not as simple a matter as a rogue trader hiding paper losses at some farflung trading desk. Rather, it involves the central operations of the broker and could not possibly escape the attention of the compliance department, internal auditors or external accountants. Thus, the conspiracy must necessarily involve dozens, if not hundreds, of individuals in a capacity that makes them obvious accessories to crime with little to gain from nondisclosure.

In light of the above facts, we need to examine just how likely unreported naked short selling is happening throughout the brokerage industry, especially at the primary brokers that account for the vast majority of customer funds and trading. I will let you make up your own mind since it involves subjective assessment on account of no widespread campaign of unreported naked short selling having ever been reported. But before I move on, let me mention perhaps the most important aspect of unreported naked short selling: that it is unreported. That means there is simply no way to know how much of it is happening since it is . . . again . . . unreported. As such, it does not show up in trading volume and thus nobody, not even the intrepid Mr. Butler, can possibly know anything about it. If short selling does show up in trading volume, then by definition it must also show up in either the reported short interest listing (if the shares are borrowed) or the Regulation SHO Threshold List (if the sale cannot be completed for failure to deliver shares to the buyer). This still leaves open the possibility that some short selling of borrowed shares is not being reported on the short interest listing, and while this would be a big problem in that it misleads market participants, it would not result in the creation of 'phantom' shares for the reasons already explained above.

My third point is that even if the alleged short selling did show up in the volume of SLV shares traded, it would not be possible to quantify its effect on the ETF's silver holdings. The following chart illustrates this point better than I can try to explain in words. Click on the chart for a full-size version.

I have other charts and more to say but will save them for the full-blown analysis.

JUNE 24 2008 4:05AM - I consider Monday a good day for au/ag despite the brutal price drop because oil seems to have finally lost its stranglehold. With silver bouncing strongly from $16.50 yet again and the dollar floundering around the 73.50 level, I suspect we are nearing the final low. The 200 day moving average is now well above $16.00 and still climbing strong, putting a strong floor under silver prices at the same time that I am starting to once again get multiple indications/tingles that another rise lies directly ahead.

One final piece that may have just fallen into place is the sizeable reduction of silver holdings over at the iShares SLV ETF today, which is something that looked predictable given the last few days of SLV trading. At the same time, the Swiss ETF ZKB picked up the SLV slack and then some, adding a very brisk 3 million ounces of silver in just one week, a record by my recollection. Meanwhile, the poor London ETF PHAG can't seem to catch a break as it once again sheds the odd couple of hundred thousand ounces of silver instead of getting with the program and accumulating. It seems like the English might need another rousing bank crisis to get them interested in real money again. Never fear, one is probably closer than they think.

Speaking  of which, our jolly men at the U.S. Fed have decided to get frisky again, insisting that all's well while $317.3 billion of bona fide paper dollars, or more than 40% of the under-mattress-stuffable greenbacks, sit atop the oven. The Fed has no business taking on private loans and other 'assets' that the banks would rather do without because its only defense is a strong balance sheet. But that was 40% ago. Now, behold Chairman Bernanke holding the match, which wouldn't be as big a problem if he knew at all how to cook. Instead, he apparently knows how to pose like Alfred E. Neuman.

Getting back to silver, I would like to address a question that has popped up a few times in the past several days, which is the number of 1,000 ounce bars being flipped back and forth between the bored noblemen of the London metal desks to generate the 121.2 million ounces of daily volume reported by the LBMA for the month of May. The answer is important if not timely considering the recent brouhaha about the possible delays of delivering silver to SLV, the silver ETF. I have several so-so sources and a few enticing clues about the number, but these are not something I am ready to discuss at the moment. Instead, I would suggest that we use an available proxy to estimate the number, and the best one to my knowledge is the COMEX.

We can take average volumes for COMEX trading and compare this to the total outstanding futures contracts as well as the number of ounces held in COMEX approved warehouses. If we do so, we will find that for the month of May, the average daily volume was around 30,000 contracts and the futures-only open interest was roughly 120,000. COMEX warehouse stocks, meanwhile, totaled less than a single day of trading volume. Before going further, it is important to note that silver trading in London is much the same as silver trading on the COMEX, meaning that the intent to make or take delivery is largely secondary to the motive of trading for profit. There have been days when I personally accounted for 20 contracts out of the total COMEX volume of 25,000, entering and exiting positions several times and ending flat for the day. And I trade relatively small accounts.

The main difference between COMEX and London is that the trading instrument is a futures contract at the former and the allocated/unallocated warehouse receipt at the latter. Thus, London is trading physical metal that is present and accounted for while New York is trading metal that can someday, presumably, be deposited with the exchange. Taking this into consideration, we can place a relatively certain minimum on the silver in London of 125 million ounces in constant back and forth trade, all readily available at some reasonably premium to the present price, probably double. Before we go further, it would help to explain that 125 million ounces of silver doesn't actually get trucked around every day. Only warehouse receipts are exchanged in a manner similar to stock certificates. This is possible because metal storage is standardized in London and therefore each 1,000 oz. of silver is just as good at one vault as it is at another.

By analogy to the COMEX, up to another 375 million ounces could be held off the London market, already accounted for in industrial offtake agreements, leases or otherwise committed. This silver would in all likelihood not come to market at less than some multiple of the present price, if at all. Excluded from the grand total of 500 million ounces would be silver held in private portfolios, which is likely to be a pathetic figure (see my above comments about the English needing banking crises to remind them to invest in silver). Also excluded is the silver held by the two ETFs, SLV and PHAG, totaling slightly over 200 million ounces.

Therefore, 750 million ounces of silver (counting 50 million held privately and give or take a couple hundred million) might be held in London vaults by analogy to COMEX. This would all be in 1,000 oz. good delivery form, no coins or retail bars. Obviously this is a much larger number than all of the silver 'experts' insist is out there, but intuitively this number makes sense to me because it is about half the 1.5 billion ounces that I have come to believe is out there in the 1,000 oz. bar form. I use half because London is the most important silver market bar none, and also happens to be where about half the world's observable silver is held. Please don't worry if I'm right as 1.5 billion ounces is no more bearish than 5 billion ounces of gold. The vast majority of this silver is not available to the market under normal conditions or prices.

Unfortunately, due to the secrecy surrounding metal vaulting, there is no way to ever be proven right or wrong about something like this unless prices rise high enough to bring virtually all the silver out of hiding. Even a connected research firm such as GFMS or CPM Group has no idea what the true number might be. They don't even bother to make guesses or estimates by inference for fear of seeming naive. I, on the other hand, have no such problem! I'm even willing to wager that my free estimate is likely to be more accurate than their high-priced ones. In the near future, I'll be refining this modeal by looking at other markets to see if the COMEX ratios for silver hold up or need to be tweaked.

JUNE 18 2008 3:15PM [REVISED AT 6:25 PM] - Ted Butler's latest commentary claims Barclays' iShares silver ETF, SLV, may be in danger of default because the Authorized Participants are unable to obtain bullion due to a possible shortage in London. I have at least six objections to this theory along with several areas of agreement. Let me get straight to the point by summarizing the takeaways. If you are looking for a convenient way to trade silver or obtain some of your au/ag exposure in a manner that permits fast, low cost buying and selling, the ETFs are hard to beat. What Mr. Butler and other experts have said about lack of metal backing, shorting, etc. shouldn't matter to you at this point even if the accusations were true, which they aren't (at least not yet). On the other hand, please don't buy the SLV as a substitute for physical silver held in your own secure possession. The only thing ETFs are good for is tracking prices. There are plenty of circumstances where having some silver would be useful besides buy low, sell high. Alright, let's move on to my critique and be sure to read the last few paragraphs for a useful announcement.

First, the intraday net asset value (NAV) of SLV is consistently near par (as opposed to the published NAV which uses a closing price that often includes timing discrepancies). That means ETF demand is pretty much being satisfied by the amount of silver currently in the Trust, corresponding to the number of shares issued and outstanding. If there were a major unreported short position in SLV being built, that would mean the cash silver price would consistently exceed the ETF price resulting in at least a small, consistent discount to NAV. This is because shorting would tend to depress the ETF price while demand for cash silver could not be similarly suppressed. In fact, slight premiums have been the norm. More on NAV in a bit.

Second, Mr. Butler claims SLV buying is being met by short sales of unbacked ETF shares, yet the latest short interest report shows around 250,000 shares short (representing approx. 2.5 million ounces), which is down from a high of almost 1 million shares in early March. Since then, the alleged shorts--the infamous Authorized Participants--have not only managed to cover 750,000 shares (about 7.5 million ounces) but also added 20 million ounces of silver to the ETF at the same time. How is this possible if no silver is available in London? Shouldn't a few market players other than the Authorized Participants be aware of said shortage, and press the cause by enthusiastically buying shares of SLV? If this demand was being met by widespread shorting on an unreported basis, we should see a slight discount to NAV as per above. Alternatively, if there was strong demand but it was being met by delivery of silver to the Trust, we should see par or even a slight premium to NAV, which is precisely what we see. In any case, a true shortage of silver in London would be revealed by an unusually large, consistent premium to NAV. I've tried to convince Mr. Butler to consider this as a better warning of imminent default, to no avail.

Third, the London-based silver ETF with the unfortunate moniker of "PHAG" has been flat in terms of holdings for several months after a rather large liquidation in early February. Surely this London-based instrument would be an ideal way for a few insiders to game the supposed shortage in London good delivery silver. Yet its silver holdings have been "positively moribund", as I'd imagine a witty Brit might put it. Meanwhile, ETF holdings of gold, platinum and palladium are all up sharply since February.

Fourth, Mr. Butler argues that it is illogical to allow the shorting of metal-backed ETFs using borrowed shares because these investment vehicles are unique in that investors "buy shares of these ETFs because they are assured that this specific metal backing exists. Investors buy shares knowing that the sponsors and custodians guarantee the metal to be there." But in point of fact, this is not the only reason why investors buy these ETFs. They do so because ETFs are convenient and have low transaction fees, because they expect the ETFs to closely track the price of the metals, because they are restricted in the forms of precious metal investments or securities they can hold, and because "they are assured that this specific metal backing exists". In other words, what appears to be the only important reason to Mr. Butler is actually one of four or more important reasons to most ETF investors. There is nothing unique here. The assurance of metal backing is not much different from the assurance that a company is legitimate and generating the profits that it reports. Or that an index fund holds the underlying assets necessary to guarantee fund performance.

Mr. Butler's contention that short selling a metal-backed ETF dilutes the assets is not, however, entirely without merit. Unlike the short selling of a profitable, dividend paying company where the short/borrower is required to compensate the lender by making dividend payments, a short/borrower of SLV (or any other asset-backed ETF for that matter) is not required to put up silver (or Trust assets) as collateral, which would be equivalent performance. Instead, the risk of performance default is managed using posted cash margin and backed by SIPC and supplemental broker insurance. To the extent that an ETF investor should have no expectation that he or she could redeem ETF shares in exchange for the underlying assets, this is not entirely an unfair or inappropriate approach. Furthermore, as this "loophole" applies to all asset-based ETFs, not just gold and silver, SLV is not facing a unique problem. In any case, the severity of the problem is restricted by practical limits on the amount of shares that can be shorted, which is unlikely to exceed 10-20% of the issued ETF shares in the most extreme cases (Mr. Butler's claime of 50 million ounces of SLV shorts is well beyond the range of what's possible, in my opinion). Still, taking default risk into account, I'm not against the idea of requiring margin on gold and silver ETFs to be in the form of allocated gold and silver accounts instead of cash. This would no doubt be impractical from a brokerage standpoint, but it should apply equally to both short and long (margin) positions.

In the final analysis, it would be very difficult to maintain large short positions in an ETF while also making sure the price is closely tracking the underlying asset. This is probably why the short interest in SLV has declined since March. By contrast, if SLV was shorted to the tune of 25-50 million ounces of silver as Mr. Butler suspects, this would represent a tremendous amount of investment demand that would also manifest itself in all the major silver markets of the world, not just in SLV and the American Eagle silver coins! To Mr. Butler's credit, however, I do think we should be adding the published short position in SLV to the issued number of shares in order to arrive at a figure representing what the future metal holdings of SLV will probably look like. Had we done that in early March when the reported short interest peaked at near 1 million shares (almost 10 million ounces worth) and the Trust held 175 million ounces of silver, we could have concluded that those 10 million ounces of shorts would probably make their way into the Trust as the short position was reduced. Sure enough, SLV has actually added 20 million ounces since then. Another way to look at this is to consider whether or not it would be possible to cover a reported short position by delivering silver to SLV in a short period of time. If the answer is no (let's assume by way of example that next year SLV has 250 million ounces of which 20% or 50 million ounces are held short through borrowing), then the threat of which Mr. Butler warns might truly become imminent. Until then, it would probably be premature to get skittish about SLV.

Fifth, Mr. Butler claims the reported short interest may be understated due to "naked" shorting. Let's take a closer look at this allegation. I shall presume that Mr. Butler defines a "naked" short as a sale of shares that are not owned, and have not been borrowed or located, by the seller in time to clear and settle the trade. In the case of SLV, the clearing is done by The Depository Trust Company (DTC). DTC issues to each stock exchange a daily lists of securities that have not cleared within the standard "T+3" (trade date plus 3 days) settlement days if such securities exceed 10,000 shares. The exchanges then calculate certain reporting thresholds under the SEC's Regulation SHO. In the case of SLV, the minimum is 100,000 shares that fail to clear in T+3 over any 5 consecutive trading days. This doesn't have to necessarily be the same 100,000 shares, but there must be at least 100,000 in each of 5 consecutive days. Yes, you are right, that is a drop in the bucket. If Mr. Butler's allegation of rampant "naked" shorting is true, SLV would appear on the Regulation SHO "naked" short report regularly if not every day (see AmexTrader web portal). I sampled a few random days including yesterday, and could not find SLV on the list.

At this point, some of you might be wondering if it is possible that the nefarious "naked" shorters have somehow devised a way to avoid detection by staying off the Regulation SHO list. It's possible, but only if the trades are made between in-house accounts and never reported for clearing to the DTC. Since the DTC keeps track of only the total shares held in the name of each DTC participant and not the individual customer, movements in internal accounts can theoretically go unreported. In fact, it is a common practice to lend and borrow margined stock for shorting between customer accounts at the same broker-dealer. But that is not what we are talking about here. Instead, intra-broker "naked" shorting involves crediting nonexistent securities to the account of a customer when in fact there are no securities being lent from other in-house accounts, and then not reporting such trade for settlement through the clearinghouse. In other words, such hypothetical "naked" shorting is nothing more or less than plain old embezzlement. While not unheard of, this type of fraud would be very difficult to perpetuate on a large scale for long. In any case, even such "naked" short trades can never create more shares than have been issued since the total number of shares recorded by the DTC is not changed. In fact, no "naked" shorting can ever create an artificial supply of shares so large that it could possibly hide something as major as a shortage in a physical market. This is because market participants would be immediately alerted by trading and pricing discrepancies. Certainly we should expect the presence of an unusually large premium or discount to NAV of SLV.

This doesn't mean that, as an example, an offshore fund can't technically engage in a bear raid by selling short a lot of shares that it doesn't own, and has no intention of borrowing, in the hopes that the share price gets driven down to the point where large numbers of shareholders capitulate and thus allow the raider to cover the short at a profit. Several such abuses have been documented over the years, and the SEC has even launched a recent initiative to punish future perps. When it comes to SLV, however, "naked" shorting cannot possibly depress a bulging premium in NAV that would result from a bona fide shortage of deliverable London silver.

Sixth, Mr. Butler claims he is able to discern--simply from the elevated trading volume of the SLV--that silver should have been added to the ETF but was not. This is a rather provocative statement given that there is no direct relationship between trading volume of an ETF and the creation or redemption of ETF share in baskets. Indeed, the SLV's Authorized Participants may create new shares by delivering silver to the ETF for many reasons, including to fill an off-market order for a private client. Conversely, an Authorized Participant may fill a series of smaller market orders of a few hundred or thousand shares by selling short with the intent to cover in T+3 days. Since shares can only be issued or redeemed in baskets of 50,000, this practice might be entirely legitimate. Neither of the above scenarios have anything to do with the volume of shares traded during a particular day. Besides, the stock of Google and other companies trades many millions of shares every day but Google the company isn't involved in any trades itself (though some days employees are probably busy exercising stock options or selling ESPP shares). Trading volume in both stocks and ETFs is mostly just traders, investors, brokers, etc. churning amongst themselves. Sometimes they churn less, sometimes they churn more, but it's not every day that there is such imbalance between the bid and ask that market makers must come to the rescue. In fact, low trading volume is often a sign of illiquidity, and I would expect the SLV's Authorized Participants to be most active precisely during such periods. This appears to be the exact opposite of what Mr. Butler is looking for (new shares added to the SLV when trading volume is high).

In closing, let's revisit the SLV's NAV calculation as I believe it is an overlooked but very important piece of information. In my market indicator section, I display the "Premium/Discount" that is calculated by Barclays accountants every day and sometimes even posted on the SLV website on a timely basis. Unfortunately, this calculation is faulty since it contains timing discrepancies. I won't describe these because Barclays does an adequate job here. Suffice it to say that it is more revealing to analyze the premium/discount to NAV throughout the day as a trend rather than at a single point in time. I personally don't make much of the end-of-day NAV figures calculated by Barclays unless there is a clear trend for several days. For example, a consistent end-of-day premium does tend to result in silver being added to the ETF, after which there is usually a short period of discounts as the new shares are absorbed.

The intraday or real-time NAV is what I personally use most days in my market analysis and trading. Importantly, the intraday method can hypothetically give the exact type of warning about a developing shortage that Mr. Butler claims he can discern from trading volume alone. How? Well, if virtually every trade throughout the day is being made at a substantial premium to NAV, and this goes on for several days, we can rightfully ask why the Authorized Participants are not jumping on the arbitrage profits. For example, if they can buy silver bullion for $20.00 per ounce and exchange it for ETF shares worth the equivalent of $21.00, why wouldn't they do it? The answer is perhaps that there is no silver bullion to be got. Alas, for now at least there appears to be no sign of a "hidden silver default", judging by the intraday NAV.

Some of you are probably asking, where do you get this intraday NAV thingy? Well, you can get the live data and create custom programs to calculate and display it just like the pros, but it isn't gonna be cheap. There are some creative shortcuts, however, including one that I really like, and while I'm not going to give it away for free, it is going to be cheap when I do finally make it available.

Speaking of which, I am at long last going to launch some sort of subscription service very soon--it doesn't look like it will be a fully functional website with all the bells and whistles to start, but it will be something, and it will include stuff like the intraday NAV for both SLV as well as GLD (this has implications for the basis as well) plus other goodies like several basis calculations and trading strategies, as well as stock and option analysis, reader mail and more. Hopefully all the web design work we've been doing in the background will pay off shortly and we'll be able to launch a sophisticated online interface later this year, but I'm not going to put things off any longer for the sake of a picture perfect start. Frankly, I think this intraday NAV feature alone will be worth the asking price of the subscription.

In any case, I still want to get things started on a good footing, so I will be announcing another "free subscription contest" during the next several days as well as contacting everyone who previously expressed interest in the service. So, it wouldn't hurt to keep an eye or two open.

JUNE 16 2008 5:10PM - Oil tried to continue its crusade as the anti-dollar this morning while au/ag played second fiddle, but it was the monetary metals that hung tough when the dust settled. It is only a matter of time before au/ag lead the monetary protest vote, but for now we can at least be thankful that their sympathy moves are very powerful. Indeed, silver's spike earlier today came close enough to my $17.50 target that I decided to take some profits (around the $17.30 area) and I will now be looking for new reasons to add speculative positions. That could happen if silver surmounts today's peak or goes back down to the $16.50 range. I'm inclined to think that the way forward is with the 200 day moving average's support, which has just climbed above $16 for silver. One scenario that might get us back down there but not much further is an end to the dollar rally near the 75 level in the next couple of weeks. Ideally, that would be accompanied by softness in oil to below $125 followed by a slow drift down toward $100.

JUNE 13 2008 4:05PM - The dollar has fought and conquered the 74 level resistance as oil continues to loiter near its record, creating an interesting situation where both are showing strength while au/ag remain on the defensive. One possible way for this to resolve after some requisite volatility is for oil and the dollar to weaken in unison as au/ag take center stage. Along these lines, here is what I said in response to someone who recently dismissed gold because it is "just money". The investment value of gold is that it is mispriced as money, not that it is money itself. To the extent there is recognition of the negative social consequences to most of the commodity "investing" that is currently taking place, this will invite a major popular backlash. Simply put, the commodity market is broken when higher prices resulting from long speculation (hoarding) cannot encourage additional production as a result of NATURAL CONSTRAINTS IN SUPPLY. When this happens, the futures markets are not only unnecessary, they are actually counterproductive. The direct beneficiary is gold (and silver) because bullion hoarding is more socially acceptable and may represent one of the few outlets for commodity exposure in a coming investment crackdown. Those presently hedging dollar exposure with oil or allocating to a broad commodity index for portfolio optimization would be forced into gold and silver, which is where they should be in the first place. In fact, the main historic role of gold and silver are to protest fiscal policy, and only the greed and hubris of Wall Street have permitted a substitution of vital food and energy for that purpose.

Of course, the volatility of which I speak implies that au/ag prices can go down, not just up. So while we may now have entered an attractive buy zone, it could get even more attractive. A reader recently wondered exactly how attractive (or in his words, "too horrible to contemplate") and I threw out that a spike low of $750 in gold and $14 in silver cannot be ruled out. I want you to be prepared should that happen, because that would be an excellent time to mortgage the house (assuming you are in the enviable position of having equity and can find a bank making loans these days) and buy the monetary metals like they are going out of style.

Speaking of which, I couldn't resist buying another 5,000 shares of U.S. Silver today even though their latest production update for May reveals the road to recovery will be drawn out. As such, I have lowered my sales price target for this December down to $1.00, which still represents a theoretical 100% gain from my cost basis around 50 cents on what now amounts to just 20,000 shares acquired out of my planned 50,000 share trading position. I may or may not acquire more shares as I continue to use this trade as an experiment and demonstration in position size, discipline and risk control.

I also bought more Hecla near $8 to almost complete my position in this stock. I will buy more should it fall to sub-$7 levels. The company's need to finance the $700 million cash component of the purchase of the Greens Creek mine appears to be weighing on the stock, providing the buying opportunity. Once the carryover effect of the financing has diminished and the company's ability to repay it out of cash flow from operations has been amply demonstrated (later this year), the stock should be poised to make new highs on its way to $20. I'm not a big fan of stock options, but in this case a good way to play this outcome might be the Jan '09 $10 calls, currently trading at $100 with solid volume. Should the shares reach $20 before expiration--not a poor bet in my opinion--this option would be worth $1,000 for a 900% return. Given the inherent risk in options, I like to look for both reasonable odds and at least a 10-to-1 leverage, and this one has both.

I have a lot more to talk about including Jason Hommel's latest attack, the subject of which is Professor Fekete himself, but alas I am running out of time for today. I plan, however, to write a series of articles over the weekend addressing this unwarranted smear, as well as the dubious claims made recently against the Perth Mint, Kitco's precious metal operations, and the U.S. Mint.

For now, I will wrap up by pointing out that despite all the claptrap from Mr. Bernanke and friends, his balance sheet still shows over $300 billion of Federal Reserve notes at risk of default from credit exposure, representing nearly 40% of the monetary base. The monetary base, if you don't know, is the only portion of the money supply that is not the liability of any private party but is the liability of the central bank and in turn fully backed by the government itself. In a "normal" run on the banking system, it is the monetary base into which everyone would try to scramble with their liquid funds and savings. With 40% at risk, however, most people would probably trot right past the Federal Reserve Note on their way to the tip of Exter's Pyramid, where gold and silver reside. Unfortunately for them, that tip isn't very big and cannot accommodate everyone. In other words, a run on the banking system in America today would mean tremendous monetary demand for gold in preference over paper dollar bills. With a 40% risk exposure, you really should own some real money, even if it is just a few ounces.

JUNE 12 2008 4:45PM - Gold is holding up better than silver, which had the worst performance of just about any commodity today (with wheat and sugar in close pursuit). As a result, the white monetary metal had trouble with its $16.50 support while its yellow comrade stayed comfortably above its own at $850. The situation presented somewhat of a quandary to speculative longs in silver but I think the right decision for now was to hang tough. One reason for doing so is that gold's 200 day moving average has risen all the way up to $855 as of today, so the low of $858 this morning was pretty much a slam dunk technical bounce. Meanwhile, silver's 200dma is just about to cross $16.00, so it seemed natural that the morning's low would gravitate toward that number. In fact, silver stopped somewhat short, bouncing strongly from $16.25. I expect the remaining 25 cent gap to close pretty soon, and it won't require silver to drop any further assuming the sideways price drift continues for at least 2 more weeks.

In any case, we are now officially entering a strong buy zone for both silver and gold, one that may last just a few days or most of the summer. If you've been itching to buy bullion, now is about as good an opportunity as it has been since last August. Tulving is offering specials on silver American Eagles and Canadian Maple Leafs: 100 coin minimum with $20 shipping/handling (will cost you under $1,900). I would expect you can find many other bullion dealers right now who would match this. If I was just starting out or looking to build a nice little position, this is probably the way I would go. Buying now might be a bit early, so be sure to leave some funds for future acquisitions unless you're a gambler.

Once again, it bears repeating that we are now entering a very good buy zone for both gold and silver, and this is the first time I've said as much since last August. Had I been paying better attention, I might have identified the solid opportunity in December as well. In retrospect, it's not a huge missed opportunity since silver is only a couple of dollars higher now than the December low, and we could come pretty close to that number (low $14.00s) over the summer.

Based on the above, I am planning soon to turn my ultra-short-term speculative flag to "green" once I think the immediate risk of further price declines has passed. And while the flag remains green for all other time horizons, the "buy" should now officially be interpreted as "strong buy" vs. "buy like you normally would". In other words, buying bullion is no longer just a good idea if you have some extra dough lying around (lucky you!), it's now also a good idea to raise additional funds for buying bullion by liquidating other assets.

JUNE 11 2008 5:05PM - It's amazing to me that the markets would actually buy Bernanke's recent jawboning about raising rates to fight inflation, and disappointing that oil, not gold, would be leading the countercharge for the truth. The fact is that the Fed cannot raise rates without creating Armageddon and I urge you to visit Jim Sinclair's website at www.jsmineset.com for ample support. This is a seriously embarrassing ploy that has the potential to backfire and send oil prices even higher in protest, since many traders see Bernanke as trying to talk oil prices down in a strikingly brazen and foolish example of academic hubris. On the other hand, there is now the very real possibility of Forced Commodity Liquidations Coming by popular demand, which would likely dampen food and energy prices at least temporarily if not reset them at some lower, though still elevated, level. This has the makings of a "gunfight at the OK Corral" over the summer and we could be in for a period of extreme volatility in virtually all markets. The possible winners? Gold and silver! Assuming, of course, the appetite for commodity exposure does not completely shrivel in the face of legislative restrictions. Why? The monetary metals might be virtually the only outlets for commodity-correlated investment demand left standing after the gunsmoke clears. If I'm right, this could be an incredible au/ag buying opportunity right now and perhaps even better in the next few weeks, with a very quick payoff to follow. One of the greatest beneficiaries could be gold and silver mining companies since they would benefit from high metal prices while seeing their costs decline as a result of lower energy prices. If you sold in May and went away, I'd suggest you at least pay attention this summer as it could be a seasonal aberration.

JUNE 10 2008 2:10PM - Unfortunately, it continues to be all about oil and the dollar. The speculative element behind crude was finally revealed late last week when a mere prediction of higher crude prices resulted in one of the largest daily moves on record. Only once oil settles down will au/ag start trading on their own technicals and fundamentals. At this point, I expect that PM prices will either (1) drift sideways until the 200 day moving averages rise to meet them in the next few weeks or (2) go down soon to the 200 day moving averages possible in sympathy with a decline in oil. Currently, both au/ag are near important support levels again and a break lower cannot be ruled out. Downside is more limited if prices drift to meet the 200 day moving averages as opposed to dropping down to meet them because momentum can result in a significant overshoot to the downside. The way I would speculate on this is exactly the same as the last few times: going long at current levels with a target around $17.50 for ag and $900 for au and a stop below $16.50 and $850, respectively.

Now some words on the basis in au/ag. Both remain "uninteresting" in that they are within a historically normal range (moderate contango) and are not indicating whether one monetary metal is more attractive than the other. There may be other reasons to favor silver over gold but a strict reading of the basis says buy 50/50, and don't expect the end of the world to come next week. I continue to concentrate my basis work on developing the subscription service instead of updating the figures and charts on this website, so unless you are able to do your own basis calculation, you are probably going to have to take my word for it. I do, however, plan to spend more time discussing the basis in the next few days and weeks, starting with the following e-mail exchange I've had recently. Hopefully it will help illuminate some of the concepts as well as provide a slightly different perspective on Professor Fekete's groundbreaking work.

A reader writes:

I have probably thought about no other concept more often than the basis for the precious metals. Yet I am confused by what can be regarded as cause and effect.

Say for example, that I have a metal (not monetary) that I am willing to store in inventory [hoard] and therefore willing to accept price risk [perversely] then if the market went into backwardation, I should like that…as one can make risk free money from selling spot and buying forward (deferring inventory ownership until then and picking the premium.)

If I were a warehouseman, and I held this metal spot and hedged forward (when it was in an appropriately steep contango) and then it subsequently moved into backwardation, then I can sell my inventory, and buy back my forward position for a tidy profit. However, I cannot hold hedged inventory again in this metal, until it has moved into contango.

So does the backwardation cause the hoarders and warehousemen to do whatever they do, or is it the case that the backwardation results from what the hoarders and warehousemen are doing? Or is it a combination of the

two?!

My response:

I think you are on the right track but it would help to define the exact goals and intentions of the hoarder and commercial warehouseman. The hoarder simply seeks to profit from a price rise due to induced scarcity in the near term. Backwardation may or may not result from hoarding. For example, if speculators buy a lot of futures contracts because the spot price is rising, they can keep the basis positive indefinitely. On the other hand, the reason for hoarding is based on the hoarders' assessment of the probability of generating a profit, which is arguably highest for markets already in tight spot supply. Such markets are more likely to be backwarded even without hoarding. In any case, the hoarder could care less about the futures price as long as the spot price is higher in the future. There is an exception to this in that some hoarders may sell call options against their positions, and of course this is more profitable when the price is in contango. At the same time, selling call options will dilute speculative buying power and reduce the basis. All in all, hoarding probably tends to move the basis toward backwardation and dishoarding toward contango.

Warehousemen are an entirely different lot. They merely seek to earn a fair return on their investment. They are essentially in the business of renting storage space. If they don't have inventory, they are not in business, and they won't carry inventory unless they can sell for more than they buy. Of course, any inventory they already hold is fully hedged, so changes in the basis only affect decisions about future levels of inventory. Warehousemen don't really care about spot prices, only the basis. Unlike hoarders, their actions are not going to create backwardation. Instead, warehousemen will refuse to add inventory when the basis is not sufficiently in contango. Ideally, this will create excess supply to drive down spot prices. Warehousing will recommence only when it can be done profitably (once contango is restored to normal levels). An important exception to this may occur at the delivery choke points where product is moved between markets. Here, it is possible for contango to rise and remain at elevated levels (even for futures contracts that are spot month) because of terminal capacity or other factors.

In summary, we can see that hoarding will tend to reduce the basis, perhaps to the point of backwardation, whereas commercial warehouses will be closed to any new storage in response. Conversely, dishoarding will increase contango but new warehousing will ensure that contango does not rise too far. In effect, these are opposing forces but driven by very different considerations. Hoarders seek extraordinary profits that will be pursued until confidence is exhausted. Typically, confidence is long gone before the hoarders reach their goal. Warehousemen seek ordinary profits that will be pursued only while it is reasonable to do so, which is most of the time. In the middle are speculators and producers, making it virtually impossible to discern anything of value by studying the basis in non-monetary metals and commodities in general.

The case of monetary metals, however, is different. True backwardation can occur as a result of ubiquitous, unsatisfied demand. Such demand is unlikely to be based on the profit motives of warehousemen, hoarders, speculators or producers but rather on the monetary needs of savers who wish to eliminate exposure to fiat money. It is possible that profit seekers could act in concert to create conditions for periodic backwardation in conjunction with high investment demand, but this alone is unlikely to maintain pricing dominance in the spot market for long (due in part to the lower transactional friction that exists in the paper market, which seduces market participants to return time and again).

Sustained backwardation is normally impossible when the monetary nature of gold and silver are not universally recognized since that means there will always be someone willing to sell metal in the spot market and buy forward to take advantage of efficiencies (i.e. avoiding storage and insurance fees, earning a return in fiat cash). When gold and silver are widely viewed as a superior form of money, however, fewer people are willing to trade present ownership for the future. Conversely, when fiat returns on cash are negative (real interest rates are negative), gold and silver are increasingly viewed as money.

The Professor's last contango thesis points to a time when the monetary metals reach a tipping point with private, institutional and even government acceptance of their status as the apex of money. This tipping point is probably instantaneous but there would likely exist a broad transition period during which backwardation becomes increasingly common as a result of growing willingness to forego the efficiency of future gold ownership. Such efficiency may not seem like a great thing when the ability to deliver becomes suspect and holding gains are widely expected to make holding costs negligible. Stated another way, backwardation in gold is the result of the monetary need for present ownership exceeding the efficiencies to be gained from deferred ownership.

Of course, if backwardation gets too steep during the transition period, there will be speculators who are willing to sell gold, but on balance and in time such speculative fervor would die out. The basis may even fluctuate between positive and negative territory for quite some time, but at some point it would turn negative (backwardation) permanently assuming gold is unassailably on its return path to monetary destiny.

Why? Because the basis in gold and silver ultimately represents an "interest rate" as measured by backwardation. This is perhaps easiest to see from the perspective of the "lease" rate, which increases as the basis decreases.

Let's take it a step further by observing that the concept of basis is only meaningful while there is a competing currency regime in which to price gold. More precisely, the fiat price of gold and silver can be viewed as forex pairs where gold/silver backwardation would be the result of a holding preference for physical metal over its future form, and over dollars in general.

Indeed, discounted future value (monetary backwardation) becomes the natural state of affairs for gold under a gold standard, where paying for gold storage would be as dumb as paying a bank for holding your dollars. Perhaps it might help to understand this if we consider an example. Assume I borrow 100 ounces of gold. I must naturally pay back more than 100 ounces as compensation for its use. Let's assume it is 110 ounces. Now consider the source of the loan repayment is a stream of gold payments I will be receiving in the future. Clearly then, the future gold I will receive must be worth less than an equivalent amount of present gold since I was not able to borrow the full amount. In other words, 110 ounces of future gold will go toward satisfying my obligation to repay 100 ounces of gold that I received today. In fact, it turns out that future gold must be discounted in order to arrive at its present value under a gold standard just like future fiat money must be discounted in order to arrive at its present value under a fiat standard. As long as banks don't hand out loans with negative interest rates, the future value of gold will always be less than its present value under a gold standard. Under a gold standard, there is no gold forward rate, no gold futures and no gold contango. To me at least, it seems like "no gold contango" would be a plausible first step toward an inevitable eventuality (i.e., return of the gold standard).

JUNE 3 2008 12:30PM - Well, it looks like au/ag, oil and the dollar are going to grind for a while absent some external shock. Silver did get above $18 in the past couple of weeks but just as quickly fell back to where it started. This has been quite frustrating but not unsurprising. Now, we need to watch the $16.50 level as quite a good layer of support has formed there. Should we fall below such support, the prospects of a drop to at least the 200 day moving average appear to be "good". Fortunately, the 200dma has been rising and is presently above $15.75. Several people have, however, pointed out to me there may be reason to believe a final bottom could be substantially lower under certain circumstances. For now, let's keep an eye on $16.50--I would recommend speculative position stops be placed a bit lower, perhaps around $16.40--and worry about the dire possibilities later.

If you have been buying silver bullion lately, you know that the retail shortage seems to have let up for now. I think the availability of bullion is a pretty good reason to do a bit of shopping even if prices might get better in the next few weeks. Moreover, many Internet dealers such as Tulving have reduced their minimum order size (although there might be shipping charges). In fact, a number of dealers are now splitting "junk" bags of 90% U.S. silver coins, which I have long considered a barometer for a silver shortage. We'll have to keep an eye on how this progresses, but it sure looks like the beginning of something big.

Speaking of big, the public stockpile of silver that I track in my market indicators has just passed 400 million ounces for the first time ever as of last Friday. Amazingly, this number was less than 150 million ounces just a bit over 2 years ago. And it doesn't seem incomprehensible that the stockpile could be over 500 million ounces next year. Such a pace of additions would obviously put a strong floor under the silver price if not help it reach new highs. One question that remains unanswered is how much of this stockpile is tied together with the institutional commodity investing/speculation. That is, what happens to the stockpile if the commodity sector sees enough players exit?

A quick update on the state of the dollar-you-can-fold, the Federal Reserve note. The latest Fed report shows a slight decrease of risk to $313.2 billion, down from a record $328.3 billion two weeks ago. I won't get interested until this number falls under $200 billion, at which point we would be able to start talking about possible improvements in the credit market. Until then, au/ag should continue to benefit from the uncertainty and fear.

MAY 19 2008 6:25PM - Oil hit new highs, the dollar finally wobbled and gold moved back above $900 late last week. Silver is still lagging, though--ideally I'd like to see it trading closer to $17.75 at this point. It could, however, play catchup this week and get above $18 in a hurry if gold has the guts to keep marching higher. Whether gold does or not may depend on where oil is headed next. Will the latest reminder of OPEC's "silent embargo" against the U.S. quickly fade from traders' memories while peace and calm spreads to hot spots like Nigeria, Venezuela, Iran, Lebanon, etc.? Or will the breaking of resistance at $126 carry oil to $200 in a few weeks as some traders are predicting? My guess, which of course is irrelevant, would be that the downside risk in oil is significant, with negative implications for au/ag. On the flipside, this could be gold's chance to improve relative to oil. We could very well see au/ag outperform other hard assets simply by falling only modestly while the commodity sector experiences a steeper correction. Alternatively, gold may get new support from the unlikeliest of places--the Federal Reserve-- given that a new record of $328.3 billion (42% of Federal Reserve notes outstanding) is now subject to credit risk. Balancing the possibilities, I believe au/ag are in a pretty good position at the moment and light buying for long-term holdings would be appropriate. I'd consider buying more aggressively on any dips especially if the 200 day moving average around $15.50 is reached ($830 for gold).

MAY 15 2008 2:25PM - Gold moved higher today on the inflation theme and left its buddy silver trailing behind. Yet it is silver that seems to have the better fundamentals at present, what with another 2 million ounces added to the big Barclays iShares ETF yesterday. Perhaps silver's lackluster performance today can be traced to the CFTC's erstwhile attempt to disprove Ted Butler's theories about silver manipulation on the COMEX.

The CFTC takes apart most of Mr. Butler's claims about the silver market rather convincingly using logic that appears pretty solid. For example, the CFTC claims to have interviewed 5 of the largest 10 commercial traders in COMEX silver, finding that the commercials have numerous customers on whose behalf they trade that sometimes leaves them net long on the COMEX but typically close to neutral when combined futures contracts, physical positions and OTC derivative positions are taken into account. Of course, the rub is the OTC derivative positions and if there is any truth to Mr. Butler's claims, it lies here. Yet that truth is most likely much smaller than Mr. Butler alleges. In particular, it is the OTC derivatives and not necessarily the COMEX that creates the main risk of default in silver deliveries. Be that as it may, only a few will probably notice that the CFTC actually makes a critical admission that is in total agreement with Mr. Butler and is also exceedingly bullish for silver prices: that low silver prices in the past were due to the existence of stockpiles and the recent rise may have been due in part to the exhaustion of such stockpiles. The CFTC does not proceed to reach the natural conclusion that silver prices will continue to rise unless more stockpiles become available or new ones can be built up, but this is understandable considering its job does not include providing investment advice. So, this CFTC study ends up being a very bullish development for silver even though it pretty much puts one of the biggest silver bulls in his place.

Speaking of studies, over the next several days I will complete my review of the recent silver surveys released by the various metal consultancies and will post a critique. For now, I will just say that a disagreement about the future prospects of the white wonder metal seems to be emerging.

Now for a quick update on silver stocks. I bought another 5,000 shares of U.S. Silver, under 50 cents, in the past 2 weeks. The company recently announced a share buyback of up to 7 million shares, which is not huge compared to the 211 million shares outstanding but it does indicate that the ballooning share count is probably not a big worry going forward. I still view my strategy of U.S. Silver doubling by early December as viable.

Then there is Hecla, which released its first quarter results recently and the shares got knocked because earnings did not meet expectations and costs are rising. On the earnings front, the miss was basically due to a delay in shipping a month's worth of concentrates from Greens Creek, so this was really a nonissue. With respect to costs, Hecla made a point that should be of interest to all shareholders who own companies that produce silver in lead and zinc concentrates: apparently lead/zinc smelting costs are about to go much higher like many other aspects of the mining industry and there also appears to be increasing competition for smelting contracts with the possibility that some producers could be left out in the cold (the last part is my speculation, not Hecla's). So, I would suggest that you add another arrow to your "due diligence quiver"--namely, it is now more important than ever to understand the wherewithalls of your silver producers' smelter contracts especially where production is growing from a small profile to a large one.

Finally, it looks like Silver Wheaton will keep announcing silver stream deal after deal, the latest with Farallon Resources. This actually has an interesting tie-in with the CFTC study. Some of you may recall that I wrote a piece a few years back about how Silver Wheaton was about to change the silver market because by-product miners typically sold their silver production forward and this was the basis for a significant portion of shorting including the commercial shorting on the COMEX. In fact, the CFTC refers to this being one of the major reasons for commercial shorting on the COMEX. So along comes Silver Wheaton and others like Capstone Silver and Coeur d'Alene Mines and they start to buy up this by-product source of silver. The result is that, little by little, the source of forward selling is diminished and the silver price is no longer pressured by an artificial (paper) supply of silver coming on the market prior to the appearance of real supply in the form physical production from the mines. I thought (and I still do) that such a development would chip away at one of the major constraints to higher silver prices--the propensity to short forward production. And so, Silver Wheaton's ability to still do these types of deals is a very bullish fundamental factor in the silver market, even though I'm the only one who seems to talk about it.

MAY 14 2008 2:22PM - The dollar is still deciding what to do next and Wall Street continues to fantasize about the "worst being over". The au/ag moving averages, however, continue to rise with the 200DMA currently residing at $15.50 for silver and $830 for gold. If another bottom still needs to be put in before au/ag advance higher, I don't expect it to be much lower or too far in the future.

MAY 7 2008 2:44PM - While the dollar threatens to move higher we cannot be too confident that au/ag have put in bottoms. In addition, oil has risen to a level it may not be able to maintain for long yet that rise has translated to very little assistance to au/ag. The flipside may be that any decline by oil would not hurt au/ag that much, but then again such an outcome won't help either.

The speculative shorts in COMEX silver futures according to the latest COT report are down to an incredibly slim 11% whereas commercials hold 73% of short positions and the remainder are "spreads". Unlike Ted Butler, I don't believe spreads are uneconomic: their tiny margins allow them to be used as effective tools to speculate on changes in the basis (contango/backwardation). In fact, this is an area of I've been looking at very carefully lately, although I haven't made any moves yet. In any case, the current COT structure in silver is very unusual and it portends some potential fireworks ahead. Mr. Butler claims one possibility is that commercial shorts are unable to liquidate their positions further and therefore this could mark the beginning of a "big move up shortly".

MAY 2 2008 12:36PM - The latest big news ignored by the "don't worry, be happy" crowd on Wall Street is the Fed's increase in the Term Auction Facility from $100 billion to $150 billion along with the easing of collateral restrictions under the Term Securities Lending Facility. Now, AAA-rated asset-backed securities of all types can be pledged, not just mortgage-backed securities. What this means is that credit deterioration and liquidity problems continue to spread outside the mortgage sector.

The other big news today was the addition of 4 million ounces to the Barclays' iShares silver ETF, which is now closing in on 200 million ounces. This should make it clear to everyone paying attention that: (1) investors will buy physical silver when the price is rising; (2) investors will buy physical silver when the price is falling; and (3) investors will not sell physical silver during price spikes. Perhaps this is why silver had a nice rise today.

MAY 1 2008 3:05PM - It took about 5 hours for my latest silly technical analysis to be invalidated, which is a good thing because there really wasn't any time to act on it. Unfortunately, the present au/ag dip indicates further declines are likely. In particular, a breach of the $16 level in silver (it has not happened yet) portends a quick drop to $15. But cheer up, there is some good news here. First, silver is now within $1 of its 200 day moving average and is thus presumably getting close to a bottom. Second, the recent new bloom may wear of the U.S. dollar and economy rather quickly. Today, stocks soared on the news that consumer spending rose last month despite the fact the rise was due almost entirely to price inflation. Delusional is an understatement. Third, investment holdings by silver ETFs and funds continue to be steady in the face of steep unrealized losses. Fourth, the FED's balance sheet still looks bad with $283.8 billion of reserves at risk (although down somewhat from last week). Fifth, au/ag's vulnerability to a substantial decline in oil and commodities has been decreasing. Sixth, COMEX open interest in silver has plummeted to normal levels and gold is also down substantially from the highs. All in all, I believe the above factors point to a solid au/ag buying opportunity ahead, if not here and now.

Here is an interesting point. A friend suggests the recent stellar performance by bullion did not translate to PM shares, especially the juniors, because the buyers in 2007-2008 were not the same as those who drove the market in 2005-2006. Namely, the 2005-2006 buyers consisted in large part of individual investors in the U.S., Canada, Germany, etc. who split their funds somewhat democratically between physical metal and shares. These individual investors were attracted to the junior market and threw substantial amounts of money at it, causing it to soar. By contrast, the 2007-2008 buyers were mostly institutional investors looking for diversification or direct exposure to commodities. They piled into index funds and au/ag futures, causing open interest to explode. They also bought some of the large resource stocks, which is why the HUI and XAU have done relatively well, but they largely ignored the junior market.

He had another pretty good point, which is that some mining share booms such as the one in 1995-97 were predicated on new discoveries and not necessarily higher metal prices. Indeed, relatively low metal prices have the effect of keeping most marginally-economic projects in check and thus the number of companies vying for investors' attention is reduced. That allows the true gems to really shine and creates the opportunity for substantial price appreciation across a swath of quality companies. This is only natural since there is a finite number of quality projects. Compare that to today when the majority of "new" projects are really just old projects that were not economic at lower metal prices. This means that, ironically, higher metal prices can actually obscure the true value of worthy projects. Another takeaway is that investors should be weary of projects whose value is predicated on high metal prices. This doesn't mean such projects should be shunned, but instead investors might do well to understand the risk and balance it with companies whose projects would be profitable even at marginal metal prices. In effect, low cost producers are safer as investments while high cost producers have better prospects as speculations.

At the start of this bull market, the marginal price for silver was roughly $5 and for gold it was $300. Today, those numbers could arguably be increased to $8 and $500. Among companies that produce silver, three juniors jump out as easily profitable even at marginal prices: Silvercorp, Excellon and Fortuna Silver. There are others as well but these are the three I've had a chance to analyze recently and would have few qualms buying (although I don't presently own any shares). Among the seniors, Hecla, Pan American and Silver Wheaton would also be profitable at marginal metal prices. I've been buying Hecla for unrelated reasons but perhaps I'll buy more of it based on this investment thesis. 

APRIL 30 2008 11:00PM - The Fed did nothing surprising today but it appears that au/ag were prepared for the worst judging by their relief rallies after hours. The monetary metals have not, however, escaped the gravitational pull of weak sentiment nor have they repaired the recent technical damage. Silver will need to trade above $19 and gold above $950 for that to happen. Fortunately, we don't need to wait until then to establish long positions from a speculative perspective. You see, the July 2008 COMEX silver contract never quite got down today to the $16.42 level that it hit on April 1. There is some significance to this because the $16.40 level marks the bottom of the uptrend line starting on August 17 at $11.55 and touching $13.975 on December 17. Moreover, a similar pattern in 2006 was resolved in a rather bullish manner. Click following chart for a better view.

I admit this is pretty silly even for technical analysis, but it does give us a pretty good place to put a stop. Namely, just below $16.42 basis July 2008 COMEX. At the moment, the price is right around $17.00 so there is a bit of downside exposure, but not too bad. Should we get another pullback, the setup would get even better because the stop would be tighter. Now here is the real interesting thing though. Note the trend line was kissed about 6 weeks after the 2006 high was put in, and that was the absolute low of the move. That low has not been threatened since, not even by the August 2007 washout. Today, it is also about 6 weeks past the 2007 top (so far) and the trend line has just been kissed as well.

Okay, enough chart voodoo, it's time to move on to mining voodoo. On April 22, I had this to say about Crystallex: "It can't get much worse for the company unless the project is simply taken away." Well, that's pretty much what appears to have happened today as a Chavez bureaucrat denied the final environmental permit for Las Cristinas. The denial was based on a subjective, simple decision--one that could have been made years ago, sparing Crystallex shareholders the endless agony and pain and saving the company hundreds of millions in expenditures. 

Meanwhile, Aurelian has announced a layoff of 300 local employees at its Fruta del Norte project in Ecuador as a result of that country's amateur experiment with revising mining laws. At least in this case no additional money will get spent on a project that could be destined for nowhere.

No wonder the PM stocks are in such a state of malaise: the wet blankets just keep coming and coming and coming. Novagold at Galore Creek, Northern Dynasty at Pebble, Gabriel Resources at Rosia Montana, plus the aforementioned Aurelian and Crystallex are all 10+ million ounce world-class gold deposits that may never produce a single ounce of gold. Perhaps this is what Barrick management was thinking when they announced Peak Gold last year.

Okay, enough griping. I'd like to briefly update the U.S. Silver situation. The company put out some pretty bad fourth quarter 2007 numbers yesterday which tend to show the tough and long road that still lies ahead before the turnaround can be called a success. The first quarter of 2008 is not looking significantly better and so shareholders will now have to wait 4 months for some possible good news (when second quarter results will be released). This represents yet another reigning in of already low expectations and some frustrated shareholders took the opportunity to throw in the towel today. As a result, the shares traded as low as 41 cents Canadian on big volume of almost 8 million shares. Buying at these prices were those investors who've peeked between the lines and found some reasons for hope. Some of these reasons could include: (1) operations appear to have bottomed out during the third and fourth quarter of 2007; (2) if possible to achieve historical head grades again, operations would be very profitable even at current low production levels; and (3) management may have finally lowered the bar enough to jump over it with ease. With respect to my previously-outlined strategy, nothing has really changed given that the success (or lack thereof) of any turnaround should still become apparent during the third quarter of this year. The only thing different now is the financial results were bad enough that the share price could see pressure for some time. For me, this means an opportunity to acquire shares cheaper and for longer, and that's exactly what I intend to do -- carefully. I will mention each time I add to my position in order to help develop this important concept of "carefully" when it comes to speculation. So far, I have 5,000 shares at 61 cents and 5,000 shares at 55 cents.

I'm going to wrap up today on a more positive note. My favorite gold porphyry hunter, Exeter, just announced a phenomenal drill intercept at Caspiche in Chile consisting of 719 meters of 1 gram per tonne gold and 0.38% copper. This hole confirms the world-class potential of this project and the main question now is whether it is merely large (10 million ounces) or humongous (20 million ounces). I'm not exaggerating much when I say this is a billion dollar hole. It puts to shame everything that competitors Serengeti and Southern Arc have done and easily bests Canplats' impressive Camino Rojo work. Yet apparently the market didn't seem to notice (or agree) given that Exeter was up less than 10% on tepid volume. Regardless, it's only a matter of time before PM investors start to realize this is a must-own gold explorer. I have removed all stop losses from my positions and will instead aggressively accumulate for my long-term speculative portfolio on any weakness. It will probably take some time for Exeter to fully blossom but I'm fairly certain that it will trade at $10 in the next couple of years and maybe sooner. I base this on the observation that MAG Silver, a joint venture partner with Penoles in certain concessions at Fresnillo, Mexico, has a similar share capitalization as Exeter yet it is trading at $12. This based on drill results not much better than what Exeter has been doing at its Cerro Moro project in Argentina. On this basis, Exeter's $4 share price is more than justified by Cerro Moro alone, which means that you are getting the 719 meters of 1 gram per tonne gold and 0.38% copper for free. If you like giveaways, here is one for a billion dollars.

APRIL 29 2008 2:00PM - It doesn't look good here as both gold and silver failed to maintain support today with the Fed meeting underway. Oil appears ready to take a rest, the dollar continues to threaten a rally above 73 basis the index and investor mentality is getting more and more mental. By "mental" I mean oblivious to the nasty economic conditions that appear to lie ahead.

How quickly the fortunes of monetary metals can change! Just a couple of weeks ago the problems seemed so severe that only a fool could say that the end was in sight. Yet tomorrow there is a reasonable chance the Fed could signal--and stoke the misconception--that the worst is over by not cutting rates or by cutting 25 basis points while signaling that rate cuts are coming to an end. In the short term, a shift in investor sentiment toward complacency could very easily clobber the vulnerable resource sector along with au/ag. The vulnerability is on account of potential hot money outflows as speculators flee for the hills. The failure of support at $890 gold and $16.70 silver is very worrisome in this regard as it portends a sharp move lower at least to the 200 day moving average currently around $825 for gold and $15.25 for silver. A severe drop could even breach these levels and result in a decline to perhaps $750 and $14.00.

On the other hand, I'm not convinced the Fed actually cares a whiff about inflation given the persistent and very real threat of an economic disaster. After all, home prices are still falling, loan defaults are still rising, consumer confidence is still sinking and spending is still shrinking. The liquidity crisis at the banks may have been temporarily forestalled, but the liquidity crises facing consumers and businesses appear ready to spin out of control. Unfortunately, there are no easy, practical solutions for such crises but there are plenty of impractical approaches, such as the tax rebate checks going out in the mail this week. Too bad this type of economic stimulus will be about as effective as peeing into an inferno.

There should be little doubt that other, more meaningful yet no less impractical approaches will be tried in the future. They too will fail. Meanwhile, the practical solutions don't seem very practical and that makes them very difficult and unpopular: (1) encourage a substantial rise in labor costs and general price levels in order to eat away at relative debt levels; (2) return to the gold standard; (3) endure monetary collapse and start over with yet another fiat standard; etc. These scenarios are all bullish for au/ag prices. In fact, I can't really think of a practical solution that would be bearish.

While the above are longer term considerations, even the gloomy short-term picture has some rays of hope for au/ag. For example, the growing au/ag pessimism may be a sign that the worst is actually over and any further declines, even if sharp and painful, could be over very quickly. It is also possible that the imminent Fed action/inaction could be interpreted as bearish for the dollar, at least by its foreign holders. Furthermore, any Fed validation or legitimization of concerns about inflation would be bullish for au/ag regardless of the dollar's reaction. It's a long shot but one potential outcome is a disconnect in which the dollar rallies moderately while au/ag prices explode. Even if, however, none of these things come to pass, it is entirely possible that the Fed action has already been discounted by the markets. That could mute any dollar or au/ag reaction and might even reinforce the dominant trend (dollar down, au/ag up). In summary, the risks are significantly less acute than they would be if gold was still trading above $1000 and silver above $20.

Be that as it may, the rays of hope for PM stocks seem to have completely faded away as the share prices keep getting clobbered day after day amid steady selling and pessimism. It's hard to imagine how some of these prices can possibly go lower but yet they keep going lower regardless. We are already at levels in many stocks that are below their lows of last August and yet the final washout may still lie ahead.

Hopefully many of you who have been buying in the past few weeks and months are doing so carefully and therefore still have some funds left to scoop up the current and future bargains out there. Right now, you can find good values by asking a blindfolded monkey to throw darts. Some of the recent companies I've discussed, such as Hecla, U.S. Silver and First Majestic, are approaching valuations that are more appropriate for banks and utilities. Personally, I will be making some careful additions to my position in these and other companies in the days, weeks and months ahead. If the au/ag bull market is not over (a 99% chance), then the current situation represents one of the best buying opportunities in PM stocks ever.

APRIL 25 2008 2:30PM - One foot went over the edge of the cliff this morning but the other foot wouldn't follow, so we'll have to wait until next week to see the au/ag drama play out. One negative in gold is the recent reduction of gold holdings by the GLD ETF to the tune of 1.6 million ounces. On the other hand, the silver ETFs are holding steady even if they are not adding.

Speaking of adding, I bought another 5,000 shares of U.S. Silver today at 55 cents. The shares have now reached an all-time low and this is a bit disconcerting given the imminent release of presumably positive 4th quarter financial results. Until I see those, I'm not going to buy anymore as 10,000 shares is more than enough of a risk on what could turn out to be a punt. I also bought a small position in Hecla today as I expect it to double from current levels (more on that later). I will be adding to this starter position on weakness. Finally, my "stink bid" in Oremex has not been filled yet but I am still looking to augment my First Majestic position with this small gamble on a share-for-share basis.

A quick roundup of some other stocks. After exiting Southern Arc and Serengeti positions a few weeks ago I don't see much price impetus in the immediate future. Southern Arc may have some good drill results in a few weeks and I'll watch for those, but for now my focus has actually shifted to another stock, Canplats, that I've recently mentioned. The price of this one has finally started to come back down yet its Camino Rojo project near Penasquito in Mexico remains fairly exciting. I have not bought shares but I'm looking into it. I'm also mulling over Exeter near $4 as it seems to have found its legs and a slew of drill holes from its Caspiche discovery in Chile should be announced soon. Finally, I'm an observer of Silver Quest, a stock that has done particularly well in the past few days. The company has recently had to raise money at a lower price than it would like which has caused some dilution, but the financing was supposedly oversubscribed and the stock has been on a minor tear since then. The latest news out of this junior microcap silver explorer is the appointment of Exeter man Michael McPhie to its Board of Directors. The one thing I'll point out is that today's impressive price move was made on very little volume so there is probably going to be some retracement, but this might be one to keep an eye on especially if it falls back toward the 20 cent level.

APRIL 24 2008 11:00PM - I've noticed that many of the au/ag bulls are expecting the correction to continue, which could be a pretty good indication that it might be just about over. Prices still hover at the edge of a cliff but until that last step is taken, there is always the chance for salvation. One interesting development I've been watching over the past couple of days is the divergence of prices in different spot markets as if traders are marching to the beat of their own drums. This could mean there is aggressive buying in some markets and aggressive selling in others. If so, it could be good news in that the current downtrend may not have much coherence behind it.

I'd be tempted to make a moderate physical purchase here (if I didn't already have my fill) considering the current silver price and the growing availability of bullion. Some dealers like Tulving are now sitting on a bit of inventory as purchases have slowed down in the past few weeks. I note that Tulving has recently reduced its minimum silver order to 300 ounces so you no longer have to be a millionaire to buy in bulk. I'd certainly keep some dough in case the correction does continue, but tactically this represents a pretty good point to average in a purchase. We are, after all, $5 off the recent highs. The equivalent in oil would be under $90 per barrel, which seems worlds away.

Despite all the negativity, there are several short-term reasons to remain bullish on au/ag. One of the biggest is this business about rice shortages, which is putting our mass psychology on display. Riots, panic, hoarding, withholding. All the qualities that we should expect to see in monetary metals at some point down the line! To a minor extent, we've actually already seen a bit of this in the retail silver market. And let's not forget the near-failures of Northern Rock and Bear Stearns, which have brought the fear of financial panic forward from the back reaches of our minds. Food shortages certainly feed into this mentality. And according to the Economist, this is one trend that may be here to stay. Not to mention that the new status of commodities as an investment class are bound to make the situation even more extreme. What I'm saying is we could be in for one torrid hot summer where "sell in May and go away" could turn out to be a disastrous investment decision.

As I was reading that Economist article, something occurred to me that I wanted to throw out as fodder. It was during 1972-74 that we had the industrialized world's first major "food shock" along with the better-known "oil shock". The mess in oil was the result of the 1973-74 Arab Oil Embargo, which was punishment for U.S. aid to Israel during the Yom Kippur War. My guess is that today there is a "silent embargo" to punish the U.S. for its invasion of Iraq. Moreover, the rise in early 1970's food prices also appears to have been caused by similar factors that are in play today. The first one is the relationship between food and energy (back then it was because both were key components of production and consumption, today because ethanol made from foodstuff is used as a substitute for oil). A second similarity is new demand driven by the rise in the incomes of large segments of the world's population (back then it was the U.S, Europe, Japan, etc., and today it is China, India, Brazil, Russia, etc.) In 1973, there too was much talk about reaching global production peaks and not having enough food to feed, clothe and power the world, just as there is today. Finally, of course, there is the similar rise in mistrust of governments and their fiat monetary systems during both periods.

There are some interesting implications here.

First, food and commodities quickly topped out by 1974-75 on an inflation-adjusted basis and after more than 30 years they are only now approaching their real 1974 levels. By contrast, au/ag rose multiple-fold after a serious correction in 1975-76 to peaks in 1980 that we are nowhere near today in real terms, especially in the case of silver. Could it be that we are merely in the first innings of this au/ag bull market instead of the second or even third stage as some pundits claim? Possibly, given that we are just now having our first food and oil shocks of this bull market.

Second, I note a similar performance of PM stocks today compared to what took place in 1974-76. This chart provides a good reference point. Note the choppy action for almost 2 years, which is comparable to the price action we've had since June 2006. Note also that gold stocks were making highs as the Dow crashed and that they remained strong for almost a year after gold put in a top. This lagging out-performance of bullion by stocks was even more pronounced at the end of the bull market in 1980. So perhaps we shouldn't be so confused by the tepid performance of gold stocks these days; it could very well mean the best still lies ahead.

Third, widespread price inflation (as measured by core and non-core CPI and PPI) did not become entrenched during the 1970's until after the initial oil and food shocks of 1972-74 had actually started to subside. Similarly, price inflation (should it be on its way) this time around could also have a lag effect with the entrenchment coming perhaps in 2009 or 2010.

Fourth, this time we may not get a severe spike in commodities with a subsequent bust as occurred in the mid-1970's but perhaps rather a spike followed by stable, elevated prices. Eventually, labor costs would have to be adjusted to match this new reality (for one, so workers don't starve) in spite of globalization and this would increase the price of manufactured goods, creating a feedback mechanism that in turn pushes commodity prices higher. This is precisely what happened in the late 1970's on the national scale. This time around, it would be global.

Fifth, the large amount of fund flows into the commodity sector may have an unpredictable and dramatic effect on prices in both directions, but for reasons I've tried to explain before, the direct impact on supply and demand may actually weaken over time. By comparison, investment considerations were largely non-existent during the 1970's. One possible reason for a declining impact going forward include the growing popularity of short or reverse Exchange Traded Notes which would allow the Commodity Index Traders to offset long index positions on paper without the need for futures. In addition, government policies at some point will probably discourage or restrict organized commodity speculation. Yet eventually, high and stable prices may encourage commercials to hedge an increasing percentage of future production, which would allow the free market to alleviate investment pressure.

So to wrap things up, here is one possible scenario using the 1970's experience and the Economist playbook. Commodity prices rise during 2008 and reach a peak at some point, then fall back moderately but remain at elevated levels as a result of factors such as ethanol and continued prosperity in emerging economies. Au/ag peak possibly around the same time and then also proceed to correct until the first whiff of price entrenchment, which may come hard and fast on the heels of the commodity peak. In the meantime, gold stocks remain resilient and start to outperform bullion. As price inflation heats up, it feeds directly back into commodity prices. Commodities become proxies for price inflation but au/ag, for a myriad of reasons, outperform oil, food, base metals, etc. as was the case at the beginning of the bull market. At some point the monetary system collapses or fantastic solutions are found for all the big financial problems, and then it will no longer be worthwhile to own au/ag for speculative or investment purposes. Don't get too excited, it's only a theory.

One last thing. The Economist article makes a point that countries with large agrarian sectors such as India are net beneficiaries in a world where food is "cheap no more". This could be an important point because Indian farmers have historically been big buyers of au/ag and may continue to be big buyers as prices rise much higher. Like I said, rice shortages could turn out to be very bullish for gold.

APRIL 24 2008 2:35PM - Still clinging to the bottom of their support zones as I type this, au/ag struggled all day to keep it together as the dollar threatened a rally. It will be interesting to see how the Asian markets respond to these prices later tonight, although investors there might be too busy buying rice to care much about the monetary metals. The rice shortage is now making worldwide headlines and it looks to get worse before it gets better: Brazil, for no apparent/good reason, has just suspended exports.

The dollar rose the last couple of days partly because a chink in the armor of the European economy is becoming apparent while investors in the U.S. are starting to think the worst is over. For example, the German economy is showing early signs of trouble as German business confidence dropped more than expected last month. Second, Credit Suisse has just reported a first quarter loss on account of a $5 billion write-down. Meanwhile, U.S. investors celebrated a tiny profit out of struggling Ford, a small decline in unemployment claims and murky data on durable goods. Little shrift was given to another horrible report on new home sales. All in all, the market remains "cuckoo for Cocoa Puffs".

In my opinion, the most important--and relevant for au/ag--news continues to be the Fed's balance sheet, which has deteriorated once more. As of yesterday, a total of $304 billion of monetary base was at risk which represents 39% of the $777 billion of Federal Reserve Notes outstanding. How long will this continue? Well, the amount at risk has increased progressively each week to the point that it may have resulted in sufficient (for now) liquidity injections into the credit system. $304 billion is a lot of moolah and it is still probably sloshing around. As a result, we could see some stabilization at this point. This in turn might even allow the Fed to repurchase some of its Treasury security holdings just in time to bring Treasury yields back down. Yet I expect things will get worse down the road as long as the housing mess continues to fester, which it will until inventory is reduced and banks start to lend again.

APRIL 23 2008 1:00PM - Au/ag back down to the bottom of their ranges even with oil at record highs and the dollar within spitting distance of a record low. This is very troubling because au/ag should be shining at this moment. If oil and the dollar are nearing the end of their moves in the short term, it's pretty much guaranteed the current levels in au/ag won't hold and they are headed back to their 200 day moving averages. PM stocks are getting hammered today in recognition of this possibility. It seems they just can't catch a break. Meanwhile, bullion buyers are holding their collective breaths as evidenced by the major ETFs being stuck at the same level of holdings.

The positive side to all of this if you like to speculative with options is that the July puts are still pretty cheap--for example the July '08 $15 for under $1,500--while the calls are starting to approach bargain territory (possibly for good reasons). If the current levels hold, there is still the chance to make another run at the March highs but it will need to happen before the end of June. That makes the July call options an appropriate bet, although it is very risky to buy them before we know the $16.70-17.00 support will hold or not. If I were to buy, I'd probably buy the $20 calls in pairs, selling one on a rise back toward $18 to pay for the other. Of course, the safest bet right now is to have some money available for future bargains in bullion and stocks instead of blowing it on restless speculation.

Here is one reason why we might be seeing this pathetic weakness in au/ag. It's quite self-explanatory:

Strong euro prompts manufacturers' threat

GENEVA, Switzerland, Apr 22, 2008 (UPI via COMTEX) --

The weakening dollar has forced major European manufacturers to consider moving production to dollar-based economies, an industry coalition said. On Monday, the AeroSpace and Defense Industry Association warned of "massive relocation of aerospace production capabilities to U.S. dollar priced locations, where labor costs are approximately 30 to 40 percent lower than in the euro zone," The New York Times reported. As a sign of the shifting currency values, European Aeronautic, Defense and Space company Airbus is raising prices of the super jumbo A380 plane by $4 million, the Times reported. EADS also announced Tuesday it would purchase a California security systems company, PlantCMI for $350 million, in part to strengthen its presence in a dollar-based economy.

The above, though anecdotal, is good ammunition to use next time you hear some pundit saying the dollar is toast and will imminently collapse.

APRIL 22 2008 9:00AM - Silver showed its ugly side yesterday by sliding another 3% as gold struggled to stay even despite weakness from the dollar and record oil prices. We have at least a partial explanation for the strange happenings late last week in "lease" rates, basis and spreads with the revelation that banks have been under pressure to underreport LIBOR in order to lower their own short-term borrowing costs. My quick examination of the facts and circumstances indicates that there might in fact have been a certain amount of underreporting. In particular, LIBOR in the past few weeks and months appears to have been, at times, anywhere between 5 and 25 basis points (0.05% to 0.25%) below where it might otherwise have been expected. On average, it appears to have been about 10 basis points lower. This is much less than the 30 basis points some experts have alleged, but there is another issue that could even be more important. It seems that LIBOR tends to get "sticky" when it should be rising, as if the banks are trying to influence market rates by trying to put a break on them via the self-reported LIBOR. Each time it becomes clear to the banks that the ploy won't work or the rate differentials simply get too big, the banks appear to snap LIBOR back in a swift move that closes the gap within a day or two. This is precisely what seems to have happened late last week. The "catchup" appears to have been even more fervent than usual due to the widespread publicity about the underreporting, which may have resulted in an additional 10 basis point rise in LIBOR above and beyond what was required to restore parity with the market. Apparently, all the banks have been told to stop whatever they may or may not be doing. The net result of all this is last week's increase in the futures spread and basis may have been anomalies that should be ignored like all the other noise.

Where does yesterday's drop in silver leave us? Well, still above the important $16.70-17.00 level but basically back within a trading range. Silver will now probably need to fight its way all the way to $19 before we can confirm another breakout. The good news is that all this time the 200 day moving average has been climbing and recently crossed $15, which is a mere $2 and change below current levels. That means it might be getting close again to when it is safe to accumulate au/ag. Lo and behold, the bullion dealers seem to have found some inventory just in time! Be that as it may, I'd continue to be slow and careful for now.

On the other hand, it might only be a matter of time before the dealers run out of silver again. First, however, the grocery stores might run out of rice! There are people apparently stockpiling rice here in Silicon Valley if the story is to be believed. I haven't seen it personally and curiously it hasn't made the local media, but I'm sure it will if the phenomenon spreads. There is a major risk to au/ag here in that government attempts to cool down food and commodity prices could be targeted at the monetary metals, or else they might be collateral damage. Already there are threats out of the European Central Bank that there could be coordinated intervention to stop the dollar's slide as well as give the commodity markets a cold shower. Presumably such cold shower would come from the policy side, such as higher taxes on commodity gains, position limits or restrictions on the size of investment vehicles.

Speaking of cold showers, the resource market got another big one late last week as the silly government of Ecuador has passed a "mandate" that freezes all exploration and development work for up to 6 months while a new mining law is drafted. The mandate also strips most companies of the majority of their land holdings, potentially bans open pit mining, and significantly increases the odds that a project can be denied on arbitrary environmental grounds. In effect, this mandate has killed mineral exploration in Ecuador for the foreseeable future. The share price of Aurelian, which hopes to develop the Fruta Del Norte deposit hosting at least 13 million ounces of high grade gold, has cratered along with other companies that have projects in the equatorial country. I believe this latest setback to the mining industry will also have a negative impact on companies that don't have projects in Ecuador as it again reminds investors of the significant political risks borne by international mining outfits. I expect companies with projects in other politically risky regions will be hit the hardest although there is one company that might be somewhat immune. That company is Crystallex, the operator of the Las Cristinas project in Venezuela. It is a single permit issuance away from starting construction on its 17 million ounce gold mine (and has been for almost a year). Unfortunately, the economics of this world-class gold mine depend very heavily on Hugo Chavez's mood from day to day as well as the foreign exchange regime of Venezuela, which has been subject to artificial controls for 5 years now. Without fully understanding the implications of exchange rates, it would be foolish to consider Crystallex as an investment although it might be a worthwhile speculation on the basis of imminent permit issuance. It can't get much worse for the company unless the project is simply taken away. Along with Apex Silver's San Cristobal, at least 3 top world-class projects have now essentially been ruined by South American madmen.

APRIL 18 2008 4:30PM - In typically frustrating fashion, silver gave back all of its hard-fought gains of the week by the time the COMEX opened this morning. It seems that finicky traders in London sold the monetary metals with abandon as the dollar index rose above 72 and the Euro cooled off a bit.

Oil remained strong, however, as did several other commodities. Stocks in general are also rallying today based on Google earnings that assign a forward P/E of 45 to the Internet darling's shares as well as the news that losses at Citibank were bad, but not as bad as expected. This of course is demented logic and so it comes as little surprise to me that gold and silver (shorthand from now on: au/ag) should suffer on a day when talk of a rise in bond prices on account of inflation fears is starting to dominate the financial media.

In any case, this market nonsense is ignoring the latest deterioration of the Fed's balance sheet, wherein $286 billion of backing for the Federal Reserve Note has now been placed at risk. This represents 37% of the U.S. monetary base and essentially means the dollar is facing the most precarious situation of its almost-centennial existence. Yet it is probably still too early to question the survival of the world's reserve currency given that rising bond yields increase the Fed's ability to print and drop money from helicopters. Many commentators claim that the Fed has already been doing this, but the truth is that the Fed has done zilch to directly increase the money supply since the beginning of the crisis. You see, the only means for the Fed to increase the money supply is to issue Federal Reserve Notes (FRNs). The rest is the responsibility of banks and financial institutions through the process of fractional reserve lending. To wit, FRNs in circulation stood at $775.789 billion on August 15, 2007 and today they stand at $777.511 billion. Moreover, this number has been roughly the same since late 2006.

So, basically here is what might happen. If bond rates keep rising while credit conditions resume their drop into a bottomless pit, the Fed will be able to take advantage of "good helicopter-flying weather". Aggressive Fed buying of bonds will then lower the long end of the yield curve while flooding the system with fiat money. Under these conditions, the dollar could be expected to make another steep decline, perhaps all the way down to the 52 level discussed in my March 18 commentary. Look, I'm not saying the Fed is willing to do this, but at some point the danger of waiting longer may start to exceed the danger of flying the helicopter. Despite all the huff, Bernanke likely understands that printing money has got to be the last resort, and he probably looks forward to taking the credit for doing so at exactly the right time. That means when it finally happens, it will be quick and out of nowhere. You want to own some au/ag in advance because it will be difficult and very expensive to obtain afterwards. In fact, you should be planning to sell (some) in the aftermath of a true helicopter drop.

The above essentially means that rising bond yields are very positive for the au/ag price assuming that the credit markets will continue to depend on massive central bank intervention to avoid collapse. Conversely, newfound stability in the credit markets and improvements in the Fed's balance sheet will signal a reduction in the urgency to own au/ag. We are talking about intermediate trends here that can influence prices over the course of months and years, not day to day fluctuations.

Okay, enough monetary B/S, I'd like to move on to some nuts and bolts. Or is it soup to nuts? Specifically, I would like to talk about a couple of silver producers that reported very good financial results yesterday. The first is First Majestic, one of my subjective favorite silver stocks, which has recently started to publicly emphasize its goal to become a senior silver producer. The latest operating results represent a solid step in that direction. Highlights include 3.1 million ounces of silver produced in 2007 (3.5 million ounces of silver equivalents, expected to grow to 5.5 million in 2008) and C$15.9 million in mine operating income excluding non-cash charges. With C$50 million in the bank and a fully-diluted market cap of C$375 million, this is pretty good but the valuation clearly relies on expansion of production in the future.

So far so good, but listen to this. The company raised over C$45 million in an offering last month, something that was not necessary if the plan were to simply continue developing its 3 existing mines. Its Chalchihuites or other projects certainly aren't ready for that kind of exploration money, either, which brings up the possibility that First Majestic is once again on the hunt for major property (or small company) acquisitions. Unfortunately, there aren't many properties remaining in Mexico so First Majestic will probably have to bite the bullet and by some company kit and kaboodle. Fortunately, this is something First Majestic's president Keith Neumeyer seems competent and comfortable doing, given his diverse investment, finance and operations background.

So, why don't we look around to see if there are any tasty targets that First Majestic could gobble up with its modest C$50 million war chest? Alas, the only one I could find is an unloved, downtrodden little company by the name of Oremex. Provocatively, Oremex has already sold a property to First Majestic during 2006 (in the La Parilla district) and still holds a small concession in the Chalchihuites camp where First Majestic has been poking around in an attempt to consolidate the district. Thus, the two sets of management likely have become well acquainted with each other already. Considering the paltry C$10 million fully-diluted market cap--despite the 50 million ounce inferred silver resource at the Tejamen open pit project--it's no wonder that Oremex recently adopted a shareholder rights plan. You see, if the surface rights negotiation at Tejamen can be concluded soon, the project might produce perhaps 3-4 million ounces of silver starting as early as 2011 or 2012. That production would be almost pure silver with minor gold credits, one of the few in the world this size (similar to Coeur's soon-to-be-shuttered Rochester Mine in Nevada). Given First Majestic's goal of becoming a senior silver producer and its largely unrecognized status as already having among the highest percentage of production from silver (which goes a long way to explain why the company is a subjective favorite of yours truly), Tejamen would fit in pretty well.

Now, please don't get me wrong, this is all pure speculation based solely on publicly available information and a bit of brain juice. Also, realize that Oremex is a risky stock as illustrated by the more than 50% decline in share price since I put it on my potential "Ten Bagger" list in late 2006 (does that make it a "Twenty Bagger" now?) But here is something to consider. Why not buy a share of Oremex for each share of First Majestic you buy or already own? That limits the risk in that you won't go crazy buying too much Oremex, and if it goes kaput you can mentally deduct the cost from your hopefully big profits in First Majestic. On the other hand, if Oremex gets bought out for a mere $25 million (not a remote prospect), you've made some respectable dough in a tough market regardless of what happens with the price of First Majestic. And if First Majestic does end up being the acquirer, it might not be a bad idea to roll the Oremex proceeds right back into First Majestic in order to leverage the presumably accretive results.

Alright, let me move on to the second "silver" producer (no, Oremex wasn't it). It is Fortuna Silver, and I put the silver in quotes because the silver component of its current operation, Caylloma in Peru, is actually 25% or less as a percentage of revenue. Still, the 2007 results were impressive for the first full year of operations, producing 0.5 million ounces of silver and approx. 10,000 tonnes combined of lead and zinc (roughly 2.5 million ounces total production on a silver equivalent basis). Of course, when silver is such a small component of the product mix, it doesn't make sense to report silver equivalents, and Fortuna management to its credit has refrained from the practice. I note this hasn't stopped some gurus like Jim Dines from picking Fortuna Silver as their top pick for "silver" producers expected to benefit from a near-term rise in the silver price. I'll get back to this in a second, but first I will note that Fortuna generated C$19.0 million in mine operating income excluding non-cash charges during 2007 as falling zinc prices were partially offset by rising lead prices. Fortuna also had around $50 million in cash at year-end (probably higher now) and a fully-diluted market cap of C$225 million as of today. The market cap compares favorably with First Majestic on the basis of mine operating income, and arguably if First Majestic is undervalued then Fortuna is even more so.

On the other hand, one possible reason why the market has assigned a fair and square lower value to Fortuna's 2007 operating metrics might be the mix of silver to base metal production: less than 25% silver for Fortuna whereas it's the reverse for First Majestic at more than 75%. Yet the base metal argument becomes less convincing when one realizes that Fortuna's current silver-poor ore mix is the result of a deliberate decision to mine the veins at widths that capture most of the lead-zinc (which is somewhat diffused) but substantially dilute the silver (which tends to occur in discrete bands). Caylloma has veins that are in fact very rich in silver: recent assays include 6,231g/t (around 200 ounces) of silver plus 10% combined lead, zinc and copper over an estimated true width of 1.5 meters. Such bonanza grade material is easily 80% or more silver by value and could be added to the production mix using selective mining methods without huge difficulty, though an increase in cost. If and when there is an improvement in the proportion of silver produced, this should transfer directly to the share price.

Another reason for the relatively low valuation might be that Fortuna is still recovering from the silly episode of frantic buying that briefly pushed the share price to almost $4 on the basis of the Dines recommendation last November. Beyond this, we may also want to consider that the Caylloma mill had approached functional capacity toward the end of 2007 with any future significant improvements being dependent on more electric grid power being made available to the mine. This creates uncertainties about production growth in 2008 and beyond while the company's other project, San Jose in Mexico, is still in pre-feasibility stage. Yet as I've stated above, silver production can theoretically be increased at Caylloma, even if mill capacity has been reached, by varying or mixing the mining method(s).

In addition, San Jose deserves some consideration as it has reasonable grades of silver-gold mineralization occurring over vein widths that might be amenable to bulk mining methods (essentially the same situation as Caylloma but with precious, not base, metals). Even so, the company has set just a modest target of 5.5 million ounces of silver equivalent production once both Caylloma and San Jose are humming along a few years down the road.

Given that First Majestic already has plans for the same production level this year and then to continue advancing from there, we can perhaps start to see where the relative values make sense. Along these lines, maybe the most compelling difference between the two companies is that, self-admittedly, First Majestic plans to be a senior producer while Fortuna has more modest goals of becoming a mid-tier producer. There is nothing wrong with either, and of course some mid-tier producers have larger market caps (Agnico-Eagle) than some seniors/majors (Gold Fields). In my own opinion, however, First Majestic is right now the better pick of the two as a junior silver producer especially for investors/speculators who believe silver prices will outperform base metals in the future. Conversely, if you think base metals, particularly lead and zinc, will do better, Fortuna Silver might be the better choice for you.

Putting my money and opinion where my mouth is, I already own First Majestic for the long haul, I don't own Fortuna currently but may consider it in the future (especially if I change my mind about silver and base metals, or Fortuna's mix of production starts to favor silver), and next week I will start buying Oremex to equal my First Majestic share position.

APRIL 17 2008 8:00PM - The dollar recovered a bit today and stopped gold and silver dead in their tracks, yet silver continues to maintain its prospective trading pattern going into the 5th straight day. Thus, the rally is still technically alive but it will need to get going again soon. First, silver will need to re-conquer the $18.30 level again, something it is currently having a bit of trouble doing. Until it does so, there is no reason to be taking new long positions. For this reason, I wasn't terribly upset that the May call options didn't get very cheap today. [Update: silver has in fact crossed $18.30 in the past hour, so things are looking up].

Now here is something interesting. Right after I start talking about the calendar spreads in COMEX silver, we get one of the biggest spread moves--but in the wrong direction! The spread between May '08 and Dec '09, for example, increased by almost 10 cents today, which is a fairly significant one-day change. Meanwhile, the silver "lease" rates have suddenly all turned positive with the 12 month "lease" rate reaching its highest level of the year. The silver basis is registering a similar "blip" as well. To a large extent, the same thing is also happening in gold.

What does this mean? Well, basically that a major shift in the markets may soon be taking place. It could have to do with interest rates, which have turned up since Monday as a likely result of changing expectations about inflation, economic conditions and the Fed's actions (or lack thereof) in the next two weeks. In particular, the long end of the yield curve appears to be getting steeper, which may be telegraphing that further interest rate cuts by the Fed may not be very effective as economic stimulants. We had a similar situation back in 2001, which resulted in then Secretary of the Treasury Robert Rubin assassinating the long bond. That, in many respects, was responsible for getting the current gold bull market rolling. There is reason to believe that the present situation, though it may appear negative for the monetary metals, is actually very bullish.

For the time being, however, as the long end of the interest rate curve rises, so does the long end of the gold and silver forward rate curve. The net result is the widening of spreads and the basis, which might give some people the false impression that gold and silver prices will come under more and more pressure. Yet the potentially huge amount of investment demand sitting on the sidelines means that "cheap" spot prices could be seized upon at any moment as a major buying opportunity . This could violently reverse the widening of the spread and basis as it has a number of times in the past, resulting in an overshoot that actually creates backwardation. Those of you who have seen or kept copies of my basis charts from past seminars will be able to verify that abrupt changes in the basis are typically initiated by a "head fake" during which the basis actually spikes in the opposite direction. That is precisely what might be happening now. Basically, if this theory is right, then we should very soon see the basis and spreads collapse as prices move explosively higher. Now, please don't get excited, this is only a theory, and I'm not going to make a very large bet on it (but I will probably dive into a few of the aforementioned spreads in the days ahead).

And what about the rising "lease" rate? Well, interest rates are simply moving faster than forward rates in gold and silver; recall that the "lease" rate is merely the market interest rate minus the forward rate on bullion. There is little rhyme or reason to this from day to day, so it remains to be seen if this is a developing trend or an anomaly. Should it turn out to be the former, I will comment on it further.

APRIL 17 2008 1:15AM - As mentioned yesterday, the 30 minute charts provided the perfect breeze for gold and silver to attempt flight. The pattern of higher lows and higher highs continues intact into its fourth day, which is a very good sign that an assault on the March highs is being mounted. Of course, the cooperation of both the dollar (down) and oil (up to new record high) has made this all possible, yet it is the technical perfection of the gold and silver charts that holds the real promise. The monetary metals haven't shown this kind of discipline for quite some time. Strong accumulation by the bulls is the likely cause.

Unfortunately, I never had a chance to load up on those May $19 silver call options before they doubled in price, which proves that often it's not enough to be merely right; you need to be right and early. The option doesn't look quite as tempting at $1,000 but I might look at it again tomorrow should it get a bit cheaper. That could happen if silver tests $18.30, but it is important to make sure that level is being held before rushing out to buy something that will expire in a week. The July $21/$23 option spread is perhaps a better alternative, although it was the July $22/$24 that saw all the action today. There was also some interest in the September $22/$24 spread, which is a little bit more expensive but still not a terrible idea. On the other hand, somebody was out there buying a bunch of $18 straddles (long both calls and puts at the same strike price) in both Dec '08 and Mar '09, paying between $20,000 and $25,000 for the privilege of breaking even should silver move at least $4 in either direction. What a vote of confidence for volatility, not to mention indecision!

Here is something else I'm keeping an eye on: the calendar spread in futures. Specifically, the long May '08 and short May or Dec '09 combo. This spread would benefit nicely from a reduction in contango and a move toward backwardation, which I expect to see if silver keeps pushing higher. The target is parity where the two contracts trade at the same price. That would be $2,000-3,000 profit per spread, which is not bad considering the margin is just $108. Too bad there is such low volume in the May and Dec '09 futures that successfully executing and later exiting this spread is going to be next to impossible. Perhaps the May/Dec '08 would be a more realistic option with a profit target of $1,000.

Okay, now for some important stuff. Professor Fekete will be holding the next session of Gold Standard University Live at Szombathely, Hungary from July 3-6, 2008. Please take a look at the details. For this seminar, I will be demonstrating some new techniques for calculating the basis, including a simple but very effective tool that overcomes the problem of price data availability. I will also review some recent signals for trading and "bi-metallic arbitrage", answer questions, etc. If interested, please e-mail me so I can get a sense for the number of potential attendees from among regular readers of my website.

Speaking of readers and websites, I am astounded by the major increase in visitor traffic that I've been getting here despite the too little time I've had to update articles, commentaries and stats. I want you to know that the high level of interest has re-energized me and I will try to do a better job of updating the site even while I continue to work on developing the subscriber service. Yes, the same one I first mentioned last October and thought I could launch by December. The bad news is that the service is not ready yet, but the good news is that the longer it takes, the better it will be at launch. Be that as it may, I would like to thank all of you for your patience, understanding, and continued patronage.

Finally, you may have noticed that I completed this commentary at an odd hour of the night. The reason is that I've been following a trade setup all evening that failed to materialize until just now. As it is, the position was open a mere 36 minutes but the result was arguably worth it: $600 profit on a nearly risk-free trade. This is what I meant earlier when I talked about the "technical perfection of the gold and silver charts". Alright, I'm off to bed...

APRIL 15 2008 4:00PM - The dollar's minor rise today was offset by another impressive oil and commodities run. As a result, the monetary metals continue to waffle just below the highs established last Monday (silver is somewhat lower) with attempted spikes in both directions being vehemently rejected. Although momentum is being sapped by the trading action, extraordinarily precarious conditions continue to elevate the potential for very substantial gold and silver price movements directly ahead. And given the recent decline in COMEX open interest, gold and silver traders are in a good position to aggressively leverage the dollar's next breakdown or yet another shudder from the credit markets.

Many of the fundamentals I monitor continue to provide little fodder for discussion. In April so far, silver holdings have been steadily increasing only at the Swiss ETF. The basis is unremarkable. Negative "lease" rates in silver continue to be limited to the shorter maturities.

On the other hand, there has been some interesting action in gold with the negative "lease" rates disappearing as April COMEX contracts have mostly been rolled forward by now. As of today, delivery notices for April have amounted to over 2.2 million ounces of gold, which is more than double the pace of last April and the highest level since at least 2006. Furthermore, more than 1,300 April gold contracts are stubbornly being kept open, which is a relatively high number this far into the cash month. I've previously espoused a theory that could explain the elevated cash month activity in gold, which is that it may represent a reversal of last August's liquidity crisis that forced many gold owners out of physical bullion and into paper via the COMEX. In effect, these former bullion owners may be slowly reclaiming their precious property.

The latest snapshot of the Federal Reserve balance sheet shows further deterioration as there is now $224 billion of reserves exposed to third-party credit risk. This is up from $0 on December 22, 2007. At this pace, the Fed will soon have to consider new "incremental" options or else just sell off its entire portfolio of U.S. Treasuries as some lawmakers have recently suggested (sorry, can't find the link at the moment). I believe this continues to be the most bullish fundamental factor for silver and gold in the medium term. Careful, gradual accumulation should be considered by everyone who is not already up to the eyeballs in the stuff.

What about where prices are heading in the ultra short term? Well, on 30 minute charts available on www.barchart.com (I don't know if these links will work but here they are: Gold; Silver), we can see a pattern of higher highs and higher lows over the past two days (as of the time this commentary was posted: 16:00PST on April 15, 2008). If this pattern can stay intact long enough that spot gold trades--and stays--above $930 and spot silver above $18.30, we would have the precondition for a new move that can explosively challenge March's highs. The 30 minute charts say this could happen very shortly. On the other hand, a breakdown from this incipient pattern could significantly weaken the immediate prospects for a move higher. Needless to say, I will be watching the intraday charts closely in the days ahead.

Although I am in the process of buying a small number of July silver call options, I remain interested in May options because they could represent exceptional leverage on a move over $18.30 as contemplated above, as long as such move starts by Thursday. Of course, there is a very high degree of risk on account of the short time to expiration (next week), but these May options are getting very cheap. For example, consider the May $19 call option, which I may try to buy tomorrow under $500 as long as the above-referenced intraday pattern remains intact (otherwise, I will likely sell what I now have). Here is the reasoning. While mostly marching in place, silver has still managed to trade in a range of 75 cents per day. Considering the size of this daily price movement, a break above $18.30 would put the May $19 call option within easy striking distance of being in the money. And two "small" 75 cent moves would be all that is required for silver to once again trade near $20, which could generate a quick 1,000% return on this particular call option. Now, do I think the likelihood of this is high? No, but this strategy doesn't require good odds. Indeed, it should technically break even with a lowly success rate of only 10%. In other words, it makes sense as long as silver has a greater than 10% chance of trading near $20 by next week. Presumably, a buyer of the May $19 call option would have to believe so. Whatever the odds might be, they can and should always be improved with techniques such as careful entry timing, risk-reward positioning (theoretical returns should be at least 1,000%, etc.), selling a portion of the position at profit targets so the rest can ride for free, and offsetting with futures instead of outright option sales when appropriate. The lattermost technique can be particularly effective especially when the strike price is near a support or resistance level that is expected to deflect prices (such as my recent option strategy using May $17 puts).

APRIL 10 2008 3:00PM - Silver has quickly given up Monday's highs while gold is barely hanging on. The dollar looked like it was just about to break down but sharply reversed itself. We are in undecided territory pricewise but today's action gives a slight nod to the downside. And with every passing day, the prospects of another run soon at the March highs become dimmer.

From a longer term perspective, the Fed's balance sheet looms very large. As long as there continues to be the kind of deterioration I described yesterday, gold and silver will maintain their crisis-hedging allure. With 27% of its entire arsenal already spent, the Fed is quickly running out of ammunition. In fact, one or two more credit debacles may be enough to force the Fed to thrash the U.S. dollar in new and even more harmful ways (assuming that's possible). Already, the recent Fed actions have injected a significant amount of liquidity into the system, much of which has obviously gone into commodities. That explains why they keep moving higher in the face of recession jitters. This commodity squeeze may in turn unleash an unexpected wave of new inflationary pressures, which would be very bullish for gold. This is because gold discounts inflation fears by rising in price before any major inflation actually hits. So, between bouts of fretting about the credit markets and recession, we are likely to see bouts of fretting about inflation. It may very well take years for this alternating scenario to play out, during which gold and silver will remain good buys.

APRIL 9 2008 5:00PM - Silver and gold have regained Monday's high after a sharp but contained fall yesterday. If the upward momentum continues tomorrow, there is a chance that the "dead cat bounce" from two weeks ago may be exceeded. That would make the dead cat aspect suspicious while brightening the prospects for an imminent march to new records. Such a move would be supported by the dollar breaking down from its recent bottoming pattern, which is being tenuously maintained for the moment.

If silver and gold start to slip again, however, then we are likely to head back toward the bottom of the trading range ($890 gold, $16.75 silver). Frankly--and selfishly--I actually wouldn't mind seeing this continue for a while longer because I've been having a lot of success picking entry and exit points and using tight stop losses. On the other hand, I do have some May silver call options that would benefit from a breakout. The time is really ticking down on these May options, although both the $19 and $20 strikes still have a chance to shine if we do get a breakout above $18.75 by next week. If we turn back down instead, I will probably start looking at July options. These are still quite expensive although the July $22 calls would be a good buy under $1,500. Also, some of the option spreads are worth looking into, such as the July $21-23 or $22-24. The latter has an advantage in that it may remain relatively inexpensive (though not for long) should silver break above $18.75. By "inexpensive", I mean a spread that has a maximum return of at least 10-to-1. Since a $2 difference in strike prices is $10,000, that means a spread should ideally cost no more than $1,000.

On a different front, I am informed by a kind reader that local dealers have "a lot of silver" for sale in Ottawa in the form of 100 oz. bars. Those of you in Canada who are having trouble getting silver may wish to check the dealers in Ottawa or otherwise send me an e-mail and I will get you in touch with the gentleman who's familiar with the local scene. There is also good news for U.S. bullion buyers as it now appears several dealers have some additional inventory. The U.S. Mint may even start producing 2008 silver Eagles again later this month. Meanwhile, there continues to be plenty of "wholesale investment" demand for the 1,000 oz. bars with the Barclays silver ETF making the latest big move by adding 5 million ounces since late March. The total holdings of silver in identifiable stockpiles (tracked in Silver Alerts on the home page) is now approaching 400 million ounces.

I made my first foray into the "U.S. Silver" stock strategy today, buying 5,000 shares at 61 cents. I will most likely keep buying in the next few days but that depends on the trading price and other factors. In addition, I have amended the strategy by extending the hold period until December 3, 2008 instead of the imprecise 6 months. The reason is that the 3rd quarter financials will not be released until the end of November. Also, the company's production goal is to be producing at an annual rate of 4.2 million ounces by August, and my strategy gives USA.v until the end of September to achieve that.

To close today, I wanted to briefly mention the very sorry shape that the Fed's balance sheet continues to take. There are now $100 billion of Term Auction Credits backing the Federal Reserve Note as well as $50 billion of "other assets". These "other assets" now include $7 billion in discount loans, an increase of $6 billion since last week. I haven't heard much talk about these discount loans, but $6 billion is a very big increase. Given the stigma associated with these loans, the borrower must be quite desperate. In addition, the Primary Dealer Credit Facility announced on March 16 is now up to $38 billion.

Even more worrisome is that in its first week of operations, the Term Securities Lending Facility is already $64 billion. Since this "facility" is a loan and not a sale of U.S. Treasuries, it is not reflected on the Fed's books. Yet if these U.S. Treasuries are not returned, the Fed will not be getting them back.

In total, the Fed has now exposed $214 billion of the U.S. monetary base, or an amazing 27%, to a risk of default. And the mess appears to be far from over. To say the least, this continues to remain a very strong reason to own gold and silver.

APRIL 7 2008 4:00PM - Bullion alert. According to their websites, www.tulving.com now has Mint sealed boxes of 2007 Silver Eagles available for immediate delivery and www.golddealer.com has 100 oz. brand name bars as well as Mint sealed boxes of 2008 Canadian Silver Maple Leafs in stock. If you have been desperate to buy (not a good condition to be in), you are starting to see some options. Remember to be careful and make only gradual purchases because you want to have funds available if and when prices head lower. It's better to miss an opportunity than go all in and promptly lose 30%. Yes, I know a Mint sealed box is 500 coins, but perhaps you and a few buddies can split an order?

APRIL 7 2008 12:40PM - More upward movement today by silver and gold, this time in the face of a rising dollar. Silver reached about $18.25 and gold around $930 in early trading, and these will now be the important levels to watch. If they are taken out convincingly, there is a very good chance that last week's highs around $18.75 silver and $950 gold will also quickly fall. This could potentially lead to renewed momentum capable of challenging the March highs in the weeks ahead. On the other hand, a failure to take out this morning's highs would have negative implications in that the odds of an imminent breakdown would increase significantly.

This is quite a sensitive situation but there is actually a very easy way to speculate on it. You simply move from a sell to a buy position depending on which side of $18.25 and $930 we happen to be on. The closer to these prices that either a long or short position is established, the tighter any stop loss can be. Now look, I am talking about pure speculative buying and selling here, not long term positions. Those should continue to be accumulated slowly and carefully at this point.

APRIL 4 2008 2:15PM - In a case of "do as I do and not as I say", so far things are playing out as I had speculated with actual money in futures contracts a couple of days ago. To wit, gold and silver held support by the barest of threads, but held they did, and then moved back up in a possible, upcoming challenge of the price level they reached last week. I have now taken partial profits by exiting some of the June gold futures at 9182 and all of the silver futures at 17800 (that leaves me net long in both calls and puts in May silver). These are solid, if not spectacular, gains considering the 2 day hold. In any case, these futures have now paid for all of the premiums on the various options I've been buying lately including those rotten April gold puts that expired just out of the money last week. Unfortunately, I can't take a lot of pride in this latest trade because it was made possible only by using a "live stop loss". That is, I watched the market like a hawk during the opening hour of the regular COMEX session (5 A.M. for me). There were moments with white knuckles but neither gold nor silver prices dropped low enough to scare me. The reason for the pre-dawn vigil is that prices have been typically the most vulnerable during the past few weeks as the COMEX opened, but each time the selling largely disappeared after the first hour. Recognizing this, as well as waking up very early to make sure it didn't change, was more the result of sheer effort and luck than any kind of skill. In other words, don't try this at home, folks. That being said, the above could have worked very nicely on an unleveraged basis using something like the gold and silver ETFs. A 2 day profit of 3-5% is nothing to sneeze at assuming it can be repeated frequently.

In reading back over my commentary about the Commodity Index Traders, it occurs to me that I've left a patient cut open on the operating table. For example, I didn't make very clear that Commodity Index Traders (CITs) are never required to actually hedge the unsecured debt securities they issue in the form of ETNs or otherwise. If they wish (which is perhaps a death wish), they may simply take the other side of the ETN on a naked basis. For each dollar the ETN gains, the CITs would lose a dollar, and vice versa. Furthermore, not having to tie up the money received for issuing ETNs means those funds are available for investment. For example, it could be invested to earn interest. Similarly, when the CITs use futures to hedge their exposure, they only need to put up a certain amount as margin and the rest is available to earn interest or other investment income. This is an important reason why CITs might not like to hedge with unleveraged instruments such as the gold and silver ETFs.

Moreover, ETNs are not limited to being long a particular index; they may be inverse or short an index as well. Such inverse ETNs are just starting to appear now but I would expect that as commodity prices rise, they can only become more popular. And I think CITs will really love this. Why? Consider the situation where a single CIT issues both a long and short ETN in the same amount and with the same maturity. The CIT now gets twice the money but it has very little hedging to do since gains on the long ETN would be offset by losses on the short ETN and vice versa. This relationship is not mathematically perfect because a long ETN can gain more than 100% but a short ETN can never lose 100% and vice versa. In fact, an inverse ETN is more tricky to hedge than a long ETN and therefore the CITs need to use some creative strategies such as put options, active trading of futures, etc. In any case, a balanced issuance of long and inverse ETNs would allow the CITs to maintain a much smaller net hedge position while getting essentially free access to twice the amount of money. Quite a racket, no?!?!

Please suffer along while I look at this a bit more carefully because there could be some interesting implications to all of this.

(1) Large banks and financial institutions (who comprise the CITs) will have a strong motive to promote the commodity sector both from the long and short side since it is a veritable money fountain to them. To the extent that ETNs and similar schemes may provide a new source of money inflow and liquidity for the banks, the commodity sector may ironically turn out to be the critical component of their survival. At the same time, I would note that there are many ETNs that are not related to commodities. What they all seem to share in common, however, is their provision of liquidity to the banking sector.

(2) As inverse ETNs gain in popularity, the CITs would be able to gradually reduce their long futures positions, which could very well put a brake on commodity prices without breaking them. Importantly, this may reign in the commodity bubble without popping it. The reason is that ETNs have nothing to do with the fundamentals of commodity supply and demand even though they increasingly dominate commodity prices. It would be in the banks' best interest--as issuers of ETNs--to foster such a disconnect for as long as possible, which could be a very long time.

(3) The total amount of dollars allocated to the commodity sector may very well continue to grow year after year as investors keep "allocating", "buying the dips", "riding the momentum" and "picking the tops". Meanwhile, many of the dollars flowing into commodity ETNs might end up getting funneled by CITs into markets other than commodities (since the long and inverse ETN positions can be offset on paper). The net result could ironically be increasing support for the credit and stock markets and banks in general.

(4) Since the stock and credits markets are essential to the long-term health of commodities, the status quo of constant but penultimate crises may be maintained for much longer than it would seem possible. The banking sector itself may even regain some lost vitality despite the apparent odds against that happening. Such an outcome might be troubling to impatient doomsday gold bulls, but it might also mean a commodity bull market that lasts even longer than its biggest proponents enthusiastically predict. In effect, the dependence of commodity prices on the fits, starts, accelerations and slowdowns of the industrialization in China and other emerging economies could turn out to be just another urban legend. If so, the cyclical buildup and drawdown of commodity stockpiles that has closely controlled prices in the past may now be irrelevant as our brave new world drifts toward "peak everything". Even the things that analysts like Frank Veneroso look at may no longer matter.

(5) The above would be a true "Goldilocks" scenario for gold and silver since they are the only two commodity sector components that can be effectively held in both paper and physical form by a broad class of investors. As such, investment dollars should keep flowing into gold and silver in a disproportionate manner and this should mean that they will eventually outperform the other metals as well as agricultural and energy commodities. In particular, this bodes well for PM mining companies because a relative decline in energy and other input costs would boost their bottom lines. Gold and silver mining profits would thus become inherently leveraged to the rising (and falling) price of bullion, making the current suffering by PM stock shareholders ultimately worthwhile. If you should doubt this, then consider that the great prosperity experienced by Homestake Mining during the Great Depression was not the result of rising gold prices but rather stable gold prices amid a steep drop in mining costs. After all, the term "outperform" is relative. To boil it all down to an essence, PM stocks may turn out to be the very best place to put your money in the interesting times ahead. Maybe not yet, but perhaps very soon (2-3 months?). The tipping point may very well occur when the number of credible gold and silver explorers and producers starts to shrink due to the dearth of new projects and a wave of consolidations.

APRIL 2 2008 12:30PM - The support levels have been regained and so for now we must view yesterday's violation with some skepticism. Until $17.00 silver and $890 gold become a new area of strong resistance, it may be premature to conclude that prices are imminently headed lower. Instead, we may see a trading range develop as the choppy action robs momentum. To take advantage of this opportunity, I have gone long in silver futures at exactly $17 against my May 17 put options. That may be a perfect hedge, but I'm still using a stop loss on these futures in case we get another big move down so that the put options then have a chance to make a profit. I have also gone long the June gold futures at $890 with a stop loss just below that level. Unfortunately, the put options I would have used as a hedge for these gold futures have already expired. I am not considered these as outright bullish trades but rather as a range trading strategy that will be unwound should prices again approach this Monday's highs around $18 silver and $940 gold. As I write this, I'm already up quite nicely so I may also place a trailing stop on these trades. In any case, this is probably the largest long futures position in gold and silver that I've carried for more than an hour or two in quite a while. And just like the last few times, it was made possible largely because well-timed put options provided the means to safely guess the bottom.

I am hearing critiques of my recent tirade about Commodity Index Traders (CITs) and their true impact on gold and silver as well as the commodity markets. Ted Butler and some others believe the CITs don't buy gold and silver futures because this would show up in the commercial long category of traders. Instead, it is claimed that the CITs use the silver and gold ETFs to hedge the precious metals component of the commodity index they guarantee. Yes, I said guarantee, not track. This is perhaps where we should take a step back and look at who these CITs actually are and how they operate. They are not index funds nor are they hedge funds or any other type of funds. Instead, CITs are large banks and investment houses that issue securities in the form of index tracker notes and Exchange Traded Notes (ETNs). See Wikipedia and Investopedia to learn about ETNs. These notes represent contracts that guarantee a return equal to a particular index or asset class but are not backed by any form of asset or collateral (they are unsecured debt). The issuer of the notes merely needs to have a sufficient credit rating to convince the investor that the risk of default is remote.

The key here is that the issuers of these unsecured debt securities are the very same commercial traders that already hold large positions (often net short) in many of the futures markets, gold and silver in particular. Their designation as CITs is perfunctory in that the same trader may show up as a CIT for a part of its position and as a regular commercial for another part. Meanwhile, index and investment funds don't belong in the commercial category at all because they are speculators by definition. Thus, they show up in the large non-commercial (speculator) category of the regular Commitment of Traders reports.

Sorry for the long diatribe but I think it is important to realize the distinction between CITs and index funds. Now, let me get back to the defense of my proposition.

I concede that the number of futures contracts held by commercial longs in COMEX gold and silver has not increased by the expected amount that would fully account for the activity of the CITs in agricultural commodities. But when you include options, commercial longs actually now hold a larger position in COMEX silver than the large speculators. In COMEX gold, commercial longs are holding around 150,000 long futures and options vs. about 200,000 for large speculators. Looking at options in addition to futures is important because CITs, as I mentioned above, are not required to hold any assets or collateral to back the index notes and ETNs they issue. In markets, however, where the note issuers have little book of business, such as agricultural commodities, they would still want to hedge their exposure and they can do this simply by going long futures. In other markets, where they already have a large book of business, such as gold and silver, they may try to hedge their exposure using call options and synthetic long positions created using complicated trading strategies. Their purpose in doing so is to earn arbitrage profits and generate gains from their trading desk operations. The proprietary trading by CITs might not result in a huge expansion in long futures positions held within the commercial category for a variety of reasons other than their probable reliance on call options, although I have no doubt that some, if not a large portion, of the long commercial futures are actually held by CITs. As such, my opinion remains that the CITs likely constitute most of Ted Butler's "raptors". The alternative seems hard to believe: that the CITs would buy the unleveraged gold and silver ETFs to hedge their short positions. They are bullion banks, after all!

Okay, I hope that I've put that particular opposition to bed. Now let's move on to one that is more complicated and nuanced. A well-informed reader with direct experience on the merchant side of the agricultural markets is telling me that the influence of the CITs is not connected to the phenomenon of futures contracts expiring at a price much higher than the spot price. Instead, the disparity seems to be the result of the less-than-perfect connection between the "interior" market (farmers, local warehouses and grain elevators) that feeds grain supply into the deliverable inventory (central grain terminals) and the export market that removes supply from the deliverable inventory. I concede this is a plausible explanation for the price discrepancy especially since out of all the commodities, only the grains appear to have such a linear interior/export market relationship. In effect, the futures price of grains is the U.S. price, not the worldwide price. That may be true for some other commodities as well, such as cattle, but export isn't such a large component of these other commodities.

Be that as it may, I would like to note that there is a "central terminal" system in the domestic gold and silver market that appears similar to the system for grains. In the case of precious metals, that central terminal is none other than the approved warehouses of the COMEX. After all, this is where Warren Buffett accumulated the 130 million ounces of silver that he subsequently shipped off (exported) to London. Speaking of Mr. Buffett, I recently ran across an interesting analysis of his silver purchase that I don't remember reading before. It seems to tie into the current discussion as well as my own focus on the basis, especially when the author states:

"Bottom line here is: until sufficient supplies of deliverable silver arrive in London, we will see the spot price trade about 7 to 10 cents above March futures. For a change, we will see the spot physical market leading the futures market, i.e. the dog wagging its tail and not the tail wagging the dog."

This was apparently written in early 2001 when there was, in fact, a disturbance in the basis according to my own work (between December 2000 and March 2001). It was resolved without silver breaking out of its bear market since presumably the flat, long, ugly bottom was still in the process of being completed. I would note, also, that it was the spot silver price that traded above the futures price during the 2001 episode and not just at expiration, whereas currently in grains the big mystery involves the futures price trading above spot on the date of expiration. It seems the central terminal structure in grains may contribute to futures prices exceeding spot prices (contango) whereas the effect appears to be the opposite for silver (backwardation). This could be the case because the reference spot price for grains is established in the domestic market but the reference spot price for gold and silver is established primarily in London and other foreign bullion trading centers. In other words, grain exports are departing a spot market where supply is available whereas gold/silver exports are arriving in a spot market where supply is needed.

Be that as it may, I'm still suspicious about the CITs contribution to any past and future disruptions in the basis of not only grains but gold and silver as well. Moreover, I'm becoming more and more inclined to believe that the correlation between commodity, gold and silver prices has become closer due to these darned CITs.

APRIL 1 2008 3:10PM - Silver and gold have both violated their critical support levels today. After an early swoon that brought it within $1.50 of its 200 day moving average, silver did manage to fight back and has recovered to the $16.70 area, which is still technically within the support zone but barely so. Gold, on the other hand, has decidedly broken its lower support of $890 and is currently trading at $880. That price is now also lower than the "$887.50 Angel" popularized by proto-gold bull Jim Sinclair, who earlier today issued a $1 million challenge to anyone who doesn't think gold "will trade at $1650 before the second week of January 2011." In effect, Mr. Sinclair is saying that the gold bull market is intact, but it may take up to 3 years for his "slam dunk" price target to be reached. If so, that is fine with me. I look forward to the opportunity to make some extra money along the way by increasing leverage near the 200 day moving average and decreasing leverage as prices climb to unsustainable highs. If this is truly a break of critical support, it just means a chance to make some extra money is close at hand. In the meantime, I continue to appreciate the opportunity to accumulate gold and silver in opportunistic ways such as using the "Bi-Metallic Arbitrage via the Basis" that I am co-developing with Prof. Fekete.

For now, it is not quite 100% certain that the critical support levels have actually failed and therefore I would recommend the same thing that I have been recommending since early last November when I threw up the speculative caution flag: buy slowly, carefully and in moderation. There will be a time for gusto, but in my opinion not yet.

On the flip side of the coin, I am starting to hear from readers who may be experiencing financial pain or panic as a result of this latest swoon in the monetary metals. Several of these readers have even suggested that I consider turning some, if not all, of my alert flags yellow or even red based on the worst case scenarios that I have outlined in past commentaries. To this I can only say that the alert flags are nothing more than a reflection of my own investment position and time horizon in the silver market at a particular point in time, not an attempt to pick tops and bottoms. Yes, I could have tried to call a top around $21 in silver and turned the speculative, and perhaps even short term, alert flag red, but there were no compelling fundamental or technical reasons for doing so. In fact, I had expected silver to reach the $23 level, and it may very well have done so if not for the untimely crash at the very last moment before the end of a dangerous technical period. There was no reason to sell because I had already scaled out of most leveraged positions last November. Ever since then, I've been making only careful moves into the market, staying mostly invested but also keeping some powder dry.

I believe one of the worst thing you can do as an investor is to buy or sell in a panic and this is reflected in the measured pace at which my alert flags change their colors. Frustratingly often, luck is the only thing that separates those who are right from those who are wrong. Thus, we should expect that we will sometimes be unlucky and prepare for the consequences.

Okay, enough BS, I'm going to discuss a silver stock today that I think may offer an unusual opportunity regardless of where silver prices are headed in the next 6 months. It is a stock I've mentioned before but I don't recall if I've ever discussed it as an investment opportunity. That, however, is exactly what I am going to do now. U.S. Silver is a relatively new company that acquired the Silver Valley projects of Coeur d'Alene Mines in mid-2006 for about $15 million in cash. These projects consist of the Galena, Coeur and Caladay Mines as well as surrounding exploration territory, which U.S. Silver has been steadily expanding.

Before going further, I will mention the main negatives about U.S. Silver, and those are the share structure and dependence on recruitment and retention of skilled miners in order to meet production forecasts.

The company has 250 million shares on a fully diluted basis, which is a very high number and is probably the result of management relying too much on investment banks. This slew of shares includes a substantial number that will become free trading over the next few months as well as tens of millions of shares that will likely be sold into a rising share price. My strategy for U.S. Silver includes a possible solution to dealing with this share overhang.

The lack of skilled miners isn't unique to U.S. Silver, but it is particularly acute when it comes to underground, deep shaft stope mining as practiced in the Silver Valley of Idaho. New demands on the labor supply won't disappear soon, either, because local, regional and international mining operations keep expanding. For example, the neighboring Sunshine Mine just went back into production last December. While it may be true that U.S. Silver has been struggling with this problem for the last two years and will continue to struggle with it for the foreseeable future, the possibility that an upper hand has been gained is precisely why I am discussing the company now. Specifically, U.S. Silver has instituted an employee bonus pool tied to profits, which appear to be right around the corner. Miners are a fickle bunch but very practical when it comes to financial matters, so the prospects of working at a profitable mine for a lot of money is often the best recruiter.

U.S. Silver currently trades around 60 cents Canadian (it was as high as $1.50 last May) for a fully diluted market cap of $150 million at present. The low share price is probably deserved based on production problems and shortfalls due to the aforementioned labor shortage as well as the need to bring the mine infrastructure up to spec.

Buying shares in U.S. Silver is a turnaround play like Gammon Gold (which just reported a disappointing update to its production outlook and mineral resources, and as a result, the stock has fallen back into a sell zone) and therefore is quite risky in that a turnaround may not materialize, or it may be delayed. Be that as it may, the 60 cent share price offers an attractive entry point assuming a 6 month hold. If the share price reaches $1.20 within 6 months (approx. 100% return), I will take profits (selling at least 50% of the position) because there is likely to be a pullback from that level as a large amount of private placement shares are sold into the market. Once a pullback is completed, there may be another opportunity to buy as long as the 6 month window has not closed.

Why the 6 month window? Well, that is the timeframe I believe should reasonably be required to demonstrate whether or not management's most recent production goals for 2008 can be achieved. If yes, the share price should easily double. If no, the share price is likely to wallow at current levels and perhaps even somewhat lower (this is where the risk comes into play).

The above is not a recommendation to buy or sell U.S. Silver or any other stock. It merely lays out a strategy that I plan to utilize in my personal trading/investing/speculating. Specifically, I am buying U.S. Silver in the next few days and will hold the shares until the earliest of: (1) September 30, 2008, (2) share price reaches $1.20, or (3) turnaround plan has floundered. Nobody gave me this idea and I'm gaining nothing from sharing it other than the discipline that comes with public disclosure. I may or may not update what happens to this trade but I will mention if I change something. If you do something similar to this, please be aware of the significant risks that accompany a strategy where the goal is a 100% return within 6 months.

MARCH 31 2008 12:10PM - Silver and gold are going back down to test the critical support levels. Watch $890-900 in gold and $16.70-17.00 in silver as these levels mark the boundary between uptrend and downtrend. The main risk is now technically to the downside. As such, the name "Chicken Little" seems appropriate to describe the legions of PM and financial gurus screaming for you to get into gold and silver in a big way because the sky is falling. Instead, I propose that you buy in moderation and remove the idea from your head that in 3 or 6 or 9 months you will be fabulously wealthy. That is a very unhealthy way to think about this market. Rather, you should expect to suffer some unrealized losses for up to 1-2 years during which you can keep buying to lower your overall cost basis using dollar-cost averaging. Another benefit to slow and methodical is that you won't be shaken out of the market precisely when you should be buying.

Here is an interesting article sent along by a kind reader that discusses the "basis" in agricultural commodities: Odd Crop Prices Defy Economics. Basically, this article asks the question but does not answer why futures contracts in grains like corn, wheat and soybeans have been expiring at a price that is significantly higher than the cash price for that day. This represents contango of an unusual sort in that the cash and futures prices should really be equal, or very close to equal, at expiration. Several professors of economics who have extensively studied the mystery are at a loss to explain it, but commodity traders with battlefield experience have attributed it (correctly, in my opinion) to the proliferation of index funds that track commodities. These funds do not buy based on fundamental factors that apply to each commodity market such as supply, production forecast and cash price, but rather they simply and blindly allocate X percentage to each commodity in order to reconstruct the particular commodity index, such as GSCI or CRB, that they are supposed to track.

Ongoing analysis by trading guru George Slezak of a report called the Supplemental Commitment of Traders, which break out the positions held by Commercial Index Traders, reveals that these "dumb" commercials hold 25% of the total open interest in the agricultural commodity sector and up to 40% in some individual commodities. Since the futures held by Commercial Index Traders have no relationship to actual demand in the cash market (Commercial Index Traders do not produce commodities, take delivery of futures contracts or buy in the cash market), their combined actions can apparently create pricing discrepancies that become especially prominent at futures expiration.

There is a lot more to say about this phenomenon of blind commodity trading by index funds as it pertains to market trends in general, and I reserve the right to do so, but there is a more urgent issue to be addressed. Namely, if the commodity index traders are buying commodities in a blind manner, doesn't that mean they are also buying silver and gold futures blindly? The answer has to be yes, although we don't know to what extent because there is no Supplemental Commitment of Traders report issued for non-agricultural commodities. Yet it would seem that even a moderate amount of participation by these "dumb" traders in the silver and gold markets could have some consequences for futures prices. For one, silver and gold may have now become much more sensitive to the general mood and swings of the commodity markets compared to the past. If so, there should already be somebody out there who has studied the charts and written a commentary on this. I haven't found one, but should you run across something like this I would appreciate hearing about it. There could be all kinds of important implications that might emerge from a careful study of this phenomenon. For example, silver and gold may be more, not less, sensitive to recession-driven weakness in commodities than the "experts" generally believe.

Second and perhaps even more relevant, if there is undue influence on the futures price from demand that is disconnected from the cash market, might this not impact my studies of the basis? Specifically, absent the "dumb" buying by Commercial Index Traders, there would presumably be less demand for futures and therefore the futures price would be lower. Nothing would have changed in the cash market, however, so it is possible that cash prices would not be impacted to the same degree. In effect, the actions of a new breed of "dumb" traders could theoretically hide signs of movement toward backwardation and result in an artificially large positive basis (contango). Stated another way in the form of a question, would we be closer to, or even in, backwardation by now if Commercial Index Traders did not exist? Of course, this question is rhetorical at this point but it seems appropriate to incorporate possible "dumb trader" scenarios into my studies of the basis. I don't expect to have any definitive answers soon and perhaps ever, but I do believe that trying to find an answer can only make the analysis more accurate and relevant. Therefore, I would urge the "gurus" and "experts" in the PM market to also recognize that the Commercial Index Traders may represent a large contingent of demand for gold and silver in paper form. Paper demand, of course, is a mirage because the miracle of modern finance allows it to be easily satisfied with paper supply to the detriment of the physical metal itself.

The presence of Commercial Index Traders in the gold and silver futures markets can perhaps also help explain some other phenomenon to which I and others have prescribed alternate solutions.

For example, it may partially explain Ted Butler's "raptors", who are commercial COMEX traders consistently taking positions on the long side of the silver market. Mr. Butler has stated that the "raptors" may be an emerging force to replace the "dumb" commodity funds that have historically dominated the ranks of large speculators. These commodity funds are trend followers who enter and exit the market at predictable points and thus the commercial shorts have been successfully praying on them for many years. It would be quite ironic if the "raptors" are no smarter than these long-suffering commodity funds, although it may very well turn out that whatever the "raptors" lack in intelligence is made up by their existential longevity and purpose.

Moreover, the Commercial Index Traders may also be the source of a portion of the immense increase in open interest in COMEX gold futures since last summer. Such a hypothesis would be confirmed if deliveries on gold futures remain near historic norms despite a large and sustained rise in open interest and an increase in domestic and worldwide financial turmoil.

Another potential impact could be in the area of "lease" rates. We've had negative "lease" rates in silver off an on since last summer although today they are positive across the board. As may be the case with the basis, excess demand in futures as a result of Commercial Index Traders' blind buying may artificially increase forward rates without consideration of changes in market interest rates. Since the "lease" rate is defined as the market interest rate less the forward rate, an increase in the forward rate above the interest rate would turn the "lease" rate negative. I have stated before that negative "lease" rates could be a sign of growing preference for the forward return provided by monetary metals--that is, the prospects for price appreciation against fiat money--as opposed to the forward return on fiat money itself (interest rates). Unfortunately, it is possible that an important shift in monetary preference (or lack thereof) may have been obfuscated by "dumb" buying of gold and silver futures in the recent past. If so, this would go a long way to explain why silver "lease" rates have turned negative intermittently but gold "lease" rates have not.

Well, actually, let me correct that last statement because the 1-month and 2-month gold "lease" rates did go negative late last week as pointed out by several readers. The reason for this appears to be the sudden rise in gold forward rates, particular the short term rates. Does this, too, potentially have something to do with blind futures demand from Commercial Index Traders? Perhaps, although open interest in gold futures has actually been falling. I would point out, however, that we are in the midst of rolling from the April to June COMEX futures and there are indications that the process isn't going that smoothly. For example, there were 3 times as many expiring April contracts traded on Friday as the remaining April open interest at the end of the day. Yet that frantic level of activity still left a hefty 45,000 contracts being held for first delivery notice today. The forward rate in gold may have very well been positively impacted by the sheer volume of contracts being rolled forward (including those held by Commercial Index Traders) at the same time that many commercial shorts were looking to exit positions. If this is the case, we should see the negative gold "lease" rates turn positive again in a few days. If not, it may be time to dust off my prior prognostication about "leasing" because the time when monetary preference shifts away from fiat could finally be close at hand.

MARCH 27 2008 1:00PM - After holding critical support, it is no surprise that silver and gold rallied strongly but the extreme upward momentum seems to be dying down. According to a number of sources, this may be a dead cat bounce. For example, see Gold in Free-Fall where the author argues gold should touch $966 in a "last kiss" goodbye before plunging to $850 and then $730. In my opinion, such technical work is good at outlining the possibilities but not very good at all in predicting the actual outcome. Still, there is more than a remote chance of something like this happening and at a minimum one should be ready for it. That means purchases should continue to be done in a careful and measured manner. Despite the short-term risk, many powerful bullish forces remain in place.

More reports of shortages as well as indications that dealers are starting to price gouge. Apparently, one dealer in Canada wants $38/ounce for 10 oz. bars. This is probably not the worst it will get, so please let me repeat my previous warning that you should not pay ridiculous premiums. Better to buy the ETF or put some money in a www.goldmoney.com or www.bullionvault.com account. Also, the junk bags of 90% U.S. coins are still widely available for now and it is only a matter of time before the dealers start to split them. Some companies like www.bulliondirect.com have already been doing this for some time, but it is not yet common practice. The neat thing about this form of silver investment is that it is very easily subdivided, highly recognizable, virtually counterfeit-proof, very liquid and yet in finite supply. At much higher silver prices, I expect 90% U.S. coins to trade and be quoted in $1 face value increments, becoming the de facto standard (again) for silver traded at the retail level.

In addition, some dealers have started to take "advance orders" for newly minted product. For example, www.tulving.com is offering both 100 oz. JM/Engelhard bars (minimum 7) and A-Mark 1 oz. round (minimum 500) for delivery "not before" April 23 with a 20% deposit, which allows you to lock in the current spot price. This is not an ideal situation, but at least you have just 20% of the purchase price at risk because the other 80% is only due when the silver is ready to ship. Bear in mind, however, that even an honest and ethical outfit like Tulving cannot guarantee 100% that an advance order will always be filled. An extreme move in the market may leave almost any dealer with tremendous losses leading to insolvency if there is a miscalculation that creates an open short position in the order book. Therefore, an advance order should never be your sole or even primary means for buying silver. Large orders should only be placed when the dealer has inventory on hand ready to be shipped immediately.

Wrapping up the topic of the silver shortage, I note that the Central Fund of Canada (CEF) has just filed a shelf prospectus for $750 million that would allow it to sell shares over the next 2 years. This effectively opens up what is otherwise a closed-end fund. Over the next few months and years, CEF could buy up to 20 million ounces of silver if the price remains around $20. No doubt CEF is making this unprecedented move in response to the shortage of silver bullion in the Canadian retail market. Therefore, we are likely seeing the first signs of physical shortage at the retail level being transmitted to the wholesale level (CEF buys and holds 1,000 oz. silver bars).

Moving on to PM stocks. It has been a long time since I've talked about the 3 amigos--Serengeti, Exeter and Southern Arc--who are leading the hunt for the next world-class gold discovery. So long, in fact, that other contenders like Canplats (CPQ on the Vancouver exchange) have arguably passed one or more of them. Yesterday, however, Exeter and Serengeti have returned as rivals for the pole position with both companies reporting incredible results from their ongoing drill programs.

First up is Exeter with its 576 meters of 0.74 grams per tonne gold and 0.28% copper along with another hole of 740 meters, part of which graded 0.57 grams per tonne of oxide gold at surface and the remainder is 0.44 grams per tonne sulphide gold with 0.25% copper. Another hole pending assay has a 950 meter intercept, the entire length of which was mineralized. The hole wasn't drilled any deeper because the drilling rig reached its limit. These results indicate that Caspiche may very well have similar grades and vertical continuity to the giant Cerro Casale gold deposit nearby. Barrick just paid $750 million to acquire a 50% interest in Cerro Casale from Arizona Star Resources. Meanwhile, Exeter is earning a 100% interest in Caspiche subject to a 3% NSR royalty and its market cap is current around $250 million. That leaves a bit of upside considering Exeter is barely up on the news. I continue to favor this company as a still undervalued, high quality junior PM explorer considering it has 3 potential company-making projects. I own shares and also continue to buy as long as it remains near $4.

Even apparently more exciting was the news released by Serengeti. Recent drilling at its Kwanika project has returned a hole with 0.78 grams per tonne gold and 0.74% copper over 610 meters. The release of this news on the same day as Exeter might tempt us to accuse the two companies of playing a game of dueling banjos, but if that's the case, Serengeti may be ahead at the moment because the copper grade of its hole is truly marvelous. The market seems to agree as the share price is up 160% in two days. Too bad I didn't realize where the latest hole was going to be drilled because it would have been obvious that Serengeti was going to report a great hole. You see, the mineralization at Kwanika appears to dip from surface to the West and guess what angle and direction this hole was drilled? Considering I am now up on this position and there may be future opportunities to buy as the mania dies down, I am exiting for now. As great as the Serengeti hole may have appeared, I actually believe Exeter hold the better odds of ending up with a world-class gold deposit.

Meanwhile, poor Southern Arc has mostly come up empty in expanding on its initial success at the Motong Botek target. The share price has consequently drifted down even though until yesterday, it arguably had the single best drill hole among the "3 amigos". But don't count Southern Arc out of the fight just yet since one of the drills is now back on the central portion of Motong Botek where initial success was seen. In addition, the company will be releasing drill results in batches going forward as opposed to one hole at a time. The latter approach can take a terrible toll on the share price because stepout drilling is never going to result in one great drill hole after another, even if you're Aurelian. Had I been paying better attention, I should have acted on the risk to the share price that such an approach would create, but instead I held on. I should soon have a chance to re-evaluate my position as soon as the next batch of drill results are released.

Okay, enough "amigos", I'll dwell now on primary and secondary silver plays. Actually, this is going to be rather short and sweet since my research hasn't turned up many new companies that are decidedly better bets than those I've discussed before. Impact, First Majestic, Excellon, Silvercorp, Oromex, Silver Quest, Genco, Great Panther, Endeavour, etc. remain among the more prospective, although maybe not the most exciting, bets. I own most of the above.

Some others like Bear Creek, Silvercrest (despite the name, more of a gold stock based on proposed heap leaching at Santa Elena) and Aquiline appear to be on the cusp of a move to higher price levels based on development-related progress and therefore deserve some attention. A few others that may see strong resource growth this year including Silver Eagle, Orko Silver, Arian Silver, Apogee, Minera Andes and Esperanza Silver (also more of a gold stock now), but it is probably good ol' First Majestic that will grow its resource numbers by the largest amount and greatest proportion. There are a number of considerations with this group of companies that I haven't fully looked into and therefore I don't currently own any of them (other than First Majestic of course), although I may buy some in the future.

Last but not least, Mines Management remains a strong candidate for long-term accumulation at current levels. The company has received zero recognition for permitting progress to date, which includes confirmation that the mining permit for Montanore originally issued in 1993 remains in full force and effect, subject to subsequent modifications of the mine plan (if anything, the proposed project has since been downsized and its environmental impact reduced). I currently own only a smattering of shares but will start to think about purchasing more as progress is made in permitting and feasibility studies.

MARCH 24 2008 7:00PM - Silver and gold are managing to hold support here with silver sitting on a technical ledge around $17 and gold at $900. If you have speculative capital at play, watch closely because silver trading below $16.50 carries high odds of visiting the 200 day moving average, currently around $15. That would be the level I would consider aggressively buying assuming other factors remain positive. Aggressive buying may also be warranted if and when we get a signal in the basis that has so far not been forthcoming. In the meantime, there is nothing wrong with cautious buying but outright exuberance should probably be avoided.

Speaking of buying, the shortage of silver at retail dealers continues to persist in the U.S. with more and more reports of little or no inventory. I have also received confirmation that some dealers in the U.K. and mainland Europe are out of stock. What good is a price drop if we cannot buy on the dip? My answer is that you should be patient and not get desperate. Don't settle for poor quality or be willing to pay a big premium. In my opinion, anything more than $1 per ounce over spot (including shipping and handling) for silver bars or rounds is way too much. More than $2 for silver American Eagles is also excessive. This applies to large lots of several hundred ounces. Premiums on "small lots" of a few ounces have always been very high and I don't recommend you purchase silver this way (see below for alternative).

Scanning ebay listings is a good way to get a sense for the size of premiums on various forms of bullion, although you should be aware that many of the items listed there at this point were originally bid to current levels when silver was over $20. I have kept an eye on ebay off and on for many years and have generally found that the amount of bullion on auction as well as the number of bids tends to fluctuate with the general mood of the markets. Interestingly, there doesn't seem to be much of a shortage of silver bullion available there right now. On the other hand, the number of listings has typically been somewhat higher during periods of strong prices, so there appears to be a lack of depth in whatever supply might be out there. The premiums also appear to be unusually high, which clearly indicates more demand than supply. As for buying silver or gold on ebay, I would advise caution. A few years ago, great deals were a constant and this sometimes made up for the risk when dealing with private parties. For example, I once bought a bag of Franklin halves (90% U.S. silver coins) from a guy in Pennsylvania. These bags are somewhat rare and he was selling at a discount to the spot price when silver was around $5, yet there were very few bids. The guy checked out and so I put in a bid and "won" the auction. Well, right after I received the bag, he listed 4 more bags with both Kennedy and Franklin halves at a similar discount. At that point, I e-mailed him to say I didn't think he should be selling any more considering the price of silver was about to explode. He insisted on going ahead and I managed to pick up 2 of those 4 bags at a great price. You are not going to see that kind of deal on ebay today. The closest I could find is this, which is not a bad deal (20% premium to spot with no bids) only because the coins are uncirculated.

Bigger premiums may certainly be in store for the future if this shortage persists, but I'd advise against being in a big hurry to pay them. If you are willing to be somewhat flexible and have a sufficient budget, you can still get silver at a good price. Earlier today, for example, www.tulving.com had 100 oz. JM/Engelhard bars with a minimum order of 7 bars, at a premium of 59 cents per ounce and a slight delay in shipping. Many dealers also have $1,000 face value bags of 90% U.S. silver coins (quarters or dimes). Either of these items will set you back over $10,000 so this is not for the truly small investor, but these are among the most liquid forms of physical silver investment and top my recommended list along with Eagles and 10 oz. bars (really hard to get now).

There will be a time to reconsider what constitutes excessive premiums when dealers start splitting the $1,000 face value bags (containing ~715 ounces of silver) into $100 face value (~72 ounces). Such a move would confirm that the shortage of retail silver bullion is really here to stay. If you have reports of dealers already doing this, please let me know.

An alternative to desperately searching for silver bullion now and/or buying in small lots is to buy the silver ETF as a temporary measure. The ETF can be used to accumulate funds for a larger or later bullion purchase while giving you exposure if prices should go on another tear. This is a cheap way to average your bullion purchase by pooling funds in advance of a single, large purchase of bullion such as 100 oz. bars or 90% silver bags. Do remember to factor in the tax consequences of buying and selling the ETF although this is likely to be cheaper than the premium you would otherwise pay when buying small lots of bullion. Another option if an ETF is anathema to you would be accumulating funds in www.goldmoney.com, www.bullionvault.com (only has gold) or a similar outfit. Mind you, these are not substitutes for bullion held under your own control, but they can serve as means of diversification in addition to accumulating funds.

Finally, it might be a good idea to buy some gold bullion instead of silver. There appears to be no shortage (though this might change) of gold bullion in dealer inventory right now. I like that as a contrarian indicator.

Buying aside, part of the reason for this "silver shortage" could be due to secondary supplies drying up. Secondary supplies are made up by people selling "junk silver" and unwanted bullion to dealers (or on ebay). Intuitively, it would seem such selling would accelerate in response to higher prices. For example, in its 1991 report, Charles River Associates estimated that at $20 silver up to 1.3 billion ounces (silverware, medallions, trinkets, etc.) might be headed to the refiners for recycling and 700 million ounces of bullion could be sold back to dealers, greatly boosting inventory. It now seems that such thinking was grossly incorrect. Much of the selling in the past few years appears to have been insensitive to prices, meaning that it was not motivated by profit. Indeed, some silver may have been sold based on the mistaken belief that it was a "dead investment". That's exactly why the guy from Pennsylvania sold me the 3 bags of Franklin and Kennedy halves. By now, most sellers who are insensitive to silver prices are likely "out of stock" while the number of those who view silver as a dead investment has undoubtedly shrunk. It's even possible that some sellers are actually withholding supply in anticipation of higher prices to come. This is certainly the case with some of the bullion dealers out there. At the same time, there seems to be no shortage of buyers willing to pay more and more for silver.

There are some important implications here for a silver market that has historically been dominated by the trading of paper contracts representing 1,000 ounce warehouse-acceptable bars. Specifically, one possible longer term outcome of a dealer shortage in silver is that many of the 1,000 oz. bars currently traded over the counter or held in exchange stockpiles could get siphoned off to meet the burgeoning retail demand. If so, this could mean we are headed for a period in which the small retail investor is in charge of the silver market, as advocated by Ted Butler. That would mean throwing away most market analyses and historical studies such as those involving COMEX trading (Commitment of Traders, open interest, etc.). My "job" would become much simpler because the vast majority of retail silver buyers don't have the same technically-oriented speculative motives that guide trading on the exchanges and over-the-counter. Basically, many small investors are hoarders who tend to act like mini-Hunt brothers: accelerated accumulation as prices rise, selling only when forced. This involvement of crowds means that a Silver Mania is possibly around the corner and we may soon see exactly why silver can be such a spectacular speculative opportunity. On the other hand, the basis is saying not so fast, we are not there yet.

In closing, I would note that a distinctly different sentiment is being advanced by the media as it pertains to gold. Apparently, Americans have become active hawkers of gold, lured by the recent four digit price. News articles reporting on the phenomenon like Cashing in on the Gold are all over the place. Other articles such as Got Gold? No Better Time to Sell have taken more of an advisory role in recommending a trip to the ol' pawn shop. Yet other than the odd Now Is The Time to Sell Ungraded Silver Coins, I'm not seeing similar reports or recommendations about silver. Maybe we'll get them when silver reaches $50?

MARCH 20 2008 12:20PM - The 50 day moving averages got skewered last night and silver is now plumbing the next support at $17, a very important one because the next stop could be $15. Gold bounced before it reached its own $890-900 support and is trading somewhat higher but the downward bias is still intact and very powerful. I am taking some profits in put options and continuing to plow them into calls, but letting a few puts run in case we keep dropping toward the 200 day moving averages.

If you are looking to buy physical silver bullion, it looks like you are probably SOL for now as many major dealers are reporting that they are partially or completely sold out. Indeed, one of my favorites, www.Tulving.com, shows that the only thing not sold out are the 90% junk bags. Jason Hommel has been covering this closely so I'm not going to get into the details. This is obviously a very important development and basically what it says to me is that some people are trying to buy this dip very aggressively. On the other hand, it could also mean dealers are holding inventory back in anticipation of higher prices. Meanwhile, the big boys are clearly in charge of prices on the COMEX, in London and everywhere in between. These are the places where the weak hands seem to be concentrated and we are finally witnessing them getting shaken out just like I've been expecting for months.

So, where to next? Well, I find it very encouraging for higher prices that retail dealers are sold out at this point by comparison to the 1979-1980 period. There was way more demand then before bullion supplies started to run dry. Lines reached around the corner at coin shops (of course people today tend to order over the Internet or phone so the equivalent would be having to wait on hold for hours and hours). Back then, there was also an incredible amount of scrap sales and we are not seeing that today.

If the silver market is about to be visited by a chronic shortage of supply at the retail dealer level, it might mean that the shortage will soon migrate to New York, London and elsewhere as well. In effect, unsatisfied bullion demand may spill over into other media such as the ETFs, futures, and equities. In the case of the latter, that spillover may be exactly what lights the fuse under the gold and silver stocks.

Another angle to this is that gold and silver could benefit from a major sector rotation as speculators flee commodities but retain exposure to the monetary metals for their safehaven status. We have seen before how the most liquid investments tend to get sold first during a liquidity panic. We have also seen how quickly these liquid investments can recover. I am looking for that to happen again with a vengeance.

MARCH 19 2008 3:00PM - I have started to acquire some call options in case we get a lively bounce. If we don't, the put options I acquired a few days ago should hopefully cover their cost. The original plan was to go long futures if we got a steep correction, and I will probably still do that (though not in April gold since those options expire in less than a week). But the odds of a strong bounce from the 50 day moving average, which appears so far to be holding up, are pretty good. Meanwhile, the strike prices on my put options are still too far out of the money. The May $20 silver call options look particularly inviting here and I am keeping an eye on them. They are somewhat expensive but the price has already declined from near $10,000 last week to under $2,500 today.

One cheaper method to play a possible bounce would be a bull call spread. This involves buying a call option and simultaneously selling another call option at a higher strike price. For example, buy the July $22 and sell the July $24. The proceeds from the sold call option reduce the cost of the purchased call option. The short call option also caps the maximum profit, which in this case would be $10,000 (each option contract is for 5,000 ounces of silver). So why do this? Well, consider the July $20 call option costing $5,000. Let's assume a phenomenal outcome such as silver going to $25 by late June. The $20 call option would be worth $25,000 for a 400% return. But if you can buy 5 of the July $22/$24 call spreads for that same $5,000, your profit would be $50,000 if silver goes to $25, which is good for a 900% return. Not only that, but your profit would still be $50,000 if silver went "just" to $24. On the other hand, the $20 call option would be a better speculation if silver rose above $30 or traded between $20 and $22.50. There is another advantage to the bull call spread: if prices keep dropping, you can often buy back the short call option (the $24 in this case) on the cheap, which would then uncap the long $22 call option. Now, if silver turns back around and goes to $25, your profit would be $75,000. And if silver goes to $30, it would be $200,000. Now that's what I'm talking about! Of course, if prices fall when you are long the $20 call option, you can always just keep buying more call options as they get cheaper, but your leverage is still not going to be as good as the bull spread.

Please note this is a simplified example that does not take into account time value, which makes the price of the $22 call option rise slower than the price of the $24 call option unless both are either deep in the money or close to expiration. Thus, actual profits are usually going to be substantially less than theoretical profits. For example, if silver jumped to $24 tomorrow, the July $22 call option might trade at $13,000 while the July $24 option might trade at $8,000. In effect, the July $24 call option would have $8,000 of time value while the July $24 call option would have just $3,000 of time value. Therefore, the bull spread would be worth "only" $5,000. This disparity between time values at different strike prices is called delta and it will shrink over time. As a result, long spreads perform best when there is not a lot of time remaining to expiration. My personal trading rule is to never pay more than 10% of the maximum profit potential on these spreads. In this case, that means $1,000 or less. Currently, the $22/$24 July spread is trading at more than $1,000, although both the $23/$25 July spread and the $21/$23 May spread are within my buy range. The $22/$24 May spread makes no sense because you can acquire the May $22 outright for under $900.

I am also looking at some specific set ups in PM stocks. It wasn't the right time to buy when all the pundits were pounding the table near 500 HUI, but the opportunities are now starting to emerge. The first is Exeter, which is primarily a play on drill results but also has a pretty clear technical picture. It has strong support at $4 that serves as an ideal accumulation point with a 10% trailing stop loss. I really, really like this trade as a "set it and forget it" (assuming stop loss is in place). Another is Gammon Gold but this one I am being much more careful with. It is a turnaround play that may not have seen its final bottom at $6. Currently at $8.50, it needs to hold $7.75 and move higher within the next 2 weeks in order to keep momentum positive. I am a buyer anywhere in the $8's but will run for the hills on a break of $7.66. Finally, I like First Majestic here as well. Currently also sitting on its 200 day moving average, this one is a good candidate for averaging down in case the PM stocks keep getting hammered. The cheaper it gets, the better. At some point soon, I suspect the stock will cross $5.50 for the last time on its way to permanently higher levels as the company threatens to enter the realm of senior silver producers.

MARCH 19 2008 9:30AM - The Fed cut was just a bit less than the market expected. The general stock market rallied yesterday anyway and the dollar also seemed to have found its legs, at least temporarily. I am not surprised at all by the reaction from gold and silver as well as commodities in general. As I stated a couple of days ago, the Fed action came right at the boundary of an important technical count. The other worrisome factor was that silver started to underperform gold last week. After today's big drop, we may stabilize for a bit around the 50 day moving average (essentially where we are now with silver around $18.30 and gold at $945.00) but immediate downside risk (this week) remains to around $890-900 for gold and $17 or so for silver. If these levels are penetrated, then the 200 day moving averages come into play, currently around $15 for silver and $800 for gold. This is probably not a bad point to start nibbling on some long positions in both bullion and the PM shares, but I am continuing to caution against very aggressive moves into the market.

MARCH 17 2008 10:40PM - I ran across the following argument from Tom Tripp, purveyor of the Millennium Dollar, posted in the comments section of yet another depressing article on the subject of the U.S. dollar/economy's demise. Aside from Mr. Tripp's dubious claims about the inferiority of gold and silver for monetary purposes, I was struck by how well his observations fit into my discussions of the Fed's latest experiment with monetary engineering, namely the "temporary" switching of collateral for Federal Reserve Notes from safe U.S. Treasuries to risky mortgage-backed securities. Mr. Tripp asserts, somewhat convincingly, that the dollar should be backed by "inflation-adjusted" mortgages. Well, whether or not the Federal Reserve and U.S. Treasury like it, that's where things seem to be heading on account of the various "facilities" that the Fed has been busy inventing lately. We will have arrived at the final destination if and when Fannie Mae and Freddie Mac fail.

Tom Tripp: "A hundred years ago, the Yale economist, Irving Fisher, said that the only way to end our monetary disturbances (inflation and deflation) was to issue a monetary unit that was backed by inflation-adjusted assets. He proposed a basket of commodities, which is unworkable; but residential real estate is the ideal asset to serve this purpose. Contrary to gold and silver, it can expand and contract with the population; and no one can run off with it. It is firmly fixed in its place. If inflation, and deflation, were measured properly; then the mortgage obligations and payments for American home owners would be ratcheting down with the values of their homes. A U.S. dollar backed by securitized inflation-adjusted mortgages would consistently represent a fixed, constant claim on American homes; provided that the mortgage underwriting was properly carried out. By factoring out the inflationary premium in the real amortizing rate, real mortgage payments in America would initially drop by 25% to 35%; but then, increase with inflation or decrease with deflation over time. Wages indexed to inflation would move in unison to the mortgage payments, substantially ending the mortgage defaults. Banks would earn a fixed real rate of return, no matter what the inflation or deflation rate; and home owners would always be able to make the payments; barring unemployment, health or age problems, which can be insured against. We now have the technology to create a real monetary system, but this cannot occur until there is a substantive change of perspective in the leadership of the American monetary system. The Federal Reserve has to stop representing the American banking cartel interests first, and start representing the American people first. The U.S. Treasury must force the banks to accept inflation-indexed (real) mortgages and real securities. Until the Federal Reserve and the U.S. Treasury act together to promote a real monetary system, this quagmire will continue."

MARCH 17 2008 4:30PM - Earlier today we had a spike that coincided for silver, gold, oil and many other markets caused by news that JPMorgan is buying Bear Stearns for $2/share (which is a 98% haircut from the price Bear has traded recently). In addition, the Fed has announced yet another round of market interventions over the weekend in an increasingly desperate bid to stop, or at least slow, the credit crisis. Toward the end of the volatile trading day, gold is holding its ground and silver is down marginally from Friday's close. Tomorrow is a Fed meeting where the range of possible action on interest rates is as wide as we've ever seen: from the unlikely-but-possible no rate cut all the way to the very real possibility of a full 1% cut in rates. In light of this, we should not be surprised that the gold-silver ratio is back near 50 given the uncertainty fueling flight-to-safety buying of gold. The move in this ratio belies possible weakness ahead but it is hard to see the monetary metals suffering long or hard while the financial system continues to teeter on the edge of a razor.

The fundamental indicators I track are giving off a lot of conflicting signals but I would give some significance to the continued strong metal accumulation by the ETFs as a sign that underlying investment demand for bullion remains strong at record prices. In perhaps an even more important sign, the basis in silver (and to a lesser extent gold) has contracted significantly today, reversing a trend of loosening over the past few days. This is real-time confirmation that demand in the cash market for physical metal is currently very strong. Unless and until this changes, silver and gold will remain biased to the upside with the real possibility of moving significantly higher on a spike in trading volume. At the same time, I would like to emphasize that the basis has not given a major warning sign that financial catastrophe is imminent, which is actually quite surprising when you think about it. It would be quite ironic if later we look back on this episode and realize that Jim Cramer, the Fed and the monetary metals (at least secretly) were all for once (a) correct and (b) saying the same thing. Before that happens, however, there is a lot of reckoning left to be done.

Importantly, March 17 has come and almost gone and we've had no bona fide correction in silver. From a technical perspective, this shifts the odds greatly in favor of an imminent move to the $23.425 target, although I must caution that technical tools are especially inaccurate in this type of market. For example, if I'm off just a couple of days in my "count", that would mean the Fed meeting could still be the catalyst for a major, precipitous correction in gold and silver prices. Presumably, this would happen as a result of the Fed cutting rates by less than expected, which may provide some support for a U.S. dollar that is apparently teetering on the edge of an abyss.

To close today, I would like to make a bit of a contrarian plea for you to be careful when listening to the renewed drumbeat of opinions exhorting you to aggressively buy bullion and PM stocks. One of the reasons you are seeing fewer articles on this site besides my lack of time is that I don't believe "buy with both hands" is very good advice to either newcomers or old hands in the gold and silver market, especially with prices already up 50-75% in less than a year. I don't care for prognostications that current record prices represent excellent risk-reward because they are based on too many assumptions. This is not good advice even if the bull market has many years to go since it basically throws all discipline out the window.

It might be good advice if we knew for sure that the dollar is going to collapse in the next few weeks or months, but that kind of "success" would be based purely on luck. What type of luck? For one, the luck involved in keeping European and other economies in one piece long enough to perpetuate the dangerous and wrong impression that other fiat currencies are somehow superior to the dollar, or that the emerging economic, monetary, fiscal and financial woes cannot infect other countries at least as severely as they are already infecting the U.S. Even more luck is required in order to keep commodity prices moving higher and higher absent major supply shocks. Then there is the luck needed to find a new expanding consumer base to replace the tapped-out Americans so that Chinese factories and construction firms can stay busy. I'm not saying all of the above cannot or will not happen, only that it involves way more chance than what the "sure bet" or "slam dunk" commentators would like you to believe. In point of fact, gold and silver are WAY LESS safe as investments at $1,000 and $20 today than they were at $250 and $4. That doesn't mean there aren't some great opportunities still ahead or that gold and silver no longer serve the same purposes they always have to diversify portfolios, protect wealth against inflation and provide crisis insurance. In fact, gold and silver can be bought for these purposes at just about any time with virtually no regard to price. But if you're simply looking to multiply your money, you should know that the easy, gimme, profits have already been made.

MARCH 13 2008 3:40PM - In the past two days, the dollar sliced through the $72.37 level without even slowing down while cash gold touched the $1,000 level (and nearby gold futures even traded above it for a few minutes). This portends a possible spike higher although volatility is probable in both directions. In any case, silver has rallied $1.40 in the past 24 hours and looks very intent on taking on the $23.425 target discussed here on February 28.

The news out of the economy and credit markets continues to be miserable and this is the main reason the dollar is falling lower and lower. The latest blow comes from Carlyle Capital, a fund that leveraged investor equity by a factor of more than 30-to-1 in order to buy supposedly safe Freddie Mac and Fannie Mae mortgage-backed securities (MBS). Although the securities themselves appear to be in okay shape, investor aversion to MBS is such in the current marketplace that MBS market values have been declining. As a result, Carlyle is being faced with bigger and bigger margin calls from its lenders. This is exactly the situation that the Fed is attempting to band-aid using its latest "Term Securities Lending Facility" as announced here. Needless to say, this latest Fed move is incredibly bullish for gold and silver for many reasons, not the least of which is the fact that even more private, risky credits will soon be used to back the faltering Federal Reserve Note.

The plan is for the Fed to swap up to $200 billion (or more, presumably if the program is successful) of its Treasury securities in exchange for agency debt and higher-quality residential mortgage-backed securities (the exact type that is causing Carlyle to fold). Now, it shouldn't take a genius to figure out that the backing of the Federal Reserve Note is being slowly eroded and that the Fed may never have a chance to reclaim its $200 billion in Treasury securities (which currently back the dollar). The net result is that Fed's balance sheet, the strongest of any Central Bank, bank or entity in the world just last December, is very quickly becoming just as risky as that of the bankrupt Carlyle Capital. No wonder people are fleeing the dollar like there is no tomorrow. Yet most other Central Banks are doing the same thing if not worse. For example, Northern Rock in the U.K. is in the midst of a government bailout and the European Central Bank is willing to accept even some complex Structured Investment Vehicles (SIVs) as collateral for its cash lending.

The net result is that silver and gold are going higher. Under the circumstances, we might eventually see a rotation out of oil, base metals and other commodities based on fears of a global slowdown and into the monetary metals based on fears of the systemic risks that the Central Banks are intent on taking in order to fight a global slowdown. That would make gold and silver go much higher regardless of what happens to the dollar.

Speaking of the poor devil, just how significant was the $72.37 target? Very. It is based on data going back all the way to 2002. Indeed, a breach of the $72.37 level portends a drop in the dollar index all the way down to $52.80 as a possible final low. Interestingly, this corresponds with a level that many analysts are saying would make American exports competitive in the global marketplace. Please understand, I'm not saying that the dollar is about to decline this far in the next few days, weeks or months, only that an eventual target low of $52.80 has been created by the breach of $72.37. The low could come years from now. On the other hand, the charts do seem to suggest the dollar may be getting ready to fall off a cliff. In particular, the dollar has just broken down from a trend channel that has been in place since August 2005. If this is a false breakdown, we should know in the next few days.

I am still looking for some type of corrective action back toward the 50 day moving average in silver, although both the dollar action and the new Fed program argue against much of a breakdown in the weeks ahead. One scenario that could unfold any day is the commodities taking a significant breather, which could temporarily weigh on silver and gold prices. If this did happen, I would expect the monetary metals to shake off the weakness pretty quickly, moving to new highs in fairly short order, possibly in blow-off style. This is my favored scenario for now and I will continue to look for opportunities to leg into speculative trades that might present themselves. In terms of bullion and PM stocks, I would continue to be moderate and careful in buying with at least a two year investment horizon. Underexposure would be a reason to be somewhat more aggressive.

MARCH 8 2008 9:00AM - Silver and gold ended the week in rather solid shape considering the parabolic rises in many commodities have either slowed or been stopped dead in their tracks over the past few days. Notably among metals, platinum and palladium have dropped about 15% from their highs this week, including 8% on Friday alone, based on reports that power was finally being restored to the mines in South Africa. The grains have also been taking it on the chin. In fact, the uptrend on the daily charts has been violated for many commodities, although the uptrend on the weekly charts remains largely intact. Has the commodity sector topped out, at least in the short term? If so, the monetary metals would have lost an important source of support.

Another source of support to keep an eye on is the dollar, which hit an intra-day low of 72.455 on Friday. This is within a split hair of my downside target of 72.37 and so I was not surprised that the dollar bounced vigorously from this level.

If we get counter-rallies in the dollar and commodities, it is possible that silver and gold will take a breather and retreat to their 50 day moving averages or perhaps even lower in the next few days. That's around $900 for gold and $17 for silver. I do believe, however, that should we get such a correction, it may be very short-lived and followed by a violent rally to new highs. What to do about this? Nothing for most PM investors but simply to sit through it for now and perhaps to be ready to buy select PM stocks. If the many pundits are right about PM stocks going to the moon shortly, this would be an ideal situation to get on board.

Personally, I have acquired a small scattering of put options--$900 strike in April gold, $17 strike in May silver--just in case things turn out according to this theory. If we approach the 50dma in the next week or so, I would ideally go long futures against some of the put options. This would mitigate downside risk while providing leverage for a new move to the upside. I am also considering some other strategies in case we don't correct to the 50dma.

Considering the longer term, I will discuss why we might see commodity and PM prices sustain high levels for some time to come even in the face of a confirmed recession. By "high levels", I don't necessarily mean new records, only that commodity prices may not collapse in the brutal fashion that some might predict.

MARCH 6 2008 10:40AM - It has been an exciting market the last few days with silver breaching $20 for the first time since 1980. We have seen both big rises and falls each day this week, which I take as a sign that we are approaching a major top. Things don't make a lot of sense near a top because the markets are moved by the whim of speculators as they quickly cycle through greed and fear. Thus, we see that silver is down about 70 cents as I write this while gold has taken a $17 dollar haircut even though the dollar continues to fall to record lows. For sure this strange market action is going to be blamed on the cartel, but the fact is that every market in parabolic ascent will experience this type of back-and-forth volatility.

I would like to comment on a very important issue that is being discussed by just about every pundit out there, and it is that a short squeeze may be occurring in silver. A short squeeze happens when a significant percentage of shorts, for one reason or another, are forced to get rid of their losing positions but there are very few other sellers in the market. With nobody left for the shorts to offload their positions on, the panicked shorts must actually become buyers in order to close out their positions. Of course, few sellers and many buyers is a recipe for a price explosion even if there is no fundamental or technical reason for it.

With that definition out of the way, I have the following advice: don't you believe a short squeeze is happening in silver right now, at least not in the way alleged! True short squeezes are very short term in duration and can be identified by volume spikes. The ONLY support for an allegation of a short squeeze in silver is the recent decline in the net commercial short position in COMEX silver futures. Yet precisely the same thing happens just about every time the silver price spikes higher. It happened during both the 2004 and 2006 spikes to varying degrees. The 2006 rally came closest to being a short squeeze but it ended up being merely an episode when shorts covered a lot of their positions in a market that rose beyond their preset loss limits. So far, I don't see anything different happening right now. In fact, we are not as far along the path to a short squeeze as we were in 2006.

Why not? Simply put, the basis is not signaling that a short squeeze is occurring. Moreover, there appears to be nothing abnormal happening in the COMEX warehouses, March contract deliveries or "lease" rates. In other words, if this were a true short squeeze it would not merely happen in COMEX futures but in the physical markets as well. Truly panicked shorts would increasingly look to offset their short positions through physical buying and this would cause the basis to shrink since the shorts would be buying contracts that are close to delivery. Yet the basis has actually been expanding in the past few days as short covering has consisted primarily of shorts not rolling forward their contracts, giving longs the upper hand in the contract months that are further out.

None of this is to say that a short squeeze cannot happen in silver, but it would have to be accompanied by massive physical demand that should be obvious from reading the basis and other fundamental indicators that I track on this website. Until then, the reduction in commercial short positions on the COMEX is what it is, nothing more and nothing less.

FEBRUARY 29 2008 1:00PM - A rough day on Wall Street had most PM stocks on the rocks but the metals themselves are continuing to fight higher despite the growing evidence of exhaustion. The next couple of weeks could see a pitched battle between profit-takers and buy-on-dippers.

Many factors are pointing toward a big increase in volatility. On the plus side, we have had a big reduction in COMEX silver open interest since last week. When this happens with rising prices, it tends to show longs in control and shorts losing control. On the minus side, the first day delivery notices for March silver were nothing to write home about, so it continues to appear that the vast majority of the action on the COMEX is speculative and little is spilling over into actual physical demand. Back on the plus side, the basis shrunk considerably yesterday; should this represent a confirmation of the trend started in late December, it portends still higher prices ahead. Finally we go back to the minus side to point out that the basis has reversed much of its advance since yesterday, which is a worrying sign considering that large fluctuations in the basis typically precede a reversal in price trend. So what does this all mean? Basically, I don't think we should be very confident about either a big move up or down until we get some more confirmation early next week. I'm itchy to deploy some short-term speculative funds given the light exposure I've had since November but I'm also willing to remain patient until the right setup presents itself.

FEBRUARY 28 2008 3:20PM - The dollar turned from ugly to hideous today and PM investors loved it, sending both gold and silver to new highs. Many commodities, however, bested the monetary metals' performance as a result of a growing frenzy in speculative buying. In effect, the fear of inflation is causing investors to buy up natural resources in a classic case of self-fulfilling prophecy. I'm not complaining, but I really hate when this happens because prices driven by hot money are never sustainable. We eventually end up with a huge correction and it takes a long time to make technical repairs. This should be no problem if you are a patient investor and you plan to hold for years through thick and thin, but it is very disconcerting for everyone else.

I have a hunch based on my "feel" of the market and some technical indicators that in the next few days we may see a rather nasty correction in silver that could retrace up to 50% of the $6 advance since the December low. On the other hand, if silver can get past March 14 without such a correction, it has a very good shot of advancing all the way to $23.425 before taking a significant rest. In either case, I expect any strong pullback to be followed by a powerful attempt to make a new high. I haven't found a great way to speculative on this scenario due to unreasonable option premiums and of course leverage remains a no-no. Some ways to play this hunch might be to sell some high flying PM stocks now and then buy back a carefully selected group of laggards if and when the drop in PMs ravages the juniors, or to simply trade the gold and silver ETFs. For now, however, I continue to contently sit on a near fully invested portfolio.

I've been asked a number of times why I am not convinced that the current move in gold and silver can be both continuous and sustainable. My best, and perhaps only, answer is that the basis is telling me that the current demand in the physical metals sports a strong speculative element whereas hoarding and monetary demand are secondary. Speculations in silver, gold and commodities tend to collapse at some point while true monetary demand tends to gather steam and grow unstoppably. Bottom line, if this is the "real deal", it still needs to be confirmed by the basis.

Then there is the idea that short covering itself will drive gold and silver to incredible heights. While it is true that short covering does happen in the PMs and it is bullish--as best demonstrated by the dehedging of gold mines in the past few years--I tend to believe that regulatory policies, rule changes and other means would be used to save the markets and major participants from default if the threat were serious enough. Whether you want to believe that such actions would result from a conspiracy to cap the gold and silver price or otherwise, the fact is that governments, banks and market regulators will do everything in their power to keep the financial system from blowing up. That, after all, is the job they are paid to do. Thus, if too many longs try to take delivery of COMEX gold and silver, the regulators will restrict delivery. If too many over-the-counter shorts are forced to deliver silver and gold they do not possess, they will be let off the hook and allowed to settle in cash. If too many "lessees" cannot return borrowed metal, the "lessors" will be forced to accept alternate remuneration. There is no point lamenting this because it is the way things have always worked. It is called "human nature".

Yet even without such intervention, I have my doubts that the supposedly massive naked shorting in the gold and silver markets could ever drive prices through the stratosphere. This is because at some point the longs will start to become sellers if for no reason other than to take profits. This may be at much higher prices, but it will be increasingly the case as prices rise. At the same time, more and more proceeds from other investments will be required to maintain unit parity in demand. It has been long argued by some PM pundits that higher gold and silver prices beget more investment interest and even higher gold and silver prices, but only true monetary demand for gold and silver can keep such a scenario going for long. Without the monetary demand, historic gold and silver bubbles have popped very quickly. So yes, short covering can be a force in this market, but it will never be "the" force to the point that it causes the price of silver to increase by many tens of dollars per ounce, much less hundreds.

Last but not least, I wanted to comment on the recommendation by several gold and silver pundits that simply holding bullion in your own possession is the safest choice. Unfortunately, these pundits seem to ignore the possibility of "homestead wealth" being robbed, pilfered, confiscated or destroyed by natural disaster. Compared to the unacceptable risk of unallocated metal accounts, it may very well be safer to hold bullion in your own possession, but I believe there are a number of other secure methods of storage that are at least as safe, if not safer. I won't comment on these approaches too extensively here although I do plan to cover them in detail as part of the new service. For now, it should suffice to say that diversification, discretion and ingenuity are important. Ideally, you should never hold more than 10% of your bullion in any one place especially if you have more than a few $1,000 worth. Yes, that means you should find 10 secure places (or more). A top choice, especially for gold coins, would be a safety deposit box. It goes without saying that you need to be able to get to this box in case of a banking or other crisis. I would also give a nod to www.bullionvault.com and www.goldmoney.com. All of the COMEX approved depositories will also hold your bullion in designated storage, although the fees can be substantial. If you do this, make sure you get a segregated account and not just an allocated account. You can also find great ways to hide your stash at home, but storage fees will look like a great bargain should you become a victim of crime or act of God.

One nice thing about keeping bullion at home is that often you can find means of storage so secure and inaccessible that it serves as its own incentive to hold on through thick or thin. For example, it's very easy to dig a hole in the backyard and pour concrete into it. Be sure to use concrete with high tensile strength, properly cure it, add rebar and adequately protect your encapsulated hoard from pressure and moisture (surplus steel ammo cans and welded 3/16" or thicker steel plate both work great). I guarantee nothing is going anywhere without some very determined, loud and time-consuming demolition. The cost advantage is compelling compared to spending $25,000 to $100,000 or more on safes and vaults. Then again, even the best safe in the world is no better than a cheap gun safe from Walmart since both are equally easy for a determined robber to open if you value your life and that of your loved ones over money.

FEBRUARY 27 2008 2:45PM - Silver obliterated my target yesterday during a magnificent blastoff fueled by a pathetic dollar, growing inflation concerns, hints of Fed rate cuts, new nominal records in gold, oil, copper and many commodities, etc. How long and how high can this move go? Well, silver is starting to look parabolic on the various charts, so if this rally is to be judged by historical standards, it is closer to the end than the beginning. In addition, the gold/silver ratio has been dropping very quickly and is currently under 50, down from the 55 level in just a few days. This usually tends to happen near the top of a PM rally. Yet even if it lasts just a few more weeks, we could see several dollars tacked unto the silver price. For example, if the gold/silver ratio drops to 40 or below as some commentators are suggesting, silver would be $25+ if gold is able to reach $1,000. That doesn't mean silver will spend a lot of time trading at such a level since there is quite a bit of speculative froth that has built up and will need to be deflated. On the other hand, the outlook depends very much on the amount of further carnage in the U.S. dollar and the global financial system. With respect to the dollar, my new critical test level is $72.37 in terms of the Dollar Index, which is far enough away to support a rise in gold to $1,000 or even higher. Whatever happens next, we are entering a period of extreme volatility, so hold on to your hats!

Okay, let's move on to a few fundamentals. First up is the ETFs. Despite the recent protests of "fish smells", the Barclays ETF (SLV) has just added 4 million ounces of silver and now holds 20 million ounces more than it did in late December 2007. The London ETF also seems to be turning the corner after a decrease in its holdings of almost 3 million ounces since early February, although the pace of additions is rather slow for now. Next, the silver ETF in Switzerland seems stuck in neutral at the moment but it is probably just digesting the 3 million ounces of silver it has added since December. Given the very strong rise in silver prices over the past few weeks, one might perhaps expect the ETFs would have been growing at a faster pace, but let's not forget that they have already sucked up quite a bit of the available supply during 2007 to the tune of over 50 million ounces. In light of this, 20 million ounces over the past 2 months is not a bad pace. And then there is this: Central Fund of Canada announced today that it plans to raise $57 million from investors, and "[s]ubstantially all the net proceeds of the offering have been committed to purchase gold and silver bullion." I'd guess we are talking about 1.5 to 2 million ounces of silver here. Hey, it all adds up. Consider the Millenneum BullionFund, which appears to have added around 1 million ounces of silver to its holdings in 2007 and has been on a roll recently as reported by an associate.

Now, mind you, this isn't the type of demand that is going to launch silver and gold to the stratosphere. That task is still the job of speculators for now. Rather, I would call this "moderate but persistent" demand. This kind of steady demand would probably still be responsible for nice increases in metal prices absent the speculative element. Moreover, moderate but persistent demand is likely to help limit the size of the inevitable correction that will take place on the backside of the current rally. Simply put, the lack of big crowds piling into these ETFs as prices rise probably means that there will not be any big crowds seeking to exit through the narrow door as prices decline. Of course, the higher silver and gold move from here, the bigger the subsequent decline will be.

There is also the possibility that we could get some agreement among a segment of PM bulls who decide that the IMF's timing is pretty good and now is the time to sell. I'm already getting indications that bullion dealers are currently well supplied with bullion due to recent selling by customers. Absent growing interest from the general population in the U.S. and other Western countries combined with price sensitivity in India, we are probably seeing a buildup of bullion supplies in many markets. If so, moderate but persistent demand would be a great way to work this supply back down as PM prices stabilize.

Alright, let's move on and briefly talk about "lease" rates and the basis, which are both meandering meaninglessly for now. This actually comes as a bit of a surprise to me given the explosive silver price. If physical demand were overwhelming--overwhelming the shorts, that is--surely this would show up in the "lease" rates and the basis. Here again we find a useful explanation for the situation by way of moderate but persistent demand. Let's not give up on these indicators, though, because they are likely to start moving again soon and the direction and speed of that movement may give us a lot of useful information.

I'll wrap up today by pointing out that the resource stocks are finally showing signs of life with some juniors actually jumping by double digit percentages over the past few days. Off the top of my head, there is Great Panther (I own), which has re-ignited the hope for a big resource at its Guanajuato Mine; Gammon Gold (I own), which appears to be in the midst of a successful turnaround; Excellon (I own), which has weathered a strike, mill shutdown and an extended break in its excellent drill results; and MAG Silver (I don't own -- darn!) which has just completed the exercise of some warrants. The reason for the nice pop in some others like Silverstone (I don't own), SNS Silver (I don't own) and Silverquest (I own) isn't as readily apparent. In any case, it has been quite some time since the board has been lit up by so many double-digit gains. Yet with PDAC only a few days away and metal prices so strong, it is still too early to tell if this is for real or just a temporary phenomenon. Given the time of year and how far into the commodity rally we are, I'm still very inclined to remain skeptical. Yet that doesn't mean there may not be some very compelling reasons to buy particular stocks, and in fact there are.

Specifically, 4 of the above 6 stocks I mentioned, and at least a few more that I can think of, are poised to report new 43-101 compliant resource numbers in the days, weeks and months ahead that may take the market by surprise (hopefully in a good way). I'm in the process of compiling a list of these stocks, and assuming we haven't launched the new service by the time the list is complete, I'll probably discuss them in this commentary. I've even given a name to this list of stocks: "Quality Resource Growth". The theory behind it is based on a multi-faceted and rather convoluted analysis, but it can be boiled down as follows.

One: Record earnings by PM stocks will not be given full weight because of lagging suspicion that high metal prices are not sustainable and therefore neither are the earnings. It may take several quarters of sequential blowout earnings to dissuade this notion. In the meantime, we could see many PM producers attain "reasonable" P/E ratios in the teens. In effect, this is the same thing that has happened with all the base metal producers since early 2006.

Two: With all the drilling out there, a lot of great assays are being put out. At some point, investors will start to become numb to these drill results unless there is a direct correlation to quality resource growth. In other words, drill results will only seem great if there is a reasonable chance that the project will turn into a mine.

Three: The majors tend to buy companies that have projects with feasibility reports but are not yet in production. A significant source of new capital coming into the resource market -- until the general population starts treating gold stocks like the dotcoms in the 1990's -- will likely come from the majors, not to mention state-owned companies of resource strapped companies like Japan, Korea, India and China. This is because one thing that majors excel at is putting a project into production, and frequently when a junior tries to do that, it is wrong and can be expensive and take a long time to fix. Besides, a junior producer tends to have a larger market cap (i.e., more expensive) than one with a feasible project even if the share price isn't necessarily higher. This might seem like a contradiction until you realize that the share dilution required to put a mine into production often results in a larger market cap AND a lower share price.

Four: Many mining companies are starting to realize that "world-class deposit" is becoming synonymous with "too expensive to develop" or "environmental opposition" or "target for nationalization". In any case, there is a dwindling supply of big projects in low risk jurisdictions. So much so that Newmont (I don't own) has just announced a new strategy of "growth by baby steps". Look here if you don't believe me. I think this is just the start of a trend that is a long time in the making. New Jersey Mining, by the way, is a great little family run exploration and mining outfit. The father and son Brackebusch team is somewhat unique in the mining industry, as is their can-do approach. They even built a neat little gold leach plant all by themselves. I don't own any shares at the moment, but this is one I'm keeping an eye on.

Okay, enough babbling. I'd be interested to hear your opinion on my "quality resource growth" theory, not to mention any candidates you might think worthy for consideration. If you have some base metal stocks in mind, I'd like to hear about those as well considering that the difference between the "haves" and the "have nots" should be even more stark in that sector.

FEBRUARY 22 2008 3:20PM - Silver and gold continue to claw their way higher to close out the week at or near their bull market highs, this time on the back of a weaker dollar and strong prices across the metals complex. Silver is now just cents away from a critical test, so next week could be very instructive. In particular, my December 28 technical commentary discussed a target of $18.685 for December 2008 COMEX silver by early March, and here we are at about $18.40 on February 22, after having peaked at exactly $18.50 intraday. In disbelief, I checked the calculation again and actually came up with a small adjustment to the target: it should actually be $18.815.

This type of "lucky" accuracy tends to create big, dangerous egos, so I'm going to resist the temptation of predicting choppy prices next week followed by a test of the $18.815 level the week after that. I am willing to make a cautious prediction, however, that watching the silver price very carefully around the $18.815 level -- whenever it arrives -- on the December 2008 COMEX chart is bound to be very educational.

Two quick notes before delving into a lengthy and very important topic. First, there has been a lot of head scratching amongst analysts and market pundits about the lack of additions to the metal ETFs despite the supposed strong physical demand driving gold and silver prices to multi-decade, record highs. Jim Sinclair writes that there is something fishy going on and the chorus has been repeated across the PM sites. Well, had you attended the "Gold Profits in Troubled Times" seminar in Dallas last weekend, you would know how the ETFs work and it should come as no surprise to you that the ETFs don't always add or subtract metal from their holdings when it would make sense that they do so. In 38 words or less, the ETFs are controlled by Authorized Participants consisting of bullion banks that may have an agenda that conflicts with the arbitrage profit they could earn by adding metal to the ETF when demand exceeds supply and vice versa. For a more thorough explanation, read my prior articles in the ETF section of this site, sign up for the new subscription service when I finally announce it is ready, and/or attend an upcoming Gold Standard University Live Seminar.

Second, we've had a bit of fist banging on tables lately to emphasize that now is the perfect time to load up on junior resource stocks, including once again from Mr. Sinclair, as well as Mr. Hommel and many others. I'm not so sure about this strategy. Yes, you are well advised to buy now, although selectively and not in large chunks. Also, your investment horizon should be at least 2 years. Unfortunately, there is the very real risk that the resource stocks could go substantially lower from here. I give them 50-50 odds of a washout that would make last August and the past few weeks seem like good times. Such a dire event may be required to clear out the remaining weak hands and sideline enough capital to support a strong wave of new buying during the subsequent upswing. Resource stocks are creatures of momentum, and I don't see how they can get enough momentum right now given how badly they are languishing despite strong metal prices. So yes, please do buy, but also keep it cautious and be on the lookout for perhaps even better buying opportunities in the not-to-distant future. But most of all, you are bound to be disappointed if your investment horizon is measured in months instead of years.

Now to the very important topic. A couple of days ago I made a teasing, brief mention of the "Term Auction Credit" invention by the Fed, promising a detailed follow up. In the meantime, one kind reader pointed out this commentary by Dr. Gary North that I believe everybody should read in preparation for my diatribe on this subject, which is in the form of a response to an inquisitive e-mail from another kind reader:

Mr. Szabo,

Reading your website is one of my daily routines. And I am glad to find sensible people on the net, such as yourself. I have no in depth knowledge of FED-speak or terminology. Your article of the 20th of February mentions the "Term Auction Credit".  I supposed at the time that this was in some form or another - electronic credit being borrowed on a short term by financial institutions.  When you say that this electronic credit is used to substitute for FRN, should I read this as a (vertical) shift in the famous John Exter pyramid?

Please correct me if I am completely off the ball here. And who is holding the electronic credits in the end?

If this is a correct reading, then this means that the John Exter pyramid effectively works and confirms (again) Prof. Fekete's point? 

******

My response (excluding the pleasantries):

Before answering your question specifically, some background is in order to make sure we are on the same page. "Term Auction Credit" is the new lending operation instituted by the Fed last December because banks would no longer borrow at the discount window due to the stigma associated with doing that (i.e. confirmation of liquidity problems that necessitate last-resort borrowing from the Fed). Both discount window loans and Term Auction Credits represent short-term advances of Federal Reserve Notes to banks, but there are at least 4 differences: (1) term auction credit rates are competitively determined whereas discount loans are made at the "discount rate" set according to Fed policy, (2) term auction credits cannot be rolled over but rather banks that continue to need funds will have to bid at another auction, (3) the term auction program is presumably temporary, and (4) borrowers are not identifiable. The last difference is key to the banks and is the main reason why the program has "succeeded", while the first 2 are presumably meant to create a more competitive and flexible facility that allows the rate on term auction credit to float unlike the discount rate. Yet it is the third item that may be the most important to gold and silver investors in that the continuation and even expansion of this "temporary" Fed program could provide a useful barometer of the dire status of the financial and banking system in the U.S.

From my perspective, there are no "electronic credits" involved in either the term auction credit or discount loan programs, nor any other direct interventions by the Fed. In each case, the bank or financial institution provides collateral to the Fed and in exchange the Fed "prints" and credits to the bank a certain amount of money in the form of Federal Reserve Notes (FRNs). While the transaction is initially reflected as a deposit with the Fed (accomplished by a book entry in the Fed's computer system), in all cases the Fed will have the real paper FRNs sitting in its vaults, immediately ready to be sent to the bank's vaults. What the professor means by "electronic credits", I believe, is the ability of banks to lend FRNs on indefinitely through fractional reserve banking. In a severe liquidity crisis, banks will not be willing to lend FRNs as they will need reserves to meet withdrawals and make up shortfalls in loan defaults. As such, the ability of the Fed to flood the system with FRNs and thereby increase the money supply through the multiplicative action of fractional reserve banking could be severely limited. This is because those holding inferior forms of money will want to scramble down to the tip of the upside-down pyramid where gold and silver reside, but they will face an impasse at the FRN level. This devolution process will make anything "above" FRNs (including bank deposits, CDs, money market funds, etc.) essentially worthless while FRNs will be in shorter and shorter available supply even as the Fed desperately dumps them from helicopters, airplanes, hot air balloons, carrier pigeons and everything else capable of flight. In shortest available supply, however, will be gold and silver. That, as I understand it, is the professor's theory of simultaneous hyperinflation and deflation on account of Exter's pyramid.

Be that as it may, there is also the little issue of the Fed being able to print FRNs at will, which seems to be taken for granted not only by the Fed itself but by both its fans and detractors. The fact is, the Federal Reserve Act, the act of Congress that authorizes and regulates the Fed, proscribes that the Fed must be the (relatively) safest financial institution in the land and therefore it can never hold high-risk or non-performing assets on its books. And so, until last December and since at least the 1990's, the amount of FRNs circulating in the money supply have always been less than the face value of U.S. Treasuries (plus gold pledged from the U.S. Treasury in the form of gold certificates and special drawing rights with the IMF) that are held by the Fed as reserve assets. It helps to think of FRNs as liabilities of the Fed (which they are), because then we can easily see that the above policy resulted in each outstanding FRN being 100% collateralized by securities or direct obligations of the U.S. government (including gold held in Treasury and IMF reserves).

This was demonstrably by design, as a number of policy papers written in the 1980's and 1990's by the Fed's own staff argued the importance of the Fed employing a "neutral" and "confidence engendering" approach to conduct its activities. Thus, for example, the Fed's open window and system operations have consisted of the Fed buying and selling U.S. Treasury securities as the main direct method to control money supply, both temporarily and on a permanent basis. Consider instead a less restrictive policy in which the Fed would buy corporate, municipal, mortgage or other securities: doing so would artificially influence the interest rate differential between sectors based on the Fed's relative purchases or sales, which would in effect result in the Fed "favoring" some forms of lending over others. In addition, excessive exposure to a troubled sector, which the Fed may be politically pressured to assist, could endanger the Fed's balance sheet. Better to stay out of the fray completely, it was argued, and if any sector should be favored, it would be the federal government (subservient to the interests of banks, of course).

Okay, enough gnawing on skin, let's get to the meat of the issue at hand. What happened in December is that starting with the December 27 H.4.1 statistical release, the Fed reduced its holdings of U.S. Treasury securities by a whopping $25 billion, which was about the same amount ($20 billion) of the first Term Auction held the prior week. Not only that, but in the following weeks the Fed kept reducing its U.S. Treasury holdings in lock-step with the increase in term auction credits such that as of today it has $60 billion of credits but $65 billion less in U.S. Treasuries. Not surprisingly, the total FRNs in circulation have not changed much between the beginning of December and today despite the much-publicized "liquidity injections" generated by the $60 billion of term auction credits issued so far. In fact, FRNs outstanding have actually fallen in the past two months! Furthermore, FRNs in circulation are no longer entirely collateralized by Treasuries and other federal government obligations. Part of the collateral now includes "Other assets pledged" in an amount of $53 billion. And just what are these "other assets"? Well, there is an "other assets" line on the Fed's balance sheet that appears to include assets denominated in foreign currencies, but this totals only $48 billion. The only "other assets" amounting to tens of billions are the term auction credits.

Why would the Fed do all of this? Perhaps Mr. Bernanke learned a lesson last August when the Fed's initial reaction to the liquidity crisis was to go out and buy U.S. Treasuries in the marketplace, which combined with flight-to-safety demand from worried investors, overwhelmed the securities market and caused the yield on T-Bills to collapse (more demand means higher prices and higher prices means lower yield). Mr. Bernanke discovered then that the cost of this particular method to drop money from a helicopter was too high; market interest rates were being influenced in ways that may have been contrary to the Fed's interest rate policies. For example, if Fed rate cuts are seen as reactionary by most market participants, they become largely ineffective. It may be so, but at least the holding of U.S. Treasury securities accomplished the goal of keeping the Fed's balance sheet (relatively) safe and risk-free.

The Fed, however, seems to have competing and often contrary goals, and so interest rate policy seems to have won out over asset preservation when it came time to draft a new program that would supplant the largely ineffective discount window operation. Namely, the acceptance of many forms of bank assets under the term auction facility allows the Fed to stay out of the Treasury markets--even better, the Fed could sell some Treasuries and thus influence the market rate of interest--but at the expense of compromising the safety of the Fed's balance sheet. As an aside, we can study which Treasuries the Fed has been selling and thereby discover the Fed's intended target of manipulation. For example, it turns out that the Fed has primarily reduced its T-Bill holdings since December, which may mean that Mr. Bernanke and friends want short-term rates to be higher and/or long-term rates to be lower. Selling T-Bills will do that by driving down their price and raising their yields, which could help put the Fed back in charge of leading rates down instead of following the market down. After all, the perception of being in charge can be even more important than actually being in charge.

But what about the stated purpose of the term auction credits, namely to provide liquidity? Well, the Fed action since last December has had the net effect of removing liquidity from the capital markets (the buyers of $65 billion in Treasuries paid the Fed with FRNs) and injecting about the same amount of liquidity into the banking system (via the term auction credits which provided $60 billion in FRNs to the banks). The end result is essentially a loan from the capital markets to the banking sector. Unfortunately, not only is this loan a de facto secret, but it is involuntary as well. Oh, and forget about the Fed not playing favorites, it is clear where its allegiance lies.

All of this is small potatoes, however, compared to the Fed's apparent abandonment of its long-standing policy of collateralizing the world's reserve currency only with direct obligations of the U.S. government (U.S. Treasury securities and Treasury-held gold). This act of discipline placed some limits on the Fed's ability to print money as it could no longer issue FRNs when no more Treasury securities were available for purchase at a reasonable price in the marketplace. A reasonable price, in this case, would be one where the market price is close to the face value of the security, which is important because bond premiums do not count for collateral purposes. The "problem" of government debt "shortage" could, of course, be readily solved by a government following the Keynesian model of stimulus spending, a perfect example of which is the pending Bush tax rebate. The Fed would simply buy the debt required to fund deficit spending, and thus monetize the stimulus. Without fail, such an approach will devalue the inflated currency and is therefore very friendly to gold. No doubt some of the gold demand in the past few weeks has been driven by this theme.

Yet there is an important distinction to be drawn. A central bank is expected to monetize a government stimulus by acquiring government debt regardless of how reckless the stimulus might be, because failure to monetize as necessary would be even more reckless. It is an entirely different matter for a central bank to abandon fiscal prudence by changing its reserve policy from one of risk-free collateralization to one where collateral is provided by the very entities (banks) in need of rescue. This is precisely what happened last December when the Fed removed direct U.S. Treasury backing for a portion of the FRNs in circulation and substituted whatever mish-mash of banking assets that have been pledged to secure the term auction credits. These banking assets may be performing today, but they are down the rung in terms of risk compared to U.S. Treasuries, and they expose the Fed to the same spectre of deteriorating balance sheets as faced by the banks that the Fed is supposed to be safeguarding. It may not matter much that the term auction credits are temporary since even 3 months could be a very long time during a fast developing crisis. The complexity and derivative-laden interdependence of today's markets means that AAA credit can turn into junk almost instantaneously.

You might interject at this point that the U.S. government is the ultimate guarantor of the dollar in every case where the Fed is unable to maintain sufficient collateral to back it fully. Not only that, but U.S. Treasuries represent nothing more than the very same government promise, so why is the type of collateral held by the Fed important when all defaults will presumably be cured by the federal government? To this objection, I would answer that there is a big difference between a promise and the actual need to deliver on that promise. The Fed cannot possibly default BEFORE the U.S. government defaults if it keeps reserve assets predominantly in U.S. Treasuries, but that is not the case if the Fed holds increasing amounts of private sector debt. In the latter case, the Fed would default when it holds too much defaulted private sector debt as reserve assets. This would require a government bailout to rescue not only the Fed but the monetary system as a whole, although it is not clear to me that government intervention would actually work. It would seem to me that evaporating faith in the fiat money issued by a central bank cannot be halted by government dictate. In other words, confidence in the banking system is tantamount to confidence in the government's fiscal and monetary policy.

The bottom line is this. As the guarantor of liquidity to the banking system, the central bank can arguably survive and alleviate a default crisis in the private sector by holding government debt as its key reserve asset. By contrast, a central bank that holds increasing amounts of private sector debt as its reserve asset is not only incapable of surviving and alleviating a default crisis in the private sector, but may ultimately bring about a crisis of confidence in the government itself that leads to a default on government debt and a wholesale financial collapse. I believe this is the reason why the Fed has survived for almost 100 years, and also why it may not survive a handful more.

As with many important things in the world of finance, the key is hidden in a little table at the bottom of an obscure statistical report that few seem to know or talk about. Although surely some people MUST know, even if they don't talk about it. They are probably too busy buying gold and silver to talk! Or provocatively, this could be why Manfra, Tordella & Brooks, a coin and bullion dealer located in the heart of Wall Street, has been doing such brisk business lately. If anybody is going to realize the meaning of obscure statistical reports from the Fed, it could very well be the suits on Wall Street. You know, the same guys who ridicule gold on CNBC. Only they might actually be buying it down the street at the same time, getting in before they recommend bullion as the next hot investment to their mainstream clientele.

Sorry for not relating this more directly to Exter's pyramid but I believe the above is a more important explanation of how these recent Fed developments, not discussed in either the financial media or gold community, may have made a powerful contribution to the present moves in gold and silver, and may have a critical role to play in their future.

FEBRUARY 20 2008 4:45PM - Silver and gold on a tear since Friday with everything lining up in support -- oil, commodities, the dollar, inflation, credit and financial problems, supply concerns in platinum and copper, etc. I'm still looking for a critical test of silver in the mid to high 18's by the start of March, although the current momentum looks capable of pushing prices that high before February is even over.

Many fundamental indicators I track in the silver market are starting to stall, a sign that the recent gains will need to be consolidated at some point soon. One indicator that has not stalled yet, however, is the basis, which continues to shrink according to my proprietary calculation. As a result, I believe demand in the physical market continues to be the main force with speculative demand in futures and other paper instruments playing second fiddle. Of course there is always the possibility that the physical demand is in large part speculative in nature, but the market reports I've been receiving tend to argue otherwise.

I have recently noticed a very important new development that actually took place in mid-December--the "Term Auction Credits" introduced by the Fed at that time, amounting to $60 billion currently, are increasingly being used as collateral for Federal Reserve Notes in a reversal of long-standing practice to use only U.S government Treasury and agency securities for that purpose. I have long maintained that when a change in this policy occurs, it would represent an immense shift that would be very friendly for gold and silver bulls. And here it is right under my nose, yet it took me 2 months to notice! This could be the first step in what may turn into a Congressional amendment to the Federal Reserve Act that will be even more friendly to gold bugs because it virtually guarantees a hyperinflationary outcome. As it is, the initial change in Fed policy has shifted probabilities away from deflation toward hyperinflation. I don't have time to explain in full right now, but you could get a head start understanding what I'm talking about by reviewing the H4.1 Releases from the Fed.

Last but certainly not least, the Gold Standard University Live conference in Dallas was a great success based on the feedback I've received from many participants. More on this when I've had a chance to collect my thoughts.

FEBRUARY 15 2008 12:45PM - Another day of fluctuating prices as most markets are generally aimless without some rousing news to guide the way. The current volatility in gold and silver is very likely a sign of a windup for a big move, which I expect could be in full motion by the end of the month. As I mentioned yesterday, a successful test of the $16.70 level in silver and $890 in gold (yes, the $790 was a typo) would be very positive for higher prices.

Not much to report on the fundamental front, but I would like to point out that silver "lease" rates are now bouncing from negative levels in recognition of the tighter futures spreads and basis. This too is supportive of higher prices ahead, although the failure of silver "lease" rates to turn negative for a sustained period, or for gold "lease" rates to turn negative at all, likely means that true monetary demand will not be the main driver during the remainder of the current rally.

I've updated the basis figures, showing the small contango in both silver and gold. These levels are well below "normal" and indicate a healthy level of physical demand. More importantly, the basis remains in a shrinking trend, which is supportive of higher prices.

IT APPEARS I SOMEHOW LOST THE COMMENTARIES BETWEEN JANUARY 25 AND FEBRUARY 15. I AM LOOKING FOR THEM BUT NO DICE SO FAR.

JANUARY 25 2008 6:40PM - Silver and gold wrapped up the week on a high note, both closing near or at their bull market highs even after some backing off. Once again, the trading pattern was consistent with strong physical demand although today's action might be pointing to the need for some rest. For the first time this week, the commodity complex played a strong supporting role as oil, base metals and grains all moved higher. On the opposite end of the scale, the dollar made moderate gains while equities suffered another big drop.

The basis has backed off a bit since Wednesday although the simple calculation that I publish on this website continues to indicate a move toward backwardation. More on this later after I've had a chance to run some numbers.

One area where we are still seeing some stubborn resistance is open interest on the COMEX, which remains at an extreme for both silver and gold. One reason for this might be pending COMEX deliveries, something I have discussed before in terms of some big short trades originating last August. According to this theory, a lot of gold and some silver were sold in the credit panic that culminated with silver's bottom at $11 and gold at $650 back then, and most of this metal has not been repurchased. Instead, the sellers went long COMEX futures, hoping to take delivery on the exchange at some future date. If I'm correct, this means we should watch the February deliveries in gold and March deliveries in silver very carefully as there could be fireworks. Already, the off-month deliveries for January have been very healthy with some interesting moves by several commercials, as if "someone trapped short looking for physicals" in the words of a correspondent who has been watching deliveries for 15 years.

JANUARY 24 2008 1:30AM - It's real late here in California but I've finally finished crunching the numbers, and I can now conclude with some measure of confidence that the basis in gold and silver has definitely shrunk since last week. In other words, the contango has become smaller. Importantly, a significant portion of the decline in contango appears to have nothing to do with the 75bp rate cut. This also means that the noticeable reduction in the futures spread for COMEX gold and silver--which very few market commentators have bothered to notice--may be for real. I'll get back to the implications for this a couple of paragraphs down.

My simple basis calculation, the one that is prone to timing and other errors, actually shows silver to be in backwardation right now, but this is mostly due to the afterhours rally that boosted the closing cash price. During periods of high market volatility, I have gotten a number of false backwardation readings from this calculation, so one day's worth of backwardation for the "simple" basis is meaningless. But what isn't meaningless is that my proprietary basis figure (the one I will be providing and discussing as part of the new service to be launched soon) has also moved perilously close to backwardation in the last two days, although it hasn't crossed over yet.

Interestingly, backtesting of my proprietary basis calculation has revealed that a similar pattern played out in early 2006. In fact, a major change in the basis and futures spreads commenced on January 24, 2006, culminating in prolonged backwardation and inverted spreads in futures during April and May 2006 as silver went parabolic. An inverted spread in futures is similar to backwardation in that further out futures contracts trade for a lower price than those closer to maturity. These spreads may deserve a closer look now, especially with the options being so uncooperative, as a tool for generating a lot of exposure to a price spike. Yeah, I know I said too much leverage is probably going to hurt you in the weeks and months ahead, but this might be a special situation deserving of special consideration. I'll poke around and see if I can come up with something.

Now, I'd like to share with you a timely bit of correspondence that gives us some very useful information and helps to untangle some of my recent references to "profit-taking" and "blow-off". A reader, who is a jewelry dealer in Delhi, has been kind enough to share that his business has seen strong demand for gold since the price crossed 11,000 rupees, contrary to reports like India Gold demand low; prices decline. He worries that similar episodes have "usually portended the last of the bull run in the past". The implication is that demand for gold in India is supposed to drop on a price rise, as the media is currently reporting to be the case, and such a situation is healthy for the gold market. On the other hand, when demand in India increases during a price rise, it can be seen as a sign that the top is near. This is a very interesting argument, although the apparent differences in gold demand across India (our correspondent is in Delhi, while the Commodity Online piece quotes a dealer in Mumbai) might be an indication that things are just beginning to change in this important gold-consuming country. Still, it might not be a bad idea to start looking for confirmation that such a fundamental change is occurring for the very reason that our correspondent may be right. Be that as it may, here are some more observations from this gentleman, followed by my response:

Our Reader:

"A. Gold and silver have traditionally had 5.50 years of bulls and bear cycles. The traditional period is ending somewhere in March, 2008.

B. The 50 day and 200 day ma are almost 10% apart, whenever that happened previously, there was a major whack down, up to 300 dma. Can the strong fundamentals override technicals, especially in the short run?"

My response:

I would tend to agree that it is very possible that we may be coming to a major peak here in the next few months as I have stated several times in my commentary. In order for that to happen though, we will need a strong "blow-off" type move--and there are many fundamental and technical factors pointing to this happening in the March-June timeframe, probably earlier than later. For example, the dollar looks to be bottoming out in this period at the same time as we find out whether or not there will be a U.S. or global recession, and the majority of interest rate cuts will probably have taken place by then.

Yet if we do get a blow-off, I don't believe it will be the end of this bull market completely as it was in 1980. PM prices may be depressed for perhaps up to 2-3 years but will likely rise strongly again in the long term unless governments and central banks make significant changes to their fiscal policies, which doesn't appear likely. There is also the possibility that gold and silver will rise so much that even after "crashing", they might still be trading above today's levels. Thus, only traders, speculators and those who have an absolute need for spending money in the next couple of years should be worried about taking profits during the coming peak.

Everyone else should try to ride the wave until (if) it becomes clear that the currency regime can be salvaged while (1) debts are deflated so they are in line with global production levels or general incomes rise to the point where debts can be serviced on a long-term basis, (2) government budget deficits are eliminated, and (3) a way is discovered to fund future government obligations like social security. It should be obvious that the probability of achieving this is practically nil, not to mention the fact that current central bank and government fiscal attempts are not even heading in the right direction, at least here in the U.S.

If and when we do get an epic global crisis or derivatives meltdown--and it's only a matter of time, be it months, years or decades from now--then it truly will be "different this time". Until then, it will be really difficult to predict whether or not the next set of economic band-aids will hold over the fiat patient, and for how long. It is futile to deny that the people in charge of the system are pretty smart, cunning and adaptive, so betting against them in the short term is probably foolish (in the sense that gold and silver should not be expected to imminently regain their monetary status). Sure, the gold/silver bet will eventually pay off, and big, but the wait can be a lifetime. Gold's two big payoffs were in the 1930's and 1970's, roughly 40 years apart. Silver has really only had one big payoff in modern times, the 1970's. Now, if five years ago you bought all your gold at $250 and your silver at $5, you've done very well, but keep in mind there have been many investments during this time that trounced the PMs. Namely, a bunch of tech stocks. Who would've thought, especially after the dotcom bomb? So when I say "big payoff", I'm referring to when gold and silver will outperform virtually every other investment or asset class, as they have done once or twice before. Bottom line, PM investors need to be prepared for a long wait even when the end-game appears to be right around the corner.

Regarding the question of fundamentals overriding technicals, I like to think that it is the fundamentals that are primarily in charge of market direction (the trend) whereas technicals provide the wiggles. So the question should really be: "can strong technicals override fundamentals, especially in the short run?" And my answer to that would be yes, especially at extremes where markets are driven purely by fear, greed and mass psychology. Now, when we talk about technicals, we need to be aware of the fact that everyone has a different way of looking at technicals: one person's pennant breakout is another's "50 day and 200 day ma are almost 10% apart". So which is correct? Well, think of it like a popularity contest: as the consensus toward a particular technical view grows, it becomes a self-fulfilling prophesy, right up to the point where just about everybody believes it, at which point exactly the opposite happens. In other words, technicals not generally recognized by a large number of market participants are "toothless", while technicals recognized by everybody are "delusion". In both instances, the technicals may seem to be useful in predicting price, but the presumed accuracy is at best temporary and more likely a coincidence.

JANUARY 23 2008 2:50PM - With continued volatility in most markets, silver and gold tried to find their legs today and mostly succeeded, swimming against the tide of across-the-board weakness in commodities and most equity markets. A tug of war between buyers and sellers was evident with the buyers at the COMEX and London gaining the upper hand early. Once London was closed, however, COMEX selling resulted in most of the gains being given back. Interestingly, the metals took off again in afterhours trading with silver in particular putting up some nice numbers (above $16.00 at the moment). I believe this type of market action is a sign that physical buying continues to be robust. Additional confirmation comes via the big NAV premium (over 2% in both the past 2 days) in the Barclays' Silver ETF, SLV.

Yesterday's closing numbers from the COMEX confirm that the basis in both gold and silver has in fact shrunk substantially. If this shrinking has continued today (I'll report on it later tonight), the implications are major, especially if it is happening at the same time as COMEX open interest is also shrinking. We'll know in a few hours and I also have much more to say on other topics, so please check back later tonight.

JANUARY 22 2008 11:10AM - The emergency Fed rate cut of 75 basis points had quite an effect on the markets today, but silver "only" managed to recover its price from last Friday. Not bad considering silver traded all the way down to $15.25 overnight and thus regained 75 cents as a result of the Fed action. Still, I bet most investors would have thought silver might be much higher immediately after such a major, almost unprecedented, central bank intervention. Gold did move up a net $10 as it recovered from an overnight low around $850, but this also could be considered somewhat of a disappointment. It is distinctly possible that there will be a follow-through move higher by both gold and silver over the course of the next few days as market participants realize the implications of such a desperate move by the Fed, coming immediately on the tail of such a desperate AND stupid economic stimulus plan from Bush & Co. (which ironically started the panic in the first place).

One major result of the jitters in precious metals over the past few days is that the basis appears to have shrunk significantly in both gold and silver and is now smaller than normal. By "normal", I mean the average level of the basis according to my historical studies. In other words, the contango appears to be shrinking. Now don't get too excited, we are nowhere near backwardation, but this initial twitch could perhaps turn into a trend. Should it do so, we would finally have confirmation that the second piece of the precious metal trifecta is in place (the other two being strong physical demand and falling COMEX open interest).

Part of this reduction in basis is no doubt due to the major, somewhat unexpected (as of last Friday, anyway) drop in interest rates. Thus, we will need to see some further reduction in the basis when the markets are a bit calmer in order to confirm the new trend. In particular, it appears from early indications that the gold basis has actually dropped more than the silver basis. In fact, silver "lease" rates across all time frames have gone negative today as a result of the forward rate on silver dropping less than the decrease in LIBOR. Meanwhile, gold "lease" rates have actually increased. This divergence is troubling and has been explained by one market commentator as being the result of central banks trying to cap the price of gold buy "leasing" more metal than the market can bear, whereas the central banks don't have as much (if any) silver to "lease" in order to cap its price. I'm not sure how correct this observation might turn out to be, although over the next little while I suspect the market will speak to those of us willing to listen. For now, I will just say that BOTH the gold and silver basis will need to move toward backwardation, and both the gold and silver "lease" rates will need to approach negative levels even if briefly, for the monetary consequences that Professor Fekete and I have spoken about in the past to come to fruition. On the other hand, if the central banks are indeed continuing to supply excess gold to the markets through "leasing", we may not see the gold "lease" rate go negative. Some may even argue that a "lease" rate of sub-0.50% is essentially zero.

JANUARY 21 2008 3:00PM - Closed U.S. markets did not benefit silver and gold today as stocks tumbled across the globe and the fear of recession dominated the mood of traders and investors. If this state of panic continues for a few more days, gold and silver prices may very well decline into our speculative buy range instead of us having to chase them. Chasing prices is almost never a good idea, so this turn of events could be a fantastic gift from the markets. On the other hand, many market commentators are begging for an emergency Fed action--some even calling for an immediate rate cut of 1%. If this or anything close to it happens, precious metals may turn back up very quickly.

The resource stocks (Canadian listed) got beaten up even worse than the metals today, with many companies now trading below their lows from last August. Unfortunately, it seems like we have not yet run out of weak hands throwing in the towel. But I suspect we may be getting very close. The next few days may present a superb buying opportunity for both the precious metals and resource stocks, perhaps as good if not better than last August 16.

Ideally, we should see a bottom (higher than the December bottom) in the gold and silver markets over the next week in order to maintain upward momentum for a blow-off type move to arrive by March. If the precious metals don't "snap back" immediately, we might be faced with another few weeks to months of grinding consolidation before another attempt is made at new highs. This is of no consequence to medium and long-term investors, but it is quite relevant to short-term investors and speculators. In particular, an understanding of the near term possibilities is critical to the success of option strategies (the right ones can generate returns of 100:1 during blow-off rallies). I continue to believe that the only type of leveraged strategy (other than explorers/miners) that is sane to employ at this point is far out-of-the-money call options that expire within a few months. I'm hoping some of these get cheap enough in the days ahead to warrant consideration.

Moving on, I am disappointed to report that I did not have the chance to attend the Cambridge House conference in Vancouver that was held yesterday and today. If any of you went, I'd love to hear your report on attendance, crowd mood, presentations, etc. My guess is that the scene was probably pretty somber given the performance of late by most resource stocks.

JANUARY 16 2008 3:00PM - Silver and gold are getting hit with some major volatility here as the commodity complex did not fare well today. The rising U.S. dollar and the extreme level of open interest in COMEX gold and silver is not helping matters either. The move that started in mid-December looks to be taking a well-deserved breather and now it remains to be seen how much of a correction this becomes.

The possibility that many of the longs will need physical delivery to exit their positions (because they are trying to cover gold and silver sold last August as per my recent commentary) means that the next phase in these markets may be very unpredictable and unusual. I still believe the key to figuring out the twists and turns will be to watch physical demand, the basis and changes in COMEX open interest, and so I will be doing so intently.

Speaking of physical demand, the iShares silver ETF, SLV, added 4.5 million ounces to its holdings yesterday while the big gold ETF, GLD, also added 350,000 ounces of gold the day before. So we have no worries there.

On the other hand, COMEX open interest shows no signs that it wants to decline, which means that there may still be some weak hands trying to hold on. We never really got much of a bottom in December (little sign of weak hands being shaken out), which points to the possibility that gold and silver might have to put in one more low before moving higher again. Now bear in mind that this low does not need to go as far as the December low of $13.60. In fact, that would be bad. Instead, if prices do break to the downside over the next few days, I'd expect the final bottom might happen someplace around $14.50. Yet if we wait for such a break and it doesn't come, we risk getting left behind with an undesirably low exposure to explosive price moves that might be just around the corner. In other words, the window of opportunity to get on board for a spectacular ride might not remain open for long; the entry price may largely be irrelevant. In particular, if the December low of $13.60 does not get cracked in the next 2-3 weeks, we could be looking at something really big on the horizon.

What I'm saying is that the risk of not being in the market with pedal to the floor will start to get bigger toward the end of January than the risk of adding to positions that could end up underwater. The way to mitigate the former risk is to start seriously looking for entry opportunities in the days ahead assuming you have some cash sidelined. The way to mitigate the latter risk is to reduce leverage.

Below is a visual explanation for the potential size of the upcoming move. Note that each rally is a repeat of the prior one, although more volatile (the price bars are bigger). They each last give or take 2 years, spending most of the early and middle part of the rally consolidating the prior peak until the final parabolic move that takes a few months. Because of the relative size of the price bars during the current rally, it is more difficult to see the comparable consolidation action, but once the upper right side of the chart gets filled in with some pretty big price bars, both the consolidation and parabola should become visible. Provocatively, if the current rally is properly scaled to the previous ones, the top of the rightmost parabola should actually be around the $30 level. On the other hand, this all seems too easy and neat, and in my book that reduces the probability of things actually happening according to script.

Finally, a quick look at the basis (yes, I know, the posted figures are outdated) shows it continuing to stay in a normal range. Perhaps there is quite a bit of tension being wound up that will eventually unfurl in a fury, but for now, the basis remains largely irrelevant.

JANUARY 14 2008 4:15PM - Gold hit yet another new high today, trading and closing above $900 for the first time ever, while silver tagged along for the ride once again. Just how far behind is silver? Well, even when we exclude the anomalous high in January of 1980 that saw silver spike to $50, there were plenty of other trading days in 1979 and 1980 when silver traded substantially higher than today. Yes, silver should no doubt outperform gold as we approach the peak in the current rally, but it has a lot of catching up to do at this point. Ideally, silver should drop meaningfully below the 50:1 price ratio to gold during the coming blow-off phase, and assuming gold might top out around $1000, silver should trade above $20.

Unfortunately, the risk-reward from a speculative perspective is not as good as it might sound. I would advise staying away from any type of leverage at this point and futures in particular. There might be a few call options that could work here, such as the March 2008 20 calls or the May 2008 22 calls, but unless we get a spectacular move in silver, these aren't going to have a big multi-bagger potential. Given the downside risk, I have been very conservative in this area even though there is a good chance that a scenario like the one I discussed last week (gold/silver sellers from August may need to buy back in a panic, squeezing spot supply) may yet play out. And I would certainly not be aggressively adding bullion here unless trying to establish an initial position for those just getting into the market or for crisis insurance purposes. Of course, there is nothing wrong with moderate buying especially if part of a long-term, dollar-cost averaging strategy. As far as selling, we might soon see a peak that will not be exceeded for 2-3 years, so if you need some cash before then, it might be worthwhile to consider taking some profits along the way.

What about silver and gold stocks? Well, the HUI just broke to new all-time highs today so if you are invested in the majors, you have done well. I would definitely consider taking profits, if for no other reason than to put some money into the underperforming juniors. Speaking of which, it is getting really late in the game and the juniors may not be up for the challenge this time around. It may very well be an issue of too much share supply and not enough investors. Some have pointed out that the bullion ETFs now allow investors to gain direct exposure to PM prices, reducing the demand for shares. And other than Aurelian, there really haven't been any really exciting discoveries to pan out in the past few years to spark investors' collective imagination like in the mid-1990's. Whatever the reason for the doldrums, I've lowered my expectations at this point and I have come to believe that junior investors must get really picky and precise to have a shot at making good money in exploration stocks and emerging producers over the next 2-3 years. I believe there are some other strategies that will also work in the months and years ahead and the stock coverage portion of the new service will try to identify some of these strategies and companies.

JANUARY 10 2008 4:00PM - Silver has finally broken to new highs as it handily outperformed gold today, even as the yellow metal made another all-time record. To explain the gold rise, we can point to dollar weakness on account of the growing consensus about a 50bp rate cut by the Fed later this month as well as ongoing turmoil in the credit markets (Exhibit 1: Countrywide Financial). I don't know if the outperformance by silver is just an anomaly or the start of something bigger, but we may find out in the next few days.

Over the past two weeks, I have found it somewhat surprising how weak the gold and silver selling has been. In searching for an answer to the quandary of where the sellers have gone, I finally came up with a possible explanation that seems so obvious that I can't believe nobody (including me) seems to have picked up on it before. Remember that initial liquidity crisis last August? At the time, many people were surprised that gold and silver dropped along with stocks and everything else (except bonds) given that precious metals are supposed to be crisis hedges. The explanation for this was that many banks, investment funds and other financial outfits were desperately looking for liquidity, so they sold just about everything that wasn't nailed down. Of course, gold and silver are ultimate forms of liquidity, and so they were sold in a particularly spirited manner.

But what does this have to do with the current rally? Are these sellers from August becoming buyers now? Not necessarily. For one, much of the metal sold in August may not have been owned by the sellers at all--it may have been borrowed or "leased" metal that must be contractually returned at a later date. That is to say, the sellers went short metal and long cash. To protect themselves against rising metal prices, many of these sellers would have looked to lock in a maximum loss by entering into a forward purchase of metal for delivery at a future date. Unfortunately for them, there is very little new hedging of mine supply these days, which was the historical source of metal available for forward purchase. Thus, the August sellers had no option but to turn to the only market that still supplies gold and silver in seemingly unlimited quantities--the COMEX.

What I'm suggesting is that the sellers went long in COMEX futures. This may very well explain the historic extreme in the COMEX gold open position. True, the Commitment of Traders (CoT) reports indicate that the vast majority of long positions are held by speculators, not commercials. Yet, I find it plausible that many of the August sellers, who were not historically designated as commercials on the COMEX, could in fact be designated as speculators in the CoT reports. For one, the large amount of "leased" metal being presented as hedge instruments may have resulted in the regulators denying hedge classification en masse.

If this is all true, you ask, what then explains the immense commercial short position in gold and silver? Do these commercial shorts really hold all the bullion they have shorted? There are several possible explanations. The first, which is bound to be the most popular with gold and silver bugs, is "no"; there is nothing but paper backing the short positions. While possible, my own thinking is that such an answer is too simple and arbitrary. More likely, some of the bullion sold in August was actually acquired by the commercial shorts. Perhaps some central banks may have pledged a portion of their gold on behalf of the commercials. Or, it could be Middle Eastern oil interests that are attempting to help stabilize the global financial system by hedging their growing gold stockpiles. Basically, I'm talking about 200,000 contracts or so, which equals 20 million ounces of gold. This is a lot of gold, but in terms of annual production it is only 25%. And 1% or less of global gold holdings.

Despite the risk of too much dwelling, let me get back to the idea that some of the gold sold in August may have been acquired by commercial shorts because this theory has some interesting and provocative implications. The first one is that CoT analysis from a historical perspective may no longer be relevant in COMEX gold and silver. If I was a commercial short, I would certainly be interested in covering my tracks, and convoluting the CoT may be a great way of achieving these ends. Unlike many PM analysts, I don't believe that all the commercials act in united preference to short gold and silver. Rather, like just about every business, they have a profit motive. At opportune times, the profits may seem easier on the short side; at other times, the long side. By holding or having access to physical gold, a commercial player can play both sides of the market. The physical position is not public, only the hedged position via the COMEX. Thus, any time a physical position is hedged, it is easy but not necessarily correct to assume that a commercial is short the market. In fact, the commercial may have a complicated strategy, only one leg of which is in COMEX futures. Or the commercial may simply be looking for income by forward selling bullion holdings (the profits are derived in the form of contango where futures prices are higher than spot prices--profits can thus be generated by buying metal now and selling it forward at a higher price).

What I'm trying to say above is that the CoTs seem to be showing that the knowing insiders (commercials) are negative on gold and silver prices while the dumb outsiders (speculators) are very bullish, but this may not actually be the case. Instead, commercials may be masquerading as shorts while they are actually maintaining a big long exposure. That is, they are "bulls in bears' skin" in the parlance of Professor Fekete. In the meantime, speculators may largely be absent from the market even though the CoTs show their long position being at historic extremes. If this is the case, who then are the unfortunate suckers holding the (short) bag? Well, remember how the banks were able to sell a lot of that subprime crap to unsuspecting dummies even as the wheels were coming off the cart? It shouldn't be too much of a stretch to suspect that the banks may have done the same thing in gold and silver: handing off a short position to some poor fool who actually thinks he is long the precious metals. In other words, this fool is likely to be whoever "leased" the gold and silver.

By extension, the August selling may also explain the situation in silver: much less silver may have been sold in August, which necessitated less covering by going long COMEX silver futures. In other words, a major reason gold has been able to outperform silver rather handily so far could be due to the greater demand for gold futures by those who sold gold in August. Still, enough silver appears to have come to the market in August to have resulted in Jessica Cross of VM Group to conclude in her September snapshot that silver supplies were not tight.

What I like particularly about this theory is that it also helps to explain the situation in silver "lease" rates going negative without confirmation by the basis. If relatively little silver was sold in August compared to gold, this may mean the silver "leasing" market is very inactive. I have speculated before that one possible explanation of the negative rates in silver was market inactivity. Gold "lease" rates, on the other hand, have behaved in a much more normal fashion. This may indicate a significant amount of ongoing "leasing" activity as gold borrowed and sold in August continues to be rolled over both on the short "lease" side and the long COMEX futures side. And of course, the basis would have remained in strong contango as demand for futures exceeded demand in the spot market.

In summary, what I'm proposing above is that the liquidity crisis in August may have led to a lot of gold and quite a bit of silver being sold by parties who borrowed the metal in order to raise cash. As such, this metal must be returned at some future date. Out of desperation, the sellers turned to the futures markets in order to hedge their short positions because gold mines no longer hedge their future production by selling forward. This resulted in an unprecedented increase in COMEX open interest. Of course, the wise investors who bought gold and silver in August may not be very willing to part with their precious holdings. That leaves the August sellers with one of two unattractive options when it comes time to close out their metal borrowings: (1) compete for gold in the physical market, or (2) force delivery on their COMEX futures.

Obviously, either approach would be very bullish for PM prices. The question is, when? May I suggest that we are witnessing the "when" right now! Remember that late in December, both the Fed and the European Central Bank started to make it even easier for banks to borrow emergency funds? It is very possible that these new funds have allowed some of the August sellers to start buying back the borrowed gold and silver. The unsurprising result would be the very strong rally we are seeing at the moment.

The final question that I'd like to address is: when will this yin-yang of August selling and future buying come to an end? If I am right that a significant portion of the long position in COMEX gold is in fact held as a hedge by August sellers, the answer would be that the cycle will come to a conclusion as (1) COMEX open interest starts to return to a more normal level from a historical perspective and (2) the contango of the gold and silver basis decreases. I believe both of these must happen concurrently to indicate that the August sellers are unwinding their positions. Metal prices may not peak until this unwinding is occurring in earnest resulting in substantial movements in both open interest and the basis. There is also an outside chance that the amount of borrowed metal to be returned is so large that the COMEX may default in physical deliveries.

I have just now finished synthesizing the above theory so I will need a bit of time to evaluate the investment and speculative implications.

JANUARY 8 2008 4:10PM - My absence from the silver and gold markets has been untimely but I am trying to wiggle my way back in. While I was away, gold made and, more importantly, remained at all-time nominal highs while silver has threatened to reach a new high for the current bull market, although still less than a third of the way to its own all-time record nominal high. This has happened on the back of renewed weakness in the U.S. dollar, oil strength and economic uncertainty. Importantly, the dollar still has room to move downward in both price and time according to the trend channel I drew way back on July 13, 2007, which still appears valid. As such, the potential for much higher gold and silver prices is there, even if the risk of a correction is growing. Speaking of risk, I have re-assessed my speculative positioning and have come to the conclusion that short-term risks remain acute and therefore the speculative flag should remain yellow. I am maintaining ultra-short term caution even though silver did strongly take out $15 as I discussed in my last commentary. Had I been around and actively trading, I may very well have deployed some speculative positions last week. If you were able to do so, congratulations, but please be careful! I do not recommend leveraged positions at this time such as futures, and most options remain expensive although they have not moved much higher despite the latest rally in gold and silver prices. Meanwhile, junior PM stocks continue to lag the seniors with a few notable exceptions.

Let's quickly move on to some fundamentals. The big silver ETF, SLV, has given back most of its 20 million ounce addition since December 31 but is now growing again, indicating that a large part--but not all--of the year-end increase was in fact "window dressing" as more than one reader has pointed out. "Window dressing" means a temporary entry or position for reporting purposes that is not maintained subsequently. Obviously, 20 million ounces of "window dressing" isn't as bullish as I had speculated last week, but 7 million ounces of bona fide additions still isn't that bad.

The biggest news I would like to talk about today is that sometime in the past week, Barclays has finally published a bar list of its bullion holdings, effective December 14. The 3,697 page list can be found here. I note this in case you haven't read Ted Butler's latest piece, which does a great job of explaining the situation. I won't dwell on this important development although I would like to thank those of you who wrote or spoke to Barclays. Obviously, the conspiracies about the SLV holding paper silver or stealing from the cookie jar (for example, by counting bullion held at COMEX warehouses as part of the SLV inventory) should now be given a rest.

Finally, several times in the past week, "lease" rates across all spectrums have turned negative for the first time (although there has been some fluctuation between positive and negative since then). As I've discussed numerous times, this could be a very bullish precursor to strong monetary demand for gold and silver, but not until the basis starts to confirm it. So far, no dice as the basis in both gold and silver remain remarkably composed despite the big price movements. This is something to keep a close eye on, however, as any sea change will likely be preceded by a slow creep. Much more on this and other topics in the days ahead.

JANUARY 1 2008 3:10PM - The silver ETF SLV added 20 million ounces to its holdings on the last day of the year to close out 2007 with a huge bang. The official stockpiles of silver tracked on this site now stands at 320 million ounces, the highest level in more than 10 years (back then, only the COMEX warehouses and U.S. government holdings counted as official). I've already received several e-mails from curious and excited readers, some of whom are pointing to this as evidence that the ETF is not backed by real silver. They ask, how could so much bullion be acquired so quickly without an impact on the silver price?

I haven't had much time to think of an answer, but here is what I've come up with so far. There was a similar large addition at the end of last year, although it was only half this size. I'm only guessing here, but it seems to me the 20 million ounces of silver that has appeared out of nowhere was actually accumulated over a number of months and for some reason had to be shown on the investor's books as securities instead of bullion. This was done simply by having one of the Authorized Participants of the ETF exchange the 20 million ounces of allocated silver for 2 million shares of the ETF. The transaction can be done very quickly assuming the 20 million ounces have already been verified ahead of time as eligible (bars fabricated by an approved refiner, the correct purity, weight, etc.)

Why do it this way instead of accumulating the SLV directly? Easy! Making the original purchase on the open market instead of through the ETF would have prevented the Authorized Participants from playing their usual tricks (like shorting the ETF to provide the share supply). As such, the owner(s) of these 20 million ounces may very well be a sophisticated insider who is very bullish on silver and probably looking for more than just a speculative trade. As for where this silver came from, a number of industry sources were saying in August and September that a significant amount of silver had come on the market in London, where the SLV vaults are located. I would hazard a guess this silver was from some old stockpiles and perhaps higher-than-normal refinery output earlier in the year, but nobody knows for sure. What I do know is that along with the 12 million ounces gobbled up by the ETF Securities ETF (PHAG), this 20 million ounce addition to the SLV vaults will very likely have decimated any remaining silver "inventory" available for sale in London. It is possible that we are on the verge of another squeeze play like March 2004. Interestingly, several technical and fundamental observations I made in the past few days are pointing to the same possibility.

Another possible explanation is that the owner of these 20 million ounces is an industrial player that moved the silver to the ETF because it did not wish to broadcast the fact that it is hoarding silver to secure critical supplies for its own use. The financial reporting of ETF assets may not require a separate breakdown within a securities portfolio whereas bullion might have required separate identification. This second scenario is no less bullish than the first.

There is always the chance, of course, that we will see some moderate withdrawals from the SLV in the days and weeks ahead, and this may put some pressure on bullion prices. If this does not happen, however, I would take it to be a very bullish sign. Unfortunately, my next posting will be no earlier than Friday, January 4, and it is very possible we may get some serious up or down moves in silver and gold between now and then. As a result, the Speculative Flag may turn green in my absence but I will not be able to provide you with an update. Certainly if silver makes a strong move toward and over $15, you may pretty well assume we are in the midst of a strong rally with the potential for prices to move significantly higher in the short term.

In fact, the only potentially bearish angle to this surprise 20 million ounces of silver is that there may be more silver out there than many silver investors, and even silver analysts, think. Yet this is not a particular problem in my mind because I have long allowed for the possibility that if and when the silver ETFs accumulate 300 million ounces of silver, there will be a strong case for there being a total of 1.5 billion ounces of investment-grade silver out there (i.e., 80% will remain in private, hidden stockpiles). Even 1.5 billion ounces won't matter, of course, if there is 2 billion ounces of investment demand for silver.

Finally, for those who think the SLV has anything to do with the COMEX warehouses, let me point out that the COMEX is in New York and only under some very unusual circumstances would we see silver being shipped in large quantities from NY to London (it did happen when Buffett made his purchase in 1997). I continue to believe that all of SLV's silver is held in allocated storage at LBMA-approved London warehouses and that PwC, the world's largest independent accounting firm, is in the process of physically inspecting this silver as I speak in preparation for their audit opinion. I am biased, of course, having been an auditor myself and thus having some level of expertise in what constitutes an audit as well as what type of accounting shenanigans can be (and cannot be) pulled off.

JANUARY 1 2008 2:40PM - Well, it looks like I forgot to post Professor Fekete's detailed announcement of the next Gold Standard University session to be held February 11-17, 2008 in Dallas, Texas. Unfortunately, the "early-bird" discount may no longer be available, but if any of my readers are interested, please get in touch with me and I will try to work out a special deal with the professor. If you can only attend one event or conference this year, this should be it! No BS, I sincerely mean it.

General Announcement

GSU Dallas Program Details

This seminar will have a separate segment entitled The Economics of Gold Mining that should be of great interest to gold (and silver) mining executives as well as PM investors. Information on this segment appears below.

The first document below is an invitation to mining company management to attend the seminar. If any of you are shareholders of a gold or silver mining company, it may be worthwhile for you to bring this first-of-its-kind event to the attention of its President, Investor Relations and other company personnel. The professor has the blessings of Sprott Asset Management but I know he could still use the help of all of your feet on the ground to publicize it. I believe the companies fortunate enough to attend this seminar will gain credibility for "getting it" in the eyes of many gold and silver bugs. Just imagine, hedging on the LONG side of gold and silver! The timing couldn't be more perfect.

Gold Mining Company Invitation

Gold Mining Seminar Hotel Information

I am planning to attend this entire program and will be available during and after the seminar to discuss any and all topics about the silver and gold markets, to share my research, to talk about junior mining stocks, to debate conspiracy theories, or whatever.

DECEMBER 28 2007 5:30PM - Gold and silver are in technical breakout mode on the back of a weakening dollar, stronger crude and renewed geopolitical concerns in Iraq (Turkey bombing the Kurds) and Pakistan (assassination of opposition leader Bhutto). Even with all of these supportive factors, the rally by gold has been impressive given the low trading volume the past two weeks. One has to wonder where all the gold manipulators have gone with gold just $10 or so away from its all-time-highs. The "cartel" should have no trouble selling the PMs down at this point but apparently there is a secret memo that says a concerted attack on PMs should not commence until the New Year. In the meantime, the prospects for a record-breaking move in gold seem pretty solid. It seems the cartel strategy may be to "let" gold finish the year with a bang and then make sure the metal of kings will fail to reach such heights during 2008, taking some of the shine off its investment prospects.

And although silver is still nowhere near its own record high, much less its November peak, we could very well see it make a strong sympathetic move higher in the week ahead.

I'm kidding about the cartel and secret memo of course, but the rising level of open interest in COMEX futures is no joke, as it stands once again near extremes for gold and at the highest level for silver since April 2006. The big question in my mind is, will buyers continue to join the party in January, and if so, where will they come from? If big buying doesn't show up to offset the likely plentiful profit taking in the early New Year, then the sellers may become bolder and the longs could be in for some fleecing. In such a scenario, we could see a triple bottom in silver somewhere near $13.00-13.50 by around January 15. The equivalent level in gold would be around $725-750. This would complete the cautionary speculative flag I threw up on November 2, which should subsequently be turned green.

If this "final correction" scenario does not play out by the latter part of January, it is very possible that the PMs are headed to much higher levels without looking back and my speculative caution flag should be immediately turned to green upon the first moderate pullback. I don't have a precise target for gold, but assuming the bottom of $13.70 or so reached on December 17 holds for silver, my upside technical target is exactly $18.685 basis the December 2008 COMEX silver contract. In terms of time, this high could be reached in early March 2008. Unfortunately, the best options to speculate on this possibility are the May 2008, which are rather pricey on account of the fact that they are still 4 months away from expiring. The $18 calls, for example, are quoted around $1,800. I currently have just a handful of call options in silver, mostly the March 2008 $20 calls, which may not become very valuable even if the $18.685 target proves correct. This is because the biggest part of the move may come very late, after the expiration of the March 2008 options on February 26, 2008. I'll get into the details of options and other strategies as part of the new service, but if I figure out a good option strategy in the next week or two, I'll discuss it at a high level here as well.

Now, please brace yourself for another comment on those sinking "lease" rates, which are threatening to imminently turn negative across all time frames. I ran an analysis to determine what effect, if any, that the "bullion bank premium" has had on "lease" rates. Recall that I described this "premium" last Friday as the fee charged by bullion banks to negotiate leasing transactions. Well, it turns out that the "bullion banking premium" may not be significant at all based on my analysis of forward rates. It turns out that the 1 year forward rate at the COMEX expressed as an annual percentage is about 4.25% right now (I calculated this as follows: December 2008 closing price - March 2008 closing price times 12/9ths divided by March 2008 closing price = 15.290 - 14.818 * 1.33 / 14.818 = 4.24%). This is virtually the same as the London forward rate at 4.26%. That is to say, there is only a .02% "bullion banking premium" built into silver "lease" rates at present. On July 30, 2007, by comparison, the 1 year forward rate at the COMEX was 5.15% but the London forward rate was 4.66%. So in fact, there was actually a "bullion bank discount" in the silver "lease" rates of 0.49% back then. If you think about this for a second, it makes sense that the forward rate applicable to "leasing" might actually be lower than the COMEX forward rate, because otherwise parties to a "leasing" transaction would simply cut out the middle man (the bullion bank) and go to the COMEX directly.

What the above says to me is that in July of this year, bullion banks may have been quite eager to assist in "leasing" transactions involving silver as evidenced by the size of the discount in the London forward rate compared to the COMEX forward rate. By contrast, they do not appear to have any interest right now. A very possible reason for this aside from the growing aversion to risk within the financial sector is that there may be very few parties actually looking to "lease" silver at present. From a supply standpoint, this has some major bullish implications for the future prospects of silver. Just as important, perhaps, is the fact that both London and COMEX forward rates in silver have barely declined despite a significant drop in interest rates. This may very well indicate the beginning of a new trend in terms of preference for holding silver in anticipation of price appreciation vs. swapping metal for cash in order to earn interest income. Gold may not quite be there at the moment, but if this is truly a new trend, the end-game for both monetary metals will most likely be in the form of The Last Contango in Washington.

For those not interested in the short term machinations of the PM markets, the complex world of metal "leasing" and forward rates or prognostications about total monetary collapse, I would like to point out an excellent long-term analysis of the gold price by Dr. Krassimir Petrov, reprinted today in the "Reader Mail" section of the Strategic Investment newsletter. If any of you have a link to this article, please let me know. For now, I will quote a few relevant sections of this well-reasoned price prediction. Not all of the thinking is new, but it has been woven together in a very logical and simple manner that can be easily grasped by even a neophite of the PM markets.

"For example, if a genuine deflation grips the U.S. economy -- like the deflation of the 1930s -- then $1,500 for the top of the gold bull market might be too high. On the other hand, if a long 1970s-style stagflation is in the cards, $5,000 is too low. The point is that a call for the price of gold without clear economic assumptions is a wild guess."

"A well-established proxy for the price of financial assets is the Dow Jones industrial index. The single best proxy for commodities is gold. Their price ratio, the Dow/gold ratio, tells us how many ounces of gold buy one unit of Dow Jones. If today the Dow is 13,600 and gold is $800, the Dow/gold ratio is 17. Today, it takes 17 ounces of gold to buy one unit of the Dow index."

"So how high will gold go? The correct answer is simple: as high as the Dow Jones. It is important to understand that this method does not tell us when. It could be five, 10, or 15 years. It also does not tell us how high. It could be $2,000, $10,000, or $50,000."

"Which scenario is most likely depends on how the Federal Reserve approaches inflation. Based on the Fed’s reaction, there are three possible future scenarios: (1) deflation, (2) stagflation, and (3) strong inflation. Let us consider each in turn."

"The first scenario, deflation, implies a major contraction in the supply of money and credit, similar to the one during the Great Depression [...] Under this scenario, a reasonable forecast for the Dow will be about 1,000-1,500, while the gold price will be likely in the range of $800-1,500. This scenario is highly unlikely, since the Fed will fight tooth and nail to prevent a deflation from taking hold."

"The second scenario, stagflation, is most likely. It should look similar to the 1970s. The Dow peaked in 1966. It made little progress for about 15 years. By 1980, it was just about where it was in 1966, roughly around 1,000. Gold, on the other hand, soared by 25-fold -- from $35 to $850. This means that strong inflation during the period kept the Dow from falling, so it did not fall as it did during the Great Depression. In this scenario, we should expect the Dow to remain bound in the 10,000-15,000 range. Then, a gold forecast of $10,000 is perfectly realistic."

"The third scenario, very strong inflation, is definitely possible, although less likely than stagflation. A strong inflation could push the Dow up to 30,000-50,000 in the coming decade. However, this would also push gold prices up to $20,000-50,000. It is possible, but, in my opinion, not very realistic."

I hope this analysis gets published somewhere that is accessible by the public because it contains some great insights that could benefit all PM investors. Yes I know, Dr. Petrov does not mention silver, but assuming silver also returns to a historic ratio when it reaches record highs, a $10,000 gold price may translate to $666 for silver (at a 15:1 ratio). I like this price despite its demonic undertone; for one, such a price would be quite ironic given that many silver bugs are deeply religious, and I really like irony. Thus, until I grow up and become less of a provocateur and trouble-maker, my new official long-term price target for silver is going to be $666 in nominal dollars.

Finally, I am going to close out the week by reprinting an e-mail I sent to Scott Wright of Zeal LLC in response to his thought-provoking analysis of Base Metals Stockpiles and Prices:

Hello Scott,

Thanks for the nice article on base metals and prices. I was wondering if you have done any research on the quantity of off-exchange stockpiles that may be held by the likes of the Chinese and certain hedge funds, as these "hidden stocks", should they exist in large quantity, can have a major influence on metal prices. Frank Veneroso had been a proponent of this approach although he never got quite as far as to estimate the possible "off-exchange stocks". To estimate them, however, would be relatively easy: take the change in LME stocks and add or subtract the difference between published supply and demand figures. Mine supply is relatively straightforward, but demand should be calculated based on industry estimates of annual increases over the base demand from a period where it was unlikely that hidden stockpiles were being accumulated. For example in the case of copper, this would be after the Sumitomo scandal of the mid 1990s but before the current runup, when copper was trading largely at marginal cost and LME stocks were relatively stable (ie. 1998-2002). Current demand can be estimated by using the annual growth rates estimated by industry, a number which is widely available. As you know, demand calculated by most analysts assumes that LME drawdowns are used up in fabrication, a method that completely ignores hidden stockpiles. According to this alternate method, you might very well discover that large stockpiles of hidden base metals may exist off the LME. I don't know the answer because I have not done an analysis myself other than to read and think about the works of Frank Veneroso and a few others.

As someone interested primarily in silver, I make the above observation about base metals because silver has been among the poorest performing of metals despite an apparent supply deficit; this may very possibly be chalked up to hidden stocks that have been released over time. During this "release" period, it did no good to study the COMEX warehouses for a clue about price (COMEX warehouses constituted the largest visible stockpiles of silver until the advent of the silver ETF). I wonder if this might not be a similar case for copper, zinc, lead and nickel at some point in the future, perhaps even now?

Regards, Tom

DECEMBER 24 2007 11:10AM - Merry Christmas! Silver had another great day while gold, the dollar and crude oil did little. This is a possible sign that the recent physical purchases of silver by investors, through both the ETFs and privately, have tightened the available supply of the metal. As a consequence, silver could very well outperform gold in any forthcoming rally toward, and perhaps beyond, last month's highs. This is not to say that such a rally is imminent since there are still some signs pointing to the contrary. Speculators still hold sway over the market given the relatively high level of open interest in futures, so we cannot rule out another sell-off. Yet from a supply-demand perspective, silver now appears to be in a strong bullish stance.

Given the current low prices in the junior resource stocks, it would probably make sense to concentrate buying there although it may be a good idea to keep some cash on hand for another shakeout before prices turn higher. For those still underexposed to the sector, moderate buying is recommended.

DECEMBER 22 2007 2:20PM - A reader asks:

I'm curious at you considering the monetary base as a significant measure of money supply, while ECB considers M3 the most significant measure of inflation.

I know of two sites that accumulate M3 data for US and update it regularly. (They follow slightly different methodologies.)

Nowandfutures shows "M3b" has been growing at roughly 17% annual rate last few months.

ShadowStats shows a slightly lower growth rate.

Seems these measures are much more relevant to your interests than monetary base.

I'd love to know your reasoning.

My reply:

With respect to money supply, the closer "money" is to being "spendable", the more immediate impact it has on prices for everyday goods and services vs. capital assets. Components of M3 are not typically used to make immediate purchases such as gas, bread, rent, etc. On the other hand, M3 is often used to pay college tuition, health bills, etc. These are longer-term purchases and as such, it can take a long while for M3 to "trickle down" in the form of increased spending, which may (or may not) turn into higher wages and profits, putting pressure on consumer and producer prices.

M3 is also "spent" to purchase capital goods such as factory capacity, income-producing real estate, etc. as well as make investments in stocks, bonds, etc. and very large purchases such as residential real estate and certain luxury goods. As the prices for these items increase over time as a result of excess demand, pressure is eventually placed on the prices of lower-order goods.

The delay, however, can be many years, and perfect correlation assumes no fundamental changes occur in the meantime. But fundamental changes do occur in industrialized economies: technological and productivity advances, quality improvements, increasing regulation and environmental considerations, global competition, new sources of cheap labor, etc. As an example, in the past 100 years, farm output per planted acre has increased by an order of magnitude while labor input per unit of manufacturing output has decreased by an order of magnitude. This has had a major downward impact on the prices of both agricultural and manufactured goods irrespective of the money supply. Besides this obvious fact, a fiat system is a complex web of economic relationships and interdependencies, of which money supply is but one component. As such, I believe that using M3 as a primary measure of inflation (regardless of how one defines "inflation") is a faulty approach.

The European central banks appear to see things differently and tend to have a long-term focus on economic growth largely because their socialistic, highly-regulated economies are not very dynamic. The far-forward looking nature of M3 seems to fit their governance model. Conversely, the FED's focus is primarily on the short-term business cycle, which appears to have little correlation with M3, so this figure is virtually ignored in the U.S. (and has been for a long time even before the FED stopped reporting it in early 2006). In fact, most economic studies have concluded that even M2 has a delayed and uncertain impact on the markets (perhaps for the reason that, by definition, M2 represents savings, i.e., money that is NOT spent currently). Bottom line, the FED governors seem to believe that the level of M3, and even M2 to a large extent, has little influence on economic activity, so even if they could control these components of money supply, such efforts would be futile in terms of guiding economic growth. Whether this represents dangerous short-sightedness or rational monetary policy remains to be seen, but before we pass final judgment, we should take into account the utter failure of the Japanese experiment with recession-busting: long-term, statist monetary planning seems to result in very slow, if any, economic recovery. In the next few years, we shall find out whether the European (socialistic, statist) or American (corporate, dynamic) model is superior. My bet is on the latter and if I'm right, we should eventually see a decoupling of the inverse correlation between PM prices and the dollar. This doesn't mean the U.S. dollar will survive, only that it may actually be among the last to fail.

The reason I focus on M0 from the perspective of precious metals is that the monetary base represents the second rung up from gold and silver on Exter's inverted pyramid. Whereas M1, M2 and M3 are obligations of the issuers and banks but not always the government, M0 is an obligation of only the government. After gold and silver, this makes M0 the second "safest" form of savings. This is because a bad-enough economic wind can result in defaults on virtually all forms of "money" held in the custody of private enterprise (banks), except for the kind you can fold. The latter can only be hyperinflated away, but only with great difficulty under the current incarnation of the Federal Reserve Act. A movement toward the inverted tip of Exter's pyramid would result in a deflation of M1, M2 and M3 at the same time there is a massive inflation in M0. Even then, such monetary engineering cannot rescue the fiat system unless incomes are sufficiently increased -- most likely by legislative means -- so that existing debts can be serviced. Please see my comments from December 11 regarding wage inflation and the following link for an excellent explanation of Exter's inverted pyramid: http://www.silveraxis.com/commentary/exter.pdf.

What all of this means in essence is that before we get any earth-shattering increase in monetary demand for gold and silver, we should get a massive increase in demand (and probably supply) of fiat money itself. I am not talking about demand for bank account balances but rather money you can actually put under a mattress. An early snapshot of this demand was seen in the streets of London a few months ago as depositors lined up to withdraw cash from their savings accounts at Northern Rock. It is likely that a significant portion of this withdrawn cash ended up under the mattress and some fraction of it even wound up being invested in gold and silver. This type of thing may not be long in coming on a larger scale considering that the level just above "cash" on Exter's pyramid is government bonds, for which we are already seeing both tremendous demand and a steady increase in supply. In effect, this may be the early phase of money returning from the risk-ignorant heights of monetary speculation to the risk-averse "feet on the ground" form where the emphasis is on "safe".

In conclusion, M3 is not a very proximate measure of economic growth or price levels unless one believes that a fiat monetary system is a linear, simple, closed system and can expand indefinitely. The reality is that central banks have little influence over higher level monetary aggregates such as M3 even if it is their policy of "rescuing speculators from being hoisted on their own petard" that has resulted in excessive speculation and "runaway" M3. The bottom line is that the most bullish signal for gold and silver would be a decrease in M3, the unavoidable consequence of which would be a large increase in M0. If this occurs along with wage inflation, the fiat system can possibly be salvaged until the next crisis. If not, there is a good chance the monetary status of gold and silver will once again become officially recognized. Little else should matter to gold and silver bugs although I can understand the desire for self-delusional entertainment while our modern monetary mess takes its sweet time to reach its final act.

DECEMBER 21 2007 5:00PM - An impressive move by gold today after a nice move by silver yesterday. Much of the thanks can be laid at the feet of the central bank liquidity injections which have reportedly provided around $500 billion of short-term bank loans in the EU and $40 billion in the U.S. Some of this represents a replacement of drained reserves first provided in August, but there is likely a significant addition as well. In particular, the European Central Bank appears to be able and willing to provide liquidity almost at will, which is quite bullish for European PM demand. In fact, given the apparent size of the problems in the European banking sector, the Euro's continuing strength vs. other currencies is a bit perplexing.

On this side of the pond, the Fed's work has been a bit more measured as Mr. Bernanke and friends have found a way to come up with a new twist on an old trick: a discount loan that doesn't carry the stigma of a discount loan because it is now an auction loan. Yet the only difference I can see is that the auction loan carries more anonymity compared to the discount loan. In other words, these "new" loans are still short-term (3 months or less) and still require strong collateral. But they won't show up on the bank's balance sheet as "discount loan". Yet obviously they are no more than a temporary patch. Moreover, despite all of the supposed liquidity that the Fed has provided to the U.S. banking system, the monetary base including bank reserves has increased by a mere $12 billion since August, which is a measly 3% annualized. As I stated months ago, the Fed doesn't appear to have a lot of juice in its printing press or helicopter despite all the "expert" claims to the contrary. This is because the only way that the Fed can permanently inject liquidity is by acquiring U.S. Treasury securities, but doing so will drive down interest rates in an uncontrollable manner. The reason for this is that U.S. Treasuries are already being sought by investors in a flight to safety and the additional demand from the Fed creates excess demand for them. On the other hand, should the Chinese or Japanese wish to dump their Treasuries at some point in the future, Mr. Bernanke may very well turn out as a ready buyer.

Moving on to another important topic, "lease" rates have once again turned down with the shorter months going negative and the one year rate approaching zero. This is no doubt a reaction to the massive infusion of liquidity in Europe this week. In any case, the "lease" rates have become rather good indicators of silver price action of late, and it may portend well for silver investors if the one year rate does finally go negative.

On a related note, I've been meaning to discuss a couple of good points about "lease" rates that I have neglected to mention previously. First, the forward rate that is implicit in the "lease" rate may include a bullion banking premium above and beyond the forward rate found in the spot (London Bullion Market) and futures (COMEX) markets. Think of this bullion banking premium as the fee that banks charge to arrange a "leasing" transaction, much like a loan fee. When "leasing" is active, this premium is bound to be small due to competition and arbitrage, but when "leasing" activity is minimal, as it is likely to be in silver at present, the bullion banking premium can presumably become substantial. This might explain some of the disconnect between "lease" rates and the basis. I would like to thank Shelby Moore for pointing this out in the Jason Hommel forums. Second, there may be a disconnect between the spot and futures markets themselves due to speculative money flows and other factors. For example, open interest and trading volume in COMEX gold have been at a record level in the past few months but the LBMA's clearing statistics are no higher than in 2006. If these changes are fundamental, they could result in long-term shifts in the structure of forward rates and go a long way to explaining the recent peculiar behavior of "lease" rates. If in fact there has been a structural shift, we should see a confirmation by the basis shortly.

Speaking of the basis, I have finally decided to update the figures in the statistics section so that we can easily track them from day to day, faults, warts and all. As you can see, the basis in both gold and silver remain within a normal range. Having said this, I do want to point out once again that these basis figures are subject to all sorts of timing and other errors and therefore cannot be relied upon individually. My more sensitive proprietary basis figures, however, are saying essentially the same thing at this point. These basis calculations will be available as part of the new service to be launched in January, which I need to hurry up and get started seeing as there is a good chance we could be nearing a period when the basis starts making a shift. As it stands now, we are planning to launch in the latter part of January so please stay tuned.

DECEMBER 19 2007 5:00PM - Silver and gold continue to trade within a tight range as the dollar, oil, copper, commodities and the stock markets are trading without clear direction. Investment demand continues to remain steady in silver with the Barclays iShares ETF (SLV) closing in on 150 million ounces and the London ETF (PHAG) now over 12 million ounces. Several other fundamental indicators point to silver and gold moving higher in the weeks ahead but I still feel that another shakeout will occur before that happens.

Regardless of what silver and gold prices may do from day to day, the junior explorers and producers just keep getting hammered. Many are now such great bargains that investors are avoiding them for fear that they will become even greater bargains. I will try to discuss some names in the days ahead.

DECEMBER 14 2007 3:45PM - A concerned reader expresses his utter frustration and I try to respond in a balanced manner.

Reader: "Last time I talked of GBU and NG, which had obviously reasons to go down. But that it is not the case of other stocks such as MGN, YKZ or others which continue to lose between 65 and 90% losses from 2006 highs without reason even if with taking account of dilution since that time.

I begin to think that these previous highs will only come back in several years when gold will be at 1500 and 40 for silver.

Each time we could go up (look at MGN) we are slaughtered in 3 days with silver sell off and 25% losses in the cards. Impossible to recover...

GOOG seems to be a better investment that gold and silver stocks. I think that these stocks are for western investors and they will not be interested in gold and silver before next decade, so I fear that it will be the same for gold and silver stocks...

A disappointed shareholder mainly of silver and gold mining stocks.

Tom: You are quite right that the resource stocks are very frustrating at the moment but I don't think it will take $1500 gold or $40 silver to bring them out of the doldrums. As the global economy slows down, mining costs will start to stabilize while gold and silver revenues will increase, and this should make the PM juniors quite attractive to value investors based on forward P/E, book value, etc. Populists like Jim Cramer, who have already started talking about mining stocks, will spend even more time on them. Investors losing money in Google, Apple, etc. will soon be looking for a place to put their risk capital. This is not necessarily the case with base metal companies as copper, zinc, nickel, etc. prices will very likely underperform gold and silver in the coming years. To boot, projects must be economic at marginal base metal prices and those companies relying on by-product credit for their earnings may find themselves not doing so well. I will cover this aspect in my new service, identifying the companies at risk. The one exception is uranium which is likely to benefit from global warming concerns even if crude oil prices come down.

The thing is, Novagold at $8.00, MGN at $3.00, Gammon Gold at $7.00, etc. are the equivalents of buying gold at $250 and silver at $4.00 back in 2001. On the other hand, it is impossible to pick a bottom and these stocks can certainly go lower. Yet these stocks are closer to the bottom than the top, even if gold were to go back to $250 and silver to $4.00, which is an extreme long shot. For sanity's sake, you must have at least one year investment horizon, and probably more like two. That is to say, I can only say with a great degree of certainty that PM stocks will be significantly higher sometime during the next 2 years, but not *when* within that timeframe. If you cannot live with that, as your frustration appears to belay, you might try one of three things: (1) walk away completely, (2) become a trader vs. investor (buy and sell frequently instead of buy and hold), or (3) sell most of your portfolio now and look to re-enter when there are obvious signs of greater investor participation (I personally plan to assess this frequently given that it is the key factor for recovery in this market).

DECEMBER 14 2007 2:45PM - Well, it looks like the follow through by the dollar to the less-than-expected Fed rate cut was to the upside. Having cleared nearby overhead resistance, the dollar index can now rally almost to the 80 level without much effort. Ironically, we can thank the spectre of inflation for all this given that both the November producer and consumer price index were higher than the Fed's "comfort zone". Now we know the reason why the Fed did not cut interest rates by 50 bp this week. Yet unlike the 1970's, the debt burden today is much higher (and going even higher) and the ongoing credit crunch pretty much insures that at some point the Fed will have to cut rates and keep them low for a long time regardless of inflation. In effect, these latest inflation figures are actually very bullish for gold and silver even if they contributed to this week's selloff.

Silver is becoming severely oversold in relation to gold primarily because traders fear that industrial demand for silver may drop in a recession, even if there is inflation. In effect, we are seeing preference for gold in terms of its precious and monetary qualities at the moment. Not to fret, I believe this simply means that the current rally is still alive and well and once the weak hands have been shaken out, the move to new highs can commence anew. This could be days, weeks or even months from now, very likely following a violent drop that stops short of $13.50/$750 or $12.90/$710. Silver closed about 30 cents above the higher figure today while gold is still comfortably above it, so there is a chance that silver may plumb the $12.90 level while gold stays above $750. In any case, if silver does drop to, or below, $13.50, I would become a buyer of both bullion and silver stocks.

DECEMBER 11 2007 7:15PM - I'm sorry that I haven't been able to post any comments or update the site in the past few days, but little has happened in the PM markets that would warrant urgent attention. As I noted last week, today's 25 bp Fed cut was seen as a disappointment by many investors. Predictably, both stocks and metals sold off after the announcement. We are near once again to the bottom of the trading range in gold although silver has been more resilient. Now, we need to wait and see what type of follow-through we get from the dollar during the next few days.

There are three important fundamental developments that we should keep in mind for the short term. First, physical buying as evidenced by ETF holdings seems to be accelerating even while COMEX open interest is declining. This is a nearly perfect sign for an eventual retest of the rally highs in the months ahead, as long as our critical support levels are not violated. This doesn't mean we can't go lower in the immediate future (my speculative flag remains on caution for this very reason) but should this trend hold up for long enough, we should see new highs for this move (started on August 16) at some point in the future. If I knew exactly when, I'd buy a boatload of call options and retire wealthy. But since I don't, I'll have to keep reading the tea leaves like everybody else. My best guess is that we may test the $750/$13.50 level briefly in the days and weeks ahead, which may shake out any remaining weak hands before we roar to new highs. I'd be tempted to give this scenario a chance to play out until the middle of January but day-to-day developments may trump such prognostications.

The second fundamental development is the recent reversal of silver "lease" rates higher, especially at the longer end of the curve. These rates never got quite low enough to confirm a widespread monetary panic and more importantly, they were not validated by the basis. This could still happen, but if the "lease" rates continue to move higher from here, a completely different dynamic may come into play. I'll discuss this if and when it seems appropriate since doing so now would be pointless speculation. For the moment, I will just say that if there is a monetary panic out there, it is very isolated. In effect, the behind-the-scenes insiders, the people who know about the headlines the day before they appear, do not appear to be buying gold and silver in droves. Of course, it is entirely possible that they have already acquired enough, but then again, I'm not sure these people understand the word "enough".

Third, deliveries in the December COMEX gold futures have picked up substantially during the past few days. Typically, the vast majority of delivery notices are issued in the first 3 or so days, but since December 5 (the 4th delivery day), another 600,000 ounces of gold were tendered for delivery. This brings the December contract to the average level for the year, but more importantly, the late delivery notices are a sign that some longs may have been "forced" into taking delivery vs. rolling over. In other words, some shorts were intent on selling gold and simply held their contracts without rolling them over. Since the only way to close out a futures contract prior to delivery is a short buying a contract (short covering), this amounts to a forced delivery. Generally, you don't want to see this type of thing because it indicates that metal supply in the spot market may exceed demand (at least for that instant). But in this case, the monstrous open interest in COMEX gold could have very well resulted in massive forced deliveries to the tune of millions of ounces. The fact this didn't happen may actually be a bullish sign, especially when combined with the subsequent decline in open interest. Perhaps most important, however, is the fact that no similar developments have occurred in COMEX silver.

Now a bit of macro analysis for those of you whose faith in the long-term prospects for gold and silver has been shaken. I would like to propose that the most important consideration for continuing PM price appreciation is the debt service ratio, which indicates whether or not debt levels are sustainable. If loan payments are too high compared to disposable income, debt is not sustainable and consequently the assets (real estate, corporate assets, etc.) backing such debt are likely overvalued.

Many "experts" will disagree with the above claim, stating that the prospects for hyperinflation (or conversely, deflation) are the best reasons to own gold and silver. Yet neither by itself is guaranteed to result in a substantially higher gold or silver price.

On the one hand, hyperinflation may result in price levels increasing more or less in tandem, which may not result in a significant improvement in the purchasing power of gold or silver per se. Besides, the hyperinflation argument assumes that putting new money into circulation via lending is plausible monetary policy to stave off an ultimate crisis of credit defaults. But it is not, since most central bankers understand that simply increasing total debt will increase the debt service load as well.

On the other hand, deflation may actually result in an appreciating fiat currency and short-term debt tied to it, at the expense of all asset classes including gold and silver. Besides, the deflation argument assumes that putting new money into circulation by monetizing existing debt is plausible monetary policy to stave off an ultimate crisis of credit defaults. But it is not, because most central bankers understand that it is borrowers, not lenders, who need the additional money to service debt in a credit crunch. Of course, banks are borrowers themselves and this is the crux of the current liquidity crisis.

Furthermore, absolute debt levels and related asset valuations are largely irrelevant in terms of being drivers of gold and silver prices as long as such debt levels are sustainable (can be serviced). Unless bullion is acquired using debt, it does the PM investor little good that gold and silver prices tend to keep pace with inflation. As long as debt levels are sustainable (there is sufficient income to make payments on the debt), a monetary system is essentially stable.

In fact, maintaining a delicate balance between deflation and hyperinflation has worked as central bank policy for the past 35 years and may yet work for a few more, as long as debt levels can be serviced. As such, a reduction or increase in absolute debt levels is by itself irrelevant to PM investors, which goes a long way toward explaining why owning gold between 1980 and 2002 was such a losing proposition.

In contrast, if and when we reach the point where debt can no longer be serviced, it will do no good to have central banks making dovish or hawkish monetary policy; rather, there will be a need to deal with debt service proper. Attempts to lower or freeze interest rates will not succeed but rather merely put off the inevitable requirement that income, savings, consumption and debt service must be brought into balance by some direct action or else monetary collapse. Yet only one of the components of this equation is sufficiently independent that targeting by public policy can affect debt service levels: income. That is to say, income can be arbitrarily increased and this will have a direct effect on debt service ratios. For example, a $5 per year increase in the federally-mandated minimum wage would do wonders for debt service levels after a few years, all other things being equal.

Of course, we are talking about wage inflation, which would immediately and necessarily translates into price inflation across all consumer products and services (not just milk, gas, health care, etc. but every consumer product). For all intents and purposes, this may look like hyperinflation but I think there is an important distinction. Namely, the trick is that the value of capital assets (stocks, bonds, real estate) must not make a corresponding increase. Otherwise, debt levels will soar once more and there will be no meaningful improvement in debt service. Wholesale hyperinflation cannot possibly result in debt becoming serviceable after the debt sustainability threshold has been crossed since wages will not be able to keep up with the increasing prices of goods, services AND capital assets. Inflated dollars that would otherwise be used for debt service would instead go to pay these higher prices. On the other hand, borrowers who own gold and silver should be able to pay off their debts in such a scenario and this in itself is a powerful reason for "backing" with monetary metals at least 10% of any debts you might have.

Now please don't accuse me of arguing that the proper role of central banks should be to stimulate wage inflation in contravention of the free market. That's not what I'm saying. In fact, central banks don't even have policy tools to target wage inflation. Instead, such a policy would need to be legislated (e.g., federal minimum wage). Regardless, lack of meaningful wage inflation will eventually mean complete monetary collapse. There is no other option. Ironically, the same competitive globalization that has served to keep the prices of manufactured goods in check due to shifting of production to countries with lower wages has also created a situation where induced wage inflation might be next to impossible.

Another problem is that wage inflation of several hundred percent over the course of a few years would create a major risk of runaway hyperinflation. Higher interest rates could not be used as an inflation-braking mechanism since this would increase debt service loads, reversing the impact of higher wages. In turn, there would then need to be a corresponding increase in wage inflation, resulting in a vicious cycle. In other words, runaway wage inflation must be halted without increasing interest rates. This would be very difficult, although success cannot be ruled out entirely.

What happens if we don't get major wage inflation so that debts can continue being serviced? We will get an inevitable monetary collapse as loan and asset values deflate in unison. Bad debts can only be rolled over for so long. So, we are left with the prospect of (1) certain monetary collapse if nothing (i.e., standard central bank policy) is done and (2) very likely monetary collapse even if the "right" thing (legislated wage inflation) is done.

The end could come a few years from now, and perhaps even several decades. Many gold and silver bugs may even sell out too early (e.g., after a bout of hyperinflation or deflation that does not result in either a total monetary collapse or debt becoming serviceable).

On the other hand, some gold and silver bugs may sell too late: if we somehow get successful (i.e., without a substantial increase in debt levels, asset values or interest rates) wage inflation that is subsequently brought back under control, resulting in debt levels becoming serviceable. It happened before, in 1980, although under much more favorable circumstances. Still, a repeat of such an outcome could conceivably result in monetary stability, representing a triumph for central banking and removing much of the urgent incentive to own gold and silver. What are the odds?

To conclude today, I'd like to note that the Federal Reserve's official statistics on consumer debt service levels do not seem all that ominous. In fact, it appears that most debt service ratios have deteriorated very slowly since 1980 and they don't seem to be terribly excessive. Moreover, the debt service ratio of renters (representing about 1/3rd of the U.S. population) is actually substantially lower than it was 5 years ago. There are some major problems with these statistics, however, and this will be the subject of a future discussion. For now, I would point out that these Fed figures are incomplete in several ways, the most obvious being that a substantial portion of personal income goes to service the debt of the U.S. government by way of taxes. And then there are the Social Security and Medicare payroll taxes, which go to servicing the federal obligation to retirees. More on this later, but you can probably see already where I am heading with this.

DECEMBER 5 2007 2:30PM - For the past week, gold and silver have traded within a range as a firming dollar and weakening crude oil have pressured prices. My sense is that PM prices would be lower at this point if not for the Fed meeting next week. The current speculation is that the Fed might lower rates by 50 basis points, which would be dollar bearish and PM bullish, but strong economic data released this week has tampered that "hope". If the Fed were to lower rates by less than 50 bp and thereby surprise a significant portion of the market, gold and silver prices may drop substantially, perhaps even below the $750/$13.50 targets. On the other hand, if the PMs can remain above these levels into the middle of December, this would be a very good reason to believe that we are seeing an ongoing consolidation which may result in a powerful breakout to new highs early next year. Crucial support remains at $710 for gold and $12.90 for silver. These prices are now actually at or below the respective 200 day moving averages, which are rising fast (meaning that these support levels will become irrelevant in the next few weeks).

From a fundamental perspective, we are seeing just the scenario I laid out previously: physical buying combined with a fall in futures open interest. This is a recipe for a repeat of the 2005-2006 PM run, boding well for short term (3-12 months) investment and speculative strategies in the PMs. On the other hand, the physical buying hasn't been as robust recently as I would like, with only the London silver ETF (PHAG) really doing a brisk business of adding to holdings.

Meanwhile, physical deliveries in the December silver COMEX futures have been very firm, running at double the 2007 average (30 million ounces vs. the usual 15 million). Fortunately, open interest in December contracts is dwindling and the fact that prices have not declined sequentially since November 30 likely means that the greater-than-normal silver deliveries are more of a sign of robust physical demand from buyers rather than dumping of excess supply by sellers. On the other hand, deliveries in COMEX gold have been very curious, running at a rate just 2/3rd of the typical for the year (1 million ounces vs. 1.5 million). Considering the extreme size of the open interest in COMEX gold, this might mean one of two things: gold available for delivery is in tight supply and/or the overwhelming majority of demand is speculative. Thus, we have an overall mixed bag in terms of December deliveries with no clear hook on which either bulls or bears can hang their hats.

On the other hand, an interesting thing has been happening in silver "lease" rates as the shorter maturities have reversed strongly from negative levels and the 12 month rate seems to be stabilizing. Because the basis has never confirmed the negative "lease" rates, there is a chance that climbing rates at this point are an indication that market participants are becoming more comfortable with the financial-monetary risks that are out there. If true, this might mean that another credit scare could be necessary in order to sustain flight to safety buying of gold and silver. Thus, a lull in bad news may remove from the equation a major driver for gold and silver buying. In effect, it would be PM bearish to see a return to the historic level of "lease" rates after having come so tantalizingly close to the point of no return.

I am hearing quite a bit of frustration out there from PM investors, particularly with respect to the under-performance by silver and junior stocks in the past few months. With respect to silver, all I can say is that silver trailing gold is a good indication that the current PM rally still has legs. I wish I could be so sanguine about the junior stocks. Unfortunately, equity markets are much more localized than the commodity markets, so often they have very different dynamics driving them. For example, the juniors trade primarily in Canada. The investors are mostly Canadians along with a small subset of German and U.S. investors. There is only a limited amount of investment funds held by these market participants, and without new funds or new participants, stock prices can stagnate. In effect, junior resource investors are pretty much "all in". If there is no new money chasing the juniors, it stands to reason that their prices will not go much higher. This is unlike the big cap resource stocks, most of which trade on the NYSE, AMEX or Nasdaq and therefore have a worldwide investment base. The result is that the seniors (HUI, XAU) have been outperforming the juniors.

So, how will this situation resolve? Clearly, the junior market needs to attract more money. That means new investors, whether another segment of the U.S. or global investment base, or majors starting to buy up their undervalued siblings. In some ways, the latter is already happening: we are seeing that junior financings are increasingly being led by larger resource companies. For example, Silver Wheaton has acquired significant stakes in several silver companies. But this can only go so far. At the end of the day, there needs to be new money from investors themselves. A few possibilities are on the horizon: integrated global trading accounts like those being proposed by E-Trade and others will provide better access to Canadian markets for the retail investor; an increase in Canadian juniors listing on the AMEX; liberalization of stock trading in China, U.K., etc. Until some of this happens, I don't believe the junior sector will be capable of +100% type moves as a whole, although individual stocks should still be able to make spectacular returns.

In conclusion, the best strategy until we see signs of new investors entering the junior sector, might be to make sure a PM portfolio includes plenty of exposure to bullion itself as well as some quality majors. At the same time, investors may wish to focus on a smaller list of high quality juniors instead of diversifying into too many names. This will be one of the goals of the new service to be launched in January. And of course, if you have followed my commentary at all in the past year, you will already know that I have a rather healthy disdain for base metal projects at this point, preferring gold and silver above all else.

Speaking of which, a quick update on the service. The launch date will be sometime in January. Please keep looking for "free subscription" opportunities and other details. Believe it or not, I am still in the process of replying to the first slew of e-mails along with setting up nitty-gritty administrative details. Once that is done, I will provide further details.

NOVEMBER 27 2007 4:30PM - A rebounding dollar and falling oil prices helped put a cap on the incipient PM rally. A few days left until December when it will be time to re-examine the picture. For now, I must say that I am not very happy with the recent rise in open interest in COMEX gold and silver. These contracts are currently in the midst of being rolled over from December and a huge number of options expired today in the money (in particular, the December 2007 $800 call option), so it will be interesting to see what happens with open interest in the days ahead.

Speaking of December, looks like the COMEX silver deliveries might be another doozy: silver warehouse stocks in the registered category have climbed to around 84 million ounces as of today, which is 20 million more compared to the same time last year. A lot of COMEX deliveries in the December contract would tend to indicate spot demand is alive and well. On the other hand, we need to watch out for that dirty old trick of the shorts, refusing to close out spot month contracts. When metal prices are near highs as they are now, this type of strategy can put a lot of pressure on the market. We should be able to tell if this is happening by watching the basis expand at the same time as the open interest in December futures decreases only very slowly. In the worst case situation, metal prices could suffer a world of hurt. I'll report on what I observe starting the end of this week.

David Morgan has come along today with a timely reminder about the tax-loss selling that peaks right about now, creating a great opportunity to pick up some quality juniors and producers on the cheap. Of course, if metal prices are headed down, today's resource stock prices will probably look expensive at some point. Still, long-term investors and those still underexposed to the sector should be able to add to their portfolios at favorable prices, especially given that both gold and silver are still within striking distance of bull market highs (in the case of gold, all-time nominal highs).

As if tax-loss selling weren't enough, we got a very stark reminder yesterday of the risk in mining and mineral exploration: NovaGold lost more than 50% of its value Monday after announcing that NovaGold and Teck Cominco Suspend Construction at Galore Creek. The cost of the massive project, as designed, has apparently been spiraling out of control with the latest construction estimate reaching a mind-boggling $5 billion. Part of the cost over-run is due to the strong Canadian dollar, a topic to which I will get in a moment.

Galore Creek was to be a major gold and silver producer, and this turn of events means that global production forecasts will have to be cut back. Even Barrick, in a now infamous admission, has warned the world that global gold production would face a sequential downturn in the years ahead. Barrick was likely counting Galore Creek in its numbers. As a result, what is a sad--and hopefully temporary--outcome for NovaGold shareholders is also a long-term bullish development for gold, silver and to a large extent, copper and other base metals as well.

Don't expect NovaGold to be the last company to announce delays or suspension of mine development. Up to now, most of the major disruptions have been political, environmental or operational. Crystallex, Northgate, Coeur and others have had their plans to develop world-class mines derailed in recent months by seemingly arbitrary processes. Others like Gammon Gold have suffered from operational problems. But the spectre of busted construction budgets and exchange losses is a new threat. It has the potential to impact both large and small projects in countries with strong currencies (at least compared to the U.S. dollar). Could this be a repeat of the malaise faced by South African miners in 2004 and 2005 when the Rand rallied strongly against the U.S. dollar and turned what should have been strong fiscal performance into big losses? If so, miners who operate in countries such as Canada, Brazil or Russia could face an unpleasant situation going forward. There are some marquee names in this bunch: Agnico-Eagle, Yamana, Kinross, etc.

One solution might be to favor miners that operate in countries with weak currencies such as the U.S. Unfortunately, these countries have an unacceptable level of geopolitical or permitting risk. In addition, a number of mining concerns that operate in these countries, including the U.S., have management, labor, environmental, legislative or other issues. There are exceptions.

Mexico and Nevada seem to be the mining nirvanas at this point in relation to most other jurisdictions. This could change, but risk averse resource portfolios (assuming there is such a thing) might do well to be loaded with companies operating primarily in Mexico or Nevada. On the other hand, an eventual retreat by the Canadian dollar could create a future opportunity to buy some great companies at very good prices, although a significant amount of patience might be required. For now, perhaps the wise thing to do is to become more aware of the jurisdictional issues when evaluating investment choices. Personally, I plan to carefully consider this in my evaluation of companies both in my own portfolio as well as those to be covered in the new service scheduled for launch in January.

NOVEMBER 26 2007 3:00PM - Gold has rallied strongly over the Thanksgiving holiday and into the open today while silver dragged its feet once again. This morning's dollar weakness was very supportive but another sharp drop in the equity markets reversed the PM rally late in the day. The impetus for a move higher is still there, however, as the dollar index is trading under 75 again. In the meantime, credit concerns are in the headlines once more as HSBC announced a plan to inject $35 billion into a pair of asset-backed funds in order to keep them afloat. If that weren't enough, the Fed made the unusual decision to formally announce that it was going ahead with its annual Holiday injection of temporary liquidity starting with $8 billion today. The intent was probably to show that the Fed was actively doing something about the liquidity problem but the truth is that it had the opposite effect, un-nerving the market; everyone is wondering why the Fed would go out of its way to highlight such normal and expected operations. Is there something much worse ahead that the Fed is trying to calm the market about?

Physical buying of silver continues in earnest at the Europe-based ETFs with the Swiss and London funds adding another million ounces in the past week. They are each closing in on the 10 million mark. These funds, even though they are still much smaller than the Barclays iShares silver ETF, can now be considered a success. As I stated last week, the PM rally should have legs well into next year if physical buying stays strong while open interest in the futures market starts to drift down. So far, so good.

Still nothing exciting to report about the basis as it remains within a normal range. In particular, there is no widespread buying of physical silver by the smart money as the futures speculators--hot money--continue to dominate the market.

Finally we are starting to see some discussion out there about the negative silver "lease" rate, but unfortunately most of it is quite wrong. The major assumption made by most commentators is that the current situation reveals a concentrated attempt to cap silver prices by "lessors" who are willing to lend metal even though doing so will result in a negative return. But I suspect this couldn't be further from the truth.

Let's remember that "lease" rates are nothing more than the difference between interest rates and the forward metal price. Here's how it works. Assume that the 1-year LIBOR interest rate is 5% and the forward price of silver in one year (which is the price a forward buyer could lock in for silver to be physically delivered a year from now) is 4.5%. The "lease" rate would be a positive 0.5%. Why positive? Consider the following transaction: I sell 1,000 ounces of silver today, invest the funds at 5%, and enter into a forward purchase to buy 1,000 ounces a year from now at a price 4.5% higher than today. At the end of the year, I have my 1,000 ounces of silver plus 0.5% of its value (as of the beginning of the year) in cash.

Based on the above example, we can clearly see that the act of "leasing" metal involves a simultaneous sale (in the spot market) and purchase (in the forward market). Supply is created in the short term but demand is created in the longer term. It is not appropriate to refer to a transaction as "leasing" if the sale is not accompanied by a forward purchase. Thus, the net effect of "leasing" on prices is based on the relative level of supply and demand that already exists in both the spot and futures markets.

For example, leasing will actually tend to drive metal prices higher when there is a substantial amount of excess demand both in the spot market and the futures market, as there is now. This is because the upfront sale of metal is easily absorbed by existing demand but the forward purchase actually creates additional demand in the futures market. A shortage of forward selling will create competition among forward buyers, resulting in a higher metal price. There is, in fact, a shortage of forward sellers in this market because supply that might have been otherwise sold forward is now actively being acquired by the likes of Silver Wheaton, Silverstone and others.

What happened in late 2005 and early 2006 is that a sharp increase in spot demand from ETFs drove down the forward rate relative to the cash price, moving "lease" rates higher and encouraging an increase in "leasing" activity. This in turn created spot supply to be absorbed by the ETFs but importantly some demand in the futures market as well, which contributed to higher prices in a classic feedback loop. If the silver that was "leased" would have instead been sold outright, the increase in price may not have been as spectacular. Then as now, any "leasing" activity (minimal in my opinion) has likely been supportive of higher prices.

In the late 1990's, of course, there was no shortage of forward selling due to the perversion of hedging by gold and silver producers, and when combined with inconsistent physical demand, this meant that "leasing" had a negative effect on metal prices.

Before we go further, please realize that it is "normal" for "lease" rates to be slightly positive when there is a rough balance between supply and demand in both the spot and forward markets. On the other hand, a "lease" rate that is very large or conversely tiny, or even negative, indicates that there may be a structural imbalance somewhere. The reason for this is simple: the primary purpose of "leasing" is to avoid the opportunity cost of having funds tied up in bullion vs. interest-bearing cash and so "leasing" can be seen as a pressure valve that helps to correct imbalances. When spot demand exceeds forward demand by a wide margin, the forward price normally shrinks and it becomes more profitable to "lease" metal, and vice versa.

With the above understanding, let's take a look at the current negative "lease" rate environment in the silver market. I will provide three scenarios that could explain a negative "lease" rate; the first two are cyclical imbalances that are self-correcting whereas the third is a structural imbalance.

First, weak spot demand and strong futures demand could cause the forward price to be artificially high. Such a scenario is indicative of poor fundamentals combined with speculative extremes. It would be uneconomic to "lease" under such conditions and in fact this would be a period when "leases" would be closed out, creating spot demand and futures supply. Thanks in part to the advent of ETFs, we know that spot demand isn't weak at this point so this is not a plausible explanation for the current silver market.

Second, a flood of metal into the spot market could drive cash prices down more than futures prices, causing the forward rate to rise. "Leasing" would be curtailed once again, absorbing the excess spot supply while eventually pressuring futures prices. Despite VM Group's Jessica Cross recently commenting that metal supplies were adequate in London, I don't believe there is an oversupply of silver in the cash market. In fact, comments by the Swiss silver ETF's operator and an examination of metal holdings of the London silver ETF (PHAG) indicate that bars are being acquired on an as-available, when-ready basis directly from smelters as opposed to the secondary market. Besides, prices are not in a general downtrend as would be the case with excess spot supply.

Third, assuming there is no major cyclical change in supply or demand in either the spot or futures market, what type of structural change could be taking place to explain negative "lease" rates?  Here's one: growing apathy toward "leasing" because metal holders are starting to ignore the opportunity cost of bullion ownership. This could be because a large quantity of metal has changed hands in the past several years (moving from "weak" hands who consider PMs part of a portfolio allocation to strong hands who hoard metal for strategic reasons). Or, monetary and economic conditions have changed to such an extent that sentiment is undergoing a slow but steady shift from offensive to defensive. Both these and other possible changes in market sentiment represent structural changes in the market that cannot simply be arbitraged away.

The most compelling argument in favor of the third scenario representing a structural change in the market is the persistence of these shrinking "lease" rates; in a cyclical scenario, they should have turned around by now. Cyclical events are marked by spikes in "lease" rates; what we have here is a slow denouement. Indeed, forward metal rates and interest rates appear to be de-coupling right in front of our eyes.

When "lease" rates are sufficiently negative, many market participants may start doing the opposite of "leasing": namely, borrowing money to buy spot metal and then sell it forward. For example, if I buy 1,000 ounces of silver with money borrowed at a rate of 10% per year and then sell the silver forward one year at a 15% premium to spot prices, I can make 5% on a nearly risk-free basis. This is what I refer to as the gold or silver "bond" and it represents the opposite of "leasing" activity. Some would call this a form of "carry trade". In any case, the "bond" may eventually cause "lease" rates to overshoot on the other side, soaring to unimaginable heights. At the same time, the de-coupling between interest and metal forward rates might permanently prevent a return to the "normal" condition of slightly positive "lease" rates.

By the way, this de-coupling has another, more recognizable form: gold and silver regaining universal recognition as money. And confirmation should arrive via the basis, which will start to shrink as "lease" rates bottom right before the "bonds" take off. Later, the "bonds" too will disappear at the cusp of monetary transformation, when nobody (not even the most stubborn fool) is left to sell forward gold or silver for fiat money. It's not a matter of if, but when.

NOVEMBER 21 2007 3:00PM - Silver is struggling once again while gold catches a new bid from a faltering dollar and soaring crude oil. Some of the weakness in silver is probably due to the industrial connection to copper, which dropped and closed under the psychologically important $3 mark today. This is a classic tug of war with silver playing the role of rope. How will this play out? Long term, there is little question that gold will outperform the commodity complex and bring silver along for the ride. At some point, silver should even outperform gold by a wide margin.

My hope is that in the short term, too, silver will find better market sympathy as an investment and monetary metal vs. an industrial commodity. Whatever the outcome, we are due for a bumpy ride as further bad news in the credit and housing markets is virtually guaranteed at this point. With gold, oil and the dollar all near extremes, I don't view the current situation as a no-brainer. In fact, I think it is one of the most critical periods in the PM bull market so far.

Silver "lease" rates continue to fall, now almost near zero. Despite a strong pickup in physical bullion buying in the past few weeks, however, the basis continues to play dead. The inescapable conclusion for now is that prices are being driven primarily by speculation at the moment and not an underlying sea-shift of monetary, or even longer term investment, demand. This is worrisome, but made a little bit more palatable by the recent decline in futures open interest, particularly in gold (a decline of around 50,000 contracts, or about 10% of outstanding positions). For a strong resumption of this rally, we should ideally have a continuing decrease in speculative froth combined with solid physical buying.

My Monday visit to the San Francisco Hard Assets Conference was rather uneventful. There were much fewer silver companies present than in the past but even so I only had time to stop and chat at a few booths. My most insightful discussion was with Doug Dobbs of Mines Management, who filled in a few missing details in my mind about his company's future prospects. I'll leave the details for the new service, but in essence I am becoming much more confident that Mines Management could be a solid candidate for price appreciation as it moves toward feasibility study and permitting of its world-class Montanore deposit. This is going to occur over roughly the next 24 months assuming no major delays or environmental roadblocks, and it isn't very difficult to build a case that the stock should be trading around the $10 level or even higher toward the end of that period. This is not a target per se but simply a back of the napkin valuation estimate. Moreover, the best part is that my $10 per share calculation assumes a silver price of $10/oz. and copper of $1.50/lb (I am not a copper bull and believe base metals in general will trend toward marginal cost of production in the next few years but on the other hand I do think silver will be trading higher than $10 in 2009). With the share price around $4 today, I view Mines Management as an excellent buy for medium-term holding periods of between 1-3 years.

Five other silver companies I'd have little hesitation buying at this point, or especially on a pullback: First Majestic, Impact, Genco, Excellon and Gammon Gold. First off, First Majestic around $4 or less is a steal. Impact is a stealth situation that will eventually get positive recognition for its approach to resource development and mining. Genco and Excellon have solid exploration and resource potential. Gammon Gold continues to be a volatile turnaround situation that is once again near the bottom of its range: I can't find a cheaper producer with 550 million ounces of silver and 22 million ounces of gold in resources. In terms of in-situ metal values (a calculation I usually avoid but sometimes there is no better way), buying Gammon Gold gets you gold in the ground for $25/oz. and silver for $0.50/oz. This would be excellent even for a pre-feasibility project considering a large portion of the resource is high grade, yet Gammon Gold has already been in production for almost a year with most of the mine development expenses already incurred. I'd like to simply say "duhhhhh" to those selling the stock near $7.00 today.

(I own shares in all 6 of the companies mentioned above).

A brief update on the service. I am still struggling to reply to all the initial e-mails but will announce a second free subscription drive once I've done that in the next few days. In the meantime, we have moved back the official launch date to January 1, although I will have some initial content to share with Founding Members during the month of December. I greatly appreciate your patience, and Happy Thanksgiving to my U.S. readers!

NOVEMBER 19 2007 10:15AM - The correction in silver and gold continues as the dollar and oil try to stabilize while copper and the stock markets reel. We are now getting additional confirmation that physical buying of silver in the past few weeks has been very strong: the 2007 silver U.S. Eagles are sold out at the Mint and many dealers have no inventory remaining of any year; Franklin Sanders, aka The Moneychanger, says "Not since Y2K have we seen so many buyers"; and a reader informs me that despite an increase in production of Canadian Maple Leafs this year, these bullion coins have flown off the shelf as German PM investors have bought half the supply. And the ETF Securities PHAG ETF traded in London continues to add silver, now holding nearly 10 million ounces. But perhaps most positive of all, futures open interest has now started to decline although it remains at a historical extreme in the case of gold.

If this indeed is merely a short-term correction in the midst of a powerful rally, we should soon see the basis start to confirm that proposition. No luck so far. As such, I am still cautious and I continue to view December as the timeframe for a potential trend reversal or critical development. The old $12.90 in silver and $710 in gold remain as my crucial levels for assessing the bullish strength of the PM market.

I missed the first day of the SF Hard Asset Conference because I was sick but I am feeling better and will make an appearance later today. Tomorrow, I will try to report on the turnout and general sentiment of both participants and presenters.

NOVEMBER 15 2007 10:00AM - Big, big fall by silver and gold at the moment in what may yet shape up to be even more violent a shakeup than I originally expected. We could see a sharp reversal here or further weakness based purely on the whim of speculators. In the days ahead, however, it would be encouraging to have a follow-up of physical buying combined with a shrinkage in futures open position. Should silver decline to near the $13.50 area and gold to around $750 -- roughly 50% retracements -- it could become a fantastic buying opportunity. For now, I remain cautious on the very short term.

NOVEMBER 14 2007 3:00PM - A hard fought recovery is under way with both silver and gold seeing "bargain" physical buying from investors, but it is the apparent scarcity of sellers that seems to be responsible for the strong rebound. This is not to say that demand has not shown itself to be robust because in the past several days (since my last comment, in fact) all three physical ETFs that I track have added a combined several million ounces of silver to their holdings. Until now, this type of physical demand has been absent during the current silver rally and so its appearance deserves serious consideration. No longer an anomaly or a "pocket", the investment buying seems to be cropping up everywhere at the same time. Perhaps I should have noticed the imminent emergence of this demand on November 2 when I deployed the yellow flag for speculative positions, but I was focused more on the incipient volatility that I expected to appear. Sure enough, the PM markets began a wild ride over the ensuing days.

But, is it possible that I may have mistaken a meaningless gyration (choppy consolidation) for an interim peak in metal prices? Very possible. Typically, metal prices remain bullish over the short-term when physical demand continues to rise even after futures activity at the COMEX and other exchanges has peaked. If such a scenario lies ahead, I will have to seriously reconsider my current speculative position. The trick, of course, is to recognize the situation ahead of time. In this regard, a very important clue may yet lie undeciphered: the continually shrinking silver "lease" rates that suggest a widespread expectation of a looming financial catastrophe. Despite my pontification on the subject, I believe these rates remain "undeciphered" because the basis (the spread between spot and futures prices of gold and silver) is not confirming the possibility of imminent financial turmoil.

Just in case I have not looked at the basis carefully enough, I will be spending the next several days examining and re-examining the data very carefully, even if it comes at the expense of frequent updating of the website. This is an important juncture in the market that is unusually difficult to analyze properly and so it deserves attention to detail.

For now, it is probably safe to assume that the next move in precious metals will likely be determined by the slew of aggressive speculators who seem to always pile on and bail out exactly at the wrong time. That is to say, more up and down volatility in the days ahead. But come December, the PM markets may very well begin a distinctly different phase that will surprise most people. Hopefully not you or me.

NOVEMBER 9 2007 11:30AM - Gold and silver closed out the week with continued volatility as they both thrashed around the bull market highs, threatening to take a big jump higher but not yet delivering. In the end, this week represented a messy consolidation that portends further upside, perhaps in a spiky fashion; it would be unusual for a top to form in gold and silver in the current manner since highs are typically achieved in the form of a blow-off. At the same time, my opinion remains that the risk of a short-term severe pullback is unacceptably high for leveraged trading and speculative marking timing strategies, and thus only positions with an investment horizon over 3 months should be held outright or added to cautiously.

Yesterday, the COMEX announced higher margins on both gold and silver futures but this merely reflects the recent increase in volatility and will probably not impact most positions since a vast majority of traders are already carrying gains and losses that are larger than the new margins rates. Going forward, however, we are likely to see a topping out in futures open interest with price support increasingly coming from physical buying.

Unfortunately, I am finding little evidence that physical buying is anywhere near a record level in terms of volume although higher PM prices no doubt mean that the aggregate dollar value of gold and silver purchases is very high in historical terms. On the other hand, there are pockets of intense buying activity out there. For example, physical buying of silver seems to be centered in London right now, the same place that recently was assumed to carry a healthy inventory of the metal. But with ETF Securities' upstart silver ETF adding more silver in the past few days (5 million ounces) than Barclays' big silver ETF, SLV, has added in the past few weeks, one most wonder if that is still the case today. Is it possible that investors in the U.K. have a renewed appreciation for precious metals after the Northern Rock panic? I'd be inclined to believe it, especially with both gold and silver breaking out in terms of the Pound. I'd also be inclined to believe that Russia and some Middle Eastern countries are putting a portion of their oil revenues into gold.

As usual, I have much more to say but no time, and so I will wrap up this week by wishing silver investors good tidings and apologizing for not being able to update the website in a timely fashion lately. Worse, I have not been able to reply to every e-mail in the past two weeks, although I have a plan to get caught up by next week. If you are among the 10 fastest replies to the free subscription offer, you have heard from me. If I have not replied to your e-mail yet, please except my gratitude for your patience, and expect a response by next week.

NOVEMBER 7 2007 1:00PM - The dollar falls yet again and oil moves higher, taking gold and silver on a historic ride even as just about every other asset class including most commodities are weaker today. Lots of volatility today in silver as the trading range is nearly a dollar. Prices faded toward break-even at the close after having peaked above $16 in early trading. Gold has been more calm, dropping a mere $15 from its earlier high but it is still up $10 on the day.

I was wrong, the shorts in futures have not started getting squeezed at this point: traders keep piling into gold and silver on the COMEX and other futures exchanges causing open interest to balloon. Indeed, the COMEX gold contract has set record after record in terms of open interest, which has now reached 550,000 contracts as compared to the 360,000 contracts that were open near the May 2006 peak. Silver is not (yet?) at such an extreme since the currently outstanding 146,000 contracts (futures only, not options) are a few thousand short of the post-1979 high (reached interestingly in November 2005). Speaking of November 2005, crude oil was then trading around $55, copper was in a strong uptrend but could still be bought under $2.00 and the dollar was just completing its multi-year peak (a dead cat bounce). Many junior gold and silver companies were trading at pennies whereas they now trade at several dollars. In effect, these conditions were ideal for a powerful gold and silver rally.

Now, things are decidedly different. Not necessarily less ideal in some respects, mind you, but still different. For one, it is November and we are already witness to a powerful PM rally. Is it just at the beginning, somewhere in the middle or close to the end? I am starting to suspect that the current situation may not play out anything like the Fall 2005-Spring 2006 rally at all. At the time, it was hard to make a mistake until near the end. Too many bullish PM analysts are now following that rally as a model for the current one, giving the impression that it will be hard to make a mistake once again. I too have made the comparison a number of times yet the growing consensus bothers me the more I think about it.

And if things weren't complicated enough, along comes another Chinese official suggesting that the communist-capitalist's foreign currency reserves should be diversified away from the dollar. Whenever the Chinese have made this kind of announcement in the past, not a lot has happened in terms of diversification, but the dollar sure did swoon for a bit. Methinks maybe the Chinese want the dollar to sink because the Yuan is quasi-pegged to it, which means that Chinese exports will continue to get cheaper on world markets. After the tainted product scares of the past few months, there may very well have been a slackening of demand that the Chinese are seeking to solve in a creative manner. Besides, how many worries can the Chinese government have about losses on $1.3 trillion in foreign reserves when just one of its state-controlled corporations, PetroChina, doubled in just one day to reach a valuation of $1 trillion?

NOVEMBER 6 2007 2:00PM - Silver hit both a new intra-day and closing high today as it leveraged the spectacular rise by gold toward its all-time high around $850. In after hours so far, silver has tacked on another 3% gain, rising to $15.50 on a cash basis. Although far short of the all-time record high, these are new bull market highs for silver that now confirm the potentially record-breaking move by gold. If silver is ready to take over the leadership role at this point as the gold-silver ratio seems to indicate (if not yet the basis), there could be some serious fireworks ahead for the white metal. Moreover, some of the trading in the past few days seemed a bit like a prelude to a short-squeeze in the futures. Now, I am not talking about a physical supply squeeze here, just a desire by an appreciable percentage of paper shorts to stop the financial pain. If these shorts begin to close out some deep-in-the-red positions here, we could easily see a spike that takes silver several dollars higher, not to mention that gold might be boosted well past its old record high in a hurry. It's very possible, however, that such a move would be difficult to ride, and it also carries a significant risk of collapsing under its own weight and trapping slow-footed traders.

In any case, establishing new positions for short-term gains is likely to be very tricky in the immediate future, and this is the reason I threw up a caution flag for speculation last Friday. In my own speculative portfolio, I continue to opportunistically take a bit of profit here and there, including some option positions that have nicely gone up with silver above $15 and gold above $800. My next move is shaping up to be a long strangle in which I will continue to hold only far out of the money calls and puts with the expectation that volatility continues to increase. I will be able to go into greater detail once the service is launched, but for now the most important thing is that an outright bullish trend remains intact for any investment horizon greater than 3 months.

For traders, there are two areas of sentiment that bear watching closely at this point. First, neither gold nor the dollar seem to have taken into account the chance that the Fed may not cut interest rates at its next meeting. In the weeks ahead, Bernanke and his merry men of the Fed may very well come to the conclusion that a further rate cut isn't likely to get lenders to loosen credit standards or help cushion the blow from subprime write-downs. Instead, such a move may just encourage bond speculators even more (see Prof. Fekete's recent work for more details). In the current environment, you see, a fall in long-term interest rates below a certain level may be a big problem for the big banks. So the Fed may very well decide that another interest rate cut is not worth aggravating a systemic risk. In effect, the threat (reality in some circles) of inflation is just the Fed's cover for a potentially bigger problem that may develop if interest rates are lowered too aggressively. Namely, the Fed could accidentally kick the legs right out from under such major banks as Citibank, BofA, etc. For this reason, the Fed is actually likely to be more careful going forward than most people might think. For living proof, please see the important H.4.1. Fed Release on Reserve Balances. Most analysts ignore this data, which shows the Fed has actually injected very little liquidity of consequence into the banking system. In fact, the monetary base has actually fallen since the beginning of the year while the Fed has actually withdrawn liquidity on a year-to-date basis. In my mind, there is a big disconnect somewhere, and there exists the possibility that resolution will be bullish for the dollar and bearish for gold in the short term.

The second area of sentiment that should be monitored closely is the geopolitical situation concerning Iran, Turkey and now Pakistan. What might seem like the potential start of World War III today could actually begin to blow over tomorrow, or the day of reckoning might be at least delayed for a long while. The collective reaction by speculators is often much more extreme than the situation on the ground. For example, consider the hysteria surrounding General Musharraf's imposition of emergency rule in Pakistan. Some gold traders no doubt view this as a major geopolitical shock that argues strongly for fleeing to the safety of gold. Yet the biggest loser to Pakistan's nukes falling into the wrong hands, India, seems to have let out a collective yawn regarding the situation.

Few seem to remember that such historically significant events as the Soviet invasion of Afghanistan, the overthrow of the Shah in Iran and the taking of U.S. hostages in 1979 put a strong but only fleeting wind at the back of gold and silver speculators. To wit, gold traded decisively above $300 for the first time in August 1979 and by January 1980 it had almost tripled. Similarly, silver broke through $10 in August 1979 and went on to quintuple six months later. Yet these crisis-induced gains were short-lived and more troubling, they marked the end of the PM bull market. Worse, the spiky volatility meant that few investors actually sold anywhere near the high. In terms of market sentiment, the speculative mania was not justified then, even though the world was in probably the worst crisis mode since the 1930's.

Today, the ubiquitous feeling seems to be that things can only get worse: subprime mess, credit crunch, Iraq, Turkey, peak oil, Pakistan, collapsing dollar, deflation, hyperinflation, you name it. The probability is high, however, that most of these fears will not be realized -- certainly not in the near term -- and thus we will soon witness another ironic disappointment to the sentiment of over-the-top speculators. I say 'ironic' because few people truly wish that such catastrophes will ever take place yet many "all in" gold and silver speculators/investors hold out just such a hope (mostly in secret).

Please don't misunderstand me. What I'm saying here is that it is important to monitor speculator sentiment at this point because the chance of some type of reversal is quite high, and perhaps even predictable in advance. The longer such sentiment is maintained at extreme levels, the greater the odds of nothing catastrophic happening -- that is, other than gold and silver falling precipitously as speculators bail out.

Looking at the fundamentals of both silver and gold, investment demand continues to remain modest although with some spectacular pockets of activity. For example, the major gold ETF, GLD, added significant gold to its holdings early in the current rally. And while the largest silver ETF, SLV, has disappointed in this department, it continues to sport a large premium to NAV, which is a surefire indication that silver will eventually be added. On the other hand, the ETF Securities version traded in London on the LSE (symbol PHAG) more than doubled its holdings in the past few days from around 3 million ounces of silver to 7.8 million. Although still a relatively small amount of silver in aggregate, this is quite an accomplishment nonetheless and shows the potential for physical investment demand to appear in a hurry.

Meanwhile, the basis and futures spreads, "lease" rates, futures trading and other factors continue to paint a confused fundamental picture. For example, the basis is behaving as if everything were normal in the physical markets yet "lease" rates are pointing to the emergence of some monetary conscience among metal hoarders. This begs the question, are "lease" rates premature or the basis lagging? In the futures market, the commercial shorts in gold have carried an oppressively large position, one that usually breaks the backs of speculators. Perhaps the same is starting to happen in silver, but the commercial shorts are still appreciably below record high levels. Could this simply be the result of silver's relative underperformance compared to gold so far, or is there something else going on? I hope the fundamental picture becomes more clear in the weeks ahead as I'd really like to have more conviction behind the capricious chart technicals that are screaming 'buy' at the moment. To be sure, things could be worse seeing how some principled contrarians have been taking a huge beating.

I'm going to wrap up today by mentioning the news that Mines Management (MGN on AMEX) has just received a $10 million financing from Silver Wheaton (SLW). As some of you may recall, Silver Wheaton has previously taken sizable stakes in other companies with undeveloped, potentially world-class, silver deposits such as Revett, Sabina and Bear Creak. Actually, most of these 'world-class' deposits consist primarily of base metals at today's prices, including MGN's Montanore project in Montana. While the silver is icing on the cake at this point, it could actually become the primary ore by value if silver prices keep moving north while base metal prices flounder. This is ostensibly the reason that SLW has taken positions in these companies. In the case of MGN, SLW has also obtained a right of first refusal to purchase future 'silver streams', which doesn't appear to obligate MGN to sell its silver production to SLW but does raise the possibility that construction financing for Montanore may end up being obtained this way. Yet that decision is fortunately still years away and MGN continues to maintain a great degree of leverage to higher silver prices. On the other hand, if a decision to sell future silver production to SLW is made at some point, MGN would no longer be considered a silver stock and more than likely I would sell any stock I might still have (currently I own just a small position).

NOVEMBER 2 2007 1:15PM - Gold has made history today, closing above $800 for only the 3rd time ever. Meanwhile, crude oil and the dollar are also making their own history on opposite ends of the price scale. In retrospect, the move to $800 seemed inevitable after gold's solid performance in the past few days. Yes, I know, gold still has a long way to go before getting anywhere near its 1980 inflation-adjusted high (from $1,500 to $2,000 or more depending on how you calculate inflation), but $800 is a major achievement in terms of market psychology and sentiment. And no slouch itself, silver added 30 cents today, closing north of $14.50, in the first serious challenge to its May 2006 bull market high of $15.00.

I would like to emphasize that although this appears to be a very exciting time for gold and silver since we have confirmed breakouts no matter how you draw the charts, it is actually a risky and dangerous time to be establishing new positions, especially if they are speculative. If anything, I believe this is a time to be de-leveraging positions by moving into less volatile areas or even starting to take some profits on big winners. The brave trader may want to let it all ride, but I can say with some degree of certainty that it will be difficult to pick a short-term top here and at some point prices will reverse in a very nasty fashion.

As I look at my own silver positions compared to when I first turned all flags green about 6 weeks back, I am significantly less exposed and leveraged at the moment. I am no longer overweighted in the ultra short-term speculative end of the spectrum. Given this as well as the very mixed signals that I am receiving on the fundamental front, I have decided to turn the speculative flag to yellow. What this means is that I expect a high likelihood of very volatile silver prices in the next 3 months, with prices probably dropping below current levels especially toward the end of that timeframe. This does not preclude silver from moving much higher in the immediate future; in fact, I fully expect it to meaningfully exceed $15 on the merits of gold's momentum alone. But just because silver is potentially about to trade much higher does not actually mean taking profits and realized gains will be easy. This goes especially for leveraged or momentum positions (futures, stocks on margin, companies trading far above their moving average, etc.), which will likely swing portfolio values wildly in the days ahead.

Importantly, my flags do not try to predict prices but rather to indicate the best opportunities to buy, stand pat and sell as I see it. For now, the yellow flag indicates caution and suggests profit-taking should increasingly be considered for trading positions.

And of course if you are practicing the patient art of long-term buy and hold, this is all just a meaningless wrinkle in the fabric of the current PM bull market. There is nothing here that indicates you should be selling. I would like to note that the short term, medium term and long term flags all remain green, which actually means that any buying you might do here should be showing gains over the respective time horizons (as defined in the Silver Alerts table). As such, those who are still underexposed to silver and gold should consider moderate and cautious buying even during this volatile period. You may not show paper profits for a few months, but things should turn out very well with a bit of patience.

Okay, I've hammered home that aggressively adding new positions with short-term profit goals is probably not the greatest idea right now. Yet, one area where I would still consider some aggressive buying based on the expectation of near-term gains (that is, regardless of investment horizon) is in the junior sector where the risk-reward ratio continues to remain attractive for a number of silver stocks. The ride might still be bumpy to the point of being painful at times, but building up some moderate exposure should be relatively easy and safe especially when concentrating on laggards, emerging stories and undervalued companies. There are a few in the bunch that Don Hansen just recently examined, although you might want to update market caps with current prices to make sure you have the most up-to-date snapshot. I know it's a drag, but the soon-to-be-launched service will allow us to update this type of information in a timely manner as well as provide precise commentary that should be taken into account when making investment or trading decisions.

A quick closing comment on a few silver stocks. If you own Silver Quest, congratulations, you are up 30% today. The stock has a rock solid bottom at 20 cents and seems to have made a strong move higher. I last mentioned the company on September 21, and I remain convinced that it is between a rock and a hard place from which it can successfully extricate itself in the coming weeks and months. That might have started in the last couple of days. Remember, the further the stock moves above 20 cents, the less undervalued it becomes, and it is a bit short on cash and will have to do a financing soon. That said, I could see this stock double in the months ahead with little risk of going much lower, especially not below 20 cents. Plus, there may be trading opportunities along the way.

There are a number of other stocks that present interesting opportunities as well, but once again I am running out of time and format. Thus, I'm going to use a shotgun (random) approach in talking about a few. First, Gammon Gold still looks positive to me in the months ahead as a turnaround situation. Pair it with Genco in an emerging producer portfolio and it's close to a can't miss. Second, Silvercorp has nearly doubled from the level I first placed it on my potential 10-bagger list last fall, thanks in part to a 3-for-1 stock split: it now just needs to go up another 500%! I think it's been trading too hot for buying by the armful right now, but it might be worth considered if it cools down a little. Oremex, the only other inductee so far in the select but speculative 10-bagger list, continues to flounder in severely undervalued territory, although the company just recently released an interesting press release: instead of letting 5 million warrants expire at $0.95 in November, the company has extended the expiration by 3 months. This is interesting only because the stock currently trades at $0.50 and would have to more than double in a hurry for the warrant extension to make sense. One has to wonder if this isn't a stealth signal by management to show its confidence in turning the ship around, although it would certainly be nice to see a more traditional way of expressing it (namely, insider buying of the stock on the open market).

I've got more opinions but I'm out of time, so I'll have to stop here. Have a great weekend!

NOVEMBER 1 2007 4:00PM - My further study of silver market conditions this afternoon returned more mysteries and enigmas. Fortunately, Don Hansen has come along to offer a bit of clarity in an update of his "Value Strategy" series called, unsurprisingly, Silver Mining Share Value Strategy - Revisited. In this impressive effort, Don takes the original four companies he featured plus another seven, compiling data on each and analyzing the results with expert aplomb. The outcome is a valuable resource for investors in silver stocks, at a level of quality and detail not available even from expensive newsletters. I hope to have Don expand on this effort as part of our new service.

NOVEMBER 1 2007 9:15AM - It is actually very encouraging that silver dropped below $14 this morning but then proceeded to claw its way back, even if it was with the help of gold. The potential was certainly there for things to get real ugly in a hurry, but gold is on a mission here and nothing seems capable of stopping its meeting with destiny at the moment ($800): neither a big swoon in equities, oil, copper or the commodity complex in general nor a firming in the dollar. I am still clueless as to the direction of the next big move given the great number of confusing signals and indicators that are out there at the moment, not to mention the confused sentiment of many market participants. It appears that some patience is warranted during this bumpy ride.

I don't know how the good professor does it, but he has just written yet another mind-bending paper on monetary economics titled The Shadow Pyramid - Derivatives Made Easy. I may only be exaggerating slightly when I say that we are witnessing the blow-by-blow exposition of a unified economic and monetary theory as important scientifically as some of the greatest discoveries in physics, chemistry or medicine. After attending the Gold Standard University session in Szombathely, Hungary, this past August, I coined the phrase "prosperity theory" in an attempt to capture the true meaning of Professor Fekete's work: nothing less than THE BLUEPRINT for how society can have the best chance to prosper. This unified theory is so staggering in its importance that I'm fairly certain people many centuries in the future will look back at this period, and the professor's work, as the "Golden Age" of monetary thinking. No, I did not take any drugs earlier today although reading the professor's work can sometimes elicit some drug-like reactions!

In any case, I wanted to make sure that everyone knows about the Professor's next seminar which will be in Dallas, TX, in February. There may also be a session in Szombathely next March if there is sufficient demand. Details can be found on the professor's new website, www.professorfekete.com. I'm trying to work out a special deal with the professor for members of the new service who would like to attend one of these seminars, which I highly recommend. You never know, the experience may turn out to be as priceless as having attended a lecture by Adam Smith, Isaac Newton or Albert Einstein before they were recognized for their greatness.

OCTOBER 31 2007 11:50AM - Well, the Fed has spoken and a 25bp cut it is. Unfortunately, the mention of the "I" word as in "Inflation" has given traders the impression that further rate cuts might not be very easy to come by, especially with the stronger-than-expected Q3 GDP growth of 3.9%. Despite this and after an initial dive, the equity markets have come back very strong and seem to be celebrating this turn of events. I expect this to be shortlived. Meanwhile, after-hours trading in gold and silver futures has been all over the place with some huge swings in the bid and ask, as well as volatility in prices. My impression is that PM traders don't know what to make of this sequence and a few of them are panicking both on the buy and sell side. This could reverberate into the overseas sessions as well as the regular U.S. trading tomorrow, with the possibility of some very interesting developments. I must admit that I have absolutely no idea where things are headed next but whatever happens, it is unlikely to be boring.

OCTOBER 31 2007 10:40AM - Silver and gold are holding up very well this morning ahead of the Fed announcement on interest rates, supported by a weak dollar and a strong recovery by crude oil due to shrinking inventory. I may have failed to adequately consider the possibility that silver could manage to avoid testing $14.00 this week, in which case much higher prices may lie directly ahead. My best guess, however, is that the Fed will cut rates by 25bp points today, which will disappoint some of the more aggressive speculators and result in a pullback in most asset prices including gold and silver. Trust me, I am hoping to be wrong in this instance since I have positioned myself for much higher prices!

The initial response to the new service I announced yesterday has been fabulous with the first 10 'Founding Member' spots being taken in just 20 minutes. Due to the large volume of e-mails, it will take a bit of time for me to respond to everybody (I always respond to every e-mail and will never use an automatic responder or similar cop-out). There will be additional spots for 'Founding Members' in the next several weeks, so please keep an eye open. I will try to make future announcements at different times of the day to give readers in different parts of the world (as well as those who work for a living!) a fair chance. Also, everyone who gets in touch with me about the service prior to its launch will receive a special introductory rate, which I will try to keep at, or under, US$100.

I am very happy to announce that Prof. Fekete has written his latest piece challenging several commonly-held beliefs about the silver market, in particular the shortage of silver and price capping by banking interests. The Saga of the Naked Boogieman is an intellectual masterpiece that will surely get under the skin of many silver bulls and analysts, but its integration of monetary science, economics and logic is so harmonious that even if what Prof. Fekete says is not completely accurate, it represents the foremost thinking about the subject in the world. I do have a different opinion on several matters: (1) there is probably less monetary silver in the world than Prof. Fekete's commentary seems to imply and (2) over-the-counter derivatives in silver create the potential for cross-defaults in paper silver contracts that could cause a meaningful scramble for physical metal. With respect to the former, my detailed analysis places an upper threshold on monetary silver holdings at perhaps 1.5 billion ounces, which is much higher than just about every silver analyst predicts, but still a drop in the bucket when we consider that 1.5 billion ounces of silver is valued at merely $20 billion at current prices. Heck, $20 billion will barely buy you one decent blue chip company! In the case of cross-defaults on OTC derivatives (if and when this occurs), both the issuers (Morgan Stanley and its ilk) and the recipients of unallocated pool certificates will want to own the real thing, but they both can't, can they?

OCTOBER 30 2007 3:20PM - Silver looks to test $14 tomorrow but unfortunately it is usually not a good idea to be doing that on the same day the Fed announces its decision on interest rates. The fact that gold stopped just short of $800 and has about $50 of downside before finding meaningful support is another issue we need to content with, as is the lack of meaningful rest during the current PM rally. Time-wise, we are due for that rest. The moves in both oil and the dollar are also very extended, and while they can certainly go further, the risk of retracement grows by the day. As a result, I am in the process of shifting around my speculative exposure in silver and gold in an effort to create some safety valves even though the PMs are about to exit their riskiest seasonal period.

Since I do not really wish to reduce the chance of missing an upside explosion, I have decided to simply move out the strike prices on option positions while exiting most futures, locking in trading profits. As a result, I probably will not have any meaningful trading gains until gold and silver move north of $800 and $15, respectively. On the other hand, my downside exposure is now minimal. In addition, my focus is shifting more to silver and it now represents over 75% of my speculative exposure to PMs. Finally, I have taken partial profits on some stocks including Exeter, which recently moved over $5, as well as my small, previously unannounced, position in Pediment, which has doubled in two months. Exeter is a company that continues to have a lot of potential and I will look for opportunities to re-establish a full position in the days and weeks ahead.

I still maintain positions in the other two gold porphyry elephant hunters, Serengeti and Southern Arc, with a specific focus on picking up more shares in the latter near $1.20. As for silver stocks, I am juggling my positions around a bit but I am holding strong in the junior producers such as First Majestic, Impact and Endeavour Silver (in that order).

The $12.90 level in silver remains a critical one for speculative positions although my personal trading has pushed my own sentiment to within a razor's edge of turning the speculative flag to yellow. In fact, a failure of $14.00 as support will trigger some sell stops in my portfolio and depending on what else is happening in the markets at the time, it could very well trigger a change in my speculative flag to yellow as well. This would essentially mean that the chance of silver taking out $15.00 before year-end will have become significantly less likely.

Now for a topic long in the making.

I have developed a strategic approach to buying, selling and trading silver (and gold) stocks, as well as the metal itself, over the past few years combining fundamental analysis and other disciplines, so please don't think what I write here in these daily commentaries is a comprehensive treatment of the subject matter. These are merely highlights and boiled down bits of information, restricted by the limited time I have to work on this website. The truth is that I update the site only while I am trading or researching the PM sector, but lately I have found my trading and research getting more intense and therefore the amount of time I have available to spend on the site has declined. After some thought, I keep coming back to the conclusion that one possible way to keep the quality of SILVERAXIS high is to combine my work here with a fee-based model where I have the luxury to go into greater detail and provide even more value.

David Morgan of Silver-Investor has recently made a statement to the effect that free information is worth about as much as you pay for it, which is possibly a reference to sites like mine and some others. While I don't necessarily agree with Mr. Morgan (my "calls" documented here are at least as good as most paid services to which I subscribe), there is something to be said for the potential improvement in discipline and focus arising from running things as a business vs. hobby. That said, I will never charge for the content of SILVERAXIS, nor do I foresee a decline in the quality or quantity of information posted here. It's just that I would have more reason to write on the subject of silver and gold if I made a career of it. Not to mention that it is hard to pay the mortgage and raise 3 kids strictly out of trading profits, which can sometimes be hard to come by. At the same time, it is not really fair to my better half that she should have to worry about these things. As a result, I am finally taking the step of making silver and gold, and in a more general sense the whole natural resource sector, my official career.

What does this mean? On December 1, my partners and I will be launching a new website and service that will use unique tools and analyses to identify trading opportunities in silver, gold, and natural resources. My personal focus will be silver, with the plan to cover every "primary" and "secondary" silver producer and explorer out there (more than 100 at last count). If you've been a long-time reader of SILVERAXIS, you will probably realize that I have tried to do that here, but it has proved impossible primarily because of the time required. I will also offer more in-depth and timely analysis of the silver market than is possible at SILVERAXIS alone, and my partners will be doing the same for gold and other metals.

Details are still a bit sketchy and the quick launch in December pretty much guarantees some bumps along the road. What matters at this point is that we will be bringing a significant amount of effort and brainpower to the table, including a proprietary database of resource companies and some other features not available anywhere else.

In recognition and appreciation of long-time and frequent visitors to SILVERAXIS, I would like to offer a 1 year free subscription to the first 10 readers who contact me with the words "FREE SUBSCRIPTION" in the subject line. I will consider these 10 fast-fingered readers as "founding members" entitled to a forever renewal rate of $100 per year, which will include the entire bevy of services we may offer in the future. We haven't decided on a final price for our introductory service, but it isn't going to be any less than $100, and the rate will certainly increase in the future.

Don't worry if you are not among the first 10 as everyone else who contacts me about this new service in the next 30 days will have the opportunity to subscribe at a special introductory rate and may also get a special invitation to join the "founding members". In addition, I will offer more FREE SUBSCRIPTIONS in the coming days if I receive a positive response to this initial announcement.

In conclusion, I am truly excited about the opportunity to share more in-depth information about the silver market and I look forward to the improvements that will accrue to SILVERAXIS!

OCTOBER 26 2007 10:00AM - Yes people, that was silver obliterating its supposed double top at $14. We should look for a test of that level early next week, and if it holds, this may become our new critical floor level. I just read an interesting piece by Adam Hamilton in which he explores silver's historical lagging of gold. Mr. Hamilton articulates very well what I have been saying for a while now, which is that silver plays catch-up during the later stages of a gold bull run. This is when the gains in silver are spectacular, as they are likely to be in the months ahead. This is also why I have been primarily in gold up to this point but have lately been switching into silver. And this may also explain why the open interest and trader positions in silver futures on the COMEX are well below historic highs even as "COT analysts" fret about the extremes that have been reached in gold.

OCTOBER 25 2007 9:30AM - Silver decided to come out of its slumber this morning in a big way as it boldly attempted a breakout of a supposedly bearish double top around $14. Unfortunately, the top seems to be holding for now, but the move today is the first really exciting thing to happen in quite a while. Meantime, gold seems to be heading imminently for a new high. As October draws to a close, seasonal factors will start to become supportive to PM prices once again. It may be too early to state with any degree of certainty that we have dodged the bullet and avoided a major correction, but the risk will definitely decrease, not increase, over the coming weeks. I am maintaining a certain degree of caution but have not changed any of my "alert flags" from green as I remain highly leveraged and prepared for opportunities to add to existing positions.

A quick comment on silver "lease" rates, which have now gone negative on the 1, 2 and 3 month terms and are close to zero in the 6 and 12 month terms. As I have discussed on numerous occasions now, this turn of events is not unexpected and may be phenomenally bullish for silver. What is happening is that interest rates are falling while the contango (premium of future silver prices over spot prices) on silver is actually rising. This is highly unusual because contango typically falls with falling interest rates as future silver prices are determined in large part based on the cost to carry metal in inventory, the biggest component of which is finance cost (interest). Far from being a sign of "excess" metal that silver "lessors" are desperate to lease out at whatever price they can obtain, these negative "lease" rates are actually a harbinger of monetary crisis. It appears to me that there is a significant unwinding of short hedge positions against physical silver holdings by some market insiders who recognize that price appreciation on physical metal is set to outpace the rate of interest in the near future. As more and more market participants come to this realization, "lease" rates are set to continue declining. At some point, physical supply starts to dry up and lease rates will witness a nasty reversal as contango starts dropping toward zero. We seem destined to repeat the events of early 2006 when physical demand on the eve of the iShares silver ETF's launch drove silver into deep backwardation. Make sure you own a lot of silver if and when that happens.

Also make sure you own the right kind of silver as Ted Butler recently discussed in Money For Nothing. I am not going to dwell on his very important words of caution other than to say that you really don't want to have any counterparty risk in your silver position. Pool accounts, unallocated silver and many other paper schemes are simply counterparty instruments that have a substantial risk of default. The only way to absolutely avoid this risk of default is to hold silver in your own secure possession, but you should consider diversifying your holdings to minimize other risks such as loss due to theft or natural disaster. There are various means to accomplish this and I will talk about them in the future, but for now I will just say that there is absolutely no reason to have a pool or unallocated account when you can own the iShares silver ETF. The ETF may have its problems, but it is vastly superior to any and every pool account or paper silver scheme.

OCTOBER 19 2007 12:30PM - Another ill-behaved day from silver as the metal appears more inclined to fall than rise. The gold-silver ratio is not looking very good at this point and needs to reverse soon. The iShares ETF has been dead in the water with a small NAV premium but no addition to holdings in several weeks, a sign of flat investment demand. The charts are not overbought but they look tired. Practically nobody other than the usual suspects has been writing commentaries about silver lately. One consolation is that if I am interpreting this interview with the Kantonalbank silver ETF management correctly, they are not acquiring metal from the secondary market but rather directly from refiners on a just-in-time basis. If there is some silver bullion floating around London, it doesn't appear to have made a dent over in Zurich.

I did exit some speculative positions today (mostly gold but some silver as well) and if I don't end up building them back up early next week, I will have to turn my speculative flag yellow despite the fact that silver has not reached the critical $12.90 level. The risk of a short but nasty correction is growing by the day, and I am simply too leveraged to withstand the worst case scenario. On the other hand, I am prepared to jump back in especially if the gold-silver ratio drops below 55 or if the precious metals can maintain composure while oil and the dollar buck their respective trends.

It's the end of the week, so please excuse me while I get some stuff off my chess in response to the recent revival of conspiracies involving Ft. Knox, the U.S. gold reserves and price capping. If you are not interested in my crusades to get at the hidden truths in the gold or silver market, please skip this commentary.

Gold Reserves In Play

James Turk believes that The US Gold Reserve is Now in Play based on the apparent change in the description of the U.S. international reserve position from "gold stock" to "gold (including gold deposits and, if appropriate, gold swapped)". This reminds me of all the wild speculation around the change in terminology from gold bullion to "deep storage gold" a few years back. Many people thought then, and still think, that "deep storage" refers to unmined gold as in 'deep underground', whereas I have demonstrated that the term refers to gold that is kept in the U.S. Mint's vaults at Ft. Knox and West Point under U.S. Treasury seal as differentiated from gold used in minting operations. My source for this revelation was none other than the audited financial statements of the U.S. Mint that contains a definition of the term "deep storage".

Now, Mr. Turk is once again making some spectacular leaps of faith to arrive at his conclusion that the U.S. gold is officially out on loan to the bullion banks in a final desperate attempt to cap the gold price. His ignores the possibility that the recent change in terminology may be far less sinister. You see, it says right here that 11,037 tons of gold are held as collateral against gold certificates pledged as backing for outstanding Federal Reserve Notes, which leaves just 4 tons (about 120,000 ounces) available for whatever sinister plot the U.S. Treasury Department might be concocting in the way of "gold deposits" and "gold swapped". Coincidentally, Mr. Turk would be well advised to read my treatise on gold "leasing" and swapping so that he may come to understand that a "gold swap" involves the exchange of gold for cash, not gold for gold as he fancifully alleges to have occurred sometime around the turn of the century to the tune of 1,700 tons between Germany's Bundesbank and the U.S. gold held at West Point. Such a transaction would not be a gold swap--in fact, in strict accounting terms it would not be a transaction at all if the gold weights and values were equal. This prior episode of imaginative thinking was triggered by the change in terminology of the gold held at West Point from "Gold Bullion Reserve" to "Custodial Gold". This change, alas, was made based on a valid but boring determination that the gold at the West Point facility was not a "reserve" balance of the U.S. Mint itself but rather gold held in custody for a separate government entity charged with taking care of the gold: the U.S. Treasury Department. The accountants merely corrected a poor description.

So here we are once again. It seems the conspiracy spinners never grow tired of ignoring simple logic such as: Why would the U.S. government tip its hand with respect to an otherwise secret, illegal and fraudulent attempt to dispose of gold that is being represented as backing Federal Reserve Notes in circulation, by making a highly suspicious, nay confessional, terminology change in a federal report that is scrutinized by nobody in the world other than gold conspiracists? This is a little like Alan Greenspan's famous slip of the tongue in 1995 when he allegedly admitted that central banks manipulate the gold market even though the whole point of his speech was that there is no need for official intervention in gold or any other market in which derivatives play a large part. Isn't this a bit like a criminal blurting out "I'm guilty" while explaining his alibi during an interrogation? I mean come on, the logic simply falls apart on the face of it.

No Gold in Ft. Knox? Not Again!

In The Ghost of Ft. Knox Past, it is alleged there is no gold in the fabled depository based on some ancient and long ago settled (mostly by me) fuss concerning mysterious shipments of gold and other shenanigans. Here is the response I wrote to the author and the irresponsible publisher of his piece:

Silver Manipulation Revisited

I received an unusual volume of feedback on my recent comments on October 11 related to the commercial short vs. world commodity production chart that Ted Butler recently popularized. There was one in particular that had an unusual degree of passion and thought, and I'd like to reprint it here at the risk of the author's ire, along with my reply:

***************

My reply follows:

OCTOBER 18 2007 4:00PM - The dollar got whacked today and gold reacted as expected, hitting a new high for this bull run. Silver once again played laggard although it had a bit of an excuse this time as copper was weak. My silver market indicators all look fine but the length of the current bull run in precious metals is starting to get a bit worrisome and so we shouldn't be surprised by a minor setback in the near term. Gold can fall $60 from here but silver only about $1 and we would still be in a zone of strong sentiment and bullish momentum. Not only gold has gone a long distance without rest but so have the dollar, oil and a number of commodities. I'd expect a period of retracement and some possible equity market weakness to cool things off a bit. I am generally not trading out of any positions here although I may consider reducing the leverage a bit tomorrow or Monday. As I do this, I may actually increase my silver exposure on a net basis compared to gold because the lesser monetary metal seems to be in a safer position and is less extended.

OCTOBER 16 2007 1:30PM - Silver's performance today was even more disappointing than yesterday, especially in comparison to gold. This may change soon but it does demonstrate why silver investors should also own some gold--if nothing else, to reduce the temptation to throw in the towel when the going gets really tough. In terms of sentiment, it is quite tough for silver investors at the moment. At least there is some consolation in the observation that if there are few buyers, there must also be few sellers. Who knows how long this holding pattern will remain in place? All I know is that $12.90 remains a critical support level and must not be breached.

OCTOBER 15 2007 12:30PM - Silver disappointed today as it was repelled by the $14 level on the cash market even as gold reached a new closing high above $750. Gold has now had the longest string of days trading above $700 ever, its highest moving average over almost every time scale and its second highest weekly close. Meanwhile silver is nowhere near its 1980 high and in fact traded higher than this in 1983 during the third or so of its "dead cat bounce" after the 1980 spike high. What explains this failure to keep up? It isn't like the industrial aspect of silver has been responsible for silver's poor showing given that oil and base metals have put in a solid performance in the past few weeks and months. So what is it? Well, for one, there are no Hunt Brothers this time around -- by which I mean speculation and investment demand in silver has been subdued compared to gold, which is being acquired by a growing litany of safety seekers. Surprisingly, investment funds have been more keen to speculate in the basest of base metals, lead. Perhaps it is silver's multitude of industrial uses in tiny quantities--as opposed to the large amounts of base metals used in high visibility applications like copper for electric wire, nickel for stainless steel and lead for acid batteries--that explains why large investors seem to have lost interest in the white monetary metal. As Richard Daughty recently stated, silver is getting no respect. This has nothing to do with nefarious conspiracies to cap the price of silver: the activity on both the long and short side at the COMEX has been dreadfully dull of late.

So, am I worried? The answer remains no. In fact, I think this is very healthy behavior for the usually manic silver market. I continue to view the present situation as an opportunity to accumulate with the expectation that silver will take out its May 2006 high at some point in the near future. And the fact that silver has not taken off like a rocket means that any upcoming retracement will hopefully be shallower than usual, permitting speculators and investors to gradually build positions. As I stated last week, if there is some silver available to the market, particularly in London, it may take a few weeks or even months to work through it. I would note that both the prior two big rallies in the silver market in 2003-2004 and 2005-2006 took a number of months to build momentum before the final blow-off that saw silver prices just about double from their respective starting point. A similar move this time around would mean silver prices north of $20.

There are still a number of junior silver stocks out there that possess a great deal of leverage to rising silver prices. Some of these shares are trading at 50% or more off their all time highs even though they have substantially increased production and resources. I've mentioned First Majestic and Gammon Gold in the past, both of which are in the process of recovering from production problems likely in time to catch some tailwind from a silver rally. Another one that seems to be on the verge of turning the corner is Endeavour Silver. A recent management sweep and revision to the mine plan have made the company's goals more realistic and achievable. Although there is some risk that delays and problems may persist, the downside in Endeavour Silver is limited. And the company may yet catch the wave of rising silver prices on valuation considerations alone, although this depends on how fickle silver investors will be during the next few months. I suspect production stories will come back into favor especially if silver rises and stays above $15. Moreover, silver producers without much base metals like Endeavor Silver, First Majestic, Gammon Lake and others may outperform their base-metal rich peers if copper, zinc, lead, etc. fail to keep pace with the monetary metals, something that I strongly suspect will be the case in the future. [Disclosure: I've sold a bit of Silver Wheaton shares today and bought Endeavour Silver, EXK on the AMEX. I haven't owned EXK since July; I'll follow up in a few weeks to see if it was a wise choice to buy it now.]

OCTOBER 11 2007 10:30AM - Both silver and gold have broken out as of this morning. The HUI did so yesterday, which I forgot to note, but in retrospect it was a sign that gold would soon be forging new highs. We can now forget the warning calls of a double top made by some technicians. The reason we are moving higher is that the dollar is on the ropes once again as expectations of another Fed rate cut solidify.

Gold is now solidly in bull market record territory and looks to move higher in the weeks ahead. Silver, on the other hand, is still more than a dollar short of its bull market high reached in May 2006. What exactly is the problem? Well, speculation and investment interest continue to be subdued even though imminent price appreciation seems to be a no brainer. Perhaps Jessica Cross of VM Group is correct when she says that there is currently a lot of metal in London waiting to find buyers. In the face of a larger-than-normal supply, it is possible that traders are treading carefully. I personally have no issue with this situation because it allows for continual accumulation at attractive prices. At some point soon, the presumed supply in London is bound to be eaten through and silver would then be ready to take off to new highs. Unfortunately, call options have become rather expensive once again, although I was surprised to find my favorite wild speculation being offered this morning. I couldn't resist nibbling especially since buying futures on a day like today can be quite risky.

The juniors have finally started getting into the act as well, with many companies rallying over the past few days. Relative bargains still abound, however, and I would definitely put any unspent money into the junior sector at this point. Companies such as First Majestic, Excellon, Minefinders, Genco and Impact come to mind although there are some solid exploration plays to consider as well.

A brief update on the trifecta of explorers hunting for the next monster gold deposit. Serengeti has been beaten up as expectations of the size of system it has on its hands have returned to Earth along with the realization that the deposit is located in British Columbia where it can be difficult to permit an open pit operation. The current share price is probably not a bad entry point but substantial price appreciation depends on the company coming up with solid drill results outside the smallish envelope containing the mineable grades identified so far. In other words, tonnage must be expanded as a next step.

In the meantime, Southern Arc has completed six holes at its Selodong project in Indonesia and each one has intersected very long intervals of mineralization, although some of it is only marginally economic (actually, subeconomic unless copper maintains its current price level). This again is probably a fine entry point but the stock is likely to live and die by the drill bit. The chance of a major move in either direction is very possible, so I wouldn't consider this a trading stock at this point even though it was a very good one during most of the summer. I have put this stock into my long-term exploration portfolio pending developments.

Last but certainly not least, we have Exeter continuing to drill up impressive holes at its Cerro Moro bonanza gold and silver discovery at the same time as the company prepares to commence drilling the Caspiche gold porphyry in a few weeks. My only complaint is that news flow has been slow from the company as bonanza silver grades and base metal values still have not been announced from the first drill holes at Cerro Moro after almost 6 months. Accumulating this stock on weakness, however, has paid off as it is now up 70% from its August lows and above the level I first started buying the shares back in late June. Although probably no longer in the undervalued zone at this point, I expect Exeter to perform well in the coming months as it has at least 3 sources of potential upside. Besides that, Exeter trades on the AMEX and is therefore easy for U.S. investors to buy and sell.

Now, I'd like to make a thousand word or so technical comment about this chart on the short position in silver futures compared to other commodities and gold. If you are interested in studying the mechanics of the silver market, I urge you to read ahead, but those who are supremely confident that silver prices are heading up in the future because naked manipulators will be forced to cover at much higher prices may want to skip the following dose of reality.

First, the chart apparently does not consider recycling in the "days of production" figures, understating the true supply of silver. Every metal is recycled to one degree or another, unlike agricultural commodities and fossil fuels. Silver happens to have one of the highest rates of recycling and this should not be ignored: according to GFMS, the annual recycling rate for silver is 29% of mine production while VM Group believes silver recycling is more like 66% of annual mine supply. Second, the chart also ignores supplies made available by the secondary market such as private and government dishoarding. According to both GFMS and VM Group, governments continued to dishoard silver as recently as 2006. And of course we know that around 500 tonnes of gold is dishoarded annually under the Central Bank Gold Sale Agreement. Dishoarding, on the other hand, is not a regular feature of any other commodity except perhaps palladium. Third, some markets like metals can draw supply from all over the world, but others like orange juice, pork and milk tend not to include much international supply or demand in U.S. futures trading. Thus, it may be inappropriate to include "world" production figures for some of these commodities when making comparisons to silver or gold. In other words, it would be appropriate to include only those production figures that have a reasonable chance of being hedged via the futures market. Fourth, a number of commodities included in the chart have a larger concentrated long position than short, virtually eliminating the possibility of short covering through physical delivery. For such commodities, comparing the concentrated net short position to annual production is meaningless.

Let's consider the quantitative and qualitative effects of these factors in terms of the chart.

COMEX Silver Open Interest on 10/2/07: 117,498 contracts, futures only

4 Largest Traders By Net Position: 38.1% Short = 44,767 contracts or 223.8 million ounces

8 Largest Traders By Net Position: 49.1% Short = 57,692 contracts or 288.5 million ounces

Annual Mine Supply, GFMS (2006): 646 million ounces

Annual Mine Supply, VM Group (2006): 672 million ounces

Days of World Production to Cover Concentrated Net Short Contracts, 4 Largest Traders: 223.8 / 646 * 365 = 126 days

Days of World Production to Cover Concentrated Net Short Contracts, 8 Largest Traders: 288.5 / 646 * 365 = 163 days

So far, so good. But now let's look at what happens when we include recycling.

Annual Silver Recycling, GFMS (2006): 188 million ounces

Annual Silver Recycling, VM Group (2006): 446 million ounces

Days of World Production Plus Recycling to Cover Concentrated Short Contracts, 4 Largest Traders: 223.8 / 834 * 365 = 98 days (using GFMS figures; but 75 days when using VM Group figures)

Days of World Production Plus Recycling to Cover Concentrated Short Contracts, 8 Largest Traders: 288.5 / 834 * 365 = 126 days (using GFMS figures; but 96 days when using VM Group figures).

So, if we include recycling in the production figures, we can see that the concentrated net short position in silver may be 30-40% smaller than the bar shown on the graph. In effect, the bar for silver would be more like the one for gold. There is, however, a similar amount of recycling in the gold market, and thus the bar representing gold would also shrink proportionally. This would make the bar size for gold about the same as the one for cocoa.

But hold your horses please. We haven't included any dishoarding as yet. For example, GFMS claims that government sales accounted for 78 million ounces of silver supply in 2006; if this is true, it would shave another 5 days production off the above figures. Similarly, the near 500 tonnes of central bank gold sales would shrink the bar for gold as well, making it just slightly larger than the one for coffee.

Next, let's consider another problem with this graph: 'world production' is not an appropriate measuring stick for all commodities. Milk, pork and orange juice, as well as to a lesser extent wheat, oats, soybeans and some other agricultural commodities, are not traded internationally at the same rate as are silver, gold, crude oil, copper, sugar, coffee, etc. Futures positions for commodities traded predominantly in regional markets will necessarily be much smaller than those for commodities traded internationally. In fact, the chart seems to confirm that the more international trade there is in a commodity, the larger the concentrated short position is in terms of global production. If you think about it, this makes sense. The more accessible the cash market is for a particular commodity, the more likely that someone will use the U.S. futures market to hedge or speculate. Certainly nobody is going to be trading milk futures in the U.S. based on milk production in India. On the other hand, Indian trading in silver is a key factor in the hedging and speculating decision of COMEX traders. This can also work in reverse when the global cash market is so large that there is insufficient speculative capital to provide much of an opportunity for commercial hedging. I am talking about crude oil of course. It should come as no surprise that the chart has oil on the far left side of the list opposite silver.

Now, let's examine the implications of a concentrated short position in a commodity. One reason to measure it in the first place, as explained by Ted Butler, is to gauge the ability of shorts to cover their positions by making physical delivery. Assuming the concentrated short trader is not already in possession of the commodity being shorted, there are two sources that can be 'raided' in order to acquire a physical position to be used in settlement of any outstanding futures contract that cannot be rolled over. The first is the subject matter of the graph: annual production. To this we have added recycling and dishoarding.

Before we move on to the second source, let's examine a concept that may be just as important as annual production: "settlement of any outstanding futures contract that cannot be rolled over". What does this mean? Well, we know that a short futures position can be closed out in one of three ways: (1) acquiring an offsetting long position (covering), (2) making a delivery of the commodity in a so-called exchange-for-physical or (3) rolling over the contract to a future date by acquiring a short calendar spread (in effect, matching the need of longs who want to remain long but must also roll over their positions before contract expiration). Interestingly, the ability to conduct (1) or (3) is directly related to the size of the concentrated long position in a commodity. This is because exchange rules prohibit cornering attempts and therefore large concentrations of long positions cannot possible stand for delivery: they must roll or sell their contracts near expiration. Thus, when we see a large concentrated long position in a particular commodity, we can pretty much rule out the possibility that large short traders will be forced to settle using exchange-for-physical. The implication of this is that the concentrated short position is largely irrelevant in commodities that also have a concentrated long position of equal or greater size. Which commodities are these? Out of the ones on the graph, they include crude oil, sugar, wheat, corn, copper and palladium.

To take it a step further, it would be even more appropriate to subtract the concentrated net long position from the concentrated net short position when analyzing concentration ratios. This is precisely the advice the CFTC offered to Ted Butler many moons ago, and there was a reason for it other than obfuscation. In effect, the regulators were telling Mr. Butler that large shorts need not fear delivery requests from large longs. Any potential problem is limited to the extent the large shorts exceed the large longs. I'm not going to try quantifying this effect here, but let's just say that offsetting the large shorts and large longs in silver will result in a net short exposure about half the size shown on the graph. In fact, there have even been periods when large longs briefly exceeded large shorts in COMEX silver, such as April 2003 and September 2001.

Okay, let's now look at the second way to acquire physical supply to cover a short position: existing stocks. Interestingly, the commodities remaining on the graph -- after removing those with either small local markets or huge global ones as well as those with little risk of being covered by exchange-for-physical -- seem to share a common feature: they all have stockpiles of various size that can be drawn down in order to satisfy rising demand. In the case of silver, approximately 60% of the concentrated net short position of the 4 largest traders is held at the COMEX warehouses. This compares very favorably to gold at 54%. Of course, much more gold and silver exist in readily available form in London, Switzerland, Tokyo, Dubai and elsewhere. There are hundreds of millions of ounces out there if the price is right, starting with the ETFs.

For cocoa, the percentage is much higher at around 375% (3.75 times the concentrated net short position is stored in central warehouses). By contrast, the ratio for coffee is around 62% based on coffee stored in approved U.S. coffee warehouses. On the other hand, less than 1% of the concentrated net short position in platinum is held at COMEX warehouses. It seems that when we add existing stocks to annual production, it is none other than platinum that may have the most outsized concentration of net short positions.

In conclusion, it is true that silver may be an outlier when we narrowly construe commodity supply to include only annual production in the form of mineral extraction or agricultural harvest, but when we add all of the possible sources of supply, silver may end up somewhere in the middle of the pack. The only way to know for sure is to redraw the graph so that it is a more accurate reflection of the commodity markets. The existing picture may very well be worth a thousand words, but it is definitely worthless without those thousand words.

OCTOBER 10 2007 12:00PM - Silver and gold continued to trade at the upper end of their recent range today as the dollar resumed its slide. I believe the next big move in both the dollar and precious metals may be driven by significant economic developments instead of technical or fundamental considerations. There is no way to know for sure what these development will be but anecdotal evidence suggests credit and business conditions are about to get worse, perhaps much worse.

What's this 'evidence'? Well, I got a pre-recorded call this morning from my 'friendly' phone company, AT&T, reminding me that my phone bill is a few days past due and threatening to disconnect my phone if I didn't pay the (small) outstanding balance immediately. I can't recall ever receiving this type of call from a phone company even when a payment was more seriously past due, so I'm wondering how bad AT&T's delinquency rate must be. After all, phone service is a necessity for many people (although less so with the advent of cell phones) and therefore likely to be prioritized by "bill jugglers" who cannot afford to pay every single bill on time. Could it be that the financial hardship faced by a growing segment of Americans is more prevalent and deeper than indicated by the rising rate of default on home mortgages? Even worse, are many consumers no longer able to make even the minimum payment on their credit cards and as a result credit card companies have suspended these consumers' charging privilege?

The most recent figure on credit card delinquencies is for the second quarter of 2007 and it shows late payments actually dropping slightly. Well, that was a few months ago, before AT&T and who knows how many others started to make calls to collect on balances that are only a few days overdue.

So here is the lowdown. I suspect most people will pay their phone bill (not to mention mortgage) before making the minimum payment on a credit card. Therefore, if phone bill delinquencies are on the rise then credit card delinquencies are also on the rise. The implications for consumer spending are disastrous. You know the rest of the story.

For those who don't, let me repeat my new motto: Fortunes may be saved in gold, but fortunes will be made in silver! Or if you prefer, the rich should buy gold and the soon-to-be-rich should buy silver.

Before I forget, I would like to comment on the recent IRS private letter ruling that Individual Retirement Accounts (IRAs) can hold precious metal ETFs such as SLV and GLD without the risk of adverse tax consequences. I had taken for granted that an IRA can hold these ETFs on a tax-free basis, but apparently the IRS itself was not so certain. With its recent private ruling, however, the coast should be clear for retirement funds to flow into these vehicles. As a result, I would not be surprised to see a number of CPAs and investment advisors to newly recommend metal ETFs for tax-deferred retirement portfolios. The outcome of this might be a surprising amount of metal added to SLV and GLD in the near term. You see, many investors may choose to hold these ETFs in tax-free accounts because otherwise gains are taxed at collectibles rates (28%), not at the lower long-term capital gains rate applicable to most other investments (15% or less). Even when trading ETFs vs. holding them long-term, the IRA advantage is significant for investors not in the top tax bracket as the 28% collectible rate can put a major crimp into realized returns. In summary, this IRS ruling may seem like a minor technicality but it could have a major impact on money flows into silver and gold ETFs. Let's keep our eyes on what happens to ETF metal holdings in the weeks ahead.

OCTOBER 9 2007 12:15PM - We are seeing some range trading here as silver and gold consolidate six weeks of gains. I missed a story last week that has big implications for the gold and silver market. Peter Hambro Mining has come up with a new way to obtain financing that is somewhat along the lines of the "reverse gold carry trade" or "gold bond" idea that I recently discussed. Under this new debt structure, Hambro bondholders are essentially given some capital appreciation if gold rises above $1,000. For its part, Hambro gets ready access to capital (the $150 million in bonds sold out in a few hours) at a low interest rate, although a portion of future mining revenues are capped by the deal. As such, this transaction shares some features with forward selling, but the important difference is that no gold is sold into the spot market up front and there is no obligation to deliver metal, only its cash equivalent. This strictly limits the risk to Hambro of gold going nuclear. On the other hand, the leverage to rising gold prices has been reduced for Hambro shareholders in exchange for avoiding stock dilution. So far, however, shareholders don't seem to mind at all judging by the rising share price. I would expect other companies to announce similar deals in the near future.

I speculated recently about the emergence of this type of deal based on several factors including activity in the gold and silver "leasing" markets. For example, I had this to say on September 29:

"Before wrapping up what is turning out to be another excruciatingly long lecture on metal "leasing",  I would like to point out that some "lessees" in this market are almost completely indifferent to lease rates, just as some liquidity-strapped "lessors" are willing to lend even when rates are negative. To understand this, assume that the "lessee" borrows gold or silver, sells it, invests the proceeds in the money market, but "forgets" to hedge its obligation to return the gold or silver at a future date. Why might he, she, or it do this? Fearlessness, stupidity, ego; take your pick. Or, a gold/silver producer or similar party who will come into possession of bullion at some future date. In other words, "leasing" allows a party who will hold, and be in a position to sell, bullion at some future date to essentially borrow money against such future bullion sale at a rate equal to LIBOR (this is because such "lessor" pays the "lease" rate but is also foregoing the forward premium since the future bullion sale will represent the return of "leased" metal and thus will not generate any cash). As such, there is a whole category of potential "lessees" that is not sensitive to "lease" rates at all, whether they be negative or wildly positive.

In particular, I'm talking about mining companies that might be using "leasing" to generate cash flow in advance of production. An alternate form of this has already been tried: the Silver Wheaton and Silverstone business model of buying future "silver streams" for an up front lump sum and fixed future cost. But as I will point out in the next few days with the help of a surprising source, such a business model may not be as great as the hype. The "leasing" market, on the other hand, provides a very similar outcome if only for a maximum of 12 months of forward production. Interestingly, this is precisely what Prof. Fekete is talking about in his Peak Gold series--legitimate hedging being limited to 12 months due to unlimited risk lying beyond. This topic will be explored at much greater length during the Professor's third session of Gold Standard University Live next February in Dallas. Far from being an academic exercise, it could turn out to be a revolutionary summit on the future of hedging in the mining industry."

In effect, Hambro has gone beyond the "leasing" structure, making some tradeoffs: a longer time commitment, but no need to sell metal up front nor to deliver it in the future (the bond is repaid in cash and pays capital appreciation in cash if gold rises above $1,000). I would note that a Hambro-type deal will work only as long as investors are satisfied with principal repayment in cash and no gold collateral. On the other hand, the "leasing" approach I describe above would become more attractive when investors are looking for both income and collateral security (repayment in bullion). In fact, I believe the Hambro transaction might be the next step (after the Silver Wheaton model) toward the "gold/silver bond" I described on August 6:

"And it is the oft-ignored lease rates that might be signaling the beginning of this critical development! In effect, the gold and silver carry trades may not only finally be coming to an end, they may already be on the way to reversing. A reversing of the gold and silver carry trades, of course, would involve borrowing cash to buy the metals with the expectation that portfolio gains will exceed the rate of interest. Such a strategy might seem like a good deal for lenders as well, especially if metals are pledged as collateral and risk is limited because no leverage is utilized. Such a prospect may seem like a very competitive alternative for creditors seeking safe harbor for underutilized capital in the potentially rough times ahead.

If the above high-flying theory turns out to be even partially true, such a turn of events could perhaps be even more important for gold and silver than the advent of the ETFs. This is because large investment pools, as well as funds that can borrow money to invest in gold and silver, represent an immense supply of capital compared to small individual investors. A lot of money will be required to propel gold and silver to historic levels, and here we have a scenario that does not rely on hyperinflation but rather the funneling of EXISTING fiat credit into gold and silver!

What I'm actually describing here is no less than the possible stealth launch of gold and silver as money, initiated by the private sector but inevitably followed by central banks. Followed how? Well, at the point that central banks can no longer compete in the credit markets because nobody wants to buy treasury securities backed by "full faith" when they can buy investment securities backed by gold and silver, the central banks may also have to start issuing securities backed by gold (they'd back it with silver as well, but they don't have very much of it).

Note that this is the ultimate reversal of the gold carry trade, allowing increased borrowings that would be limited only by how high the price of gold can go.

Note also that this would require cooperation by central banks to keep the price of gold from falling too low (!) so that outstanding gold loans would remain sufficiently collateralized."

I think the Hambro deal selling out $150 million in just a few hours is an indication that demand for "gold/silver bonds" will be very strong as these products are developed during the next phase of the precious metals bull market, a phase that will likely be driven by financial turmoil and crisis after crisis in the credit markets.

[Sorry for re-posting these past commentaries but I felt the Hambro development is important enough to justify repeating myself.]

OCTOBER 8 2007 2:00PM - Dollar strength finally crimped silver and gold's style as both metals suffered losses of around 1%. The speculative buy remains in place as long as prices stay above the critical pre-50bp cut level ($710 spot gold, $12.90 spot silver). It appears now that the dollar may be able to retract all the way to the 80 level on the dollar index without causing silver and gold prices to fall this far, though they may come close. As such, it may not be worthwhile to establish new positions until prices soften further, or alternatively, they start meaningfully to head higher. What would be meaningful? Well, it's subjective but I'm looking at $13.75 spot silver and $745 spot gold. On the other hand, a new financial turmoil may lie just ahead as we approach a seasonally volatile period for the markets. A "one-off" event may panic speculators into selling gold and silver once again, in which case the downside may be substantial. As such, be prepared to either trade around or ride out the storm.

So what kind of events might panic investors? Well, at least two banks have failed in the past couple of weeks, the first being the long-troubled Netbank which finally closed its doors on September 28 followed by tiny Miami Valley Bank of Ohio last Thursday. That marks at least the third FDIC-insured bank to fail this year, a pace that could accelerate in the coming months. So far, there is no reason to panic but expect the situation to worsen. Personally, I believe the biggest problems this year will be the homebuilders, at least one of which will face bankruptcy. Of course, there is always that surprise out of left field. Fortunately for silver and gold, most of these surprises are likely to be dollar bearish and precious metal bullish.

Several readers have asked for my opinion on the recent report by VM/Fortis Group in which a "surplus" of 6,000 tonnes of silver is predicted for 2007, representing an increase of 1,500 tonnes since an estimate was originally made in VM Group's first Silver Book published in June of this year. For the math- challenged, 6,000 tonnes is equal to almost 200 million ounces. Meanwhile, 1,500 tonnes is almost 50 million ounces. A silver surplus of that size is certainly something that we should consider worrying about. So, should we worry?

Well, not necessarily. I asked Jessica Cross, CEO of VM Group, to color in a bit more of her firm's silver outlook in relation to the increase of 1,500 tonnes of "surplus" now expected to total 6,000 tonnes for 2007. Here is how it went:

Silveraxis:  Would it be fair to say this is not "surplus" proper but rather the "residual" of identifiable supply in excess of identifiable demand? Does it make a difference?

Jessica Cross:  You are indeed correct in that our bottom line figure is a residual (either positive or negative in any given year). This figure is made up of 1) what we know we cannot measure especially physical investment demand and 2) what we may have either over or under-estimated - so yes it does make a difference.

Silveraxis:  Is this upward adjustment in "surplus" or "residual" since June due to growing mine supply, less ETF demand or some other identifiable factor?

Jessica Cross:  We are being told there is metal in London. This implies liquidity and while I cannot prove this conclusively, I do believe the majority of this is the result of greater recycling on the back of a stronger price, from both industry sources and jewellery. A perfectly normal market reaction. I then look to the lease rates - the lower the lease rates, the greater liquidity. But in future years (not so much already) we must expect greater mine supply - not necessarily from primary silver producers but as a by-product from base metals especially zinc and copper as the base metal producers respond to greater demand for industrial metals.

Silveraxis:  Any news on silver use in wood preservation (I have not been able to make headway but still trying)?

Jessica Cross:  I have heard that the wood preservative sector has gone to the authorities for EPA clearance and licensing although there has been nothing in the press which is very frustrating. As is usually the case with bureaucracy, there appears to be a delay but this does not detract from the promising nature of this potential end use. It means we have to roll the inclusion of this sector into late 2008 or 2009, which we will do in our next update.

Silveraxis:  Are you essentially saying lower silver prices are needed to draw out marginal investing, hoarding and restocking demand?

Jessica Cross:  I think silver is currently sensitive to movements in gold. We have gone on record saying we think gold might test $800 before year end. If it does, the excitement will probably spill into the other precious metals.

Silveraxis:  Finally, how relevant is 1500t considering that various sources for the underlying data are often in disagreement to the tune of 2000t-3000t in a single category such as jewelry/silverware and recycling (I'm referring specifically to changes between 2005 and 2006)? Can you provide some level of sensitivity, confidence or range of possible values to gauge the potential margin for error?

Jessica Cross:  I believe that embedded in our residual, which is higher than others, is a level of strong investment demand. In a strong investment environment, 1,500t is not relevant - it can be mopped up with ease. We maintain that the global jewellery industry is much larger than other commentators and this can affect both sides of the supply/demand balance - greater demand but also potential for greater price-related recycling. With respect to recycling, we have modeled what we believe is happening and we continually seek confirmation from industry sources.

I would like to thank Jessica Cross for these answers as they help place the implication of a "surplus" in the silver market into a much better perspective.

So, am I personally worried about a 200 million ounce "surplus"? Well, not necessarily. As Jessica Cross explains above, the "surplus" is actually a "residual" basically representing the "unknowable activity" in the silver market including undeclared transactions, private investment demand and hoarding, and the sum total of data errors. You see, unlike GFMS and CPM Group, VM Group does not try to balance supply and demand by plugging in a figure for "implied investment".

I happen to agree with the VM approach because price is determined at the margin of supply and demand and therefore the residual, instead of being a buried statistic, should actually be one of the most important figures to take into account. That doesn't necessarily mean that I agree with the size of the VM Group's residual. "Implied investment" appears to be substantially smaller according to GFMS and CPM Group. The correct number may lie somewhere in the middle. Ironically, the VM Group's higher residual figure might actually make it the most bullish of the three research firms on the basis of investment demand. Its approach, however, does require more descriptive care such as not labeling the "residual" as a "surplus". I would expect this to be rectified in the future.

In conclusion, I'd like to point out that the annual residual as calculated by VM Group has been well over 100 million ounces every year since 2003 and yet silver has still managed to more than triple in price. So a large residual is not, on the face of it, bearish. Far from it, a large residual may actually be bullish as it could be an indication that investment demand is very robust. On the other hand, a growing residual also means that conventional supply and demand figures are failing to account for an increasing proportion of market activity. This raises the level of uncertainty in, as well as the opacity of, the silver market, reversing in part the promise of clarity provided by silver ETFs. As such, I don't like to see an increase in this residual figure, yet I do fully expect it to grow as the silver bull market marches on.

OCTOBER 5 2007 9:45AM - Not quite an "E-ticket" but a pretty wild ride in silver and gold today as the employment numbers weren't bad at all especially considering the upward revision in the August figures. The dollar still decided to give up the ghost, however, after a big early jump and is actually trading down for the day as I write this. Unfortunately, silver has been unable to gain much leverage even as gold is within striking distance of its September high. At some point we may need to start suspecting that there might be enough physical silver out there at the moment to meet whatever demand is being generated. That is to say, silver speculation and investment demand appear to be timid. Perhaps everyone has run off to corner the lead market? Who knows, but sentiment does have a way of ignited spontaneously, so I wouldn't write off silver just yet. If gold continues to trade toward all-time highs, silver at some point will start to catch up (toward its own all-time high) very quickly. The risk is that it doesn't happen in time and silver sits out what may be a historic rally. The other risk is that a correction in the commodity complex clips silver's wings at exactly the wrong time. If this concerns you, own some gold.

OCTOBER 4 2007 11:45AM - Silver resisted gold's lead today as the yellow metal appears to be discounting bullion-friendly employment numbers tomorrow. In other words, the bets appear to be on a soft Labor Department report that will give the Fed ammunition to keep lowering interest rates, which would pressure the dollar. I personally have no clue what surprises the report may hold, so I have temporarily substituted some in-the-money call options for the futures position out of which I keep getting shaken on account of tight stops. This allows me to stay geared to rising prices while also protecting profits.

Unlike my own experience, it looks like the last few days of gyrating prices appear to have done little to fix the large speculative position that has appeared in COMEX gold and to a much lesser extent in silver. Perhaps some resolution will come by way of crazy action tomorrow. If so, we may be in for a very volatile day with another big swoon in gold and silver as large speculator stops are over-run. On the other hand, several commentators have pointed out that a similar situation existed in October 2005, seven months before both gold and silver hit their May 2006 highs. Throughout that period, large speculators maintained near-record long positions. Compared to the current economy and financial system, things weren't nearly as drastic or desperate back then, so a repeat performance should not be a big surprise. That is, we may already have had our correction and prices are ready to move higher once again.

Focusing on the longer term for a moment, I am heartened to see the type of "advice" still being provided by the mainstream financial press as illustrated here. As long as most people don't get why it makes sense to hold physical gold and silver, it will continue to make sense to do so. Clearly there is a long way to go before this changes.

OCTOBER 3 2007 10:30AM - In an outright bullish move, gold and silver fought back today to break even in the face of an ongoing recovery in the dollar and tepid action in the commodity markets.

OCTOBER 2 2007 4:00PM - The inevitable happened today as the dollar strengthened, oil weakened and gold/silver speculators ran out of steam and ammunition. As a result, gold suffered about a 50% retracement of its post-Fed move while silver came within 15 cents of the critical sentiment level I discussed last week. Alas, the precious metals could not be held down all day and by the close of trading silver had regained the 200 day moving average while gold got back to its opening level on the COMEX. This was still down almost $20 from gold's prior close as most of the damage to gold and silver actually occurred overseas. In fact, the strong selling seems to have emanated from Hong Kong and London, raising the possibility that central bank or government sales may have been involved. On the other hand, physical buying in New York continued to be vigorous with almost 2 million ounces of delivery notices so far in October gold, usually an off-month for spot trading but not this time around. One would expect today's action to have corrected some of the over-exuberance of large speculators in COMEX gold and a slowdown in COMEX silver speculation, which has really picked up in the past two weeks. I continue to view the pre-Fed trading levels of gold and silver as critical and will cautiously increase my speculative positions if that level is reached. For now, I have re-established some positions near today's lows in anticipation of a bounce but have kept tight stops in place should this turn out to be anything other than some opportunistic dumping by a gold "dishoarder".

I did also want to mention that we have had a significant tightening of spreads in both silver and gold futures over the past few days along with a meaningful reduction of basis that I am still analyzing. There are a number of possibilities for why this might be the case on a day of falling gold and silver prices, especially with weakness originating overseas. At this point, I would be tempted to conclude there are pockets of demand and supply that need equalizing as a result of the recent price appreciation. If so, this is rather bullish as it merely indicates a temporary period of adjustment vs. a change in price trend. More on this later if and when I can properly study the situation.

SEPTEMBER 29 2007 9:00AM - Gold and silver had another good day on the back of a weak dollar and strong commodities. Silver continues to improve in relative strength as physical demand remains strong whereas speculation in the silver futures continues to be muted. More on this in a moment. The dollar has now declined almost to the bottom of its 2 year channel and may be due for a pop. Oil and commodities are extended. On their own, gold and silver may reach for the sky from this point, but first they might have to swim against the tide during the next few days and weeks as both the dollar and commodities are due for a bit of stabilization and retracement. My speculative flag remains green, but I have started to take some profits here and there (mostly in futures and options) and will likely continue to do so next week. I am, however, holding PM stocks long and strong (particular the juniors that are still relatively near their August lows) and currently have no intention of trading them.

With respect to physical demand in silver, I believe we are seeing some of the predictions I recently made about "lease" rates come to fruition. Prof. Fekete explores this issue from another angle in Exploding The Myth Of Silver Shortage, which is a searing counterpoint to Ted Butler's understanding of the futures market as being a downward manipulation of silver by naked shorts. The argument made by Prof. Fekete is full of nuance and I wish that I had the time to fully distill it. For now, I will just say that Prof. Fekete may only be partially right about the claim that negative "lease" rates in silver indicate an abundance of silver supply in the face of short covering in the "leasing" market. The main quibble I have is that the "leasing" market for silver seems to have become rather small as compared to gold, so much so that "leasing" activity is unlikely to have much influence on "lease" rates. How can this be, you ask? Recall from my discussion two weeks ago that "lease" rates in gold and silver are merely the difference between the market rate of interest (LIBOR) and the Forward Offered rate (an annualized percentage gain/loss representing the price at which metal can be contracted for future delivery; in other words, the futures price).

It stands to reason that if silver "leasing" is a minor component of the silver market, then it would have little influence on the Forward Offered rate (and certainly zero influence on LIBOR). Instead, I would posit that the negative "lease" rate in silver is the result of the Forward Offered rate climbing above LIBOR for reasons unrelated to "leasing". For this to be the case, forward or futures demand for silver would need to be higher than spot demand. Yet the unwinding of a "lease" requires spot demand and futures supply, which creates downward pressure on the Forward Offered rate. Alas, this is the exact opposite of what has been observed. So what is going on here? Well, most likely exactly what Prof. Fekete has surmised: a panic short covering. But not in silver "leases". Instead, in the COMEX futures themselves. In fact, we have corroboration for this by way of the Commitment of Traders report, which shows the net commercial short position declining to its lowest level in quite some time. This decline appears to have bottomed and reversed over the past two weeks, but it is nowhere near the extreme that has been reached in gold (more on that in a moment).

So why has silver "leasing" become benign in the scheme of things? Simply, I believe most silver "leases" were unwound in early 2006 prior to the launching of the iShares silver ETF, SLV. Sure, some "leases" have remained, and a majority of these may even have been unwound in the past few weeks just as the Professor reckons. But it is precisely the lack of much (remaining) influence of silver "leasing" on either the futures or spot markets that proves that the level of "leasing" -- and therefore the amount of short covering by "lessees"  -- was minor in the first. Instead, I would point to early 2006 and the large fluctuation in "lease" rates back then, along with a massive increase in commercial short positions that topped out well before silver peaked in May, and most importantly, the sustained backwardation in the silver market that lasted several weeks, as an indication of a truly significant episode of liquidation of silver "leases". The May 2006 episode may very well have illustrated the ability of the underground supply of investment-grade silver to satisfy short-covering demand in contrast to the current episode which was weak in comparison. The fact that silver "lease" rates did not turn negative last time is explained by the tremendous amount of physical demand that was present in the silver market as speculators were jockeying for position with long-term market participants who were trying to convert from serial silver "lessees" to newly fanged ETF arbitrage players.

But please don't confuse the waning influence of silver "leasing" with the importance of the message transmitted by "lease" rates. As a proxy for the "interest rate" on bullion, "lease" rates still indicate the sentiment of market participants even if there is not much actual "leasing" going on. Remember, the "lease" rate is nothing more than the difference between the market rate of interest and the percentage return on gold or silver to be delivered at a future date. Think of it this way: a "lessor" could replicate a "lease" by selling gold and silver in the spot market and investing the cash proceeds in the money market, while buying a forward contract that guarantees a fixed price for repurchasing the metal at some future date. Obviously, as long as the forward rate on bullion is lower than the money market rate, you can make money this way and somebody or another will be "leasing" metal. On the other hand, negative "lease" rates don't necessarily mean "leasing" will be suspended altogether. Making money may not be the only reason to "lease" gold or silver; "leased" bullion also represents a very robust form of liquidity. In this sense, a negative "lease" rate can be thought of as a cost of obtaining liquidity. Under some circumstances (such as the past few weeks), some silver owners may have been willing to incur just such a cost in the search for liquidity during an incipient credit crunch. Yes, I am basically building a case for why silver "leasing" might perhaps have even increased during the past few weeks, as this would certainly be consistent with recent COMEX activity and price action.

Before wrapping up what is turning out to be another excruciatingly long lecture on metal "leasing",  I would like to point out that some "lessees" in this market are almost completely indifferent to lease rates, just as some liquidity-strapped "lessors" are willing to lend even when rates are negative. To understand this, assume that the "lessee" borrows gold or silver, sells it, invests the proceeds in the money market, but "forgets" to hedge its obligation to return the gold or silver at a future date. Why might he, she, or it do this? Fearlessness, stupidity, ego; take your pick. Or, a gold/silver producer or similar party who will come into possession of bullion at some future date. In other words, "leasing" allows a party who will hold, and be in a position to sell, bullion at some future date to essentially borrow money against such future bullion sale at a rate equal to LIBOR (this is because such "lessor" pays the "lease" rate but is also foregoing the forward premium since the future bullion sale will represent the return of "leased" metal and thus will not generate any cash). As such, there is a whole category of potential "lessees" that is not sensitive to "lease" rates at all, whether they be negative or wildly positive.

In particular, I'm talking about mining companies that might be using "leasing" to generate cash flow in advance of production. An alternate form of this has already been tried: the Silver Wheaton and Silverstone business model of buying future "silver streams" for an up front lump sum and fixed future cost. But as I will point out in the next few days with the help of a surprising source, such a business model may not be as great as the hype. The "leasing" market, on the other hand, provides a very similar outcome if only for a maximum of 12 months of forward production. Interestingly, this is precisely what Prof. Fekete is talking about in his Peak Gold series--legitimate hedging being limited to 12 months due to unlimited risk lying beyond. This topic will be explored at much greater length during the Professor's third session of Gold Standard University Live next February in Dallas. Far from being an academic exercise, it could turn out to be a revolutionary summit on the future of hedging in the mining industry.

Okay, back to silver and COMEX short covering at long last. The fact that short covering on the COMEX may have been possible, and may even have amounted to a panic without causing silver prices to skyrocket, is a direct affront to Ted Butler's theories about the silver market. In regard to "leasing", Prof. Fekete states such an outcome would be possible because there is actually a larger supply of investment silver than most analysts think exists. I myself have toyed with this idea and would be willing to consider the possibility that perhaps 1.5 billion ounces of investment-grade silver might be out there (including COMEX and ETF stockpiles). Alas, the COMEX short covering occurred almost entirely in paper silver: less than 20 million ounces were delivered under the September silver contract. This was a large number by historical standards and possibly one of the largest ever for a September delivery, but 20 million ounces is not massive even by comparison to the 75 million ounces of registered silver currently held in COMEX warehouses. In effect, the silver market was easily able to contain what might have amounted to a short-covering panic on the COMEX. True, the alleged panic occurred during relatively stable silver prices, but that is exactly Prof. Fekete's point!

On the other hand, please don't dismiss Prof. Fekete as a silver bear. If you read his paper carefully, you will note that he believes there is less silver available for monetary purposes, on a relative basis, than there is gold. This, of course, is no daring statement considering central banks hold a lot of the world's gold but virtually none of its silver. Yet I have never seen this state of affairs twisted around so neatly to explain why gold should still remain far superior in terms of monetary value (to the tune of 15:1 or more) even though this is not the actual ratio available for monetary purposes (in effect, there is more gold than silver). To be clear, Prof. Fekete argues that the price ratio of gold to silver is currently too high, but it will never approach parity due to monetary considerations that make gold inherently more stable, and therefore more valuable. I consider this a novel but logically pure explanation of the future price appreciation potential of silver vs. gold. I find it unsurprising, therefore, that at least one admirer of Mr. Butler's work, who also happens to be a fierce critic of Prof. Fekete, has admitted that he does not understand the concept in the least bit.

In any case, today's discussion may have even larger implications for gold "leasing". As previously mentioned, the unwinding of a "lease" should result in a detectable liquidation of commercial long positions, or alternatively a sizeable increase in commercial short positions at the same time as there is new demand in the spot market. Thus, all other things being equal, the spot price of gold rises, the gold basis falls and the net commercial short position in gold balloons. Wait a second, isn't this exactly what is happening in the gold market right now? So, is it possible that gold "leases" are the ones being unwound in a panic, instead of silver "leases"? We already know that gold "leasing" is still a big business with central banks accounting for the vast majority of the "leased" supply (anywhere from 7,000 to 15,000 tons, depending on who you believe). Could it be possible these gold "leases" are now being liquidated, accounting for the disappearance, and even inversion, of the spread between gold and silver "lease" rates? If so, could this be an indication that silver is playing catchup to the monetary status already enjoyed by gold? But wait a second, I just said there might be more "leasing" demand, not less, during a liquidity crisis. Thus, it must be the "lessors" who are reducing the supply of gold available to "lease", to the chagrin of desperate "lessees" looking for easy (if not necessarily cheap) money. This makes sense considering who the "lessors" are: the central banks. Yes, the very same central banks that appear to have sold less gold this year than permitted under the Washington Agreement.

As I postulated two weeks ago, a negative "lease" rate may be a pre-condition for gold and silver returning to monetary recognition. And where else for monetary recognition to begin than with the central banks themselves? As this recognition spreads, both gold and silver "lease" rates could very well turn negative on a temporary basis. Some will call such developments a head fake and others will blame the central banks and bullion banks for tricking the public, but you and I will know better.

In closing, I wanted to mention that I haven't been able to catch up with all of the market commentaries from the past few weeks and therefore I've resigned myself to just letting it go. Hopefully you've been able to do better on your own. If I do get a chance to add older articles, I will highlight them in yellow so that you may easily find them, but no promises.

SEPTEMBER 25 2007 12:00PM - I'm still getting caught up from two recent trips and will hopefully start fully updating the website later this week.

The dollar dropped again today but silver and gold could find no leverage as brisk accumulation is being met with more brisk profit taking. It is quite bullish that both PMs have maintained these levels for several days and continue to see strong recoveries at every sign of weakness. This remains a market of hard-nosed investors even as the snot-nosed speculators start to pile on.

I believe silver is on track to take out the $15 level in a hurry if and when gold is ready to move again. Silver does tend to exhaust itself during large daily upward moves so the rest period being provided by gold right now could be crucial in achieving new bull market highs. On the downside, I continue to look for the price level immediately before the 50 bp cut to hold ($12.90 cash basis).

There are few signs of trouble at this time, but one area of possible concern is base metal and commodity prices. A weakening economy in the U.S., U.K. and several other countries combined with another round of distress in the credit markets could pull the rug out from under most asset classes, including the natural resource sector. Gold and silver's flight to safety value could once again be challenged, even if only in the short term. As such, some prudence is warranted here in the form of careful attention to details. Having said this, I'd rather be comfortably invested in the sector than looking to enter during the next price break (which may not even happen). Timing at this point is much less important than having the right mix of quality and/or undervalued silver and gold stocks. I expect many of these to rise 2-5 times in the months ahead.

SEPTEMBER 21 2007 9:15AM - Silver and gold struggling to hold on to the highs as selling pressure is intent on robbing the PMs of their momentum. The upward trend should remain safe, however, as long as the silver and gold continue to trade above their pre-Fed announcement levels ($12.90 for spot silver, $710 for spot gold). In fact, it would be very healthy at this point for a slight pullback followed by a fast and furious recovery.

The Silver Summit is going very well with solid attendance, although by no means standing room only. Alas, the "silver hairs" still dominate on the participant side as I only counted a handful of younger investors under 50. There have been a number of good speakers and panels and the quality and breadth of the exhibiting companies is excellent. I particularly liked what I've learned about Silver Quest (by far the cheapest silver company with solid projects at a market cap under $5 million), Impact (more on this later), Mines Management (still a long term play, but now there is an end in sight along with exploration upside in the near future) and newcomers Silvermex and Mexican Silver Mines. I'll talk more about the latter two in greater detail at some point as well, but for now I will just mention that they both have good appreciation potential in the short term for risk averse silver investors looking to diversify their Mexican junior exploration portfolios. It appears there is still no shortage of high potential projects in the "land o'plenty" since both of these companies came along after I wrote in May 2006 that Arian Silver might have arrived just in the nick of time (May 2006) in terms of good projects not yet vended by their Mexican owners to junior explorers. I'm amazed that the exploration and mining potential in Mexico appears to remain virtually untapped even after the flurry of discoveries and mine developments that have taken place in the past few years.

SEPTEMBER 20 2007 8:15AM - Here we go, silver up almost 50 cents and absolutely clobbering whatever resistance it might have had. Gold ain't doing too bad either! And the dollar? TIMBER!!! As promised, with silver above the 200 day moving average and having acquired (too few, but a few) of the March 2008 call options, it is all green flags at this point. Heck, who knows, the silver stocks might even join this party soon. What a fitting day for silver to shine, the opening day of the Silver Summit. Speaking of which, time for me to go.

SEPTEMBER 19 2007 10:15AM - Silver and gold are holding up pretty well after the late day fireworks yesterday, although neither have been able to capitalize on what should be a tremendous boost to PM sentiment. I have pulled up my stop losses to slightly below the level silver and gold were trading right before the Fed announcement. I am considered this as an area of "sentiment" support and if taken out on the downside, it may mean that the PMs need a rest after a very good few weeks.

I will be at the Silver Summit in Coeur d'Alene, Idaho, the next day or two and hope to meet some of you there. Speaking of the Silver Summit, this is usually a time when mining stocks associated with the Silver Valley, and the Silver Summit in general, tend to do pretty well so don't be surprised by a rally in names like SNS Silver, Sterling, USA Silver, Azteca Gold as well as the others.

Here is some timely reader mail along with my response:

"I found too many things in your recent posts that went counter my views, to not ask for a comment

First, you mentioned Mr. Butler's latest post, in effect implying that he admitted there was no silver manipulation. Nothing could be further from the truth.

Secondly, your defense of SLV seems flawed. Barlays owns the SLV fund as it owns iShares. If Barclays goes under, the silver would still be there and belong to investors, but what does that have to do with anything? According to the prospectus, SLV can be dissolved for any of a myriad of reasons. Bankruptcy would certainly seem like a good reason. I wouldn't want SLV to pay me back my money (with some delay I'm sure), while silver is taking off.

Further, there is the well known fact that the silver in the ETF can be redeemed on demand, to big investors or silver users. What if an entity decides to have themselves 2000 tons of silver delivered one week, while the short ratio on SLV is climbing? There may be too many shorts on the ETF, just as in the futures market, and bailing the shorts out may be another reason for the fund to liquidate."

My reply:

I did not claim Butler said there is no manipulation in silver. He said that the downward manipulation in silver is unique in the history of markets. BIG difference. I agree with the unique part IF it is happening, but I don't think that it is. Thus, he thinks downward manipulation in silver is unique while I think it is impossible. Please let me know if this is still not clear.

With respect to Barclays and SLV, there is some merit to the arguments posed but it is more complicated than that. Barclays Bank is the one supposedly in trouble but Barclays Global Investors, a subsidiary of Barclays, is the one that actually "owns" the ETF. "Owns" is actually the wrong word--"administers" is more likely and "issues/sponsors" is exact. What Barclays "owns" is the iShares franchise itself, not the ETFs issued under the franchise. Yes, it's a bit like McDonalds. Regardless, if Barclays Bank went bankrupt, that doesn't mean Barclays Global Investors would go bankrupt. The unit could be sold off, or its assets, such as the iShares franchise, could be auctioned. The iShares brand itself is worth a lot of money as a standalone asset and I can't imagine why it wouldn't be in demand if put up for sale. The recent episode involving Refco illustrates this point very well.

But let's suppose for some reason Barclays Bank did go bankrupt, and for some reason Barclays Global Investors also did go bankrupt, and for some reason one or both of these companies also did go into liquidation (as opposed to a more common reorganization), and for some reason the iShares brand became worthless and thus it was dissolved, what would the end result be? Unfortunately, silver would get creamed as the SLV holdings were liquidated into the market. Thus, you don't have to worry about waiting for your SLV money "while silver is taking off". In fact, the mere rumor that SLV will be dissolved could clobber the price of silver. I personally would recommend getting out of silver in a big way at that point, and it is precisely SLV holders that would have the easiest time doing that, and so they would probably get the best price. So even if the theory of a delay in getting SLV proceeds proved true (something I doubt), it could be a godsend as former SLV investors would be able to replace their silver investment at a big discount in comparison for what the SLV shares were sold. I say this, of course, with tongue-in-cheek, as it is about as likely as any other farfetched (e.g. your) scenario.

On the other hand, I am in agreement that there are many reasons why SLV could be dissolved and this is certainly a major risk for not only SLV investors but silver investors in general. That said, "could" is a far cry from "will" just like the fact that life on Earth "could" end tomorrow, but hopefully it "will" not happen. Recognizing the signs of impending disaster is important but not a reason in itself to not invest in SLV, just like knowing that life could end tomorrow is not a reason to end it today. In essence, even if the wild rumors about Barclays Bank proved true, this would not be a reason to get out of SLV.

Finally, I disagree with the premise that ETF silver could be redeeming while a short position is growing. There is no such thing as "naked shorting" an ETF, which means that ETF shares must be borrowed in order to short them (which is already much harder than shorting stocks). If someone is redeeming shares that means there are less shares to borrow and thus a smaller short position than what would otherwise be possible. Simply put, it is nearly impossible for both to grow at the same time.

Speaking of redemptions, I have stated before that drawdowns on SLV silver can be a very bullish sign because it might mean that some silver users are having to get their metal directly from the ETF as a result of tightening supplies. It should be pretty easy to see when this is happening. Here is the "big secret", which I have revealed before:

It is likely that ETF silver is being redeemed by silver users desperate to acquire supply when redemptions occur in the face of a healthy NAV premium.

This is because "normal" redemptions by the ETF's Authorized Participants (arbitrageurs) happen near NAV parity or at a discount. In contrast, redemptions at a NAV premium would mean that the party taking delivery of the redeemed silver is paying a premium over the spot price. This would be a phenomenal development for the silver market. And instead of being a problem for the ETF, it is just about the best thing that might happen. You can thank me later when you make a ton of money from this idea.

SEPTEMBER 18 2007 12:15PM - Well, the Fed went above and beyond, cutting both the discount and fed fund rates by 50 basis points in order to lower the risk posed by tightening credit to both housing and the economy. The stock markets celebrated immediately, and silver quickly ran up 20 cents while gold added $8 dollars in the aftermarket. Moreover, the HUI is finally trading in breakout territory, having pulverized the downtrending overhead resistance that goes back to early this year. I probably don't need to mention that this turn of events is very bullish for gold and silver, but especially for silver, which is now just a few cents shy of its 200 day moving average while continuing to show a very low level of market participation by speculators as indicated by the Commitment of Traders structure. If and when silver trades above this key level (around $13.20 spot), it could be off to the races.

Not wanting to miss out, and because I have some protection in the form of some very cheap puts acquired earlier today, I jumped on the bandwagon in the past few minutes and acquired some December silver futures at $13 just after the Fed cut was announced. As I write this, the position is already up several thousand dollars, and this is merely the aftermarket! Nonetheless, I will use a tight stop loss because I have no need to get greedy at this point.

Next up, I will probably look to the March 2008 silver call options as they are a screaming value at the moment, in particular the one call option that I currently have in mind (hint, it's way, way out of the money). This out of the money call option would give silver almost 6 months to strut its stuff. Buying this option as silver rises above its 200 day moving average would pretty much mean that my short term flag would finally be turning green, which I believe would be the first time the flags are green across all time horizons since I've put them on the website more than a year ago.

Unfortunately, some silver stocks are not sharing in the euphoria today and the junior market in general has largely ignored these superbullish developments. This is bound to last only for so long, and speculative money should soon flood into this struggling sector once again. In anticipation of this probability, I would advise PM investors to go on any final shopping trips very soon.

A good example of a silver stock not partying today is Endeavour Silver, the latest silver producer to be stung by operating difficulties, as 2007 production numbers were significantly cut back (from 2.8 million ounces to 2.0 million, and at a higher-than-predicted cash cost per ounce). It now looks like none of the "quality" junior Mexican producers featured here in the past year -- being Impact Silver, Great Panther, First Majestic and Endeavour Silver -- are going to be making big gains in the short run without a much higher silver price. Of course, this probably means that these companies are now very levered to rising silver prices. They could be due for a major turnaround in the next few months ahead, so we'll certainly need to revisit this situation if and when silver and the junior sector start to take off in earnest. Shortly, I will be putting together my thoughts on Impact Silver as this company has a model that is different from the others, one that few investors seem to appreciate at this point. Impact also happens to be my largest holding out of these 4 "value plays", not to mention that I have a long-term friendship with Sean Rakhimov, who is a consultant to the company. As such, I've gained deeper and better insights into this company (as well as naturally being more favorably biased).

Oh, before I forget, I have finally published my reply to the critics who believe that Barclays' silver ETF does not hold all of its silver in physical, bullion form. This certainly will not end the debate, but I think that I make a fair case against the worry warts. In particular, a couple of PM gurus have advised their readers to dump their SLV shares in the past couple of days on the basis of a completely silly argument: Barclays may go bankrupt and leave SLV investors without any silver, assuming there was any silver there in the first place. I have easily shown this to be wildly off the mark in my commentary yesterday (Barclays is only the "sponsor" of the silver ETF in the exact same way that the World Gold Council is the sponsor of GLD, the gold ETF) but I felt it was time people really started to understand how unfair these accusations have become.

SEPTEMBER 18 2007 11:15AM - Markets including gold and silver are waiting for the Fed rate decision and didn't accomplish much so far today. I have acquired some extremely cheap insurance in the form of October put options in case the markets get spooked and I have also freed up a bit of money to deploy into select silver and gold stocks should we get a surprise in either direction.

Ted Butler in his commentary for this week finally stated what I have claimed for a long time: every big market manipulation has been to the upside and if silver (I would also add gold) is being manipulated to the downside, it is a rather unique event in the history of the markets. I personally don't believe there is anything unique going on, although I would add to Mr. Butler's statement that market manipulations to the downside is in fact possible -- and common -- when the item being manipulated is not in limited supply. The best example of course is fiat currency, which is manipulated to the downside by dozens of countries on any given day. This is possible only because there is a limitless supply of fiat currency, and the manipulators know this. Silver and gold, however, are in limited supply and only a fool of the most ignorant and mindless strain would attempt to manipulate silver and gold downward. Governments and bullion banks may be stupid at times, but they aren't as foolish as they may seem. In time, this will become obvious but for now it is nice to see Mr. Butler, if not others, start to admit some of the realities of the marketplace.

SEPTEMBER 17 2007 3:30PM - There is apparently a rumor out there that Barclays Bank of London is in trouble after Northern Rock, U.K.'s 5th largest mortgage bank, experienced a "bank run" replete with people "queuing" up in lines that have spilled out of the banks and unto the streets. This has ignited another round of silver ETF bashing with speculation once again running rampant that the silver isn't there, not to mention that a bankrupt Barclays will renege on delivering whatever silver does happen to be there.

Here is what I wrote to Bill Rummel of Charleston Voice in response to his Barclays' comment, for which Bill thanked me for "setting it straight":

SEPTEMBER 17 2007 1:30PM - Gold and silver were up strong today with silver perhaps showing early signs of its intent to start playing catchup. It didn't matter that the dollar gained a bit of stability because oil and commodities in general were romping ahead of the Fed decision on interest rates to be announced tomorrow. At this point, it appears that a "mere" 25 basis point cut has been fully priced into the market and if the Fed doesn't go any further, it may even create a slight letdown. On the other hand, it is possible that gold market sentiment will be reaffirmed by a 25 basis point cut as more people start to perceive this as just the beginning of a Fed easing cycle. If this were to come to pass, gold will easily take out last May's high. Then there is the risk, slight as it may be, that the Fed decides to stand pat. Such an outcome could crater silver, gold and just about every other investment out there. It's a low-likelihood but high-cost possibility, one that deserves some consideration. I personally plan to keep a close watch tomorrow and may liquidate some positions if I don't like what I see. After all, this is why I have shifted my portfolio toward higher quality and more liquidity.

SEPTEMBER 16 2007 9:30PM - NOTE: I royally messed up Friday's commentary on "lease rates" and pretty much said the opposite of what I wanted to say. I was trying to deal with a complicated subject in a hurry, whereas it deserves careful and competent study. As a result, a shortcut turned into a one-way dead end street. I am going to make (at least) one more attempt to explain myself and ask that you re-read yesterday's commentary as corrected. Of course, I will fully understand if you are bored to tears with this "lease rate" business as it is quite esoteric and complex. But I will say this: understanding the foundations of the gold and silver market is not impossible and it is worth the commitment in time and effort because doing so will give you a lifetime of profitable insights as well as supreme confidence in your silver and gold investment decisions. Therefore, I hope you will struggle along with me. See here for my latest detailed explanation of "lease rates".

Now, to fix my prior comments:

SEPTEMBER 14 2007 11:30AM - I wanted to make a very important observation today about something that I have ignored and put on the back burner for far too long. This observation is about the "lease rates" for silver that I show in my indicators above, which is in the same format as published by the London Bullion Market Association, Kitco.com, BullionDesk.com and others for silver, gold, platinum, etc. Many people, including some insider professionals, have assumed that the "lease rates" as typically shown, for example as 0.37% for 12-month silver today, represent the actual nominal rate of interest charged by metal "lessor" to "lessee" over the specified "lease" term.

This, in fact, is not true. The published "lease rate" actually represents the percentage that the future gold, silver or platinum price -- as measured by the forward price at which bullion banks are willing to sell the metal for delivery at a future date, called the Forward Offered rate -- is expected to trail LIBOR, the London Interbank Offered Rate charged by British banks on short-term loans to each other. As a result, when the published "lease rate" is climbing, it means that the DISCOUNT from market expectation about the annual price appreciation in the bullion price is shrinking compared to the market rate of interest (LIBOR). Stated another way, the "lease rate" represents the connection between the market rate of interest and the future price of gold, through which banks and gold dealing entities are able to generate cash income on gold. Ironically, the amount of this cash income is inversely related to the expected future price appreciation in gold since a higher future gold price means a lower "lease rate". That is, the lessor of metal is actually getting less and less by leasing than he or she would get by selling the metal and loaning out the cash. Said differently, a rising "lease rate" means that metal leasing is becoming LESS profitable compared to lending cash. Conversely, a growing "lease rate" increases the profitability of "leasing" gold (or selling it now for later repurchase), which in turn can result in a growing artificial supply of gold in the spot market and a downward pressure on the gold price.

One can think of this in the same way as the price BASIS between the cash and futures markets: the published "lease rate", as long as it is positive, means that market interest rates exceed metal lease rates. the expectations of price appreciation on metal contracted for future delivery (as measured by the Forward Offered rate, the price at which bullion is made available for future delivery). Stated another way, positive "lease rates" exist only in a regime where paper is deemed superior to bullion. Just as with the positive basis that currently exists between cash and futures markets gold prices, when the market interest rate exceeds the lease rate expectations of price appreciation on gold contracted for future delivery, this typically means that the gold "leasing" market is in contango.

But what about backwardation? In terms of the gold price, we know this occurs when the cash price is higher than the futures price. Well, in terms of "lease rates", I would argue that backwardation would actually mean that the published "lease rates" are turning negative! This is because the actual lease rate on metals expectations of price appreciation on bullion contracted for future delivery in a backwardation scenario would more than likely exceed the market interest rate on cash (LIBOR). Looked at another way, if a lease rate below LIBOR results in a positive published rate, then a lease rate above LIBOR would result in a negative published rate. In effect, the superiority of silver and gold as money over fiat currencies would have to be first demonstrated by the "interest rate on gold and silver" exceeding the "interest rate on fiat", resulting in a negative "lease rate". For example, backwardation in "lease rates" would occur if LIBOR decreased to 1% or 2% (presumably during a deflation scare, or deflation period) but gold and silver prices remained in significant contango with an annual basis above 2% (currently around 5-10%). It is very important to realize this if you are looking at lease rates for indications of a monetary crisis!!!

I must say that at times I have been completely ignorant of the fact that this was not commonly understood by most people, including many professionals, and I myself have made a major mistake by not factoring this "secret" into the equation on a number of occasions, including my comments on silver lease rates on August 6. In reading those comments over, I can see how they might be extremely confusing as alleged by more than one reader. I had referred to both the published "lease rate" (remember, this is the difference between the Forward Offered rate, which is essentially the future price of bullion expressed as a percentage premium or discount to the spot price, and LIBOR) and the Forward Offered rate itself in the same breath without really separately identifying the two. This is actually a serious error that makes much of what I said self-contradictory.

I hereby apologize for this mistake and going forward, I will not refer to the published "lease rate" (representing the discount from LIBOR) as the "lease rate" anymore, but rather to the "lease rate basis" "gold/silver relative interest rate", which is the difference between the market interest rate on fiat currency (LIBOR) and the Forward Offered rate on bullion. I will also refer to the "gold/silver absolute interest rate", which is just the Forward Offered rate, or simply the basis expressed as an annual percentage.

Once again, I will note that the "gold/silver absolute interest rate" is actually inverted as long as gold and silver are in contango but this would be resolved as soon as gold and silver go permanently into backwardation upon achieving universal monetary acceptance. To understand this, we must first realize that fiat currencies, too, are in backwardation as long as real interest rates are positive. After all, a dollar today is worth more than a distant promise of a dollar in the future. Don't see it? Then ask yourself, which would you work harder for, a dollar to be paid today or a dollar to be paid in a year? The Lease Rate Basis is the difference between the actual metal lease rate and market interest rates as measured by LIBOR. In the future, I will only refer to the lease rate when I mean the actual lease rate, not the difference from market interest rates.

To be more specific with the terminology, I note that both the published "lease rate" and "relative interest rate" on silver for 12 months is 0.37% today whereas the Forward Offered rate or "absolute interest rate" on silver is 4.75%. Meanwhile, the 12 month LIBOR in U.S. Dollars is 5.13%. Isn't it a clear shame that the wrong form of money is deemed superior at the present time (the one earning a higher rate of return)? If so, shouldn't the form of money that is truly superior deserve the higher rate of return? Doesn't this mean the gold and silver "interest rate" is currently inverted?

I hope others will consider changing this convention as well, because the present approach is really a bearish way of looking at PMs, one that I too have been guilty of propagating. [See full explanation of this in my separate commentary on "lease rates"].

If you don't see what I'm talking about, I will have more to say on it in the very near future, starting with a counter-rebuttal to Mike Shedlock's off-track arguments belittling Prof. Fekete's latest communiqué on the gold standard and mine hedging. In fact, it was my attempt to understand how Mr. Shedlock could be so far off base that I realized the key was the almost-universal misunderstanding and confusion over the published "lease rates". Provocatively (and perhaps unsurprisingly), Barrick has no misunderstanding and knows exactly the risks that it faces, and this is the crux of Prof. Fekete's searing criticism. More on this later.

For now, the most important thing for you to take away from this mess is that the "lease rates" as published by Kitco, The Bullion Desk and others should be turning NEGATIVE, not rising into positive territory, when a financial crisis unfolds with sufficient substance that gold and silver become serious actors on the monetary stage. This knowledge is especially important for gold and silver investors to have because most people will be looking for the exact opposite. In closing, I would like to thank Prof. Fekete for making me think long and hard enough about this issue to see its relevance and importance.

SEPTEMBER 14 2007 10:00AM - Silver and gold fighting a rising dollar today and winning for the most part although starting to fade into the close. Gold has now maintained $700 for the longest period ever in its history based on the futures price (7 trading days). If it can stay above $700 on a cash basis until next Tuesday, gold will have put together its undisputed best showing in history, even if the 1980 or 2006 high has not yet been taken out. In a way, this price action is much better than those "spikes" and indicates that the gold bull market may have a long way still to go.

If anybody has doubts that speculative fever and risk-taking are still alive and well after the August trouncing in the junior market, I would like to point to the potential discovery of nickel-copper and other metals going on over at the McFaulds Lake area of the James Bay Lowlands, Ontario. The following screenshot is from Yahoo! this morning, showing the pending-news halt on Noront Resources (which has screamed from 40 cents to $4.00 in about 2 weeks for a 1000% gain--note that the $2.60 price shown by Yahoo! is actually incorrect) as well as the price action in early trading of the companies with nearby projects (according to message board posting). Some of these companies, although not having made a discovery of their own, are up several hundred percent over the past few days on pure speculation. Now, I think some of this is silly and bound to financially ruin a few investors, amounting to nothing more than a long shot gamble. But what it does show is the desperation on the part junior resource investors to find a reason to put money back into the sector. I had predicted that this desperation would appear at some point when I discussed Southern Arc, Serengeti, and Exeter as potential leaders in the race to discover the next massive gold project, and while little has happened on that front, this business with McFaulds Lake is a great illustration of the theory. Now for the screenshot.

Let me repeat this is not a recommendation that any of these stocks should be purchased unless you are simply looking to gamble with money you can afford to lose (and could care less about), but rather an illustration of the sidelined money that is ready to jump back into the sector. It isn't even the price gains that have me the most impressed here -- instead, take a look at some of the volumes. In several cases, these companies were trading a few thousand shares per day at most and a few didn't even trade on some days. For them to be trading in the millions of shares, much less tens of millions, is simply incredible.

I have one last thing to note, and that is UC Resources being on the above list, a company that I consider a primary silver stock on the basis of its projects in Mexico. This stock hasn't been doing very well lately for a variety of reasons, but in reality it has done no worse than most silver stocks, and much better than some. The point I would like to make is that the current episode at McFaulds Lake illustrates the advantage of having a diversity of projects instead of a singular geographic or area focus. I'm not saying anything will come of it (although UC has its own set of impressive initial drill results at McFaulds Lake), but a 40% rise in the stock price on huge volume at least creates a very good opportunity for shareholders to be able to trade should they want to revise their positions in the stock. I'd love to be in that situation with some of the shares I own!

SEPTEMBER 12 2007 10:00AM - The dollar has cratered some more this morning and is now solidly below the 80 level and into record low territory. This is no longer just a short dive, it appears to be the start of a deep sea plunge. I am still targeting, however, the 75-76 level as the end of this move in the short to medium term, which would certainly support a rise by gold to record highs.

On days like today, a falling dollar may do nothing more than help gold to maintain its price, whereas gold might otherwise have made a substantial retracement after rising $70 in less than a month. Yes, the odds of a selloff are increasing, but the longer gold can avoid such a selloff, the more likely that the next big move will actually be to the upside. So where does this leave silver? My best guess, and it is only a guess, is that silver will quickly start to play catchup as soon as it is above its 200 day moving average, which currently lies just above $13.00. Like many other commentators, I do also see the possibility of one more washout in the silver (and gold) markets, specifically due to the housing/credit/subprime mess rearing its ugly head in the headlines once again, possibly as a result of one or more homebuilders declaring bankruptcy in the not-to-distant future. But there is plenty of time between now and then for the precious metals to make a spectacular run, perhaps one for the record books. I continue to position myself, very slowly and carefully, for the possibility of such an outcome.

SEPTEMBER 11 2007 10:00AM - On this 6th anniversary of the worst terrorist attack in U.S. history, gold has continued to keep its head above $700.00 and is now in a genuine confirmed breakout. Silver has tried to keep pace but seems to be lagging, still below its 200 day moving average. This creates perhaps an excellent speculative opportunity for playing catch up, and as such I am changing the speculative flag to green. I do this sort of grudgingly since gold may very well be peaking here, although with the dollar now trading below the 80 level on the index, it is very possible that the gold rally will last longer than just a few more days. Speaking of gold peaks, please check out Prof. Fekete's latest commentary on Barrick and hedging. It is Part Two of a three part series and contains some blockbuster thinking.

I am also on the verge of turning my short term flag to green, but I do think that first there might be another housing/credit fallout before the cost is clear for silver. On the other hand, this might happen at a point when silver is trading much higher, and the price may not even come down to the current level. As such, silver right here around $12.50 may be looked upon in retrospect as a very good bargain. I've thought quite a bit about how to deal with this uncertainty, coming to the conclusion that I will switch the short term flag to green as soon as silver surmounts its 200 day moving average, currently around $13.20.

In terms of what it means that my speculative flag has turned to green, I have basically started opening some new positions consisting of call options, option spreads and futures spreads. I have done this slowly and carefully and have quite a bit of speculative powder left. Still, these are really the first new positions I've opened in several months and so it cannot be said that I am sitting on my hands.

SEPTEMBER 6 2007 9:45AM - After my thorough pontification about caution in silver and gold, the latter broke out this morning in a massive breach of the down trending resistance line dating back to April. Silver has a ways to go before reaching a technical breakout, but should gold decide to erupt to new highs at this point, there is little doubt that silver will be making new highs as well. The fact that silver is quite a bit behind is irrelevant as the shiniest white metal can move in a hurry. Both the HUI and XAU, as well as many precious metal stocks, are having massive moves as well today. It seems the recent panic sellers have become panic buyers. In my own case, I feel fortunate to be nearly fully invested in gold-silver stocks and lucky to have maintained my long gold futures positions (which I protected, prematurely it seems, with puts instead of selling at resistance). I will now monitor the markets very carefully as gold has reached a rare zone where it tends to become extremely volatile. For those with some extra cash, there is still some very good value out there today as most silver stocks continue to trade at depressed levels. I wouldn't go crazy since the situation remains risky, but this market is certainly worth a bite or two.

Should gold ascend the $700 level and maintain it for more than a couple of days, it would be very bullish for silver if it remains the laggard. In effect, I would see this almost as a risk-free speculation. I say almost risk-free because there is a chance silver lagging gold is a sign that the PM rally has no legs. On the other hand, it is more likely that such a situation would simply be trader hesitation. Certainly right now there are very few bearish signals, but quite a few bullish ones, among the indicators that I track.

Another bullish sign for both gold and silver is the nascent emergence of safe haven buying that was largely absent during the recent market turmoil. Once again, I credit the shakeout of the weak-hand hedge funds with this turn of events, as their thinning ranks have removed a major supply overhang. This supply overhang has worried me since early 2006 and its presumed evaporation is very encouraging. In effect, we may have seen the end of PM selling during liquidity crises, to be replaced by PM buying. Such a development, if in fact it is in the cards, is perhaps one of the most important things to happen to gold and silver since the advent of ETFs.

In summary, I have already considered turning bullish on the short term (3 to 12 months) but these rapid developments might be cause for an immediate re-evaluation across all time horizons.

SEPTEMBER 5 2007 2:45PM - Silver is seeing good buying support just above $12/oz. cash basis and not even another episode of diving equity prices could keep the shiny metal in the doldrums today. Of course, strength in gold in combination with a weaker dollar and firm oil prices has been very helpful. Unfortunately, there is a pretty good chance this favorable situation will evaporate in the days ahead, especially if the gold rally stalls below $700.

On the other hand, physical demand for silver continues to look very good, with the silver ETFs all either adding metal to their holdings in the past few days, or in the case of Barclays' SLV, the NAV premium having grown big enough to suggest that some additions will be made soon. Moreover, September tends to be a friendly month to both silver and gold as cultural buying in India and jewelry manufacturing offtake for the winter holidays coincide.

If it weren't for the potential of more fallout from the subprime mess and a related (or unrelated) credit crunch, I'd be inclined to believe that over the next few months silver will trade in an orderly range with a bullish bias (as it typically does in the last third of the year), but given the high likelihood of continuing market turmoil, I continue to remain cautious and vigilant. In particular, I have still not deployed any new speculative trades in silver and have also refrained from making new purchases of bullion or mining equities (other than shuffling around my portfolio as previously discussed).

Even my meager speculative exposure in gold, the December 2007 COMEX futures acquired at gold's interim bottom on August 16, has been protected at this point using put options, locking in a large portion of the paper profits. The reason I did so is that these futures are within $2/oz. of strong resistance dating back to April, and while I'd be ecstatic to see the ceiling give way, I am very thankful for the nice gains to date as they have largely restored my futures account to pre-summer levels. You might recall that I placed a not-smallish bet via call options on a summer silver rally that failed to materialize--daring enough, in fact, to have retired on if I was right--and so it is gratifying to have my war chest replenished, even if by gold. Ironically, this is not the first time this has happened: punished by silver, saved by gold. But hey, as long as it works, I'm not about to change the approach, so don't think that I have turned gun shy about speculating on the next big move in silver.

In fact, I'm officially coining a new (according to Google and Yahoo! searches) motto today:

Fortunes may be saved in gold, but fortunes will be made in silver!

Think about it, that is a very simple and complete way of looking at the reasons to own both (or either) gold and silver. In fact, this short statement even contains what I think may be the best advice about the proportion of each that you should own: if your goal is to mainly protect existing wealth, own mostly gold, but if your goal is to become wealthy through ownership of precious metals, own mostly silver. Now, it should be easy for you to guess which category I fall into currently . . . but regardless, there are times when such a basic strategy requires some caveats and care in execution, and there is a good chance the next few months may be one of those times.

Is all of this confusing? Look, my cautiousness can be reconciled with my generally bullish statements when base metals (and commodities in general) are figured into the equation. As I have noted for well over a year now, I expect base metals (led by copper) to put in a rather weak performance toward the end of this year as the housing/credit bubbles finally disrupt the new construction (primarily in the U.S.) and manufacturing industries (worldwide). How weak a performance? In the case of copper, I expect that $2.50/lb. will not hold this time around and perhaps even $2.00/lb. will be threatened.

What many analysts have not realized is that the August shakeout has removed a lot of speculation from silver and gold proper, which means that the direst of price predictions (silver down to $8/oz. or lower, gold under $500) are unlikely to prove correct. Still, silver remains the more vulnerable of the two as it is more closely associated with industrial activity than gold. To be very specific, most of the danger to silver at this point is due to the froth remaining in copper prices (particularly large speculators on the COMEX) and lead prices (metal hoarding by private hedge funds).

I sincerely believe this situation in the metals will soon be reflected in the share prices of mining and exploration companies, so I continue to actively refocus my own stock portfolio toward quality silver and gold projects. Mark my words: the twin monetary metals are likely to outperform the other metals, commodities, energy and virtually all other asset classes starting very soon and lasting perhaps for several years. Whether or not they outperform cash as well depends on the actions, or lack thereof, of the central banks. And while such actions are unpredictable in the short term (for example, will the Fed lower rates at its next meeting?), they are absolutely certain over the long term.

SEPTEMBER 4 2007 11:45AM - Nice moves in gold and silver today as the physical buying is now really starting to kick in. Two very good articles just appeared on the current status of the silver market: the first by Clive Maund I concur with almost 100% while the second by Ted Butler I like because it explains what I was about to spend some time discussing: the Barclays silver ETF (SLV) may be starting to see industrial offtake demand, just like the COMEX has seen over the past few months.

As I noted last Friday, the withdrawal of silver from the COMEX has corresponded with deliveries on futures contracts for many months now, and this is likely a bullish sign of increasing supply tightness in the silver market as industrial users may be unable to obtain sufficient silver from direct sources. And if what Mr. Butler has stated is true, the withdrawal of silver from the ETF may be the same phenomenon. Why I suspect this might indeed be the case is that the latest silver withdrawal happened during rising silver prices when the ETF's NAV was at a premium, which is quite different from what has gone on before. You see, with rising silver prices and a NAV premium, the ETF's authorized participants do not have an incentive in the form of arbitrage to redeem ETF shares for physical silver. Instead, it is very possible that a silver user (or more than one) has acquired several baskets of ETF shares over the past few days and weeks and had the authorized participants convert these shares to physical silver on their behalf. The share buying may explain the fact that the ETF has not experienced a large NAV discount over the past few weeks even as silver reached its lowest level in a year.

In any case, the most important point made by both these two silver articles is that the Commitment of Traders (COT) structure has turned rather bullish in silver with the commercials having reduced their net short positions and the large speculators having severely pared their long exposure. Mr. Butler claims the driver for this might have been his latest letter-writing campaign targeting ScotiaMocatta (a presumed large short on the COMEX), but as I pointed out a few weeks ago the August shakeout in gold and silver likely reduced sentiment at the speculative funds by a substantial amount. In fact, the spike low in silver near $11 may have been a capitulation by the speculative funds (which I consider to be weak hands). The COTs now seem to be bearing this out.

Despite the very positive developments, I feel that we continue to be in a danger zone for silver until the technicals make a better recovery, and therefore my speculative outlook (less than 3 months) should remain yellow (neutral) for now. On the other hand, the short term from 3-12 months is starting to look increasingly bright right now, and assuming no major deterioration in my indicators over the next few weeks, I will likely be maximizing my portfolio exposure once again and thus the short term flag may be turning green again very soon.

AUGUST 31 2007 12:00PM - I almost forgot to mention that I have finally received official word on the silver holdings of the Swiss metal ETF run by Kantonalbank (ZKB), and the word is good! Good to the tune of almost 4.8 million ounces of silver amassed in the short space of 4 months. This is quite remarkable considering that this ETF is only marketed to well-heeled Swiss investors. Clearly there is still some pent-up demand for silver out there and many opportunities for the successful debut of additional ETF and other investment products focused on precious metals (the ZKB ETF has also amassed 700,000 ounces of gold and a bit of platinum and palladium as well). In fact, I met two gentlemen at Prof. Fekete's Gold Standard University who are involved in private funds focused on getting precious metals into the hands of investors, one in Canada and the other an unlikely European country. More on this if and when I get these gentlemen's permission to discuss their companies and offerings. Needless to say, however, gold and silver investment demand is bubbling below the surface with the handful of ETFs only representing the very tip of what may turn into a veritable iceberg of money flow into the monetary metals.

On a separate topic, I will be attending the 2007 Silver Summit in Coeur d'Alene Idaho this year and I urge everyone who can make it to go. The details are here. There is a great lineup of speakers and although there will probably be quite a bit of conspiracy theory mongering, all of these guys live and breathe gold and silver every day, so this event will probably have one of the highest concentrations of practical advice about precious metals ever to be assembled in a single place. Still, I don't want to be the lone representative of the Gold Standard University at this event, so please consider joining me! If you do decide to register, please mention that you heard about the Summit at SILVERAXIS.

AUGUST 31 2007 11:00AM - The buying season in silver and gold is upon us, and without much in the way of bad news, both precious metals were in rally mode today. Silver is now out of immediate technical danger, although the shiny metal will need to clear the $12.50 level before it can take an initial breath of relief. Meanwhile, the silver ETF has just shed 3.5 million ounces of silver, the largest single decrease in its holdings since inception. At the same time, COMEX warehouse stocks have been dropping and now stand just over 130 million ounces, down from a high of 140 million ounces reached in late June. I don't believe either of these developments are necessarily negative, however, for reasons that I will try to explain in the next few days.

For now I will just say that COMEX silver continues to provide healthy amounts of metal to (presumably) industrial users, which is a sign of solid demand from silver users. In fact, September delivery notices so far amount to 8 million ounces and yet the open interest in the September contract continues to be more than 8,000 contracts (representing more than 40 million ounces of silver) as of first notice day. Moreover, the September spot month contract was the most actively traded yesterday, which is somewhat unusual this late in the month. Combined with the falling open interest, the COMEX situation is quite bullish for silver at the moment. Another price decline certainly cannot be ruled out, perhaps even below $11/oz., but the COMEX is telling us that any such decline could be very quick. Granted, the COMEX is only one indicator, but it is a very important one, and so at this point my inclination is to view any further weakness in silver as a final shakeout of weak hands before the next major rally.

Indeed, the next two weeks may provide some critical signals for the silver market and I will try to spend some time on the technical side during this long weekend, especially since I may be about to redeploy some speculative trades in the silver market.

In addition, I continue to review my equity portfolio in order to increase my exposure to gold and silver at the expense of base metals where possible. Along these lines, I've started to put together a preliminary shopping list of quality silver-gold stocks and it looks like this so far: Endeavour Silver, Exeter, First Majestic, Gammon Gold (could be in for a bit more operational pain), Kimber ("quality" at this point is debatable but the company does have 2 million gold-equivalent ounces and a measly US$30 million fully diluted market cap), Minefinders, Silver Wheaton, Silver Standard (I'd like to see the price come down a bit more) and Silverstone. There are many other deserving names that are worth holding or buying at this point, but their base metal exposure creates risk to future performance. In some cases, such as Pan American, Impact and a few others, this risk is adequately covered by project or management quality. In other cases, such as U.S. Silver, the timing may not be ideal although the company has excellent long-term prospects (in the case of U.S. Silver, I'm waiting for cash production costs to fall below $10/oz. silver, which was almost achieved this quarter but not quite). Then there are the ridiculously undervalued companies, such as Starcore (P/E ratio approaching 1, depending on pending quarterly results), Minco Gold (market cap is once again about same as value of its ownership in Minco Silver), Revett Minerals and Mines Management (these final two appear destined to be forever undervalued). Finally, there should always be some room for exciting exploration plays in any risk-tolerant portfolio, and Southern Arc and Serengeti (along with Exeter) continue to be among my favorites. All are still trading near their August lows and may represent some of the best opportunities to make money in the natural resource sector during the next few weeks and months.

AUGUST 29 2007 5:50PM - Not much accomplished in the silver and gold markets today as dollar weakness and stock market strength received only mild welcome from the monetary metals. I still don't have my arms fully around the current technical situation in silver and gold, but it is quite clear to me that credit market conditions will force the Fed and other central banks to make moves that are fundamentally very bullish for gold and silver. These moves are likely to take place in the next several months (if not sooner) just as seasonal demand picks up for both metals. The Fed's quandary is summed up nicely in these two commentaries: A Panic Move to Buy Safety by Gary North and It's Different This Time, I Swear by Charles Zentay.

Throughout the current credit debacle, precious metal investment demand (as opposed to speculative demand) has remained firm with the gold and silver ETFs refusing to give up ounces. Even small retail demand has been evident in the form of bargain hunting, which has apparently caused retail bullion dealers to run short on inventory. For example, one of my favorite online dealers, www.tulving.com, was recently sold out of 90% junk bags of silver, and as of the moment, is sold out of 1 ounce "Amark" silver rounds. I wouldn't go too far with this state of affairs by claiming that there is overwhelming demand, since these types of shortages are commonplace and junk silver bags continue to trade at a discount to spot prices. The apparent low inventory, however, is a sure sign that small investors are not dumping silver in panic but rather holding on through thick and thin. This stoic behavior, of course, is unlike the hedge funds, many of whom have been panicked out of their gold and silver positions. To the extent that this "liquid" gold and silver is now held in stronger hands, further downside has been limited.

Still, I do believe silver is more at risk as compared to gold, especially with gold continuing to remain well supported by its 200 day moving average. Meanwhile, silver has broken just about every chart support it had. Having said this, I believe silver would be a very good buy--regardless of the circumstances--on another approach of the $11 level, and it should be aggressively accumulated if it were to fall into the $10's, as long as your investment horizon is more than 1 year.

As for those who have partially exited their speculative silver positions (as I have, substituting in part with gold), they would be well advised to keep their eyes on fundamental demand factors affecting the silver market, because a number of indicators are once again pointing toward a possible setup similar to the one we had in May (which did not successfully play out). In fact, the current setup, should it materialize, may carry better odds while the payoff could remain as good if not better: $25 or higher silver. Possible ways to play this setup would include dollar-cost averaged purchases of the physical metal or one of its trading proxies (ETFs).

For those seeking leverage (an affliction primarily caused by youth and impatience), there are some attractive-looking COMEX futures and options: Dec 2007 $15 call option currently trading around $350, March 2008 $15/$16 call option spread around $450, or futures calendar spread long Dec 2007, short Dec 2008. While risky, these speculative strategies are actually quite "cheap" in that they have a defined risk with huge upside potential. There may be other possibilities as well, but these are the ones I like at the moment and will be keeping my eyes on. In the meantime, my primary speculative leverage to precious metals will continue to be gold futures with a precise stop loss.

AUGUST 28 2007 11:00AM - I'm finally back and although it will take a few days to catch up with everything, I will begin updating the website immediately. I'll have much to say in the days ahead about Prof. Fekete's Gold Standard University lectures on Gold and Interest, but first I need to deal with the basics.

Gold and silver first sold off and then recovered today as the dollar was listless but stocks resumed their sharp decline. We will shortly hear from the Fed in the form of the minutes of its August meeting, which could cause a reaction in the equity markets. Investors are looking for signs that the Fed is prepared to lower interest rates if market conditions turn worse.

During my almost 2 week absence, very little seems to have happened in the silver market both with respect to the fundamentals and technicals. A number of precious metal stocks have recovered a bit although most continue to trade at very depressed levels that might, in retrospect, seem like the buy of a lifetime. Silver itself has managed to rise back into a safety zone while the bottom that I had picked in gold around $655 in the December 2007 COMEX contract has held rather nicely (to my surprise).

I continue to remain convinced that the next few months may not be very kind to base metals and so I will be picking through my own portfolio one more time to further reduce base metal exposure as much as possible. My feeling is that the next 12-18 months will belong to gold and silver, not the base metals, not uranium, not rare earths. In my opinion, mining stocks in general will be under pressure during this timeframe while exploration or production focused on gold and/or silver will reclaim "darling" status in the natural resources industry. Consequently, only a few exciting discovery or development plays involving other metals will get interest from investors. In the next few days, I will try to put together a short list of companies with good prospects under such an environment.

AUGUST 16 2007 4:30PM - A couple of quick points before I sign off for a while.

First off, I have been worried about the investment funds "ruining" this resource boom for almost a year and a half. Much of the carnage that we are currently seeing can be placed at the feet of these funds, but it appears now that they are close to capitulation. This is an incredibly bullish sign going forward, especially if most of the trend-following funds stay out of commodities  (and they may if liquidity dries up and they can no longer borrow to speculate). The reason for this is that commodities will trade more on their fundamentals, which means that capital allocation will be much more efficient. I believe gold and silver will be by far the biggest beneficiaries of such a development simply because the precious metals are nowhere near historical extremes of speculation (or price) compared to the commodities. Gold and silver are THE safe havens and THE alternative investments, so when the majority of buying will be investment-related instead of speculation-related, the monetary metals will finally clobber all other asset classes. For this reason, I would urge all resource investors to concentrate on bullion and PM stocks.

Second, I would like to give credit to David Morgan, editor of the Morgan Report, for an excellent analysis of the markets, one that has been more accurate for a while now than probably just about every other "guru" out there. Both in his newsletter and private communications, Mr. Morgan has provided an outlook, though coached in caution, that has turned out to be mostly dead-on correct, including his recent call for caution into late summer. Unfortunately, the format of his newsletter is not conducive to advising specific action to take with respect to these market calls, but any sophisticated investor who has independently acted on his views is very thankful right now. Given Mr. Morgan's running record of being correct (with respect to market calls and not necessarily stock picks), it would seem appropriate for resource investors to pay attention to what he has to say right now.

This mention is not a plug for Mr. Morgan, but rather the beginning of yet another project here at SILVERAXIS, the culmination of which will be a new, sorely needed tool for resource investors to help guide them as we enter what may yet be the most profitable, if not most treacherous, phase of the hard asset bull market. This will be the last project that I take on until at least one of them makes it from light bulb stage to launch, so keep checking back for developments.

AUGUST 16 2007 1:30PM - Holy Moses, what a wipeout today! The word massacre does not do justice to what just happened. $12 silver did not hold, with disastrous consequences (not surprising if you've been reading my comments for the past few months). Even gold dropped below its 200 day moving average although it is currently in recovery mode while silver has bounced 60 cents from its bottom.

It seems the better a resource stock has performed over the past year, the worst it got hit on a day that might go down in the annals of resource stock history as "Lead Thursday".

Things moved so fast that I did not have a chance to even think about flags, much less changing from yellow to red. To do so now, in my opinion, would be extremely poor timing. In fact, I'm actually on the verge of turning all the flags to green and urging those other lunatics (other than myself) who will listen, to beg, borrow and steal extra money to put into the juniors, PM stocks in particular. But since I will be away from the markets for the next week or so, I'm going to maintain a 'fraidy-cat' stance for now.

Personally speaking, I haven't begged, borrowed or stolen (yet) but I was busy all morning selling this and buying that to take advantage of some ridiculously low prices. I also picked what may turn out to be a pretty good bottom in December COMEX gold around $655, although I did not dare venture anywhere near COMEX silver -- that's just too much leverage and downside exposure at this point. Regardless, I am now almost fully invested again after a portfolio turnover of almost 50% in the past few days. Unfortunately, turning my speculative flag to yellow last week, despite being fortuitous, did not save my portfolio from relatively big losses, but what it did do was to keep me on the bargain hunting side instead of possible panic selling.

Frankly speaking, if I wasn't actively evaluating the markets as part of running this website, I may not have made these potentially profitable moves. The encouragement to keep SILVERAXIS going, of course, comes from the largely appreciate readership, and so I would like to thank you all for your past and (hopefully) future moral support.

If some of you new or underexposed PM investors had a chance to pick up some very cheap shares today, I'd really like to hear the circumstances. What gave you the courage to buy when the torrent of blood was running in the streets? With many stocks having dropped below, in some cases well below, their 52 week lows, you have certainly picked an excellent point to get your feet (or legs, or torso, or head) wet.

So exactly why did this happen to the resource stocks on a day when the general markets recovered to almost breakeven after being down over 3% (the DOW was down by 300 points at one point)? Well, it appears that the MARKET CONSENSUS is that commodities, gold, silver and resource stocks are much RISKIER than stocks in general, and everything risky was sold with reckless abandon today. I know, I know, the market and its Wall Street experts have it backwards, but that is irrelevant. What's relevant is when will this carnage end? My guess is very, very soon, although a possible final washout to $10 silver and $600 or below gold is not out of the question. Should such an opportunity present itself, I am inclined to believe that the resource stocks will hold up much better than they did today. Indeed, with many of them 50-75% off their all time highs, it would be unreasonable to except anywhere near another 50% drop from here. But if I'm wrong by chance, the begging, borrowing and stealing will begin in earnest.

AUGUST 15 2007 1:00PM - What a rotten day for silver and PM stocks! Not so bad for physical gold; a good lesson to diversify your precious metals.

Some random thoughts today in no particular order (so what's new?) ...

I've updated the charts on COMEX warehouse stocks, silver lease rates and silver basis, just click the blue diamonds in the Silver Alerts section to view them ...

Speaking of basis, it has widened over the past few days in silver and once again seems to have telegraphed a period of relative weakness compared to gold. According to the system that Prof. Fekete and I are developing, such "weakness" should be bought because it usually indicates that the "weak" metal is about to get a boost of investor interest ...

If you haven't already read it, please take a look at Prof. Fekete's latest piece on Peak Gold, which is the first commentary to focus on the incredibly bullish turn of events wherein Barrick, the world's largest gold hedger, has revealed according to its own research that mine output of gold may fall 10-15% by the next decade. As always, Prof. Fekete puts this into the proper perspective of the monetary role of gold. And although he doesn't often mention silver in the same breath, that doesn't mean he is neglectful; just mindful of wasting words ...

Apparently someone more important than me has yelled at Barclays for not updating the NAV and metal holdings of the iShares silver ETF (SLV): for the first time ever, the ETF's silver holdings are current as of today (vs. being a day behind). What's even more heartening is that yesterday's NAV was already published early this morning, the fastest time on record. Hopefully this is a permanent improvement ...

Hedge fund jockeying may have contributed to the terrible performance by resource stocks over the past few days as many of these funds require a 45 day advance notice before quarterly withdrawals can be made (the third quarter deadline being today, August 15). Investors whose nerves have been rattled by the markets may have requested record withdrawals culminating in an orgy of selling as panicked fund managers, fearful of dwindling capital available to make redemptions, may have moved to cash in massive numbers. If so, we may witness a miraculous recovery as the selling pressure abates and newsletter writers, advisors and brokers urge their followers to engage in some bargain hunting ...

A reader informs me that he is "very disappointed" not to be able to print everything to be found on my website, without wasting a lot of paper. My reply is that printing ANYTHING from my website is a waste of paper. Since I don't have an editorial staff, no thought whatsoever has been given to making the charts, pages or commentary printer friendly. Perhaps he hasn't noticed, but this is a no-frills, non-commercial operation where the emphasis is on content and efficiency, not presentation. Having said this, I have been using the PDF format with featured commentaries for several months now and you can't get much more printer (and viewer) friendly than that. In addition, I will shortly start repeating these daily commentaries in a blog, which should make changing font sizes and document printing much simpler, as well as provide the opportunity for public feedback ...

In closing, I would like to mention again that I will be communicating and updating very lightly, if at all, over the next few days as I am due to make an appearance at the Gold Standard University session in Hungary.

AUGUST 15 2007 10:30AM - Gold is holding up today but silver is getting bludgeoned along with most PM stocks. There are so many bargains and opportunities out there, I don't even know where to start. Some of these prices are simply ridiculous -- Aquiline, Bear Creek, First Majestic, Great Panther, Impact, Kimber, Minefinders, Minco Gold, Revett, Sabina, Silver Eagle, Scorpio, Silverstone and U.S. Silver just to name a few. If most of these names are not at least 100% higher from current prices in the next 12-18 months, it's time to close shop and find a lonely, safe place to live as a hermit. Unfortunately, while it's hard to imagine these shares going much lower, let's remember that silver is still 50 cents above its recent bottom. And the odds that the $12 level will serve as support once again aren't as encouraging as last time. So just be aware that if you are buying now like I am, you need to be prepared for substantially lower prices. That would argue for holding back at least a bit of buying power in anticipation of even lower prices, as well as planning to hold any new positions for 12-18 months. I personally don't have a lot of cash sitting around at this point so I am trying to take advantage of some of these firesale prices by shifting around my portfolio (for example, raising cash by selling some of my big winners as well as the sleepers that are not expected to do much in the next year or so).

I am looking for a bounce from these levels in the next several days at which point the real danger (silver moving below $12) may appear. I will try my best to keep an eye on the fundamental and technical factors but in reality there isn't much that can make me sell anything gold or silver at this point considering that we may be near a major bottom while the credit and equity markets remain jittery. At some point, this could turn into a huge money flow into everything gold and silver, resulting in a more spectacular upward trajectory than what we saw in the spring of 2006. If I'm wrong and much more pain lies ahead for the PMs, I will be forced to switch my speculative flag, and perhaps even the short term flag, to red. In this instance, such a move will not signify my selling as much as it would indicate that I am aggressively protecting my portfolio using puts and bear spreads.

AUGUST 14 2007 11:30AM - The PM stocks, juniors in particular, are getting hit real ugly as the DOW flirts with 13,000 on another 200 point down day. Pinetree Capital, which invests mostly in junior resource stocks, is down under $C6.00 from a high over $C16.00 this April. Ouch! Uranium stocks as a group continue to get the worst beating but silver stocks aren't far behind, led by a few names like Kimber Resources which just got knocked unconscious as a result of announcing that the company is for sale. I'm not a bottom caller, and some risks still remain, but I must say that those fortunate enough to have some dry powder are currently being handed a spectacular opportunity as long as the holding period is measured in more than a few months. I personally bought XRA and KBX today along with a few other names.

On a separate note, the NAV figure for the Barclays iShares silver ETF has not been updated for almost a week and the silver holdings were updated just a few minutes ago for the first time since last Thursday. I am not happy with this development as it puts small investors at a distinct disadvantage, but in the next few months I plan to level the playing field with the help of a few like-minded people like Prof. Fekete.

AUGUST 14 2007 10:00AM - Silver and gold got a double whammy today with the dollar rising strongly and stocks taking another dive. Copper and other metals are also down so it is actually quite heartening to see the PMs hold up relatively well. In fact, this is the first time that silver and gold seem to be acting as safe havens since the markets started panicking near the end of July.

Pan American released its second quarter earnings last night and as predicted here, instead of the declining production figures put out by peers, there were increases across the board. This despite the backup in sales of concentrates which seems to have plagued a number of mining companies recently (a likely indication of capacity issues at smelters, which could be the next big production bottleneck facing the mining industry). Unlike many other silver producers, Pan American has been firing on all cylinders and seems to be in control of its own destiny. That, however, was not enough for the market as investors took the company behind the shed for a beating this morning simply because the quarter was not a blowout. With very strong support near $26, the result is a pretty good buying opportunity.

I will be posting and updating the website infrequently over the next couple of weeks due to other commitments but will try to keep current on critical developments in the silver market.

AUGUST 13 2007 10:30AM - Silver and gold were able to hold their own today despite a rally in the dollar as markets in general were calm after a massive infusion of short-term liquidity by the central banks. By short-term, I mean that much of the cash infusion consisted of temporary open market operations whereby the central banks acquired treasury securities using reverse repurchase agreements. These repurchase agreements are likely to be rolled over several times but at this point there is no indication that the liquidity will not be quietly withdrawn if the markets stabilize in the weeks ahead. This is important because inflationary expectations will only turn into real monetary inflation if the central bank operations become permanent -- that is, the treasury securities are acquired by the central banks outright. A lot has been written in the past few days about the opening of the liquidity floodgates, but most commentators have missed this important nuance. Should it warrant further discussion, I will report on it in the future. If you don't hear from me again on this subject, you can assume that most of the short-term liquidity was subsequently mopped up.

A reader wrote to me challenging why I had switched my speculative flag to yellow since silver and gold appear to be on the verge of a breakout (higher or lower). The reasons for the imminent breakout cited by this reader include the surge in lease rate, MACD/RSI/MA flattening, tight trading ranges in gold and silver, US dollar on a precipice and turmoil in the credit and equity markets.

These are great points, and some of them were the basis of my earlier super-bullish position. On the other hand, gold and silver have had numerous opportunities during the past few months to rally higher and leave their trading ranges behind, but the PMs failed each time. Worst of all last week, against a backdrop of monetary panic, gold did not get much respect as a safe haven. In fact, the dollar seems to have been the favored shelter from monetary crisis. Don't get me wrong, this will change in time but not in a day or two. What all of these events tell me is that a very substantial flow of new money will be required to move gold and silver above their current trading ranges and the money is simply not there at the moment.

Today, I am going to revisit the subject of monetary economics by urging you to read Rick Ackerman's recent debate in which he argues about deflation with a professor (not of economics but rather science). Both sides make very good points but unfortunately the whole thing ends before the real issue is sufficiently examined: does money simply disappear when there are systemic debt defaults? Mr. Ackerman does not answer the question directly but his opponent is correct when he states:

'...your "bad bet" is only bad from the point of view of the creditor. His misfortune is the debtor's fortune, since the debtor has got access to the creditor's money for free. And we are not playing favorites here -- we are looking at the global economy as a whole, and from the global point of view, it doesn't matter whose pocket the dollar is in or who is spending that dollar. The reason you haven't ever seen, and never will see, a debt-led depression, is that national economies don't care whose pocket the dollar is in either.'

Although this is a simplistic if not naive statement on account that it does not consider the future expectations of creditors (they will not continue to lend to debtors who default time and again), it is absolutely right. I have mentioned this before but it is important enough that it bears mentioning again: all other things being equal, defaulting on a debt is inflationary since it means that the loaned funds will NEVER be repaid. A bankrupt borrower will stop making loan payments and therefore the debt will stop decreasing. As a result, a credit default is the equivalent of money that has been permanently borrowed into existence. Moreover, this money is no longer held by the defaulting borrower (by definition) but rather another third party who can spend it at will. Lenders, of course, may stop lending based on future expectations of repayment risk, but central banks appear to be prepared to provide the necessary liquidity, even at the expense of drowning the whole system in an effort to prevent the slightest inkling of thirst.

If you understand the above, you should be in a good position to appreciate the possibility that future financial crises may successfully be averted by central bank intervention, though at an increasing cost to monetary stability and to the net benefit of gold and silver. How long the charade can be kept up is anybody's guess, but I should note that the Roman Empire maintained its global (relatively speaking) domination unchallenged (Pax Romana) for almost 150 years after the reign of Caligula, which at the time might have seemed to contemporary critics like the end of empire. Since Pax Americana is but 60 years old and the functional equivalent of Caligula has yet to appear in the White House (although our current President is arguably a contender), there is a strong case to be made for the end being a bit further off. The American Empire may already be in decline, but it could be very slow and lengthy.

AUGUST 10 2007 10:30AM - Silver and gold staged magnificent bounces today as central banks around the world announced that they have injected temporary liquidity into the system, and stand ready to do more, in an attempt to stem the growing panic over the subprime debacle. Since liquidity translates to growing money supply, these moves are interpreted as being inflationary and thus positive for precious metals. I would not infer, however, from this PM rally that a flight to safety has started in earnest. In particular, the violation of the $12.72 silver level in late trading yesterday has increased the odds that we could see lower prices before the bottoming process is complete. I have only marginally reduced my speculative exposure at this point -- cutting back on leverage such as futures -- but it is enough that my speculative alert flag should be switched back to Yellow. Roughly 10% of my PM portfolio is now in cash although I will try to carefully rebuild exposure in the days ahead, especially if this rally turns out to have legs.

To answer an e-mail question forwarded to me through Prof. Fekete, a rate shock on the short end of the yield curve has made its way through the credit markets even as long bond rates continue to decline. In the case of silver and gold, this has resulted in a spike in the 1 to 6 month lease rates, resulting in a significant tightening of the rate spread. This is not unexpected and I do not believe it to be related to a substantial increase in physical PM demand. In particular, the gold and silver bases continue to remain within a normal range, although the numbers appear to favor silver and rising prices in general. If this is the case, why have I turned more cautious on the short term prospects? Well, the basis may turn out to be right but it is one of many factors that I follow and the majority of others aren't quite so bullish at the moment. Besides, until I am able to establish a measure of basis that minimizes data interference, it should not be used as a precise trading tool but rather as a confirming factor of other traditional market indicators.

Turning to stocks, Gammon Gold announced earnings last night and it is quite clear that the tangle they have at Ocampo will take a while longer to unravel. I did not buy ahead of earnings (mainly because the stock rallied yesterday, rising above $10) and although these prices look attractive from a valuation standpoint, there are likely to be ample opportunities to buy the stock before the operational turnaround has been confirmed. In the meantime, I'm looking for Pan American to show the other silver producers how it's done when the company reports earnings next Monday.

In the junior arena, Exeter and Serengeti have both reached a price level where it may be safe to begin accumulating again. I successfully added a bit to my Exeter position earlier today and just missed my first purchase of Serengeti by a few cents. My third gold-copper porphyry hunter, Southern Arc, continues to defy gravity but for now I am standing aside.

In the realm of silver stocks, I will mention just two names at this point: First Majestic and Impact Silver. More on them later, but for now I will just say that if I was limited to only two junior silver stocks, FR.v and IPT.v would be at the very top of my list. These two companies complement each other so well that they provide the diversification equivalent of any 10 other silver stocks. One is arguably the most conservatively run junior explorer/producer while the other has accumulated a very sizeable nearly-pure silver resource exceeding 100 million ounces (and continues to drill like crazy) under the noses of unnoticing natural resource investors.

Both First Majestic and Impact Silver have a very strong potential to double from current prices within the next 12 months regardless of what the price of silver is doing (unless of course it falls and stays under $10). In fact, out of all the speculative junior stocks I own, these are among the very few I would have no problem with not even looking at the next 12 months, fully confident that things will be in much better shape then (not that they aren't in pretty good shape already). For disclosure purposes, I own more than 10,000 shares of Impact and have a friend who works for them. I am also accumulating First Majestic as we speak with the goal of making it a significant portion of my portfolio. In fact, accumulating First Majestic is one of the changes that I expect will make my portfolio less speculative.

AUGUST 9 2007 10:00AM - A steep drop in PMs takes silver back down to the critical level ($12.72 basis September COMEX) as the markets are unable to shake their focus on the subprime meltdown. The latest contribution to the spreading fright is French Bank BNP Paribas' "suspension" of 3 funds that "invested" in the risky loans and appear to have lost nearly everything (that is, if they only knew how to value these loans). With the Dow plunging another 200 points and commodities weak in general, gold and silver just could not keep their promising rally going. Interestingly, the dollar is actually up today, presumably because investors are cashing up and fleeing to the safety of the world's reserve currency. If so, they might quickly realize that gold is the ultimate shelter from financial crisis while the safety of the dollar is merely a mirage. In fact, the dollar can rally up to about 85 on the dollar index and still technically maintain its downtrend, but from a fundamental perspective it is very difficult for me to imagine that the dollar could actually come out ahead as this mess unfolds.

Assuming the malaise in the credit markets keeps spreading, the trick then for PM investors will be to figure out exactly how quickly the general market will seek the safety of gold once the dollar proves unable to handle the task. For my own part, a violation of the $12.72 critical level in silver will result in lightening the speculative portion of my portfolio and raising a bit of cash in an attempt to game the subsequent bottom (being the point where investors "get it"). Of course, it is very possible that the drop below $12.72 will be a one or two day event, if that, so long term investors and core portfolio holdings can completely ignore these machinations. On the other hand, we should all start to worry if presented with consistent evidence that gold and silver are being sold disproportionately by investors during a crisis of liquidity. Such an event could drive gold and silver prices much lower than fundamentals or technicals would otherwise warrant.

To be fair, there exists a pretty good contrarian viewpoint arguing against all of this panic -- especially now that stock guru Jim Cramer has uttered the word "Armageddon" in reference to the markets -- as follows: By the time a major financial event becomes general public knowledge, it is mostly over and we should move on to worrying about something else. For example, in my neck of the woods, the epic mortgage crisis has been a front-page feature in the newspapers for months. See Impossible loan turns dream home into nightmare which has some great examples of just how ridiculously out of hand the housing market got in Northern California. The account is from April, but now that most strawberry pickers and other day laborers have lost their $700,000+ homes, it appears the credit crunch is set to descend on the more well-heeled borrower.

Yet despite the temptation to take a contrarian position now (usually a smart thing when the alternate investment and gold communities agree with Jim Cramer on anything), the mortgage mess looks to become somewhat uglier in the months ahead. In particular, I believe that new home construction is going to get slammed against the wall very hard before the year is out, with the possibility that one or more of the major homebuilders will be forced into bankruptcy. They simply have too much inventory and debt on their books, having converted the huge piles of cash accumulated during the good times into a massive oversupply of new homes that may literally take years to absorb into a slow real estate market. I also think that the almost complete halting of activity in the construction sector (with the exception of building and repairing bridges) would be very hard for the U.S. economy and could have a strong dampening effect on the global commodity sector.

The upcoming crisis in the construction industry, which could make the subprime mess look like an afternoon stroll at the park, has been the basis of my investment philosophy for more than a year and continues to be the main reason why I remain a vigilant silver investor. I had expected that an intervening rally in silver and gold might create a nice buffer against potentially large losses later in the year, but with the summer drawing to an end and the PMs failing to capitalize on the numerous opportunities, don't be surprised if I temporarily pull in my horns in the weeks ahead. Of course, that might be a contrary indicator of its own and you might just get rich fading my moves.

AUGUST 8 2007 4:00PM - Silver and gold were up today mostly in reaction to a declining dollar, but the real news was the PM stocks. As I write this both the HUI and XAU are up around 3% and seem to have re-established an uptrend. Many of the more speculative junior stocks I mentioned yesterday are also doing very well today.

I am going to talk economics now, so if you have no interest in the subject, you can skip the rest of the commentary. I urge everyone else to read Dr. Gary North's Monetary Statistics for some useful insights into money and inflation.

I personally haven't said much about M3 here (that I can recall) because I agree with the Fed's decision to discontinue it from the perspective of reducing regulatory burden and bureaucracy, especially since it simply isn't relevant to monetary policy. As Dr. North points out, this irrelevance is due to the fact that the components of M3--large time deposits, Eurodollars in foreign banks, repurchase agreements and institutional money market funds--are not part of the circulating money supply that is used to acquire domestic goods, services and assets.

And why are M3 components not considered circulating money? Ask yourself this question: what "type" of money do people use to buy things? Cash and coin (M0)? Checking accounts (M1)? Savings accounts (M2)? Small certificates of deposit (M2)? Money market accounts (M2)? Large time deposits over $100,000 (M3)? Repurchase agreements (M3)? Clearly, the closer to M0, the more likely that money will actually be spent on goods, services and assets. Of course, M2 or M3 components can be converted to M0 or M1 to be spent, but one would not normally "spend" M2, and even less likely M3. M2 and M3 represent savings, but not necessarily savings in the traditional sense. Rather, these "savings" are really the flip side of the credit coin; that is, they exist only because someone borrowed money into existence.

The seeping of borrowed money into the economy can create excess demand that leads to inflation, but this is less likely if the borrowing is reflected in M3. For example, let's consider the Yen carry trade, where funds are borrowed from the Bank of Japan and invested in money markets denominated in U.S. dollars. Some of these borrowed funds may be included in an M3 component such as institutional money markets or large time deposits. But this is really irrelevant to the economy unless the money markets create liquidity. For example, the borrowed Yen may be used to buy U.S. Treasury securities after conversion to dollars. The result might be a shift in foreign bank reserves but no injection of net new money into the domestic U.S. economy even though M3 has increased. On the other hand, if the borrowed Yen are made available to mortgage banks through swaps so that they can write sub-prime loans, a portion of the Yen proceeds may end up in the hands of the general public via draws on home equity lines or profits on home sales. The net effect would be an overall increase in liquidity that will be reflected in the M0, M1 or M2 monetary aggregates.

Okay, let's get back to the idea of money circulation. Monetary inflation in a fractional reserve banking system like ours is a function of three factors: one, the total supply of money available to buy goods, services and assets; two, the supply of goods and services (Gross Domestic Product); and three, the so-called "velocity" of money. The formula for this relationship is contained in something called the "Quantity Theory of Money", which has been discredited by both the Austrian School (100% Gold Standard) and the Real Bills School (Prof. Fekete) of hard money.

Valid or not, the quantity theory is the basis of modern central banking and thus we need to understand it before we can criticize it. Unfortunately, many critics completely ignore the velocity component as they bemoan the ability of central banks to theoretically create infinite supplies of money. I say unfortunately, because the velocity factor is the real Achilles heel of modern monetary policy.

Think of velocity as the number of times a dollar changes hands as it goes from buyer to seller ad infinitum. For example, if I buy a gallon of milk at the supermarket for $3.50, that money will be used by the store's owner to pay salaries, rent, the milk distributor, etc. The employee, landlord, distributor, etc. will in turn spend their portion of the $3.50 on various consumer and wholesale goods and services such that these dollars are constantly circulating around the economy between successive buyers and sellers. The number of times this hypothetical $3.50 circulates in a given period of time is called its velocity.

From this simple example, we can immediately see that the maximum velocity of large time deposits, a component of the discontinued M3, is limited by the maturity date of the deposit. Similar reasons make the actual velocity of other M3 components much slower than M0, M1 or M2.

In fact, it isn't very hard to conclude that the closer a particular form of money is to cash and coin, the higher the inherent velocity. After all, a dollar bill can be spent again immediately but a check takes several days to clear. Moreover, time deposits have a stated maturity before they can be withdrawn penalty free while Eurodollars need to be repatriated to the domestic banks before they can be spent domestically. Another way to look at this is to observe that the average person may spend all of his or her entire cash several times a week (necessitating multiple trips to the ATM for replenishment) but checking accounts are replenished no more than twice a month (when paychecks are deposited).

In effect, velocity is the mechanism through which monetary inflation translates to price inflation. Not only that, but the rate of velocity actually changes over time--while the Quantity Theory of Money would have us believe that velocity has been constant since the ancients first traded beads for fish--such that the rate of price inflation is never directly proportional to the growth in money supply over an extended period of time.

Indeed, what we have are two opposing historical forces. The first is the speed of transaction settlement, which went from immediate in the days before banks to a snail's pace by the 1960's before credit cards and digitized checks came on the scene. Interestingly, the trend in the past 40 years or so has been back toward immediate (real time) transaction settlement. The second force is the advent of financial products that have allowed fiat money to be increasingly viewed as an investment asset resulting from two desirable qualities: transferability and interest. It was Ronald Reagan's deregulation of the banking industry that really got this trend going, which has probably been as important in keeping tabs on price inflation as the advent of international trade. How? Well, remember that all money other than currency is borrowed into existence, but that not all borrowings end up as liquidity in the hands of consumers. In the case of M3, largely made possible by Ronald Reagan, a portion of the new money borrowed into existence has not trickled down to consumers but has rather encouraged institutional monetary speculation via interest rate arbitrage.

Bottom line, it is not appropriate to use M3 as a proxy for price inflation and it is not appropriate to tie the price of gold or silver to a fixed ratio of M3. As such, M3 is not only irrelevant to the Fed, it should be just as irrelevant to PM investors.

AUGUST 7 2007 2:00PM - It was silver's turn again to outperform while a stronger dollar kept gold hemmed in on a day the Fed decided to do nothing with interest rates despite desperate pleas from Jim Cramer. The Fed apparently believes the risks of inflation and deflation are balanced at the moment. That's nice for them as nobody else has a friggin' clue!

I do have a clue about something else, however; the basis is telling us that precious metals may be entering a rally mode with silver set to outperform gold. The signal is not as strong as I would like due to issues with the underlying data, but I hope to shortly mend the data issue by switching to a proprietary formula. This formula is the culmination of many months of research and assuming it will improve upon the data available to the public, my team plans to develop a precious metal trading service around it. More on this later.

On a separate topic, a number of silver stocks got smacked today and several now represent a very solid speculative value. I mentioned Gammon Gold a few days ago, and it continues to decline into Thursday's earnings announcement. I was originally going to wait until then, but the price is now so low that I'm thinking about picking up at least a small position now and then deciding to sell or buy more after I've had a chance to study 2nd quarter operations and 2007 outlook. This is a risky play for speculative money only, but if it works out, the return could be substantial in a short period of time.

Another silver stock that I have my eye on pending the release of 2nd quarter operating results is U.S. Silver. The stock traded down to C$0.80 today, which would be a great value if management has been able to reduce production costs at the Galena mine below $10.00 per ounce. We'll find out soon, but in the meantime I may play any decline to the $C0.70 range in the same way as Gammon Gold--that is, establish an initial position and wait for earnings before deciding on the next step.

Other silver stocks I like simply because the price seems low compared to my assessment of value include Bear Creek, First Majestic, Endeavour Silver, Impact, Great Panther, Kimber, Minera Andes and others. I own or am looking to buy all of these.

Now, a quick update on Sterling Mining, which just completed a $25 million private placement in Canada that should take it to production. The company has also just received conditional approval for a Toronto listing and is apparently successfully testing a revolutionary new water treatment system that is able to remove acidic iron and manganese content from pumped mine waters. If this system continues to be successful, it would have a very positive impact on the startup of the company's Sunshine mine. For now, I continue to maintain a speculative position of under 5,000 shares initiated in June when the Toronto listing and resource figures were announced, with a sell target 50% above my purchase price. I would need to see a number of other corporate developments before considering a longer term investment horizon as I believe this stock, like many others, is fundamentally undervalued for a reason.

I'm also monitoring a number of former high flyers that may soon be soaring again, among them Pediment, MAG Silver, Exeter and the copper-gold stocks Southern Arc and Serengeti. Of these, Serengeti has fallen the most and being the only one I have not traded recently, I am inclined to give it a try especially on the back of an imminent round of investor promotion.

On the less speculative front, I believe Pan American should do pretty well in the weeks ahead based on its 2nd quarter results to be released early next week. With a trailing 12 month P/E around 28, I expect any meaningful improvement in earnings to attract the interest of value bugs.

As you can tell, I've been busy thinking about my silver stock portfolio but please recognize that these thoughts will not always, or even frequently, translate into trades or investments. And hopefully not for you either, unless you've made additional investigations to assess the appropriateness of these opportunities for your own goals and circumstances.

AUGUST 6 2007 2:00PM - Silver was down today while gold managed to recover its losses after the dollar briefly dipped below the 80 level early on but rallied back for the rest of the day. The weakness in silver could be the result of a rebalancing from Friday or the relatively larger amount of capital flowing into gold, which is the ultimate beacon of safety, following the market turmoil last week. As for the equity markets, they rebounded very strongly today on the back of a big decline in oil and commodities in general, which of course could have contributed to the weakness in silver. Unfortunately, PM stocks did not go along for the ride as both the HUI and XAU were down more than 1%.

Conditions continue to be favorable, even if not extremely bullish, for a rally in precious metals in the coming weeks and months, as demonstrated by the steady, moderate investment demand. The iShares silver ETF (SLV) continues to look strong, sporting a positive NAV once again last week, which indicates to me that the recent metal additions were easily absorbed by investors. Another round of silver accumulation looks to be in the works, one that may take the ETF up to 145 million ounces very quickly. This type of marginal demand may not seem very large in the global scheme of things, but constant accumulation like this can create very strong underlying support as well as a base for strong rallies driven by speculative money flows.

Looking at the lease rates, we can now see that both silver and gold have dropped to historically low levels and the bottoming process is not complete. As I mentioned a number of times before, falling lease rates can be a sign of either, or both, weak borrowing demand and/or strong lending supply of metals. When lease rates reach ultra-low levels as we are seeing right now (with a flattening of the lease curve and short rates even going negative compared to LIBOR), however, this could actually indicate a bullish development. In fact, there are at least two potentially positive angles to very low lease rates. First, borrowers may not want to lease because they do not want to be short metal in a market that may rise substantially because of the risk of a large loss, due to having to replace the metal at higher future prices. This is particularly relevant because metal lessees are usually small commercial and industrial users, who tend to have a good grasp of current market conditions by virtue of their transactional position (that is, they are close to the source of ultimate industrial demand and supply). Second, low lease rates may also indicate a desire by holders to not sell metal but instead lend it out for income on the expectation that metal prices will rise. If this weren't the case, potential metal lenders who are facing returns lower than LIBOR would be tempted to sell their metal holdings, invest the proceeds in a debt instrument, and buy the metal back at some point in the future. But doing so would mean missing out on any big upward price moves.

Interestingly, these low metal lease rates might also have something to do with the debt contagion facing the markets by making the lending of metal more attractive to those market participants who might have otherwise sold metal and invested the proceeds in the credit markets, which may now be viewed as unstable and unattractive. Obviously, this only makes sense as long as the risk-adjusted return on credit in the form of interest is expected to exceed the return on metal in the form of price appreciation. My suspicion is that the elevated (awareness of the) risk of default in the credit markets brought on by instability in subprime loans may be reverberating directly through the metal markets. Instead of the crisis of liquidity, however, that seems to threaten many other investment classes, metals may actually benefit from the incipient credit meltdown.

And it is the oft-ignored lease rates that might be signaling the beginning of this critical development! In effect, the gold and silver carry trades may not only finally be coming to an end, they may already be on the way to reversing. A reversing of the gold and silver carry trades, of course, would involve borrowing cash to buy the metals with the expectation that portfolio gains will exceed the rate of interest. Such a strategy might seem like a good deal for lenders as well, especially if metals are pledged as collateral and risk is limited because no leverage is utilized. Such a prospect may seem like a very competitive alternative for creditors seeking safe harbor for underutilized capital in the potentially rough times ahead.

If the above high-flying theory turns out to be even partially true, such a turn of events could perhaps be even more important for gold and silver than the advent of the ETFs. This is because large investment pools, as well as funds that can borrow money to invest in gold and silver, represent an immense supply of capital compared to small individual investors. A lot of money will be required to propel gold and silver to historic levels, and here we have a scenario that does not rely on hyperinflation but rather the funneling of EXISTING fiat credit into gold and silver!

What I'm actually describing here is no less than the possible stealth launch of gold and silver as money, initiated by the private sector but inevitably followed by central banks. Followed how? Well, at the point that central banks can no longer compete in the credit markets because nobody wants to buy treasury securities backed by "full faith" when they can buy investment securities backed by gold and silver, the central banks may also have to start issuing securities backed by gold (they'd back it with silver as well, but they don't have very much of it).

Note that this is the ultimate reversal of the gold carry trade, allowing increased borrowings that would be limited only by how high the price of gold can go.

Note also that this would require cooperation by central banks to keep the price of gold from falling too low so that outstanding gold loans would remain sufficiently collateralized.

Crazy, huh?

I believe it could happen . . .

AUGUST 3 2007 12:30PM - With the dollar falling out of bed today, silver and gold were up nicely, but not quite enough to break through resistance. Meanwhile, the general markets once again held the PM shares back with the Dow down by more than 1% and the S&P 500 down almost 2% (as I write this). The headline news was a despondent statement by Bear Stearns' CFO, who said that the current bond market is worse than any predicament facing the financial markets since the 1980's. This statement is not very surprising from a company desperately seeking to deflect blame for massive losses on subprime loans, but that doesn't make it any less troubling.

We certainly could be in for a roller coaster ride ahead, but the prospects for the precious metals seem unstoppable. The latest example came by way of Barrick, the gold miner held in contempt by most good gold bugs. Even Prof. Fekete, an esteemed and eminent monetary scientist, has an unshakeable disdain for the mining giant that first innovated and then abused gold hedging to the detriment of the gold industry. This is why it comes as a shock that Barrick has been recently researching the future of the gold market and seems to have come up with the super-bullish conclusion that the annual mine supply of gold may fall by 10-15% in the next few years. Actually, the real shock for those who believe Barrick is a lynchpin of the gold price suppression conspiracy is that the company would publicly report any gold-friendly findings at all. Perhaps the projected fall in gold output is even bigger than 15% according to Barrick's research, but Barrick has opted to adjust the data to show a more conservative decline as part of an unending quest to help cap the gold price? Joking aside, I believe these projections, should they turn out to be anywhere near reality, are incredibly bullish for the long-term gold price. What Barrick implies, in effect, is that despite the billions of dollars thrown at exploration in the past 2-3 years, there are not enough new projects even in the early discovery stage (much less development) to maintain the current rate of gold mining as production at existing mines starts to decline in the next few years.

The unanswered question is this: are we approaching "Peak Gold"? We often hear the term "Peak Oil", but there are probably some pretty good arguments against being able to predict when the "peak" date will arrive (some claim never, although that is obviously impossible). Certainly no oil company has put out a prediction of peak production, however, much less one that has oil output dropping by 10-15% within a decade. Yet here we have one of the world's largest gold companies apparently saying that "Peak Gold" is possibly within sight and global gold output could be substantially lower in a few years. Moreover, this is the very company that has placed the largest bets against a higher gold price out of the entire gold industry. Is it possible that the first major natural resource to "peak" in production will be gold?

Okay, enough gold, let's get back to silver. Silver Wheaton, the only pure silver company, announced disappointing earnings today, but the shares held up pretty well all things considered. Pan American will report earnings next Thursday, at which point we shall find out if I was smart to switch last month from SLW into PAAS.

On the more speculative front, there is a Mexican gold-silver explorer I have not previously mentioned but that deserves a closer look. Pediment Exploration is a favorite of several resource gurus including Bob Moriarty (see Oops they did it again), yet still sports a reasonable valuation. The company has just put up some rather impressive drill results, but when you look beyond the headline it should become apparent that they have a long way to go before being crowned "Aurelian Junior".

On the other hand, Southern Arc (one of three copper-porphyry hunters I have been obsessed with lately) may not be very good at putting the best foot forward, but I personally welcome management's conservatism and professionalism. By the way, I believe Bob Moriarty is wrong to prod Southern Arc to be more aggressively promotional with the drill results: sophisticated investors have no problem interpreting them and rank amateurs should not even try. A company should, of course, always make sure its investor communications are easy to understand as well as accurate, but I'm just not seeing where Southern Arc is falling drastically short of the ideal. Bob also suggests that Southern Arc should headline the widest drill interval possible instead of just the portion that most investors can recognize as being economically mineralized. I think this would be a horrible mistake for a number of reasons and so I hope Southern Arc has the fortitude to remain conservative.

Getting back to Pediment, the company has a number of solid projects and the current drilling at the San Antonio project on the Baja Peninsula is enough to justify the share price all by itself. I haven't studied the drill results very carefully, but my initial take is that Pediment could be looking at a significant gold deposit (possibly both a low grade open pit and a high grade underground mine as the deposit continues to depth, which has been a common feature of the world-class gold-silver projects in Mexico such as Goldcorp's Penasquito, Gammon's Ocampo and Palmarejo). Having said this, it might be a good idea to wait for a pullback before considering a purchase. On the other hand, there doesn't appear to be a large share overhang from recent financings and the float appears rather tight.

Both Southern Arc and Pediment remain highly speculative and very risky but have the potential to generate huge returns in a short period of time (on the order of 300-500% within 18 months). For now, I will watch both for a good entry point and will try to report on any success (I don't own shares in either company at the moment).

AUGUST 2 2007 2:30PM - Some signs of returning physical demand are starting to show up, among them a persistent if moderate level of ETF buying in both silver and gold, a robust trade in COMEX warehouse deliveries (the warehouses have been used apparently to satisfy offtake demand for several months in a row for both silver and gold, something that was more intermittent in the past--more on this later, I promise), a relatively healthy position in the Commitments of Traders and perhaps most importantly the possible signs of an impending rally according to the basis. Overhead technical resistance remains firm and strong, but should it be taken out for some reason, the possibility of a strong rally in August-September should not be discounted.

AUGUST 1 2007 12:00PM - After a strong early rise following another test of the $12.72 level basis the September COMEX contract, silver (and gold) struggled the rest of the day while the PM stocks got another drubbing. It seems whenever general equities have been weak, the PM stocks have been even weaker. This could change at some point but in the very short term it should be a real concern for traders. Also, those who are deploying new capital into PMs and PM shares should consider the possibility that future weakness in general equities may provide a fantastic buying opportunity in the PM stocks. As it stands now, there are some very good deals out there. Personally, I've been looking at Gammon Gold, which has been beaten down as a result of poor operating results and management issues. I might wait until second quarter results are released on August 9, unless the stock goes significantly lower before then (under $10). Formerly a high quality PM stock, Gammon Gold at this point is a speculation, but in my opinion not a bad one near current prices. It will likely return to being a high quality PM stock at some point in the future, and that development alone should be good for a double in the share price. I don't own any shares at the moment. Another stock I'm looking at accumulating is Kimber Resources (I own 1,000 shares). And there are many more that remain at very attractive valuations that could easily see a double from current prices upon resumption of the PM bull market. So if you have money to spare, this might not be a bad place to nibble.

JULY 30 2007 2:00PM - Speculative support at $12.72 basis September COMEX pretty much held after hours Friday and during the Asian and London markets this morning. After escaping such a close call, silver was able to take advantage of renewed trading interest as soon as the COMEX pit session commenced this morning. Gold and PM stocks also participated in the rally but all remain well shy of their breakout thresholds. For now, we will need to wait and see what the market gives us since there are a number of competing reasons for a substantial move in either direction.

JULY 27 2007 10:00AM - Another tough day for silver and gold but certainly not as bad as it could have been. I have calculated a new level of speculative support for silver at $12.72/oz. basis the September COMEX contract. This level was very briefly breached earlier today but there was an immediate recovery and several subsequent attempts to sell silver down were thwarted here. Still, I will probably lighten my speculative exposure should this level fail to hold. On the other hand, silver investors looking for a good buying opportunity should search no further -- metal and PM stock prices may not be this attractive for very long. Thus, I continue to advocate steady accumulation to those investors underexposed in this sector (I would consider underexposed to be less than 25% of net worth, across all forms of precious metal holdings including the minimum 10% that I believe should be the core holding of physical bullion owned directly and securely).

JULY 26 2007 2:00PM - Okay, that was ugly! My speculative hopes remain alive by barely a thread as we have now retraced 50% of this summer rally over the course of 3 days. Unfortunately, the lack of conviction in breaking to new highs in silver, gold and PM stocks has now created powerful overhead resistance and a pattern of lower lows and lower highs. For example, take a look at this chart of September COMEX silver:

I don't even need to draw in the obvious top channel line marking the lower highs since February of this year. And if this isn't discouraging enough, the lows of today pretty much need to hold or we could be in for a rough time in the days ahead. On the other hand, there should be good support here, so there is a good chance silver will resume its rally. Basically what I'm saying is that a few cents in either direction is likely to lead to a lot more.

It would certainly be helpful if the fundamental indicators provided a clear picture, but that is still not the case. Lease rates remain tepid, COMEX warehouse activity (on which I will comment more in the next few days) is not particularly encouraging and ETF demand remains modest. Open interest and commitments of traders on the COMEX are not saying much either. And the dollar, of course, may not be ready yet to head much lower. Finally, the basis still appears to favor gold, which is usually the case during PM weakness. Bottom line, this remains a technically driven market and every good opportunity for improvement in the fundamentals continues to be wasted.

JULY 25 2007 5:00PM - The dollar index closed below the "magic" 80 level late yesterday yet silver and gold continued to remain weak in after-hours electronic trade, which set up today's steep drop in the PMs as the dollar finally caught a break. I'm not terribly upset by this turn of events because it falls into the general shape and timeframe of a retracement. The $12.50 level in silver continues to be the key.

Today, I would like to provide a brief update on the silver ETF situation. As of yesterday, the Barclays iShares ETF (SLV) has reached a new record of 141.7 million ounces, although this latest addition was somewhat tenuous since it has caused the NAV to go further into negative territory. What this tells me is that silver demand is there but it remains modest.

Moving on, I am happy to report that the ETF Securities ETFS Physical Silver product (yes, the one with the phonetically controversial trading symbol, the utterance of which got at least one TV actor in the U.S. fired from a nice role) now holds approx. 2.3 million ounces of silver after three months of trading. Although not a big number at this point, it does look to grow in the future and so I have decided to start reporting it in my "Silver Alerts" section. This ETF remains the only one that publishes a bar list of its silver holdings. Notice, however, that for now we don't actually know when the 2.3 million ounce level was reached since no reporting date is given for the bar list (I have contacted the ETF about this, and would suggest others do the same).

Meanwhile, the only other physical silver ETF to be launched so far (as if 3 weren't enough), the Swiss ZKB Silver ETF, still has not provided an official accounting of its holdings. Without this, my best estimate based on trading volume and market data is that it holds perhaps just a little more than 1 million ounces of silver at this point (despite earlier reports that it already held around 2.5 million ounces just two weeks after commencement of trading). I will be providing an update on this ETF in the near future and I hope to be pleasantly surprised by the size of its silver position if and when it is reported.

That's it for ETFs, now I'd like to move on to Ted Butler's latest commentary in which he makes the point that a large concentrated short position is an undeniable sign of market manipulation, whether a position is backed by physical metal or naked. I couldn't disagree more. Why? Remembering that a COMEX short position is essentially a sale, try to answer these question:

Is it manipulation for someone or some group that owns (or has claim to) X million ounces of silver to SELL that silver?

Specifically, was Warren Buffett manipulating the silver market when he sold his 130 million ounces?

More generally, can it ever be called manipulation when someone or some group that owns a large quantity of something decides to liquidate its position?

Clearly not! Therefore, it is critical to establish whether or not the commercial shorts in COMEX silver are naked. If they are not, the short positions are merely sales. And I maintain they are most probably not naked, though I will admit that at least a portion of the commercial claims on silver are backed by nothing more than paper (see my recent work on the U.S. Mint's practice of selling excess inventory via the COMEX using derivative contracts). Bottom line, until someone can conclusively demonstrate (good luck!) that commercial shorts do not have access to the silver they have sold short, there is simply no basis to assume that they are naked.

What about the accusation that the concentration of shorts (sellers), even if not naked, is tantamount to a price suppression scheme? Mind you, not just manipulation of the market for the sake of trading profits but a concerted effort to keep prices artificially bottled up for long time periods. My response, pat as it may be, is that long-term price suppression of tangible goods has never, ever succeeded in the history of mankind. The reason? Prices simply cannot be kept at artificially low levels through excessive selling of an item in limited supply. Even if sales temporarily overwhelm inherent demand, the imbalance will eventually prompt additional demand as well as new uses that were once irrational. Any seller attempting to suppress prices would face mounting losses while buyers would benefit proportionately.

In contrast, attempts at price suppression of intangible goods, where supply is not strictly limited, have some historical precedent (national currencies, dumping of products in order to drive competitors out of business, etc.) though the results are often ill-fated. Still, the practice is assumed by many to be more prevalent than it actually is. For example, the supposedly widespread problem of naked shorting of stocks is actually a relatively rare phenomenon. Why? Primarily because there are few people stupid enough to try it. And even if there were more of them, it would take a special kind of company to be enough of a basket case to succumb to a price suppression scheme (e.g., naked shorting). Enron might certainly fit that bill, although its demise was hastened by reckless management not shorting. The situation is simply not all that common.

It is quite ironic, then, that silver bugs might think somebody would be willing to try suppressing the price of silver since such a stance would essentially amount to a tacit admission that silver is susceptible to manipulation as a result of some fundamental weakness. Yet, the very argument used to reassure fellow worry warts is that silver is strong enough to eventually overcome the manipulation. So, which is it? If silver is fundamentally a good speculation from the long side, it is highly unlikely that anybody would ever try suppressing its price. To argue otherwise is to try keeping your cake and eat it too.

What about the alleged manipulators, who are they exactly? Mr. Butler's latest theory on this appears to be a sharp detour from his past thinking: the manipulation is now apparently the work of rogue elements in the metal divisions of a few major financial institutions, and the previously guilty heads of these firms are now just blissfully ignorant simpletons who are unaware of it all. While this model fits better with historical examples of rogue trading in commodities and derivatives (Sumitomo and Barings Bank spring to mind), I find this revamped theory just as difficult to believe as the original. For one, the advanced trade reporting systems and controls used at the major banks that are likely among the largest commercial traders on the COMEX make it very unlikely that large unauthorized or undocumented transactions can be hidden for a sustained period of time (if even a day). Second, the monitoring and periodic inquiries by regulators at the COMEX and CFTC are designed to circumvent rogue traders by maintaining contact with a trading firm's compliance and internal audit departments. That is why in America, when traders blow up a company, they do so with the full backing of management! What I'm saying is that Mr. Butler's original theory actually made more sense.

Continuing with the theme of common sense explanations, let me offer a few more reasons why the popular theory that a large concentrated short position exists "only" in silver as a result of manipulation is pure bunk. First, let's consider the idea of diamond futures, recently proposed as a means to create price transparency in a market dominated by insular trading. De Beers dominates the diamond industry through its wholesale operations that account for 40-50% of the trade by volume, so it will be interesting to see what level of commercial trading concentrations would appear in diamond futures over time. My guess is that if De Beers did not constitute the major commercial position in diamond futures, the diamond futures market would simply fail to create price transparency. Simply put, a market cannot determine prices without the participation of the major players.

But here is the really interesting part as it pertains to silver. Would De Beers maintain a long or short position in diamond futures? The obvious answer is that De Beers is already long in physical diamonds and would therefore need to use futures as a sales mechanism, that is, De Beers would have to maintain a net short position in diamond futures. This is not only natural, but if it were otherwise, De Beers would rightfully be guilty of price manipulation. After all, who would think it proper for a single entity that already controls 50% of a market to consolidate its dominance to an even greater degree? In this instance, a long position in diamond futures would consolidate De Beers' dominance while a short position would de-consolidate it.

Think about it for a second and then apply this fictional example to the real world of silver. Doesn't it make sense that commercial traders in silver might be short by a large margin only if they maintained a dominant claim over physical silver on the long side? Why else would, or could, they be short?

Bottom line, why is the commercial position in silver concentrated on the short side? I would offer that this is simply the case because the small size of the silver market makes it susceptible to scarcity and attempts to corner it. The Hunt Brothers come to mind. As a result, the commercials are long in off-market forms of silver where there is no regulation, including derivatives and physical metal. They use the COMEX primarily for shorting (selling) their long positions. They have no other choice in a market like silver since market regulators would otherwise be all over them like white on rice (pardon the cliche but you'll shortly realize its comedic intent).

Still don't believe me? Okay, I'll try one last time to convince you. If I'm right about silver, other small, susceptible markets should have similar concentration ratios and distributions of commercial position. Can you think of any comparables? Let's see . . .  oh, here's one: rough rice. Yep, the 4 largest commercials traders in rough rice are net short a massive 251% of the net commercial short position as of the latest reporting period. Compared to the 109% concentration ratio for silver touted by Mr. Butler, rough rice must therefore be manipulated at least twice as much!

No fair, you protest, rough rice is a small market like silver, but it is not a metal! Okay, let's try palladium. Aha, you exclaim, the concentration figure is only 50% for palladium! Well, before you get too smug, you might try noticing that this concentration ratio is "so low" only because the commercials in palladium are short a staggering 90% of open interest on a gross basis. That compares to a mere 64% for silver. What this means is that traders other than commercials are short about 36% of the contracts in silver but only 10% in palladium! Imagine that, the short side of every 9 out of 10 contracts in palladium is held by a commercial trader! Following this logic to its natural conclusion, palladium clearly must be manipulated to a much greater extent than silver.

Finally, what about the most precious of the precious metals, platinum? Prices in this tiny market are also apparently suppressed by the commercial interests since the concentration ratio, as with palladium, seems low at 56% until we find once again that commercials absolutely dominate this market. And just how thorough is the alleged manipulation by commercials in platinum? They hold a massive short position representing 86% of all platinum futures contracts, that's how.

Of course, there are similar concentration ratios in much more liquid markets from time to time and so these must also be manipulated by the commercials. A couple you might want to check out right now are the Canadian Dollar and the British Pound. No more or less remarkable than silver, they all seem to have at least one thing in common: they are in strong bull markets despite the alleged price manipulation that is so reasonably beyond doubt based on the commercial dominance and concentration on the short side. With enemies like this, I ask, who needs friends?

JULY 24 2007 12:15PM - A general equities meltdown is turning what would otherwise have been a stellar day for silver and gold into another missed opportunity. Before succumbing, silver managed to almost reach $13.50 on a cash basis earlier today, but is now trading at just $13.30 as I write this. The PM stocks are also weak with many silver companies down several percent. While unfortunate, this spillover is likely to be short-term, perhaps representing the short break that PMs need before charging higher.

I have just posted the latest of Prof. Fekete's articles, in which he argues that the dollar is not about to crash. What's more important to gold and silver, argues the professor, is that interest rates are set to continue their multi-decade decline because derivatives have made bond speculation risk-free and therefore in great demand. Such a trend is not easy to change, and the powers that be are not interested in changing it. Thus, gold and silver bugs should ignore the noise and accumulate on dips, never selling. At some point, the basis will turn permanently negative indicating infinite demand for, and zero supply of, gold and silver. This is another groundbreaking paper by Prof. Fekete and I urge all to read it.

JULY 23 2007 3:30PM - After some early PM strength, Monday turned into a rather lackluster session as both silver and gold declined while the PM stock indices, the HUI and XAU, slipped just below their respective breakout levels. Not much going on today with individual silver stocks either. Stalling the momentum at this point would be an unwelcome development, so hopefully we get a quick backfill over the next few days and then a resumption of the move higher. I am still looking for the $12.50 level in silver to indicate that the current rally is a bust, which would likely lead to a furiously fast decline to $12.00 and possibly below.

I've updated the basis chart as of last Friday and the data now shows a slight advance in the silver basis over the past few days while the gold basis has actually remained somewhat tight. One way to interpret this is that physical demand for silver continues to be light and thus the white monetary metal remains vulnerable to the downside. Another interpretation is that silver may be having some trouble keeping up with gold on the way up. The latter position is supported by recent prices with the gold-silver ratio remaining relatively constant while both metals have rallied almost 10% since late June. Normally, silver would outperform gold on the way up but that has not been the case this time. Interestingly, the silver and gold basis seem to have predicted this exact development! Prof. Fekete and I will be explaining how and why at the Gold Standard University to be held in Hungary on August 17-24, 2007, so if you are interested in learning more about the potential of the basis as an investment and trading tool, please register before the limited spaces are gone.

JULY 20 2007 4:30PM - Somewhat disappointing that silver was unable to overcome resistance today as gold continued to romp and the dollar deteriorated. The general stock market weakness may have had something to do with this, and the rotten sentiment on Wall Street also kept the HUI, XAU and most PM stocks in check. There were a few exceptions, most notably Silver Dragon (SDRG.ob) which finally bounced back from a very oversold level and MAG Silver. MAG continues to amaze with its drilling and the recent AMEX listing has obviously helped as well. Indeed, its meteoric rise of almost 600% since last July makes it the best performer on my short list of silver stocks. Only Energold (the drilling company that also owns 6 million shares of Impact Silver) even comes close to MAG's spectacular performance. Few other silver stocks have even doubled since I put these lists together last November, and many are down by more than a bit. So if you own MAG and/or Energold, congratulations!

As predicted, the iShares silver ETF SLV has crossed the 140 million ounce threshold with ease and it looks to continue gobbling up silver even while physical demand from other corners of the market remains subdued.

To wrap up the week, I'm going to post a comment here that I made in response to the article Money is Also Destroyed by Michael Nystrom. This topic is very important and timely and I would urge those who seek a greater understanding of money and the future of the global economy to read this article and the comments that follow it on Mr. Nystrom's website. Hopefully my own comment should make sense on a standalone basis, but just in case it doesn't, let me summarize Mr. Nystrom's piece. He was basically saying that losses on subprime mortgages could cause a deflationary decrease in the money supply since investors' money has been "destroyed", such as what has happened with the recently failed Bear Stearns hedge funds. My comment addresses this theory:

Loan defaults themselves don’t cause deflation since by definition a loan that is not repaid will permanently add to money supply (ie., create a permanent inflation in the money supply). It is the sentiment toward lending and borrowing — leading to a net REPAYMENT of loans and a contraction in the credit (money) supply — that can create deflation. Written-off loans are NOT “repayments” and only factor into the equation in terms of future lender behavior. In effect, the only thing that really matters is sentiment, which explains why the Fed has a singular focus on it to the point of obsession. Interestingly, one of the major failures in Japan’s attempt to fight deflation was the unwillingness of Japanese banks to write off bad loans. Had they done so as quickly as it is done in the U.S., perhaps things would have turned out differently.

JULY 19 2007 11:30AM - Strength in gold and silver today has contributed to a breakout in the HUI above 370, which represents the highest intraday level for this popular index since May 15, 2006. The XAU has also broken out, reaching its highest level since May 12, 2006, which was the day after the bull market high of 171.71. Meanwhile, the dollar appears to be stabilizing just above 80 on the dollar index but is certainly not out of the woods. In any case, even a small move by the dollar to the downside can be expected to drive the PMs higher, as was the case today. I wouldn't rule out a major advance by the monetary metals at this point based purely on market sentiment and technicals, even in the face of a moderate rise in the dollar.

On the fundamental front, I am expecting the iShares Silver ETF SLV to break the 140 million ounce barrier any time now with demand for this ETF appearing to have returned lately as evidenced by the rising NAV. Volume has yet to recover but when it does, a lot of silver could end up being added to the ETF's coffers in a short period of time.

Over in London, daily trading volume in silver declined in the month of June to 112.4 million ounces per day as just reported by the LBMA, indicating that a seasonal lull of activity is at play in the physical markets. This level of trading is still relatively strong, however, in comparison to the average trading volume during the current bull market. That average is 117 million ounce per day since July 2003, but accounting for the rise in the price of silver, the actual dollar trading volume is obviously much higher now than it was near the beginning of the bull market. In fact, I would consider the recent London trading volume to represent modest but steady interest in physical silver at current prices, which is a big positive in my book.

I'm also starting to see the low silver lease rate as a potential positive, in the sense that it could very well indicate an unwillingness to borrow silver into the marketplace due to widespread fear that the price could explode to the upside and result in a large loss for the metal lessee. In effect, the current situation is in marked contrast to the persistent selling and shorting of silver throughout the late 1990's and up to 2003 as various hedging and derivative strategies required the disposal of physical metal in the spot market. Perhaps of all the positive forces supporting higher silver prices, I would be tempted to list this factor as number 2 after the advent of silver ETFs. Certainly more important than emerging industrial uses of silver such as radio frequency tags (way in the future), wood preservatives (the jury is still out but I am leaning toward pessimism in this area) and the like. This should come as no big surprise since I have been very conservative and at times downright negative on the issue of growing demand by industry as a major factor in silver's price rise. Indeed, I remain virtually the only serious student of the silver market who seems to feel this way, in stark contrast even to the establishment expertise as recently demonstrated by Virtual Metals' (now VM Group) Jessica Cross.

This low silver lease rate is sort of a double-edged sword, however, since it probably also means that speculation is largely absent from the physical market at present. Such speculation often shows up in the spread between short and long lease rates, which tend to widen as a result of the arbitrage strategies employed by professional market participants. Although I haven't updated my own chart of silver lease rates, a quick peek at the Kitco site does seem to show the beginnings of perhaps an encouraging trend: the spread between silver lease rates appears to have bottomed in June and may be poised for a rebound at least to historic norms. I would consider such a development to be very encouraging as speculative interest is by far the most powerful price driver in the markets, whether it is silver, copper, oil, stocks, real estate or what have you. Thus, the level of speculative interest toward silver is something on which we should keep a close eye. Right now, there appears to be nowhere to go but up.

JULY 18 2007 10:40AM - I would like to announce that I will be attending Prof. Fekete's Gold Standard University Session II in Hungary from August 17-24, 2007. In my estimation, Prof. Fekete is one of the world's top 10 economists and monetary experts and #1 when it comes to the role of silver and gold as money in the past, present and future. This seminar will be a unique opportunity to learn from, and share ideas with, dedicated amateurs, professionals and experts in diverse fields who share a common interest in money and PMs. As a special feature of the session, I will be presenting a summary of my own research on the basis and discussing ways to implement its signals and indicators in various trading and investment strategies. There will also be opportunities to discuss topics of interest both in small groups and on a one-on-one basis. This promises to be a very memorable, timely and profitable experience for those fortunate enough to recognize and seize the opportunity. To make sure you will be among the lucky few, please waste no time in reviewing the Announcement and Program details and then contact Prof. Fekete as soon as possible. Hope to see you there!

JULY 18 2007 10:30AM - A bust-out by silver and gold this morning as the dollar succumbs to gravity. If it weren't for general weakness in the stock markets, the PM stocks would be zooming higher as well, but still the HUI has managed to pierce the magical 360 level as I write this.

JULY 16 2007 12:30PM - Today was a strange day in terms of market action with both silver and gold zig-zagging back and forth like a yo-yo. The dollar recovered from early weakness but was unable to reach positive territory, so it was somewhat disappointing to see the PMs drifting down. PM stocks had an especially difficult day, although some like Avino and Mag Silver were up nicely. Still looking for the HUI to break through the 360 level with conviction and days like today are not very encouraging. I'll have more to say later after I update the website.

JULY 13 2007 9:30AM - The PMs seem "frozen in the headlights" today, unsure of their fate. It all seems to be up to the dollar at this point, so today I'm going to dwell a bit on the possibilities. To start things off, here is some reader mail and my response:

Q: [...] I'm very interested by your last analysis about the dollar. I'm also quite sure that this new downtrend of the dollar will trigger the new bullish trend on the PM. You say: "a projection of the downtrend channel established in November 2005 indicates that support might only be found down in the 74-75 area on the dollar index". Could you say a little bit more, I don't see it on the charts?

A: I am projecting out about 6 months for the dollar to reach the bottom of the channel (actually more like a divided highway at this point) somewhere between 74-75 (see chart). I also have a precise bottom target of 73.61 which could be reached by May-June 2008, probably after a dollar rally of 7-8 points between now and then (perhaps from a low of 76 or 77 in the next few weeks?). Obviously this scenario would imply the powers that be will succeed in engineering a soft landing. On the other hand, the dollar could rally from here all the way up to 84-85 and still keep the downtrend intact.

(click on image for better version)

I would like to add that I believe charting and technical work have their limitations -- for example, the more obvious the pattern, the less likely that it will play out as expected. Since there are dozens of different ways to see the same chart, someone is bound to be right at any one point in time. The problem is that it is impossible to tell in advance who that is going to be! I personally like the above chart, however, for its visual simplicity as well as its clear retort to those who think there is no bottom in the dollar below the 80 level. As for it being obvious, I haven't seen much publicity around this particular pattern although I must admit that I haven't looked very hard. As I just said, obscurity is an encouraging sign of predictive potential in my book. So if this particular way of looking at the dollar's technicals is already commonplace, I'd appreciate being corrected so I don't get carried away. And before I forget to say this, we could very well be witnessing a double bottom in the dollar right now, as unlikely as that may seem.

In the end, if we are able to keep things in perspective, we shall realize that it isn't the charts that are going to save or bury the dollar . . .

JULY 12 2007 12:30PM - Silver and gold romped today as the dollar remained in record low territory. Even if the dollar were to bounce here, the fact that it has taken out the December 2004 low is meaningful in terms of its future direction. Indeed, a projection of the downtrend channel established in November 2005 indicates that support might only be found down in the 74-75 area on the dollar index. And for the purposes of timing, such a decline can certainly occur over the course of a month or two. This timeframe fits in very well with many of my other fundamental and technical indicators, which have been pointing to a major, perhaps historic, rise in silver and gold prices this summer. It may not be long before my call for $25 silver actually starts to shed the vestiges of lunacy.

On the PM stock front, the XAU has broken out today and looks to close above the psychologically and technically important 150 level. On the other hand, the HUI is still futzing around below 360 and needs to move convincingly north of that level before investors are likely to start mobbing the PM stocks. Yet despite these indexes being near or at record levels, there are still a number of silver companies that are well shy of their own records set last year -- some that I like here include Bear Creek, Avino, Starcore, Impact and Sabina (most of which I own). Also, Silver Wheaton and Pan American are both doing very well, although my horse at the moment is Pan American for the reasons I mentioned recently.

On the physical demand side, the iShares silver ETF SLV added another million ounces yesterday and is now knocking on the door of 140 million ounces. I continue to believe that investor demand for this ETF could pick up very quickly, leading to the gobbling up of a lot of silver over the course of a few days. Perhaps our first clue that this is happening will be the recovery in lease rates, which already seem to be completing a bottoming process.

I'll close today with a quick update on the Serengeti/Southern Arc/Exeter speculation, with which I seem to have become obsessed. First off, I am nearing the point at which I will re-establish a position in Southern Arc. Second, I still keep trying to make sense of Serengeti's drill plan but I'm in no hurry to buy the stock at the moment. Last but not least, my sense is that Exeter is due for another report on its progress (still looking for those re-assays of silver found in the extremely high grade drill core) so it might be a good time to buy it again soon.

JULY 11 2007 1:00PM - The latest paper by Prof. Fekete is now available. I'll provide my comments later.

I also wanted to point out the eye-popping drill results that MAG Silver has just released, which are some of the best that I have ever seen. Here it is in a nutshell:

The stock is already on a tear based on news that it will soon trade on the AMEX and I must say this is one company I should have focused on more (and had more of it in my portfolio). Around US$500 million market cap, the stock is not quite the bargain it was last year but it could very well see another 50% rise from current levels before the year is out. I hate buying on such monstrous strength, however, so I would look for a pullback before indulging.

Next up is Endeavour Silver, which seems to have regained its footing on the operational front. In fact, today's announcement that silver equivalent production for 2007 should exceed 3 million ounces may represent the confirmation of a turnaround. The market has yet to react with any degree of fervor but the stock is arguably due for an upward revision and it would be reasonable to expect a 50% or bigger move to the upside before year-end. In terms of Don Hansen's analysis from last November, operations are still somewhat behind expectations but barring any major disappointments, there may be quite a bit of momentum in the positive direction.

JULY 11 2007 10:00AM - The dollar today reached an all time low for its bear market but neither the PMs nor the PM shares appear to be in a celebratory mood--yet. The HUI in particular needs to tackle a technical ceiling right at 360. I don't believe much is required to trigger massive buying at this point but we must be mindful of the downside. In particular, my speculative fervor will be nullified if cash silver closes below $12.48. Until then, green lights ahead.

JULY 10 2007 4:00PM - Wow, a lot of commentary and market action today! As I write this, the dollar continues to wallow on the razor's edge and its next move could turn out to be perhaps the most important development for the PM markets in over a year. Unfortunately, the general stock market is teetering today and this has resulted in no carryover effect to the PM stocks on what might otherwise have been a pivotal day.

First up today, I would like to point out that the various pundits are starting to take notice of a recent paper written by Frank Veneroso, GATA consultant and "nuclear winter in base metals" proponent, based on his speech in April 2007 to the World Bank Executive Forum. In this paper, Mr. Veneroso argues that base metals have been subjected to an extreme level of derivative and hedge fund speculation which have resulted in historically high, unsupportable prices. In his view, this will shortly end in fiasco as copper, zinc, nickel, lead, aluminum and the rest sink in price below the marginal cost of production (falling 80% or more). Let me just say that Mr. Veneroso brings a tremendous amount of research and logic together to make these conclusions and that in the long term, he is absolutely right. Steve Saville points out, however, in the first major piece to criticize this work, that Mr. Veneroso has failed to account for inflation in his analysis. That is, a portion of the recent increase in base metal prices has been the result, in Mr. Saville's opinion, of the tremendous rate of increase in money supply, especially M3 and other high-order monetary aggregates.

While I think Mr. Saville makes a valid point, I actually have a slight twist on his observation: it isn't incipient inflation, per se, that Mr. Veneroso has failed to account for but rather the declining purchasing power of the dollar in terms of other currencies. That is, in almost every other form of money the rise in base metal prices has not been nearly as big. For example, copper is up by a less impressive 200% in terms of euros compared to the 400%+ gains in terms of dollars. Still, failure to account for this currency effect does not make Mr. Veneroso's work any less relevant, it only means that the timing of when he will be proved correct may be somewhat delayed. This is because the situation can possibly go to much greater extremes, and it may take some time to get there. When we consider that only a small portion of the liquidity created during the most recent credit boom has been deployed into commodities, there might in fact be a lot of room left to the upside. At the end of the day, however, Mr. Veneroso will turn out to be absolutely right and for this reason every PM and resource investor owes it to himself or herself to read and understand this important, seminal research paper from cover to cover (I would note that the paper is still a draft -- work in progress -- so it might make sense to wait if you don't wish to read it again when a complete version becomes available.). I will even offer to help you figure out some of the more esoteric concepts if you are willing to invest the time to study this critical piece of work.

As far as what this all means in my worldview of the resource sector, I still believe that base metals will experience a severe decline toward the end of this year which is likely to punish most base metal mining and exploration stocks. What comes after that is anybody's guess, but at this point I am thinking that a strong level of support will form at some intermediate price such as $1.50 copper and this will serve as a launching pad for another major rally somewhere down the road. What I'm saying is that the coming washout in base metals in unlikely to bring the current resource boom to an end. In the meantime, I will continue to seek refuge in silver and gold dominant resource stocks.

Next, I would like to discuss the drilling results announced by Serengeti today. On July 5th, I noted that the drill plan made little sense to me but what I didn't mention is that I expected the results to provide very little new information, and therefore to disappoint. I based this thinking on my personal opinion that the hole locations were not very aggressive. Combined with a runup in share price, this was a classic setup that we have just witnessed with Southern Arc a couple of weeks ago. Unfortunately, my suspicions turned out to be correct and Serengeti was whacked for a brutal 35% loss today after reporting drill results which were pretty much identical to the type of results that previously drove the shares more than 2000% higher in less than 6 months. Interestingly, nothing has really changed with the prospects of the Kwanika project because the high grade core of the copper porphyry seems to be located southwest of the current holes, where Serengeti has not yet drilled any holes. Simply put, what we have here is a failure to manage and execute based on market expectations: the company should have put at least one new stepout hole into the high grade zone that they already know exists! Oh well, at least now there may be an opportunity to acquire the shares at a more reasonable price, which I may do after letting things cool off and studying the results more closely. And why again am I discussing Serengeti and Southern Arc, two gold companies hunting for gold-copper porphyry's? Oh yes, I said that one or more of these companies, along with Exeter, might help stoke the collective imagination of resource investors who are seemingly bored with this bull market. Well, so far I seem to be spectacularly wrong, but I'm hoping we are in the early innings.

In closing, I am going to quickly discuss a couple of silver stocks. First, Mines Management continued on a roll today and appears poised for a major move. I have not added to my position as yet but I am still looking for a quick 50% move higher (to $6 or so) on a technical breakout. Second, Sterling Mining continues to rise toward my $5.00 - $5.25 target without the benefit of any publicity surrounding its reported resources or any acknowledgment of its pending Toronto listing. Unless something bad happens in the next few days, I expect SRLM to very soon reach my 50% profit target at which point I will exit this speculative play.

JULY 10 2007 10:00AM - The jump in silver today has been convincing enough that I have turned my speculative mental flag green indicating that I am prepared to increase my speculative leverage to a possible big rise in silver prices within 3 months. This indicator may change again very quickly as volatility picks up, yet I am prepared to suffer up to a 50% retracement (a bit below $12.50 in spot silver) before giving up on the notion that we have a new rally on our hands.  I am retaining some caution, however, in the form of a yellow short term flag representing the very real possibility of silver revisiting, or perhaps even sinking below, its recent bottom. As I've mentioned earlier, I don't plan to change the short term flag to buy until I am fairly convinced that a rally will convincingly take out the $15 level. With the dollar's ugliness today bringing it to the verge of a major breakdown, we could be in for some real fireworks in the weeks ahead. 

JULY 9 2007 3:30PM - I have just reviewed the latest traffic and visitor rankings for my website and I was pleasantly surprised to see that I am no longer just talking to myself (and a few loyal followers)! It seems that word of mouth is slowly spreading that a crazy, notoriously combative and irritable heretic (me) has recently landed in the midst of the complacent PM community. For now, all I can do is thank you, the readers of this website, for recognizing at least the entertainment value in what I have spent quite a bit of time toiling over this past year. In the near future, however, I plan to turn this "hobby" into a legitimate enterprise as I have been threatening to do from the very beginning. Don't worry, this doesn't mean that SILVERAXIS will change in any significant way as I plan to continue collecting, organizing and dispersing the most important and relevant information about the silver market (as judged by me).

The main problem with adding a profit-based service to my repertoire is that I want to do something both unique and useful that provides true value. That is what attracted me to the silver and gold basis, which we continue to refine, in collaboration with Prof. Fekete, along a number of different paths. By the way, our introductory analysis will be revealed in August at Prof. Fekete's Martineum session in Hungary. Please contact me for details.

I am also working on several other projects that may be revealed soon, one of which is a professional trading strategy involving the ETFs, while another is a unique trading and investment tool for resource stocks. I expect that these products will be offered on a subscription model, but as a show of my gratitude to SILVERAXIS readers, I plan to offer them to you at a significant discount or perhaps even for free. All you have to do for now is stick around so that you have the opportunity to be among the limited number of guinea pigs ... errr, founding subscribers ... for these valuable services. In closing, thanks once again for being an active, participating audience to what otherwise would be a sad and lonely soliloquy!

PS: I've been asked why I don't maintain a blog where readers can comment, and the answer is that the format doesn't work very well for what I'm trying to do (help cut through the garbage to find market gems). On the other hand, it would be nice to have a place where my most outrageous ideas can be freely flamed by one and all, so I am looking into setting up a simple blog for that very purpose. If and when I do, the one thing I ask is that people post comments only when they disagree with me or would like to add something that I missed. More on this later.

JULY 9 2007 3:00PM - Silver managed to peek above a critical level today with respect to my estimation of its technical requirement to rise at least 60-70 cents above its recent lows. Alas, silver could not hold this level into the close and so it looks like at least another day or more is needed for short term resolution. Gold, on the other hand, had an excellent day by rising more than 1% without much help from the dollar, oil or otherwise. PM stocks continued to rally as well with the HUI closing above the 351.85 minor resistance level set in early May. It appears inevitable that HUI 360 will be taken out as well. I am once again on the verge of turning outright bullish on the short term and I've even started to again mull the outrageous notion that silver could rally above $20, perhaps to $25, this summer. The possibility is certainly not ruled out by technical and fundamental considerations and I really like the contrarian angle as well. On top of being almost fully invested, the most important thing that I have done so far to position myself for this possibility is to buy a few $15 call options. I fully expect these to expire worthless but I couldn't resist--very few "opportunities" provide such awesome leverage that you could be wrong 9 times out of 10 yet still make a killing overall. In this instance, the best case scenario is more than a 100-to-1 return in 6 months or less. At this point, I'm willing to risk a couple thousand dollars on that proposition.

Now I would like to talk about Mines Management, a company I last mentioned a few months ago. MGN made a powerful 16% move today off a "brutal" low around $3.30, but is still down by almost 50% since late last year. Unfortunately, the lack of much development activity at the Montanore project during the past 5 years as well as a major financing this Spring have taken their toll on the shares. What we have now, however, is a company with $30 million in the bank, around 20 million shares fully diluted and a market cap under $80 million, all of which will buy you one of the (arguably) 10 largest undeveloped silver deposits in the world. To give you a sense of just how severely this property is being discounted, if Montanore was owned by Silver Standard it would no doubt be valued at $250 million or more. On the positive side, the small float pretty much guarantees that the slightest positive change in investor sentiment will send MGN shares flying, which is exactly what might be unfolding here. I hold a small core position in the stock for the long term but will be looking to add some shares here in anticipation of a speculative rise in the next few days.

Finally, I'd like to follow up on what I consider a potential blockbuster development for silver, which is the forecast in the recently released The Silver Book of a major new source of silver demand in the form of wood preservation (estimated by Virtual Metals at 25 million ounces for 2007). Based on some further review of the subject matter, it is my personal opinion that such a level of demand is a bit optimistic for 2007 and perhaps even 2008. On the other hand, there are a number of factors that could result in robust demand for silver-based wood preservatives in the years ahead. In fact, this is one area where a new product category has the potential to more than offset the decline of silver use in photography (net of recycling) in the next few years. This assessment does involve some "ifs" and "buts" so it will be important to keep abreast of the developments, something that I plan to do and report on here in the months and years ahead. I am also in the process of investigating the various other miracle innovations involving silver in order to be able to make a first-hand assessment of their impact on future silver demand. That too, will be reported here.

JULY 6 2007 1:30PM - Now we're talking, some real buying has emerged in the last couple of days as silver and gold have climbed off their lows. Silver in particular is now close to escaping the gravity of the final bottom I was looking for. Not out of the woods yet, but another 10 cent continuation of this bounce would be rather bullish in the short term. In addition, the PM stocks have been on a tear with the HUI punching through a sublime resistance zone near 352 today. All in all, a great ending to a "summer doldrums" week for the PMs. See, I told you things always pick up after I utter that cliche!

The iShares silver ETF (SLV) added 1.5 million ounces yesterday and with the building of investor sentiment, it could easily go over 140 million ounces by next week. Silver lease rates have also improved modestly but the situation still bears watching.

For today, I wanted to revisit a comment I made on February 21 regarding my belief in the "defensive" value of Silver Wheaton at that time in comparison to other silver stocks and Pan American Silver in particular. Shortly after these comments, I established a position in Silver Wheaton in order to increase the "quality" and liquidity of my silver stock portfolio. Sure enough, SLW has proved to be quite defensive as the stock has registered gains of more than 30% during a period when silver prices have barely stayed even. Well, I am now preparing to reverse my bet and switch to Pan American as the "quality" anchor to my silver stock portfolio, if just for a short while. The reason is earnings; that is, Pan American should earn significantly more than Silver Wheaton in the second quarter and this may cause a number of institutional investors to reassess their relative allocations.

Finally, I wanted to mention my approval of the new Virtual Metals/Fortis' The Silver Book, an inaugural publication on the silver market in a similar vein to CPM Group and GFMS. This study of the silver market has a slightly different twist compared to the others, and what I like most about it is the fact that there is no attempt to balance supply and demand. In previous comments, I have made known my disdain for the inclusion in the various metal yearbooks of "implied" investment, disinvestment, or what have you, because such a method creates an aura of accuracy that is simply not there. Instead, The Silver Book just calculates the difference between the known and estimable supply and demand figures and arrives at either a surplus or deficit. I would leave out ETF demand as well because it is simply a change of investment ownership between market participants, but I do understand why it is included in THE SILVER BOOK: because at least it can be directly measured.

Interestingly, The Silver Book approach results in a calculated surplus of known and estimable silver supply over demand for every single year going back all the way to the early 1980's. Many people, especially those who base their bullish case for silver on the supposedly extreme structural deficit in the silver market, will not be happy with this report. They will probably claim it is a smear campaign by the evil silver users or their accomplices, the "commercials". Yet the conclusions in this report are very similar to those that I have independently reached based on my own research, which admittedly is less arduous and data driven but perhaps more qualitative. Based on this now official confirmation of many of my own private research conclusions, I will probably start to comment more frequently on the macro fundamental factors underlying the silver market, in defiance of the consensus. Yes, my position will be seen as different from the more "senior" and experienced "silver analysts" such as David Morgan and Ted Butler, and no doubt it will create some controversy. So be it. Besides, why listen to me if I merely parrot what the other guys say?

There are three additional observations in this report that are important for silver investors to understand. First is the fact that there are more than 20 billion ounces of silver in above ground form today. In making this statement, I don't use the term "fact" lightly but rather in the sense of it being the inescapable reality. Now, these 20 billion ounces are not predominantly in investment form as bars or coins, but rather as jewelry, ornamental and art form, and various industrial products. As a result, recycling and refining are very important considerations in assessing the impact of these non-investment stocks of silver in terms of future supply (more on this in a moment). This situation is similar to gold, where a large (but relatively smaller) portion of the estimated 5 billion ounces of above ground gold is in the form of jewelry and ornamentation. Having said this, it is very important to realize that there is probably more gold in bar and coin form than there is silver, and this creates a powerful advantage for silver as an investment vehicle based on rarity during any investment horizon measured in less than decades. Many years into the future, gold will surely end up as the rarer form of PM investment as the cycle of converting ornamental to investment form reaches its peak -- simply because there is probably 5-10 times more silver in ornamental form than there is gold. What I'm saying is that the opportunity in silver is in TIMING the investment, not blind hoarding until kingdom come. Indeed, I believe this is what makes my approach at SILVERAXIS unique: a balance between dedication and objectivity in the silver market.

The second important observation made in The Silver Book is the emphasis on recycling data. GFMS and CPM Group are also very detailed and methodical in their analysis of recycling in the silver market, but I tend to agree with The Silver Book that these firms may have historically underestimated the figures for a number of inadvertent reasons. Sure, recycling is somewhat of a black hole but better information will no doubt be gained in the future as a function of greater effort. For now, I am going to assume that the true recycling rate is somewhere between the GFMS, CPM Group and Virtual Metal figures. Even with such a derived average, the known and estimable portion of the silver market would remain in a surplus, though somewhat smaller than The Silver Book has calculated.

For now, there is at least one area that can be addressed with little risk of being wrong. It has to do with a mistake made by many commentators on the silver market: the claim that 90% of annual mine supply is irretrievably lost through non-recoverable industrial use. Right off the bat this is nonsense given that jewelry and silverware alone have historically accounted for more than 25% of mine supply net of recycling (no matter which silver study you use). Meanwhile, industrial recycling has run at a rate of anywhere between 10-30% of mine supply. These two figures combined essentially mean that as much as 50% (and certainly not less than 1/3rd) of annual mine supply is retained in above ground, recoverable form. Another way to say this is that between 33-50% of annual mine supply is added to the total above ground stocks of silver each and every year. This rate is much lower than the rate for gold, but it is decidedly not quite the same shocking story being sung by the vast majority of commentators. I'll have much more to say about this later as it has important implications for the future of silver.

Third, silver investors should objectively assess the hype surrounding the many new uses of silver in products such as RFID product tags, medicines, antimicrobial consumer goods, wood preservatives, batteries and the like. These uses, while exciting and important, are unlikely to be major sources of demand in the next few years. I even question the 778 tonnes (25 million ounces) of silver forecast in The Silver Book for use in wood preservatives during 2007 -- I will ask them about this and relay their response here. In the meantime, I stand by the conclusions I reached a while back in my commentary about The New Uses of Silver.

JULY 5 2007 2:30PM - A somewhat meaningless decline in silver and gold today with an encouraging climb off the lows. Nothing has really changed and we are waiting for some technical or fundamental guidance to give us direction.

Coeur was on the move today following an announcement that due diligence on the Palmarejo buyout has been completed and the transaction is expected to close in the 4th quarter. The stock is now trading around $4.00, which is the same level as the day the deal was announced over two months ago. The price is 15% higher, however, than the apparent double bottom at $3.50 carved out over the past few weeks. It is uncertain whether this truly was a bottom but as I mentioned a short while ago, not much else can conceivably go wrong with this company. Coeur will likely trade in a range for a few months but it is about as unloved as a silver stock can possibly get at this point and so it may turn out to be a pretty good contrarian bet over the medium to long term. On the other hand, top management is probably a liability from a strategic standpoint. I will keep an eye on it for now and currently hold no position.

Great Panther was another mover today as the market seems to have finally chewed through the large share supply from previous financings. At the same time, the threat of more financings has been alleviated to some extent as Great Panther has just raised C$4 million via convertible loans. With a positive outcome to a lawsuit involving the Guanajuato project and solid progress anticipated at multiple projects, Great Panther seems to have turned the corner and may be preparing to make an assault on the recent highs above $2.50. I believe good quarterly results will be important in maintaining the momentum. Longer term, I hope the convertible loans will be kept to a minimum because I am not a fan of this type of financing. I don't currently have a position in Great Panther although I may add upon news or earnings announcement.

One company not doing so well today is Apogee. The stock is near a 52 week low on tiny volume. Technically speaking, it has pretty strong support at current levels and is overdue for a rally. The last few times Apogee has rallied, it made 50% moves in a couple of days. Thus, a repeat from near current levels around C$0.45 is probably in the cards. From a fundamental standpoint, new management is hopefully seeking a turnaround after what I believe were some serious missteps in project advancement over the past two years. I don't currently have a position in Apogee but I will be looking to take a speculative stake in the next few days, looking to cash in on the next 50% surge.

Finally, a short update on the trio of Exeter, Southern Arc and Serengeti. First up is Exeter, which recovered nicely from the news that its Don Sixto gold-silver project in Mendoza province of Argentina was halted due to new environmental regulations. I increased my position on the day of that negative news, doubling my stake. Since then, I have taken some profits to lock in a gain of 30% and will likely be buying again in the next few days. I am still looking for a news release with monster silver grades plus strong base metal credits from the Cerro Moro project, which could spark another rally in the shares. Meanwhile, the company announced further drill results that substantially increased the strike length of the high grade veins at Cerro Moro. Such positive results can certainly continue throughout the summer as the drills are kept running full-time, and this should keep a floor under the share price. Thus, I am expecting a profitable trading range to develop for the next several months with an upward bias but no major fireworks until sometime this fall. The situation should allow intrepid investors to establish a position in Exeter at a comfortable pace.

Next up is Southern Arc, which saw its share price get way ahead of itself on unreasonable expectations of a stupendous drillhole at the Selodong project that never materialized. Mind you, the hole was good, but not good enough to support the inflated stock. Through some timely trading, I managed to somehow lock in gains of almost 80% over 2 weeks and I am currently out of the stock. I will wait to see what happens around the C$1.75 level before making another foray. There appears to be no hurry at this point because there could very well be several weeks of price consolidation ahead.

Last but not least is Serengeti, which gained 8% today on anticipation surrounding the imminent release of assay results. I never did buy this stock, partly because I did not understand the company's approach to drilling or the reasons behind the recent fluctuations in share price. While I've gained a better grasp over the past few weeks, there still appears to be a disconnect in my opinion. I can't put my finger on exactly what, but hopefully the new drill results will make things more clear. Until then, I will remain on the sidelines.

JULY 5 2007 1:00PM - I am in the process of changing the layout of the website so that the information is better organized, particularly as it pertains to silver. Going forward, information that is primarily related to silver will appear under the heading ".999 Pure Silver" under the appropriate category instead of being disbursed all over the place. With this change, I am going back to the roots of SILVERAXIS, which once again will be the only Internet destination to feature comprehensive, organized information about the silver market with an emphasis on substance. This information is drawn from a diverse, extensive list of sources, but I am only one person and if you find an online source or important information on silver that I have not included here, the growing number of SILVERAXIS readers and I would greatly appreciate hearing about it.

I will, of course, continue to also feature relevant material that has an impact on silver, especially gold. But this information will be kept separate so that the material pertaining to silver is not diluted. I hope the new approach will make it easier to navigate the site and I apologize for the mess while I re-organize.

JULY 3 2007 3:00PM - A wishy-washy day for silver and gold and the markets in general in advance of the mid-week holiday. I believe silver continues to remain under pressure with (hopefully) a final bottom beckoning just 60 cents below today's close. What might get us there is a short counter-trend rally in the dollar. On the other hand, the U.S. currency looks rather vulnerable at the moment as it sits right on top of its multi-decade low. Should it drop lower here, it might be a ways down to the bottom of the cliff.

COMEX warehouse silver continues to befuddle with the latest change being a downward revision of last Friday's accounting which appears to have been an arithmetic error (the 140 million reported ounces should have been more like 134 million). In any case, warehouse stocks are down to 133 million ounces as of today, which appears to be right around the level the COMEX inventories topped out during April, just prior to the May deliveries. Ted Butler speculates that the recent movements in warehouse silver may be nothing more than an attempt by the commercial shorts to disguise the removal of silver from the warehouses. That is, the commercial shorts might be delivering new silver to the warehouses to offset the reductions and thus portray an image of plentiful silver supply. I would tend to agree with Mr. Butler that it is the commercials bringing silver into the warehouses but I think the real reason might be to simply make the silver available for delivery under the July contract. Even if this weren't the case, the commercial shorts would have a valid reason to increase warehouse positions given the alleged, concentrated naked short positions they maintain. It seems to me these commercials are in the doghouse regardless of what they do!

So far in July, delivery notices are running just short of 15 million ounces which is virtually identical with the rate for May. More significantly, over 1,500 July contracts remain open representing approx. 7.5 million ounces. It should therefore be reasonable to assume that the commercial shorts are prepared to deliver several million ounces of silver this month. On the other hand, my own prior speculation about COMEX participants planning to sell silver in bulk during the July delivery has so far proved to be fruitless. It seems that neither sellers nor buyers are presently making large moves in the physical market that could translate to meaningful price action. Lowly silver lease rates tend to confirm this notion.

I have not mentioned the silver or gold basis in a few days so I'll briefly comment here. Both appear to have tightened AND stabilized significantly after a period of instability starting on June 8 and lasting through last week. This recent pattern in the basis corresponded roughly with a lot of maneuvering in spread trades by large speculators. The result was a growing spread especially in silver beyond the December 2008 contract. Now, the spreads may be starting to narrow at the same time as the basis appears to be tightening, and both these developments indicate that speculative focus may be returning to the nearby futures and spot market. That is to say, the basis seems to be telling us that the lull in physical buying may soon be over (if it is not over already). We'll continue to look for confirmation via other fundamental indicators.

Last but not least, I wanted to point out an important commentary on the housing bubble. In Sub Prime Woes, USD, Gold, Liquidity, Chris Laird presents a schedule of adjustable rate mortgage resets that clearly shows the mounting pressure that subprime mortgage holders will face as their interest rates adjust upwards for the majority of them before the end of this year. According to this schedule, which is similar to others that I have seen, the reset of subprime mortgages will continue well into next year. I personally believe, however, that the Fed will be forced to act before the year is out by lowering interest rates and opening the liquidity spigots once again. To what extent such action might rescue subprime lenders and borrowers is not known, but it might at least provide a reprieve for the mortgage market in general. As for housing, I continue to believe that new construction will suffer a precipitous decline by year-end regardless of what the Fed or anyone else does. There is simply too much new supply still coming on the market and virtually no new buyers.

The wild card is whether lenders will have the stomach to stay in the game and not run for the exits as they did in Japan. This situation has implications for silver in a number of ways, not the least of which is the possibility that reduced metal demand by industry might occur precisely at the same time that mine supply starts to grow meaningfully. I will write about this in greater detail in the next few weeks because the situation presents a significant risk to my medium and long term expectations of a higher silver price ("green buy flag").

JULY 2 2007 4:30PM - My comments are probably going to be light this week so let's get going. Gold and silver started out with a bang in the pre-market in response to the fortunate lack of bangs associated with 3 bungled terrorist attacks in the UK. The early panic buying was then reinforced by a particularly nasty decline in the dollar to 81.17 on the dollar index, a drop of more than 50 basis points. With crude oil also supportive and no other negatives, the PM's rollicked into the close with silver ending up around 2.5% and gold up 1.5%. Although very encouraging, I'm not going to read much into today's action because this is a major holiday week with many market participants being out on vacation. I'd start getting excited if silver were able to tack on another 20-30 cents because that would mean we might have more than just a bounce before the final bottom. By this I mean that previous corrections in this silver bull market were typically marked by a short-lived bounce of 40-50 cents that became nothing more than a blip on the charts once the correction resumed a few days later. Another day like today would break that pattern and could indicate that last week's bottom was for real.

JUNE 29 2007 12:00PM - We got the requisite bounce yesterday off the $12.20 level that I had been looking for with silver and gold getting further support today from the trifecta of (1) rising crude oil, (2) rising base metals and (3) a falling dollar. Yet the PMs couldn't capitalize on these developments and both gold and silver ended the regular trading session with a particularly nasty mini cliff dive. I continue to see the possibility of silver testing $11.94 basis the July COMEX futures. A powerful move higher from this level (especially above $13), however, would probably invalidate the need to test this bottom.

Speaking of the COMEX, there has been some very unusual activity in the warehouse stocks, which rose to 141 million ounces at the beginning of the week only to drop back down immediately to 134 million. Still, the eligible category has increased from 50 million to almost 68 million in two weeks. It is possible that a significant portion of this eligible silver will be converted to registered status in order to meet delivery requirements in the July contract. Indeed, the first notice day is running at around 12 million ounces which is approximately double the pace of May. It remains to be seen if it is true that commercial shorts may be flooding the market with physical metal, but I haven't given up on the idea yet.

On the ETF front, SLV (iShares Barclays ETF) has reduced its holdings by 2.5 million ounces in the face of several days of negative NAV readings. This is actually not a bad development since this represents less than 2% liquidation on a drop of almost 15% in silver. On the other hand, there don't appear to be many buyers of size stepping up at the moment despite the bargain buying opportunity that silver seems to represent right now.

I shall now comment on something that was stated by Roland Watson today in his piece Silver Coiled and Ready to Spring. First off, I sincerely hope he is right and I have my portfolio positioned to take advantage of the next rally. On the other hand, I would say that the downside risk remains substantial. Let's look at the following statement from Mr. Watson:

"One final question is regarding the possibility of silver breaking down to form a double bottom of $9 to $10 before its final run up. It may happen but I put it second in probability to what I have described above. The reason is that silver’s volatility tends to force it to exhaust its price correction quickly. On a forty year silver chart, I see that silver corrections tend to be a one shot affair that rebounds or drags on a bit (as with the last major correction). Nevertheless, anyone who wishes protection against such a scenario may wish to average in their silver purchases over the next few months."

Two things here. Number one, I would absolutely recommend that anybody who wishes to significantly increase their silver holdings, whether bullion, stocks, etc., should average into the market over the course of several months instead of trying to pick a bottom. That was my advice to several reader questions in the past few days and that will be my advice regardless of the circumstances. Number two, there is typically a brief reprieve during silver's sharp price declines as best demonstrated in the brutal May '06 correction. Such a reprieve usually consists of a 40-50 cent bounce followed by the final low for the move. We may be currently in the midst of just such a bounce and the question remains about where the eventual bottom lies: just a bit lower near $11.94 (which would correspond with the bottoms seen following minor rallies in the past three years) or much lower at $10 (which would correspond with the bottoms seen following the two major rallies so far in this bull market in silver -- April '04 and May '06). Proportional comparison of the current situation to the prior cycles would tend to indicate we are not due for a major drop from here, but this is by no means a guarantee. We continue to remain in a dangerous situation and only the market can tell us which direction the next dollar move in silver will be.

JUNE 27 2007 12:30PM - The best scenario for silver would be to test its low of $11.94 basis the July COMEX contract and then to rise sharply off that number before the Fed announces its latest interest rate move (or non-move as most people expect) tomorrow. That would create a perfect launch condition in case PM investors like what the Fed has to say. Given that the latest economic reports point to vulnerability (housing, retail, consumer confidence, etc.) and core inflation is supposedly under control, the odds of an increase in rates are virtually nil. On the other hand, there is a possibility that the Fed may surprise the markets by backing off its hawkish stance on inflation. Given the topsy-turvy sentiment we have out there, this could actually be very encouraging to the PM market.

There is even a remote chance the Fed may drop rates by 25 basis points in order to shore up flagging bondholder sentiment. Should the dollar react to such a move by making a beeline lower, PM investors might be emboldened to change their recently revived (and arguably incorrect) belief that a recession will be bad for gold and silver, and instead they may start focusing again on the monetary case for the precious metals.

JUNE 26 2007 9:00PM - A word of warning to those who use the various charting services available online: when you switch to long time frames, the date scale will often change from days to weeks and so will the moving averages. I don't have enough fingers (and toes) to count the number of times this mistake has been made in various published commentaries just in the past few weeks. The problem is, you might be misled to believe silver is still above its 200 day moving average if you were to look at the first chart below, whereas the second chart (drawn correctly) will clearly show how far silver has just forayed below its 200 day moving average. I don't even need my ruler to figure out that silver hasn't gone this far below its 200 day moving average since at least August-September 2005, and there is perhaps some 20 cents of downside left ahead. Clearly, going any lower than that would be a first for this bull market in silver, at least ever since $6 has firmly remained in the rear view mirror. So, don't be fooled into believing there is any type of "moving average support" for silver at this point as even the famous/notorious 65 week moving average is in danger (the third chart). Assuming technicals and fundamentals still matter in this market, times could get even more interesting in the days ahead.

Incorrect chart with weekly prices and weekly moving average:

Correct chart with daily prices and daily moving average:

If you believe in the 65 week moving average, this chart should cause some worries if silver breaks below $12 (weekly price with weekly moving average):

JUNE 26 2007 2:00PM - Not the kind of bounce I was looking for but we'll have to take whatever the market is willing to give us at this point. I've got a shaky long position with a very tight stop that cost me over $500 per contract (COMEX July 2007) to establish today, but that is nothing compared to the $4,000 per contract that was lost over the past 24 hours by every unhedged long.

I think we can now safely say that a dumping of physical silver is in progress. The COMEX warehouses stand at 141.3 million ounces a couple of days before first notice day in the July contact. Meanwhile, silver lease rates have plumbed another new low at 0.46%. To boot, gold lease rates have joined the fray, dropping to the 0.17% level today from above 0.20%. The problem that I see potentially developing here is that shorts in the July contract with physical silver to sell may refuse to close out their positions, forcing a classic long liquidation unless some "white knight" silver buyer steps in with some big money and bigger cajones.

Bottom line, unless substantial buying comes into the market, silver could very quickly (and I mean over several days) be looking at $10 or less. I hope that I am very wrong, but I am prepared to temporarily liquidate a portion of my holdings (for a few days) should this worst case scenario start to develop into reality over the next day or two. Most critical at the moment is that the July COMEX contract stay above $11.94. Should the longs not be able to hold the line there, I'm afraid the odds of a major wipeout will increase substantially above 50/50. My guess is that you would be better to simply close your eyes and come back to the markets in 2-3 weeks unless you are very adapt at trading, in which case you might be able to protect a portion of your portfolio by selling and buying back near the eventual lows. The danger with such a strategy, of course, is that today might have marked the bottom and thus trading will just end up losing money anyway. Still, a print in July silver below $11.94 will mean trouble and I am personally prepared to act on that possibility.

Where are the buy-the-dip, value buyers?!? Well, I suppose if most people are like Jason Homell, they had already used up most of their ammunition during the silver market gyration of the past few months. For me own part, I have not been buying physical metal at these levels but instead I have been slowly using up my well-protected dry powder on various stocks and speculative plays. I wish I hadn't, but at least a good portion of my holdings are in highly liquid, quality names.

JUNE 26 2007 9:20AM - The market is wild at the moment, I just saw a bid in the July contract at $12.22 while there was an ask at $12.21 not to mention some other weird stuff. I am making my fourth foray in trying to pick the temporary bottom, hopefully this time is the charm. I failed to mention earlier the reason for this large move today being technical selling based on silver closing below its 200 day moving average yesterday. This action was not a foregone conclusion, however, but rather a very instructive example of the stranglehold that market technicals currently have over silver while the fundamentals are on summer vacation.

JUNE 26 2007 9:10AM - A frustrating day so far of trying to pick a low in silver but the selling has been steady. We are now close to the final bottom I identified a couple of months ago ($11.94 for the July '07 COMEX contract) with only 20 cents of possible downside remaining. In the case of gold, the 200 day moving average is quite close below and should coincide with the bottom in silver. On the other hand, a print in the July contract below $11.94 could signal a lot more pain ahead and would be a powerful signal to step aside until fundamentals start to return to the market. In the meantime, silver could slide as low as $10 before finding its true bottom. Ideally, I would like to see silver bounce strongly from around the $12.20 level before meeting its fate at $11.94 in the next few days. Should that play out with $11.94 holding firmly, this would be a very powerful indication of a major buying opportunity. Stay tuned.

JUNE 25 2007 11:30AM - I'd like to point out that COMEX warehouse stocks of silver jumped by more than 4 million ounces last Friday to a new high (since last November when I started charting the figures) of 136.6 million. My thinking here is that July might be an interesting delivery month for futures. The low lease rates and some other indicators would tend to imply that the recent rise in COMEX warehouse stocks might be an attempt by some large holders to liquidate their positions. This could be negative for silver prices if speculative demand isn't there to buy up the supply. It is not often that shorts in futures can force a counterparty to take delivery by refusing to cover their short position (though they've tried), but theoretically it is possible. This is because if there are too many "trapped" longs who are not prepared to take delivery, the spot price can plummet. In fact, this is why we may be seeing a growing spread in silver between the near and far out futures.

In the case that the possible physical sellers are the commecials, what we may end up with is the classic pattern that many commentators have pointed out: commercials increase their short positions during rallies and trim them near the top. But what these commentators forget to mention is that the commercials know when it is a top because they plan to sell the physical at that level! This is simply the natural way that markets work despite the protests and accusations of manipulation. So you can either bitch about something that will never change, or you can profit from it.

Okay, "never change" is not entirely correct, since at some point the commercials' strategy of selling physical metal into the spot market as a way of taking profits will come to an end. Pray tell, you ask, when will that be? No, not when the supposedly naked shorts have to cover because of a short squeeze. Those odds are too long to speculative about. Rather, it will be when PHYSICAL buying by longs keeps on GROWING as prices increase DESPITE the availability of supply from the commercials. This type of manic behavior tends to occur at the top of a bull market and given the recent action in silver, we are apparently still far from that point.

JUNE 25 2007 10:10AM - Silver and gold trading in lockstep with the dollar today which to me is a sign that precious metal fundamentals continue to be less than ideal. Silver is being particularly weak as a new low is notched in lease rates (0.52% for 12 months). What a difference a year makes, this time last year the lease rate was 4.50% or almost 10 times higher. I have stated before that lease rates can be deceiving due to the fact that silver lending and borrowing may not reflect the activity in the spot market, but when rates become this moribund, it simply cannot be good for the near-term prospects of the white monetary metal.

On a related note, for the first time in a while, a trading signal on the short side was compelling enough that I could not avoid it, the result of which was a quick $450 in profit from $13.00 to $12.91 in the July'07 COMEX contract. Prices continue to fall as I write this but I have learned to take small profits on short positions. By the way, I also trade fewer contracts when I am short and I never carry a short position into the close of the pit session (1:25PM ET).

The trading signal that I am talking about is the temporary divorce between PMs and the dollar, which in the past few months has created a number of powerful trading opportunities both short and long. Before I learned to look for these temporary divorces, I was losing on virtually every futures trade that I made during certain time periods. I couldn't for the life of me figure out what was wrong but fortunately the long periods of staring at charts in disbelief finally paid off. I may be on the forefront of this realization but I expect most traders to eventually figure out this pattern, at which point it will no longer be so easy to trade it for profits. But for now, it is like taking candy from a baby.

JUNE 24 2007 11:30PM - Over the weekend, I modified the time horizons that I use to assess the risks and opportunities in silver. Basically, I have created a new "speculative" timeframe that corresponds to momentum or extended swing trading strategies of 3 months or less. The "short" category is now defined as 3 months to 1 year (vs. 0 to 6 months) and corresponds more closely with the rally-to-correction cycles that we have recently witnessed. The "medium" term is now 1 to 3 years (vs. 6 to 18 months) which approximates the separate "phases" of the bull market. Finally, the long term has now been extended to 3 years from 18 months. Why did I do this, other than because I obviously have too much time on my hands (I wish)? Well, the complicated answer is that I was finding it increasingly difficult to define a clear transition between the various time horizons. The simple version is that the year plus of price consolidation since May 2006 has stretched out the cycle frequency from peak to trough. What used to take 6 months is now lasting a year or more. This is not unexpected given the increasing amount of damage repair a volatile market must undergo, but it does require that I modify my way of thinking about the silver market.

In changing the timeframes, I had to make a decision: how should I re-allocate my prior "caution yellow flag" corresponding to the next 6 months? The "speculative" timeframe was rather easy--an obvious risk exists in this market of an imminent and sharp move to the downside. Should silver fail to hold $12, the next significant level of support would be all the way down at $10. On the other hand, the "new" short term, which now extends a year into the future, was a little more difficult. After all, this timeframe encompasses the upcoming historically strong winter and spring seasonals that have been responsible for all 3 of silver's rally peaks during the current bull market. At the end of the day, I opted for "caution yellow flag" for one main reason: the possibility that a slowdown across the commodity complex may pressure silver lower later this year. At this point, I won't get into the logic of why such a development is possible; although I will point out that it has to do with an unsustainable (at least temporarily) level of speculation in base metals. Bottom line, the net effect of my modifications is that I have become more cautious. The implications of this subtly tweaked outlook to my portfolio are yet unassessed but perhaps one early manifestation is my apparent  willingness to engage in grand speculations over a very short timeframe.

JUNE 22 2007 11:30AM - Disappointing action in silver today as gold was able to take some advantage of a wobbly dollar and higher crude oil whereas silver was lackluster in apparent sympathy with copper and the base metals. Once again, the dominance of technical trading in the silver market was in ample evidence. I'm inclined to say at this point that we are officially in the summer doldrums, but I won't. That's because every time I have uttered those dreadful words in the past, the market seems to immediately shake off its stupor. Hmmmm...maybe I should say it? Okay, I'll try: "We are officially in the summer doldrums".

Okay, let's move on to more positive things. First, I would like to point out that the combined ETF and warehouse stocks of silver have now passed 280 million ounces. And although the pace of growth has slowed to a crawl during the last couple of months, it will not take much renewed interest in physical metal to punch through 300 million. What I find particularly encouraging is that silver has managed to hang on to $13 despite all the apathy lately. At this point, it would take quite a major systemic shock to drive silver back down toward $10, a level that I believe would represent the biggest washout since the start of this bull market. As unlikely as that seems, if you are involved in anything silver without being prepared for that possibility, you should get out now.

JUNE 22 2007 10:45AM - Before I forget, I wanted to make sure people understand that I am not making investment recommendations here but simply discussing some interesting speculative opportunities involving silver stocks (well, they're not all silver stocks but close enough). This is speculation in the true sense of the word because I am merely guessing at what may happen based on information that might be unreliable or completely wrong. This is very risky stuff and some of these stocks have a major case of barnacles on their undersides, so I am aware of the possibility of a major, if not total, loss. You are not paying me so please consider everything you read here to be entertainment. I always thought it was funny when you get this type of disclaimer in paid newsletters (especially when they use words like "recommendation") but in this case I am deadly serious.

JUNE 22 2007 10:15AM - Apparently more trouble brewing with the proposed merger between Coeur and Palmarejo Silver. The recently engaged silver companies announced this morning that they need more time to think the union over. They each had slightly different things to say about the situation (Coeur d'Alene and Bolnisi Extend Due Diligence Period v. Palmarejo Silver and Gold Corporation: Announcement) but the rumor is basically this: Palmarejo's tenement boundaries as shown here may not be so exactly precise. To wit, one might wish to examine this particular map here. I smell a speculation, one that might not even be too late although the shares of the latter company are up 10 cents at the moment (a gain of about 18%). Just in case there is something to these rumors, I'm going to dip my toes in and buy a small position. Sheesh, at this pace I'm not going to have any money left to pay the mortgage!

JUNE 21 2007 2:30PM - Silver and gold down on dollar strength but once again an encouraging bounce that I was able to catch within a few cents using a "bull market" trading formula. The technicals continue to be king and traders much better than me are making a killing in the PMs at the moment.

Well, my new obsession Exeter had the requisite drop today and I was able to accumulate a bit more. To follow up, at least one respected source considers Exeter a silver stock: see this Junior Silver Index. No wonder I liked it so much! I'm sure others will also think it is a silver stock when the silver grades are announced from their Cerro Moro drilling. At this point, investor sentiment is pretty weak for this stock so I don't know what an assay grading multiple % silver is going to do, but I expect it could cause quite a stir. In fact, I'm thinking it will make chump change out of Esperanza Silver's bonanza grades at San Luis. But it's the gold porphyry that has me speculating in this stock. Using a notorious method for estimating a deposit ("cubing a hole" as applied to Southern Arc by Bob Moriarty recently) makes the single hole drilled into Exeter's Caspiche prospect "worth" around $100 million for 2 million ounces of gold. However, for a more realistic assessment, we could look at the nearby Cerro Casale project owned 51% by Arizona Star. That project has 25.4 million ounces of gold plus 6.4 billion pounds of copper in Measured and Indicated resources, yet Arizona Star trades for under US$500 million. So perhaps a conservative "value" of the single hole so far is $50 million. Yeah, Arizona Star is probably undervalued but the cost to construct its monster gold mine is estimated at $2 billion. Whoever finances mine development will take a large chunk off the top. An interesting data point so we don't get carried away with blue sky projections.

Meanwhile, there is no stopping the other two ARU aspirers, Southern Arc and Serengeti: both are up 30-40% in one week. Since this has happened on no news or announced developments, the risk is obviously increasing. So as painful as this might be, if you must buy these stocks for your ultra-high risk speculative portfolio, please do so patiently!

Now, behold another silver stock development long in the making: Sterling Mining Company and its Sunshine Mine look to be trading in Toronto soon according to Canadian regulatory filings that have just been made on SEDAR. This is a notable development, but I'm pointing it out mainly because for the first time since Sterling acquired control of this prolific silver mine, an independent resource estimate has been released. The report is a plum in many ways although there are some lemons in there too. Perhaps most relevant to many investors would be the resource numbers, which total 23.4 million ounces of silver in the Proven and Probable Reserves and 31.1 million ounces in the Measured and Indicated Resources. I'm not sure if these overlap although it is an industry norm for the figures to be presented as exclusive (that is, the total reserves and resources would be 54.5 million ounces). Beyond this, the report shows 231 million ounces in the Inferred category, but I have some questions about how this number is being presented. It might actually be more like 50 million ounces on the low end and perhaps as high as 770 million ounces (!!!) on the high end. I'm sure the clarification is forthcoming, but any way you cut the numbers obviously looks good. After all, Sterling has done zero resource definition drilling so the figures were essentially all inherited. By comparison, neighbor SNS Silver might have around 20 million ounces of "inherited" silver but virtually no "inherited" infrastructure (mill, tailings pond, etc.)

There is much more to consider here than I have time for and a detailed analysis is beyond the scope of my commentary format here, but needless to say investors were completely unaware of these developments judging by Sterling's trading volume and price action today. Tomorrow might be different, however, and I believe a powerful speculative trading opportunity might form in the short term that could take the stock price up 50% in a hurry. Just as with the 3 ARU contenders, I'm not endorsing a medium or long-term investment strategy, but for those who have the money and the temperament to speculate, there might be a train ticket to Idaho waiting for you. Personally, I did not buy today because even though this information was already public when a source was kind enough to point it out to me, I don't believe in buying a stock and then publicly talking about it immediately afterwards. But because I might very well be buying tomorrow, I'm hoping that you think I'm a clueless fool (so I have less competition in this speculation). I'll update as developments warrant.

JUNE 20 2007 3:00PM - Update on the first non-silver stock that a few people might (unfairly) accuse me of touting: the chatboard rumor is that Exeter was indeed halted pending bad news. Apparently the Mendoza state Senate has just voted to ban cyanide and other toxic chemicals in mining (similar to the recent ban in Montana) which creates some uncertainty about the future viability of Exeter's flagship Don Sixto project. If this is the case, I'm praying we get a short but powerful selloff as I plan to aggressively add to my present meager holdings (currently under 2,000 shares). Out of the several hundred junior resource stocks -- silver or otherwise -- that I have looked over the past few weeks (a process that still continues), this one appears to me to have the biggest undiscovered speculative value over the medium term. I hope you don't agree so that there is less competition for the cheap shares that might shortly be available!

JUNE 20 2007 12:30PM - Silver and gold down mostly on technicals and crude oil weakness but there are still some exciting developments afoot. First, the silver ETF SLV has added another million ounces yesterday and now stands on the verge of 140 million ounces of silver. Meanwhile, the COMEX just went through a major shift in warehouse stocks with a drawdown of around 2.5 million ounces, but more interestingly, a shifting of 2.6 million ounces from registered to eligible. Basically what happened is warehouse certificates were tendered at the Brink's and HSBC warehouses for about 5 million ounces of silver, which was withdrawn. Concurrently, about half this silver (probably the same silver) was deposited at the Scotia Mocatta warehouse as eligible silver. Now I'm only guessing at what has happened here, but all appearances are that somebody went to a lot of trouble to reduce the silver available for COMEX delivery by 5 million ounces (recall that eligible silver does not have warehouse certificates issued against it, and although such silver meets delivery specifications, it has not been made available by the seller to be issued against exchange-for-physical futures contract settlements). If this was a one time event, it would probably not be that important, but I will keep my eyes on the data in case we have the beginning of a trend, the ultimate result of which might be another long-awaited run on COMEX silver (the last time it happened was in early 2004).

I have another potentially exciting development, one that I had first profiled on June 15. On that day, I mentioned three companies with potential world-class gold-copper discoveries on their hands. One of these explorers, however, also might be on the verge of the most stupendous single hole in terms of silver assay in the history of modern exploration. You see, on June 7th, Exeter announced some drill results with bonanza gold and silver grades including one hole over 3.83 meters that graded 127.7g/t (approx. 4 ounces per ton) plus a lot of silver. How much silver? Well, we don't know yet because the grade was off the charts: more than 10,000g/t (10 kilograms/tonne or more than 300 ounces per ton of silver) for a portion of this 3.83 meters (how much exactly is a mystery at this point)! In fact, they had to go back and re-assay as if the drill core consisted of silver concentrate (the mill end-product sent for smelting). The company has also apparently gone back to check the drill core for base metals. All in all, I suspect we could end up with some of the most valuable silver-dominant drill core ever. This of course is a completely separate matter from the potential new gold-copper porphyry discovery that puts Exeter into a race with Southern Arc and Serengeti to be the next Aurelian. As if all this luck weren't enough, Exeter is set to announce a new 43-101 resource report for its Don Sixto project in Argentine where it is likely that more than 1 million ounces of high-grade, open-pittable gold is present. I own a modest position in Exeter at this point and I wish I could have bought more today, but the stock has been halted pending news. I suspect they are about to announce the silver assays because normally one would not halt trading in the middle of the day to announce a new 43-101 report. On the other hand, the stock has been weak during the past couple of days which could mean the news might be negative. If so, I would treat it as a gift from god and load up on a bunch more shares. (I'm not telling what you should do, I'm saying what I plan to do).

JUNE 19 2007 2:00PM - Excellent action by silver and gold today in following through on dollar weakness despite general weakness in the commodity sector. The sentiment is improving by the day as the Internet is now full of articles predicting the imminent demise of the dollar and the possibility of a gold rush being on the horizon. The sudden rise in bond yields is being advanced as a harbinger.

I'm not so sure about that since my fundamental indicators continue to send out mixed and contrary signals. We remain in a technical trading range in my opinion although we probably should keep our attention on this idea of bond yields being a harbinger. In particular, there is the possibility that the silver market is actually signaling the same, except nobody knows how to read the signs. I'm talking about the plunge in lease rates and the rising spread in silver futures. A valid interpretation might be the building of significant future demand even while spot demand remains subdued at the moment. The silver basis certainly backs up such a thesis. Perhaps most curious is that the present condition has not spread to gold futures. This leads me to conclude that if the bond yield is truly a harbinger of higher PM prices immediately ahead, silver could very well be the confirmation.

With that in mind, I have become a little more confident about my substantial exposure to the silver market. I might even reassess my short term mental flag at some point here to affirm a renewed expectation that silver could very well break out to new highs soon (that is, switch the flag to green). Part of the reason for doing this is the fact that my daily trading signals in silver futures have started to work almost flawlessly again after a few weeks of wretched failures. Historically, I have found these particular trading signals to work best when silver was in a bullish mode.

An update today on Mr. Butler's Raptors, which I have been able to gauge a little better after some discussions with him. It turns out the historic time period Mr. Butler refers to is the last year or so. That puts things into better perspective. And while I still have reservations about what the Raptors actually represent, that should not stop me or others from using the following COT position charts to discern some possible implications for the silver market. These charts are somewhat complex and while I don't have time to explain them in gory detail, drop me a line should you have any questions about the intriguing yet puzzling possibilities these patterns represent. I have been studying the COTs for a long time and would eventually like to teach others what I have learned over the years, so stay tuned while I get around to it.

Original Raptor Chart

Raptor Chart #2

Raptor Chart #3

Raptor Chart #4

Raptor Chart #5

I have literally hundreds more COT charts on both gold and silver but for now you will just have to take my word for the claim that there is some potentially very rewarding information hidden in the COT structures. For an example of this type of analysis in action, you could take a look at this commentary from last year. What it says is absolutely true: anybody could download the COT data from the CFTC website, format it and then use a program (I mostly use Excel) to create charts. In reality, however, doing this for just two futures, gold and silver, one a weekly basis is rather time consuming. More on this later.

JUNE 15 2007 2:00PM - All in all a solid performance by silver and gold today, although I would have liked to see a larger move given the big rise in the commodity complex led by crude oil and the significant drop in the dollar. Oh well, it's hard to complain at this point, especially with all the pessimism out there about the PMs' prospects over the summer months. There appears to be so much pessimism, in fact, that it is growing into quite a contrary indicator. Regardless, my view remains that technical trading will continue to drive silver and gold for a while longer.

I'd like to comment today on the trading volume on the London Bullion Market, which seems to be getting some attention lately from a number of commentators. First, I want to point out that silver trading volume seems to have diverged a bit over the past couple of months, although there are too few data points (the LBMA reports these figures on a monthly basis) to be able to draw a definite conclusion. Still, it does appear that silver has being closing the gap with gold on the trading volume chart (actual comparisons of trading volume figures are meaningless, I am looking at this purely from a visual perspective). The visual gap seems to have disappeared around April or May during the past three years but has not yet done so in 2007. We had a similar thing happen in 2003 as seems to be happening this year, when silver first woke up and started to follow gold higher. It did so around July of 2003, which matches up pretty well with the volume bottoms indicated in the LBMA clearing statistics. Okay, you say, this is all fine and well, but what could it mean? Only that there is a good possibility that PM investors might be in for a bit of a shock this year, especially those who expect a repeat in 2007 of the seasonality that they have become so accustomed to over the past 3 years. Instead, we could be lining up for something more like 2003. I think this is a further contrarian indicator on top of the current pessimism and could portend an "out of nowhere" upside surprise in silver and gold during the summer "doldrums" of 2007.

Another way to gauge the current pessimism is the spread in futures. In gold, it has not been very large owing to the large size of the OTC compared to the COMEX (although we have seen large changes in gold open interest in the past few weeks primarily because of spread trades), but in silver, the near-term pessimism is very clear when we look at the spreads between the near and far futures contracts. You might recall that a few months ago I talked about the potential opportunity to go long a July 2007 - short December 2008 spread which at the time was under 100 cents? Well, it was a good thing I decided against it at that time, because that same spread has moved almost 40 cents in the wrong direction (a loss of $2,000 per spread). Spreads against further out contracts like December 2009 have grown by an even larger amount (almost 100 cents)! Wow, that would have been a great trade! Oh well, at least now the spreads have reached an extreme and the risk of initiating a new position is that much lower. In any case, what this means is that further out futures are currently in greater demand than the near futures, primarily because speculators are expecting short-term weakness within a larger uptrend. That is to say, spot or physical demand is not nearly as strong right now as speculative demand. I consider this another wonderful contrarian indicator.

Given the above, I have been thinking of ways to leverage the possibility of a surprise summer upside using silver stocks, but there just don't seem to be many "mega" exciting developments in the world of silver equities at the moment. Sure, there are plenty of undervalued stocks or those looking for reasons to rally strongly, including all of Don Hansen's "value plays" (Impact, Great Panther, First Majestic, Endeavour Silver) as well as other junior producers or near-term producers like Excellon, Genco, Avino, Minefinders, etc. Not to mention the larger names like Hecla, Gammon Lake, Pan American, Silver Standard and Silver Wheaton, all of which are perfectly solid investments. Then there are MAG, Sabina, Bear Creek and a few other exploration stage companies with the potential to develop huge projects. Yet none of these (many of which I already own) seem exciting enough to me that I would consider adding to a position right now (with the exception of Sabina, whose Hackett River project is quickly growing big enough to justify the trouble of mining in the Arctic Circle and whose share price is about half the NPV of the project using conservative assumptions).

I suppose I might just be in a speculative frame of mind because the companies I have been looking at lately all seem to be in the middle of drilling programs that could make a discovery on a scale with Aurelian Resources. This type of thinking can be very dangerous for one's financial health, but the interesting thing is that there are 3 companies out there right now (that I know of, perhaps there are even more) that fit this bill. Thus, I believe this makes the risk somewhat lower than usual (via diversification). All three have drilled potentially company making holes into gold-rich copper porphyry's but what makes the situation particularly noteworthy is the length of the drill intercepts. In each case, the mineralized drill intercepts are in the range of 300m to 500m (900 to 1,500 feet) and although the gold grades are mostly less than 1 g/t, these are the types of deposits (that is, assuming they turn out to be deposits) that the majors go ga-ga over: large tonnage, open pit mining.

Now please don't get me wrong. I am not recommending these companies as investments or as speculations. They are probably too risky for most investors. I am merely pointing out a situation you might want to investigate further, as it is somewhat unique to have 3 explorers with potentially world class gold-copper mines being drilled at the same time. And yes, copper is a base metal and I do expect a correction in base metal prices toward the end of this year. But that still leaves plenty of time to speculate, especially while I wait for a true monster opportunity to show up in the silver-gold arena (if you know of any that I seem to have missed, I wouldn't mind hearing from you. And you can cross Pediment and Garibaldi off your list, I am already on top of those). Besides, these types of deposits can be economic with copper prices under $1/lb., which is a price level I can't foresee copper visiting for a long time, if ever.

So without further ado, here are the three companies I am talking about: Southern Arc exploring in Indonesia, Serengeti exploring in BC Canada and Exeter in Argentina and Chile. I'm not going to say more about these companies other than to credit Bob Moriarty for his early commentary on Southern Arc, which ironically could play a major part in heralding in a new age of exploration mania after Bre-X (the last company to look for gold in Indonesia) brought the prior one to and untimely end.

If you ask me, an exciting story or two is exactly what the resource sector needs at the moment. It is the answer to the oft-ask but seldom correctly-answered question: why are the mining equities lagging the metals? Simple, even though we've had a few discoveries here and there, nothing (yet) has caught the imagination of the investing public. I'm not talking about just the resource investing public, which is already pretty much fully invested. No, there needs to be a discovery that gets the general public excited. Then you will see the mining sector soar like it did in 1997. Aurelian could have been the one but for one reason or another the timing or something else was wrong. Now, with three potential world-class gold mines possibly on the verge of greenfields discovery, this could be the beginning of something big. And in the case of Exeter, the stock already trades on the AMEX, giving US investors an immediate opportunity to participate.

Yes, I know this is mostly just day-dreaming or wishful thinking, but I'm kind of getting bored with the same old, same old. It's time for 5 years of aggressive exploration and billions in exploration to start paying off for this business!

JUNE 14 2007 12:00PM - A message I just sent to GATA's Chris Powell in response to the latest development with respect to U.S gold reserves:

Mr. Powell

I suspect you have seen my recent contributions to the "are the U.S. gold reserves audited?" debate which resulted in my discovery of a very important development, that is, KPMG LLP, one of the Big 4 CPA firms, has taken over the audit of the U.S. gold reserves from the Treasury Dept's internal inspectors effective fiscal year 2005. But even while I think the audit question is largely answered for now, I have stated a number of times during this debate that the gold could conceivably be encumbered in a manner that was not "auditable" since only a comprehensive financial audit of the entire U.S. government has a chance of revealing something that has been intentionally hidden, especially under the designation of "top secret". So, your just-announced efforts to put the issue of the U.S. gold reserves to bed once and for all is to be applauded and I am fully in support of it (not that it means much, but I am even willing to make a small contribution if I can designate it to be spent in this specific area).

I would simply ask that your team of truth-seekers factor into the equation my recent article on the subject as well as the existence of a pledge on the U.S. gold reserves to the Fed as collateral against circulating currency (M0 or notes in circulation, not bank deposits). This gold is reflected in the Fed's financial statements at the statutory value of $42.22/oz. or roughly $11 billion for the 250 million ounces or so of gold in treasury, while the market value of the gold is over $150 billion. Thus, it can be said that the U.S. gold reserves are backing currency -- the paper itself, not electronic numbers in a bank -- to the tune of roughly 20%. This gold backing is entirely voluntary and there appears to be no reason why the U.S. Treasury simply could not substitute this collateral with U.S. government agency notes which account for the vast majority of the pledged assets already. All of this has interesting implications of its own for gold and money, but what it might mean in terms of your just announced-project regarding gold reserves is that ANY pledging of it other than the aforementioned collateral to the Fed would be an act even more fraudulent than the wildest claims that have been made so far. Personally speaking, I just don't see how this type of fraud would be possible, but I don't have absolute certainty or anything in the way of evidence other than what the government already tells us. Thus, to the extent your efforts can add light to the dark corners of the gold (and silver) markets, please count me in support.

*************

Assuming the answer to this is yes, that a GATA contribution can be designated to a particular purpose, I am serious about helping out and would urge others to follow suit, so this issue can move toward resolution and we can focus our attention on making money in gold and silver instead of collectively pissing into the wind. I suppose I have selfish interests here since I have spent too much of my own time on this subject matter and it has not made me a single penny. You see, curiosity and pomposity are big temptations for me so it would be very nice to have someone else aggressively digging for answers. That would allow me to concentrate on identifying money-making opportunities in the silver market. If you feel the same way, I would urge you to send GATA a designated contribution for the "gold reserve project", and be sure to tell them I sent you.

JUNE 14 2007 11:15AM - I have to confess that I really like silver and gold's action in the last few days. The dollar has rallied, the Swiss central bank has just announced its intention to sell 250 tons of gold over the next two years, yet the PMs are standing fast. Of course the PPI report came in with a high reading of a 0.9% increase in wholesale price but the core number was an expected 0.2%. So even though inflation is all of a sudded supposed to be bad for precious metals (see my commentary from a couple of days ago). No glass chins to be found right now! The bullish sentiment appears to be building and seemingly nothing seems capable of derailing it.

I had meant to cover some technical aspects of silver and gold before the week was out, but fortunately Peter Degraaf just put together a nice little summary of the relevant charts. You can see his commentary here. It would seem Mr. Degraaf feels this update is urgent, but in my case I have been preparing for the possible upcoming historic rally since last fall. Hopefully you have too, but if not, perhaps Mr. Degraaf can convince you not to procrastinate too much longer.

JUNE 13 2007 2:30PM - Not much new to report as silver bounces around the $13.12 level (basis the July COMEX futures) without much direction while gold manages to merely gyrate (instead of falling) on the back of a rising dollar. The fundamentals continue to remain split with a gradual improvement toward the bullish case starting to emerge, but it still remains about the technicals at this point. Alas, most of the gurus and advisors appear somewhat confused about the PMs at the moment while the "experts" over at GFMS, Virtual Metals and CPM Group cannot even agree on whether or not Indian and Chinese PM demand is strong or weak.

One thing is for sure, the silver ETF does not seem to want to let go of any shiny metal. And even while the ETFs aren't adding metal, physical buying seems to come to silver's (and gold's) immediate rescue to head of a more serious correction every time. Witness the dollar's rise above 83 on the dollar index without much overall effect on gold and silver prices. This is one reason that I believe in the briefness of the mini-rout (gold to $630's, silver to $12 or so) that may be necessary to commence the next sustained rally in PMs from a technical standpoint; an overwhelmingly successful defense of these key technical levels in gold and silver could do wonders for investor sentiment.

Now a brief follow-up on Ted Butler's Raptors, which are said to be at historic high levels. As you will recall, the Raptors are supposed to represent the smaller commercial positions that have taken an opposite stance to the 4 or 8 largest concentrated commercial traders in COMEX silver, who are net short a very large amount of metal. In his latest commentary, Mr. Butler makes the claim that the Raptors have taken the largest-ever net long position at 14,000 contracts as of May 22, 2007, but as my chart shows, this is clearly not the case. The Raptors have been net long by more contracts a number of times in the past, although one cannot deny that the current trend is pointing strongly up. Still, as I mentioned before, it is not clear to me that the Raptors actually represent a group of traders at all, and even if they do, the movement in the Raptors' net long or short position seems to be a sub-function of the movement in the overall commercial net position. Unfortunately, I haven't had the chance to update the chart for the 2 most recent COT reports, and once I do, I will be updating this discussion.

In the meantime, I would like to state that I don't mean to be overly critical for the sake of it -- although it is my nature, just ask my wife! -- but I do like to deal in straight, verifiable facts. Words are words, but pictures ... well, you know the rest of the cliche. Also, I don't want to give the impression that I don't respect Mr. Butler's work or his contribution to silver analysis, which has been immense. That is, after all, why I read it every week (and urge you to do the same) and why I feature it on this site. For example, while I find his Raptors analysis to be dubious, at the same time I think that his observations about the declining influence of the program trading large speculators, consisting in part of commodity pools such as the John W. Henry company, are absolutely brilliant; whether the commercial shorts are manipulating the silver market or not, the potential departure of the trend following large speculators who act as a foil for the commercials on the COMEX could portend a major change in the silver market going forward. To my knowledge, Mr. Butler is the only one who has discussed this major development in the silver market, and even if we may not agree with his central thesis, we should be thankful for the fact that he is on the silver investor's side!

JUNE 12 2007 3:00PM - Silver and gold fell sharply again today as the dollar found strength in a rising bond yield, which in the 10 year maturity has now rocketed past 5%. This has resulted in a fall in stocks and most other asset categories including silver and gold for reasons that are in part correct but in some ways completely retarded. Take stocks for example, where the weakness is being attributed in part to the reduced possibility that the Fed will lower interest rates in the near future because the economy remains too strong. Well, before the current generation of Wall Street geniuses arrived on the scene, a strong economy was considered good for business! The alternative is that stocks have been rallying to all-time highs over the past few weeks in anticipation of the economy turning sour.

In the case of silver and gold, one contributing factor to the recent weakness is the prospects for higher inflation, not only in the U.S. but throughout the world. In particular, China has just released its latest inflation figures showing prices are increasing faster than the central planners would like, and this might mean there will be stronger government curbs on economic growth. Okay, since when are the prospects for higher inflation supposed to be bad for silver and gold??? I thought rising inflation was good for the precious metals up to the very moment when central banks take strong measures to bring inflation under control. Is that really happening in the world today? Can it, given the precarious debt levels and interdependencies thanks to hundreds of trillions of dollars in derivatives (most of which are interest rate derivatives that could become highly sensitive to the substantial moves in rates that might be required to bring speculation and liquidity under control)?

I would humbly like to suggest that nobody really knows what is going on here. Rather, the action we are witnessing in the markets right now is pure fear and greed with little regard for fundamentals. As a result, chart technicals might be becoming very influential at this point in time. Unfortunately, silver and gold are currently looking somewhat vulnerable on the charts. On the other hand, it wouldn't take much of a catalyst to move the precious metals up on the charts to challenge $700 in gold and $15 in silver, the successful surmounting of which could become a reason of its own for a rally to much higher levels. Remember that gold (and silver by extension) loves uncertainty.

In conclusion, the downside risk remains moderate and we should not get too excited about any rally that does not make a convincing move to challenge upper chart resistance. I know that I have repeated this theme a dozen or more times in the past month or two but until things change, I have resigned myself to boring you to death with the mundane facts.

In an update on Aquiline and IMA, I was surprised to see that these two were among the biggest (and only) gainers among the silver stocks today. I will reiterate my prior comments that IMA is probably a good value buy under C$0.40 (it traded down to C$0.31 today before coming back) based on its cash position alone while Aquiline is a solid exploration play with a bright future, although I would feel more comfortable buying it on a pullback.

JUNE 7 2007 3:30PM - Well, it didn't take much eyeing of the dollar before it moved substantially higher and gave a mini-scare to silver and gold investors, whose selling has promptly -- and hopefully temporarily -- put a stop to the nascent PM rally. These moves are not decisive at this point, however, leaving open the possibility of a renewed challenge in the near future at $14 silver and $700 gold. On the negative side, gold's 200 day moving average still beckons in the $630's, the fulfillment of which could mean a sympathy move in silver to $12 or so.

The fundamental and technical indications that I track seem evenly split at this point and so I don't have much of a guess which direction PMs are heading in the next few days. I do have a rather strong sense, however, that if silver is to break $14 with authority, it might be quite a while before the rally comes to an end. On the other hand, breaking below the lows of last month will likely see the white monetary metal taking a quick trip to $12 as stated before. I believe such a move down would not be very tradable, however, and would primarily serve to shake loose a few weak longs before a new rally will commence.

This is a long-winded way of saying that my investments remain heavily leveraged for an upside move with a strong emphasis on quality, liquid, near-production or producing companies. Alas, the powder that I have kept dry for a "big" buying opportunity has been largely spent during the handful of corrections over the past few months, leaving me with less cash on hand than I typically would like. As a result, I may have formed an unreasonably strong, unsupportable bias toward a higher silver price. I have tried to take precautions against this in my own analysis, but my comments should be read with the understanding that whatever bias I might usually harbor could now be at an extreme.

A quick update on the IMA v. Aquiline (AQI) case I mentioned yesterday. As predicted, the outcome was in favor of Aquiline, which has resulted in an instant 50%+ drop in IMA stock, but little if any rise in AQI. This was not a good gamble regardless of where you placed the chips and anyone who was trying to be smart enough to "hedge" their bets by owning both companies was sorely disappointed. In fact, the eventual outcome was rather easy to discern even last year, although I must admit that the more than doubling in the AQI share price since last summer has surprised me a bit. So, where to now? Well, by my calculation, IMA will have approx. US$0.40 per share in cash and no liabilities after this mess is all over with in the next few months (legal costs awarded, appeal to Canada Supreme Court denied), so if the shares end up trading substantially below that level, IMA would obviously be a buy. So far, that has not been the case as only a few shares have traded below US$0.40 with most of today's post-decision trading having been made around that price. But it is possible that a lot more shares will be unloaded in the coming days. As for AQI, the legal uncertainty is now completely removed and even though a favorable outcome was already priced into the stock, the company should be able to benefit going forward from an even more aggressive pace of project development. With respect to valuation, AQI does carry a market cap near $500 million, a level at which some other silver companies such as Silvercorp start to look relatively cheap. So, while I think AQI probably has a great future, it may take a bit of time to grow into its current market cap.

Okay, let's move on. I mentioned Apogee yesterday as perhaps an alternate silver-zinc play to Apex Silver or CDE with a substantial country discount in Bolivia. Well, after doing some research on the company, I can see perhaps at least one reason why the share price has languished in the past few months. Apparently, early expectations at its producing La Solucion mine and at its flagship Pulacayo-Paca have been tempered after the results of initial exploration, drilling and assessment work were announced this February. While admittedly these are initial results, they have generally been slow in coming and I would put them into the category of "why bother?" Specifically, Apogee released an indicated resource for La Solucion of just a little over 100 thousand tons containing a few million ounces of zinc and lead and just 120,000 ounces of silver. Yes, this may be just a small portion of the mine and this may be the first NI43-101 compliant resource every published on this property, but why bother? I think this type of approach sends the wrong message about the mine's potential, which is clearly much greater than these preliminary exploration results are showing to date. In the meantime, I get the sense that optimizing current mine production is proving to be rather difficult.

Then there is Paca, where the company reported an initial open pit inferred resource of 18 million tonnes grading 43g/t silver with mid-grade zinc and lead values. This is better news, but not much to show for the extensive amount of drilling, past production, grab sample grades and drill results at this headlining project, which is presented as the second largest historic silver mine in Bolivia after Potosi. In addition, Apogee may have just another 18 months to produce a bankable feasibility study in order to earn its interest in this project from Apex Silver. So again, why bother to release such inconclusive and preliminary information? The drill results have been indicating that something much more exciting would be in store.

It looks to me like management may have made some strategic blunders and perhaps this is the reason that in late April, some new blood was brought in. Now, please don't take the above observations to mean that I think this company may not be a good investment. I was merely trying to analyze why the share price has languished.

In fact, there are plenty of indications that Apogee's projects are highly prospective and may have a good chance to be developed into major mines. But unlike the SIL and CDE projects in Bolivia, Apogee is still very much an exploration play with significant risk, and therefore it is in a totally separate league. On the other hand, the potential upside is much greater for Apogee while there isn't much chance of a big fall from here (assuming no negative changes in Bolivian mining laws). And from purely a valuation perspective, Apogee does seem to have a significant discount, although much of it is likely the result of uncertainty about exploration prospects rather than sentiment against mining operations located in Bolivia. The arrival of new management may be a catalyst to change this, and I would expect the story to unfold in a faster, easier to understand manner as the drills continue to come up with good assays and investor communications are hopefully going to be improved (starting with a revamped website, professional IR and a marketing plan). So yes, now might be a very good entry point on account of the low share price and arrival of new management, but I would personally prefer to start seeing some positive changes before making a significant investment.

JUNE 6 2007 12:30PM - I meant, but forgot, to point out earlier today that the latest deal by Silverstone to acquire silver production from Lundin, a la the Silver Wheaton model, has just been announced. The stock has run up 20% during the past few days (with a spike high today that is 40% above the recent trading range) in anticipation of something like this, but the initial reaction to the deal has turned tepid as the day wears on. This situation is similar to the prior deal between Silverstone and Capstone over silver production at Cozamin, which was widely anticipated by the industry and resulted in a run-up in share price several months ahead of the deal actually being announced. This time around, however, the run-up appears to have occurred merely a few days ahead of time as Silverstone just last week broke away from the $2.50 level to which it had been a slave for the past two months. Before this, the most recent move up in the stock price was after the announcement of positive drill results in March, which was a couple of weeks after the Cozamin deal was announced.

So what's up with the stock at this point, is there a good buying opportunity at this level? From a long-term value perspective, the answer appears to be "yes" at first blush, although I must admit that this type of company requires a serious amount of number crunching to properly assess valuation, and this is something that I have not done. In particular, Silverstone should be directly comparable to Silver Wheaton in terms of valuation, which is something I would like to do but probably won't have the time in the near future. Perhaps another silver stock analyst will brave the attempt.

In the short term, there are some good arguments against accumulating shares too aggressively (including the fact that 13.3 million warrants that are deep in-the-money will expire tomorrow), although it is entirely possible that the shares will seek a new higher level of trading somewhere above $2.50. Indeed, the company's stock chart shows a step-by-step rise in share price since last fall starting with $0.75 and moving to $1.00, then to $1.50 and most recently to $2.50. Each of these moves represented roughly a 50% gain, so healthy respect for pattern continuation might suggest the next stop is around $3.75 to $4.00. It is important to realize, however, that the prior moves were made in a hurry and the reaction to the Lundin deal so far has not been as positive relative to the prior events. Still, this is one to keep an eye one, and to consider buying, especially on dips. One thing to watch out for is that although the private placement related to the Cozamin deal will not come free trading until August, there could be some near-term fireworks resulting from the 13.3 million deep in-the-money warrants that expire tomorrow. Often, shareholders will sell a portion of their existing shares to fund the exercise of warrants, which can create unusual trading volume and turbulent prices. During such periods, the market makers and brokers are in charge of the price action and retail investors can find themselves at a serious disadvantage. I personally try to avoid buying or selling during such periods.

JUNE 6 2007 10:00AM - Silver and gold are selling off today as commodities are weaker across the board and the PMs take a rest after their recent gains. In the category of "I don't get it", the metals also appear to be under pressure (as are stocks in general) as a result of a report on rising labor costs, which are stirring concerns about inflation and the possibility of the Fed raising interest rates. I thought inflation was supposed to be good for gold and silver?!?

Even if the Fed doesn't raise rates, the market seems to be doing so on its own as evidenced, for example, by the 10-year Treasuries approaching 5%. The dollar is finding some consolation in this turn of events, but not much so far. Certainly something to keep an eye on though, especially if the dollar tries to capitalize on the renewed theme of higher inflation and higher interest rates. Of course, this could just be a one-day wonder with the next economic data pointing the other way.

Despite today, the PM price action is encouraging from a technical perspective, as is the moderate growth in open interest on the COMEX over the past two weeks (actually, open interest in gold futures has dropped by a significant amount). There is still room for speculators to get on board if silver and gold decide to challenge the $14/$700 level in the near future.

As I noted on Monday, the SLV silver ETF has started to add silver once more and is now up to 137.7 million ounces. I also have an update on the ZKB silver ETF that trades in Switzerland, which a source informs me has in fact accumulated 2.5 million ounces of silver in a little less than a month of trading. If true, this is a very positive sign and could perhaps have been a contributor in the recent relative strength of silver. Another positive sign is that apparently the sponsor, Kantonalbank, will shortly begin publishing the holdings of this and its other bullion ETF products, including a bar list.

If so, that would make the SLV silver ETF (and its less successful gold counterpart, the Barclays IAU gold ETF) as the only major bullion ETF that does not publish a bar list, and seemingly does not plan to do so. That is too bad, because the situation will create fodder for the conspiracy theorists. Not that a bar list is a panacea by any means, as the needless intrigue and confusion caused by the GLD gold ETF's bar list amply demonstrates. In that instance, there were allegedly some duplicate bar numbers on the list, but it turned out the critics simply did not understand the bar numbering convention used by a particular assayer. Now, that was with under 7,000 gold bars. One can very well imagine all the supposed problems, conspiracy theories and signs of fraud that will be dreamt up if and when the SLV silver ETF publishes a bar list containing more than 137,000 bars. More on this later.

A heads up on a few silver stocks. The long-standing dispute -- over the Navidad silver-base metal project in Argentina -- between Aquiline (AQI.to) and IMA Explorations (IMR on the AMEX) appears on the verge of the next major step as the Court of Appeals is set to issue its decision tomorrow morning (Thursday, June 7). Always looking for an opportunity to speculate, I have tried in the past to handicap the odds that IMA could actually win on appeal. My current assessment, which might be no better than anybody else's, is that the odds in favor of Aquiline are about 15-1. The only real shot IMA seems to have in my opinion is that the decision is remanded to the lower court on a technicality, and it's back to the drawing board for both sides. Alas, both Aquiline and IMA have rallied significantly in the last few months so I feel that placing money on the litigation outcome at this point is a sucker's bet. That is to say, the upside for Aquiline is somewhat limited (although a "relief" rally could always create fireworks) but the downside, even if remote, is massive. On the other hand, IMA will more than likely drop by 30-40% in the highly likely event that the appeal goes against it, yet the very remote odds of prevailing come with "only" an immediate upside of perhaps 500%. That may seem like a lot, but not when considering how remote the odds are. After all, would you play a lottery where the grand prize was $5 but a ticket cost $1?

What about "hedging" one's bet and putting some money in both Aquiline and IMA? The problem with such an approach is that the combined market cap of the two companies is likely to shrink as a result of the appeals ruling, regardless of which was it goes. Thus, the hedge will result in a net loss and is therefore not really a hedge at all. The problem here is that both Aquiline and IMA shareholders feel confident, to varying degrees, about a decision being made in their favor, and one of them is clearly wrong. The best thing to do at this point for those who like to speculate is to do nothing and wait for the appeals decision to be announced, and then to look at these two stocks with a fresh mind. In the aftermath of such a major event, there are usually some solid opportunities to be had.

Okay, enough about silver stocks involved in litigation, so let's move on to silver stocks involved in geopolitically risky countries. Here, I am talking about Bolivia and Apex Silver (SIL), Apogee Minerals (APE.v) and CDE. I have recently written about CDE, mentioning that its share price would probably drop further even after (because of?) the Palmarejo deal. And indeed, we have seen CDE drop almost 15% before recovering somewhat. To be fair, CDE in the meantime received a major legal rebuke on its plans to use a lake for tailings disposal at its planned Kensington gold mine in Alaska, but the fact remains that CDE has in the past year gone from a major silver producer with a ridiculously low P/E ratio to primarily a mine development play with a much higher P/E ratio (when the Palmarejo purchase is added to the market cap). I believe CDE is some distance away from finding its footing such that an extended period of sideways to down price action may lie ahead. It is really too bad given that the stock seemed to be on the verge of a turnaround just a couple of months ago. Alright, what about CDE and Bolivia? Well, the San Bartolome project appears to be on track and the market has so far given CDE little credit for its advance despite the improved perception about Bolivia's mining politics. This project could turn out to be an impetus for a turnaround in market sentiment for CDE, as has recently happened with SIL. The situation bears watching in the coming months, especially if CDE's share price continues to remain at a depressed level.

Now to SIL. I received some reader feedback after I wrote about this stock on May 22. I have paraphrased some of these replies, which were generally favorable to SIL, as follows:

• SIL will be in production for the first time this year after 10+ years of project development and 2+ years of mine construction. The uncertainties around mine startup are virtually all gone.
• Production will ramp up to 20 million ounces per year, making San Cristobal one of the largest silver (not to mention zinc) mines in the world.
• Bolivia seems content to allow private mining and has raised the mining tax only marginally.
• Sumitomo, which owns 35% of the project, appears to have confidence in the prospects for continuing foreign involvement in Bolivian mining, and likely has an inside track on the country's leftist politics.
• SIL had the worst case priced in when it was trading in the low teens.
• Since its IPO in the mid-1990's, SIL's share price has been "backing and filling", rarely traveling outside the teens. Mine startup could be the catalyst for a permanent move to a higher level.
• The hedge on zinc and lead production is troublesome, but one way to look at these derivatives is from the perspective of by-product credits to silver production. As such, these derivatives can be modeled into a project valuation of the mine. With respect to silver hedging, this is limited to less than 1 million ounces sold forward at approx. $5/ounce and another 9 million ounces of commitments (written call options) hedged around $8. This is a very small fraction of the proven and probable silver resources at San Bartolome.
• SIL has a number of very prospective exploration projects in Latin America, many of which will receive the company's attention once San Cristobal is in production. In addition, San Cristobal still has significant exploration upside.
• SIL has several hundred million in cash and short-term investments to use for mine expansion, exploration and acquisitions.

So, it appears I did not provide as well-rounded a picture of SIL as I could have, and there are clearly a number of very good non-technical reasons why the share price has performed so well of late. Yet I still think that establishing a new position at $20+ could be tricky, especially given the relative opportunity afforded by the next silver stock that I would like to discuss: Apogee. Unfortunately, I am running out of time so it will have to wait until next time...

JUNE 4 2007 4:00PM - Although off their highs, both silver and gold put in respectable performances today, closing near the level that frantic after-hours trading took both metals late last Friday. Meanwhile, the Chinese stocks markets suffered another mini-crash but hardly anybody noticed. That is, with the possible exception of the dollar, which is once again flirting with the 82 level.

Today, I wanted to talk about silver ETFs, including the two that launched just recently in Europe. Before I start, it is important to point out that we only care about physically-backed silver funds and ETFs when we discuss their effect on the silver market, since paper-based silver funds aren't likely to be influential over metal prices unless they start approaching the size of something like the COMEX, when they might actually start shunting demand away from the physical metal. In this regard, I would like to point out that SLV, the main silver ETF sponsored by Barclays, is in fact a physically backed ETF despite the trepidations of Mr. Turk and others. For those who are still waiting, my reply to Mr. Turk's recent comments on the silver ETF is coming out later this week. I had intended to time its release with an interesting development involving SLV but I'm tired of waiting.

First, a quick comment about SLV: we should soon see it start adding bullion again after a long pause. I believe this to be the case because not only has silver risen by almost $1 off its recent lows (neither the way down nor the bottom resulted in any reduction in the ETF's silver), but the NAV has been at a healthy premium for quite a few days now. In fact, some of the increase in silver prices over the past few sessions might have been the result of Authorized Participants acquiring silver for the ETF. In addition, the average trading volume in SLV over the past three sessions is higher than in quite some time.

On the other hand, I'm not seeing much trading volume in the new ETF over in Switzerland, known as the ZKB silver ETF, which apparently has traded just around 700 or so units since its inception in early May, each unit being 30 kilograms or a little less than 1,000 ounces. So, assuming that all buying has shown up in the Swiss exchange's data and that all of the trading volume represents buying of new ETF shares, it would appear that the ZKB silver ETF has soaked up no more than 700,000 ounces of silver to date. This despite a news item out of Reuters (since pulled down) stating the Swiss silver ETF had reached 2.5 million ounces after just 2 weeks of trading. Oh well, wouldn't that be nice? But I suppose something is better than nothing when it comes to demand, and besides, the ZKB ETF is primarily targeted at Swiss pension funds and institutional investors, not a particularly massive pool of funds compared to many other global markets.

Now let's move on to the third physically-backed silver ETF that has come on the scene, this one from ETF Securities. Not to be confused with the silver ETF launched in 2006, which was really a paper contract guaranteed by the insurance company AIG, this new ETF is called ETFS Physical Silver (I'll call it "ETFS silver ETF" from now on) and as the name suggests, is physically backed by metal. There is actually another ETF issued by ETF Securities that is backed by physical silver (as well as gold, platinum and palladium) called the ETFS Physical PM Basket, which makes things a little confusing. But fortunately, ETF Securities puts out a rather nice little list of allocated bars aggregating the bullion held by its physical metal ETFs so that we know, for example, that the ETFS silver ETF and the ETFS Physical PM Basket ETF held a total of around 875,000 ounces of silver as of the most recent reporting date.

These ETFs started trading near the end of April, so they seem to be of a similar scale to the ZKB silver ETF -- which is to say, by comparison to Barclays' SLV silver ETF, not very important in the big picture, but perhaps critical at the margin. I say "perhaps critical" because even though these smaller silver ETFs trade in smaller markets where demand may not be as robust, each appears capable of gobbling up a few million ounces of silver per year. At some point, a few million ounces of silver will be a big deal, even if it is not one today. Thus, these ETFs are likely to be more important sources of demand (at least for the next few years) than the much-touted use of silver in medicine, nanotechnology, RIFD and a host of other innovative products that actually require very little quantities of silver.

Finally, I was recently reminded by a reader from France that Société Générale, the French bank, issued a silver "certificate" of its own in early 2006 with the symbol code FR0010278069. I do remember looking at this silver fund at the time and determining that it was paper-based (similar to the ETF Securities funds launched around the same time). Apparently, there isn't much transaction volume in this French silver fund, but it nonetheless bears watching, if nothing else, as yet another gauge of European investment sentiment toward silver.

Enough about ETFs. The last thing I wanted to point out today was the fast pace of COMEX delivery notices issued against the June gold contract in the first two days -- over 1.5 million ounces against a warehouse inventory of 7.6 million ounces. This is well ahead of the typical pace, as is the ongoing trading volume in the spot month futures (June). As a point of reference, there were delivery notices for approx. 1.1 million ounces of gold for all of April, and only about 3.5 million ounces of silver during May. For silver to match the pace of June notices in gold so far, there would need to be notices for around 26 million ounces of silver. COMEX silver has seen that type of number in months past, but not often. Given the buildup in COMEX warehouse stocks, it looked like we could see such a number for March or May, but no dice. On the other hand, it does appear that the majority of May silver deliveries were promptly removed from the warehouses, which is a good sign that this silver was acquired by a silver user or long-term investor and not merely a speculator.

For those who don't know, COMEX delivery notices represent an intent by holders of spot month long futures positions to execute a so-called exchange for physical (EFP) transaction through which the contract is settled by an exchange of cash for the commodity underlying the futures contract. It is important to understand that a delivery notice merely indicates intent and does not represent a closed transaction since the majority of spot month futures contracts end up getting closed out without an EFP actually taking place. But still, the volume of delivery notices is a good indicator of the relative number of contracts which are initially standing for delivery in a particular month, and as such, this information can be quite elucidating when combined with other market data.

JUNE 1 2007 12:00PM - Investor sentiment for precious metals has turned on a dime over the past few days and as a result both silver and gold have risen very nicely off their recent lows even while the dollar remains steadfast above 82 on the dollar index. It seems one catalyst was a jump in jewelry and coin fabrication demand over the past few weeks, something that industry insiders were clearly aware of while the rest of the world fretted about the depths to which PM's might plunge during the latest correction. Another, perhaps more powerful, catalyst was the announcement today by the European Central Bank that it will not sell any more gold in the current fiscal year ending September under the Gold Agreement which limits member banks to annual sales of 500 tons per year. It is obviously the hope of gold bulls that the other signatory banks have also largely completed their sales for this year after a quick pace of sales in the previous few months. If this is the case, I'm not sure it is going to have a big impact on supply and demand but it sure has been rocket fuel for sentiment! More gains could follow as speculators are just now starting to pile on (silver jumped another 1% in after-market futures trading).

MAY 30 2007 7:40PM - We were obliged a prompt "mini-crash" in the Chinese markets this morning (USA time) following our jinx-inducing discussion yesterday, but sure enough, silver weathered it just fine while gold proved to be more susceptible than I would have thought. In fact, gold was almost singularly alone in reacting so bearishly to a cool down in Chinese stocks. Meanwhile, both the Dow and S&P hit new nominal all-time highs today. Speaking of nominal highs, those who haven't watched the Will the Dow Jones Crash? video by Michael Kilbach may not appreciate the importance of the concept "nominal". Well, it's quite simply really: 13,000 on the Dow today is worth less than 13,000 on the Dow 7 years ago, due to the fact that the prices of everything else have been rising -- gas, food, housing, gold and silver. A more meaningful measure than nominal stock market performance takes into account inflation or at least the rise in the price of other assets. On this basis, both the Dow and S&P, as well as many other markets, have not performed nearly as well over the past few years as the investing public has been led to believe. Watch the video for a more in-depth explanation if this concept is still foreign to you, as it is important to understand.

Okay, back to silver. Clearly today was another positive day given silver's outperformance of gold (the silver-gold ratio has dropped back under 50:1). Just as important, we got a bounce from the previous support level around $13 cash although we did take out $13.12 basis July 2007 by a few cents once again, which continues to create the possibility of another sharp drop before the bottom is finally in. The current technical action in silver appears to be driven by the proximity to the "holy" 200 day moving average. In contrast, gold is still some $20 above its own 200dma so perhaps some further outperformance by silver in the coming days and weeks should not be unexpected.

In terms of fundamental indicators, we continue to see a mixed bag. The NAV premium on the silver ETF SLV has returned to a healthy level but silver lease rates have not. Warehouse deliveries on spot month contracts on the COMEX have been disappointing for May but on the other hand they have not resulted in a lot of withdrawals of bullion stocks. This creates the opportunity for a future speculative run on physical supply.

At the same time, open interest in silver is not at an extreme level. Indeed, as Ted Butler points out in his new twist on silver manipulation, Raptor Update, there are signs that the smaller commercials are now net long by a sizeable number of contracts. Mr. Butler has coined a new term to describe the smaller commercials: the Raptors, which in the Jurassic Park and other dinosaur movies were some of the fiercest predators because of their speed, guile and agility. Then there is the T-Rex, the ferocious and murderous king of the dinosaurs, represented by the concentrated large commercials who always seem to be net short the silver market, and in an ever increasing number of contracts according to Mr. Butler. Fortunately, I have the source data close at hand and so I decided to create a chart to determine to what extent the Raptors are eating the T-Rex's lunch at the moment.

As the chart shows, the truth appears to be much more muddy than Mr. Butler makes it out to be. Yes, the Raptors now hold a net long position but this is not that unusual (especially if the current Raptor move turns out to be a lunge rather than a lounge). Notice that the Raptors were in a similar position in 2005 and on numerous prior occasions, especially during periods when silver prices were weak. What should actually strike you about this chart is that the so-called Raptors appear to follow the net commercial position (or is it vice versa?) in a very obvious way. Along these lines, it shouldn't escape your attention that the net commercial short position has actually been declining for several weeks and is near a level that has historically defined a bottom in silver prices (unfortunately, I could not get the silver price data to post on the chart for 2006-2007).

This is all good and fine, but there is a major problem with this Raptor theory. You see, the Raptors are not necessarily all commercials, all the time. Sometimes, some non-commercials are likely to be found masquerading among their ranks. How is this possible? Because Mr. Butler assumes that the largest 8 traders are always commercials, which might be true at some points but is demonstrably false at others. I would grant him that currently the 8 largest traders are more than likely to be predominantly commercials, but this is not a given. Why? The answer is technical in nature and involves some math and mental gymnastics, but for those who are up for it, here goes.

I will use data as of May 22, 2007 but other dates work just as well. Note that the 8 largest traders with net positions account for 24,112 NET long contracts (22.2% of 108,612 contract open interest) but that ALL commercials account for just 24,336 GROSS long contracts. Thus, if all 8 largest traders are commercials and assuming the Raptors are also all commercials, then the Raptors are only holding 224 contracts long on a GROSS basis. That is nothing, considering that the average non-commercial long is holding 468 long contracts based on the fact that there are 85 of them (for those who are not aware, the CFTC Large-Trader Reporting Levels are 150 contracts for silver) with 39,806 gross long contracts. It is also clearly contradictory to Mr. Butler's claim that Raptors hold 13,845 contracts net long.

Obviously, something is wrong here. Either the 8 largest traders OR the Raptors aren't all commercials. Actually, this is not an "either/or" but rather an "and", meaning that both the Raptors (as defined by Mr. Butler) AND the 8 largest traders with net positions must include non-commercials in their ranks, at least as of May 22, 2007. A similar analysis would indicate that at least one if not more non-commercials are included in the 8 largest traders on a net basis at other reporting dates.

This unfortunately pollutes Mr. Butler's math to an extent and bastardizes the Raptor concept. It is difficult to determine the amount of error that is introduced as a result, but we can estimate the magnitude by comparing the trader concentrations of gross and net positions. Such an analysis is beyond the scope of this discussion, but it should suffice to say that the results also support the presence of non-commercials in the largest trader concentrations. For example, note that the 8 largest traders in gross positions account for 30,846 long positions whereas the commercials only carry 24,336 gross long positions as of May 22, 2007. Therefore, assuming all commercial gross long positions are accounted for, the 8 largest traders must include at least 6,510 gross long positions attributable to non-commercials. Starting with this data point, it is possible to estimate the approx. proportion of commercials and non-commercials in the concentration ratios. I won't say more so as not to bore you, but those interested in seeing the COTs developed as a trading tool in the silver market should stay tuned because after many months and years of research, I believe I may be on the verge of identifying some important, heretofore unrecognized, relationships between the silver price and the COT structure.

In conclusion, Mr. Butler's Raptors don't seem to be quite as dangerous or fantastic as they are made out to be, just like the real velociraptors which were embellished by Hollywood (the actual reptile was roughly the size of a turkey and its claws were more likely to be used for gripping than slashing). Oh well, even if these Raptors aren't as incredible as they might appear, the current increase in their ranks -- an uptrend that seems to have originated in March 2004 -- is accompanied by a decrease in short positions by T-Rex, which of course is a positive development for the silver market.

MAY 29 2007 12:20PM - PM strength today seemed to derive from a slight weakening in the dollar and a rally in base metals although these moves all reversed themselves over the course of the day, with the exception of silver staying strong. It appears that silver demand has returned after several weeks of being virtually non-existent. Lease rates in particular have picked up over the course of the past two days. Meanwhile, silver stocks continue to wallow, creating some very good opportunities to start or supplement an exploration or mining share portfolio.

I had earlier anticipated another swift move lower in PMs that might take silver down to $12 or so and gold down to its 200 day moving average in the $630's. The fact that May is almost over without the appearance of such a move, however, could mean that the threat has diminished. Indeed, the technical and fundamental pictures are in a solid position to improve over the coming months. Unfortunately, silver and gold still look to be vulnerable in the near term to a number of risks, not the least of which is a global stock market correction as Clive Maund reminds us in China Crash- Domino Effect On US Markets, And Collateral Effect On Resource Stocks... How far the emerging markets, led by China, can go is anybody's guess, but clearly a mania is in full bloom. I have not personally taken a specific defensive posture against this type of risk at present -- other than moving a large portion of my portfolio into higher quality, more liquid resource stocks (around the beginning of the year) -- but the situation does warrant close monitoring and being ready to act quickly.

MAY 24 2007 10:00AM - Silver and gold are down sharply today with gold piercing through several floors of support, but it is copper that continues to steal the headlines as it loses another 3-4%. The culprit once again is the dollar as it rallies on mixed economic news while commodities in general are weaker. The move in PM's is mostly technical at this point although there continue to be signs that the near-term fundamentals are weak or at least weakening. It's still the usual suspects: an abrupt halt in the accumulation of silver by the ETF SLV (note that the gold ETF GLD has actually reduced its holdings by more than 5%) and at COMEX warehouses; very depressed silver lease rates; a "normal" contango in the futures basis, etc. I continue to see the possibility of a move down to around $12 in silver which could correspond with gold falling to its 200 day moving average around $630-635, but my hope is that such a move is fast and violent, representing the final capitulation of weak hands before the next powerful rally can commence.

In the next few days, I hope to provide some observations on the annual silver surveys recently released by CPM Group and GFMS. There is nothing shocking in these reports but there are a few interesting points that are worth discussing.

For a different perspective on the silver market, I would like to provide the following "man on the street" observations of the local retail investor situation in the U.S. True, this is just one data point, but it is as relevant and useful as any information you will find in the aforementioned GFMS or CPM Group surveys.

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From a reader in central Indiana:

I just don't think the junk silver prices are really saying negative things about silver because I don't really think junk silver bags are of much interest to the average joe.

I'm writing about your comments on junk silver 90% bags and how depressed their prices are historically. I do remember that the bags used to sell at some premium to silver in the past (I'm 49) but I'm not sure that junk silver bags will ever have that premium again. I think that junk silver bags will be priced as a substitute for 100-1000 oz silver bars because there is no interest from the 299 million Americans I call "average joe". They WILL ALWAYS REMAIN clueless about gold/silver/monetary inflation, etc. until it's too late.

I do not think that the 90% junk bags are a leading indicator or any kind of indicator anymore, I think it will just follow spot silver melt prices. It isn't pushed or marketed or hyped like it was in the 70's or 80's back when a junk bag was more "popular". Silver could go to $25/oz and I think the junk bags would still be priced the same. (priced at same as silver bars, assuming silver bars are available)

I'm a coin collector too. Ever since the silver highs of $14/oz in May '06 the junk silver bags have priced/traded as an alternative and substitute for silver bars. The bid and ask price for junk silver bags has been consistently in the 95% bid and 98-99% ask range compared to the spot price of silver for the past 12 months. My source has been what Tulving Company lists for their buy/sell prices on silver junk bags (and gold too). I've been following it since last fall and junk silver doesn't waver much.

Here's why I think the junk bag prices are ok where they are. The average joe can buy silver bags for 98% and then would pay a smelter cost of 2% to make genuine silver bars. Actually I don't think the average joe is buying, it's more likely people like you and I are doing the buying, but there aren't a lot of us to make any difference in prices. I see the silver bar and a junk silver bar as nearly perfect substitutes for each other. If I wanted gold I'd buy a krugerand or maple leaf at about 1% over spot from them too.

As a coin collector we know these bags have been picked over for 40 years so there aren't any coins in them worth collecting. Very few bags emerge from grandpa's attic anymore. The junk bag is considered the near equivalent of a 715 oz silver bar that needs to be smelted, hence the discount.

Our coin club has a monthly auction of coins and the circulated silver halves and silver Washington quarters routinely sell at the silver melt value of 9x face (25c=2.25, 50c=4.50). A bag of them with 715 ounces is now valued the same by coin collectors, I don't think it will ever command any premium over a 100 ounce silver bar as long as the demand for silver from the "AVERAGE JOE CONSUMER" remains low. Very few people in our coin club even think about saving/collecting silver to use as a money substitute too.

At our coin shows where the local dealers come, no one sells junk bags anymore since the consumer isn't demanding them. They can get them from their inventory or a larger dealer in Indy with no problems, but people aren't after them like in the last silver/gold rush 30 years ago. I also don't think that the big money players are all that interested in junk bags and would probably rather just have 1000 oz bars stored somewhere as the coinage and divisibility of the junk bag is not of interest to them. (just a hunch).

I think the average joe consumer has no interest in silver of any type now, I think that explains the price more than anything, the demand in the USA is nil by the average joe. Actually back in May 06 and thru early summer there was a noticeable increase in people bringing in silver coins, silver bags, a few sterling silver pieces and tea sets into the local coin shop to sell. No one was buying silver at the shop, but people were bringing it into sell when silver hit $14/oz. The smelters got backed up 2-3 months in early summer so the coin dealers quit buying silver bags and the people quit bringing it in when the price fell in the summer of '06. The last 6 months, there is no major buying or selling of junk and bullion silver/gold. There is still major coin buying by consumers of key coins, gold coins, silver coins, and regular coins, the ones that sell for way above melt.

I'm just a little guy who collects some coins and talks to the coin folks here in our area since they're also on our coin club board. I used to be an investment programmer in insurance til I moved back to Indiana a while back. Now, I just follow coins, bullion, and of course, the stock market, grains a little, oil, gas, gold, and silver mostly, and try to live off my investment gains and steer some of my parents retirement holdings into minerals and energy even though they don't understand what our types talk about.

One guy kept telling me he's been using 5% back (95% bid) when he's out at auctions and dealing with consumers on gold or silver, this has been going on since Sept 06 for sure. It means he won't pay more than bid 95% since he's going to turn around and sell it right away. That's what the prices are in our little market, our bigger market is either Indianapolis, Chicago, or Silvertowne and they may pay a little more; that's where our silver goes.   

We have small coin shows as we're a county of only 150,000. We just had our coin show in town Sunday, and some of the dealers said that old 1800's tokens and knives and memorabilia sold better than the nice coins they had. Our own club members would rather have a $12 civil war token than an ounce of silver or circulated silver dollar when we auction them off. (Most clubs have their own private auctions). That $12 token was $3 a few years ago. Historical items generate more interest every year.  

There still are serious coin buyers looking for the better grade & key date coins to complete their coin sets as they are even more in demand by individuals here. Some go to the shows to see the dealers and some go directly to the dealers' shops, there are individuals with money for sure. There wasn't much buying or selling of bullion silver. We don't see the $100,000+ coins like the national and big regional dealers do.

And when it comes to stamps, there is no market or demand, completely dead.

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I would appreciate hearing more local experience across the world from a mix of sources: PM investors, coin collectors, cultural buyers, bullion and coin dealers, and "average joes". My goal would be to write a periodic "Retail Silver Market Report" (with an emphasis on bullion) as I think this type of information would be very useful and relevant. Contributors to such a report would receive benefits as well, so if you are interested and in a position to provide a perspective on the silver market (whether in the U.S. or elsewhere), please do not hesitate to contact me.

MAY 22 2007 3:00PM - Across the board weakness in commodities did the precious metals in today with a particularly nasty cliff dive by copper once again as speculators are clearly in control (or rather, losing control?) of the red metal's prospects. One encouraging sign in the last several days is that the silver ETF (SLV) has refused to let go of any bullion and now sports a healthy NAV premium after several days of building strength. The basis has also recovered to a healthy contango in both silver and gold with no clear signals provided by either metal. Silver lease rates have also recovered, although only by a marginal amount, remaining at a depressed level for the third day in a row.

One indicator I have not mentioned of late is the London Daily Clearing Volume as published by the LBMA. For the month of April, it was 105.7 million ounces per day on average, which is much lower than the levels seen in 2004 (133.8 million) and 2006 (238.1), years in which silver performed exceptionally. This reduced level of silver trading in the OTC market continues a trend established last fall and does not appear to be a sign of reduced supply but rather a declining interest in physical trading which seems to go hand in hand with our observation of the activity in the leasing market--that is, subdued. While this statistic is unlikely to be a leading indicator, it does suggest that professional sentiment is toward silver trading in a range as opposed to making a significant move in either direction in the near future.

I wanted to talk about a company today that has surprisingly been the number one performing silver stock over the past month or two, beating out even the exploration wunderkind of the month, MAG Silver. The surprise is because the company has a market cap over US$1 billion and its main asset is located in a politically unstable Latin American country. No, I am not talking about Silver Standard but rather that "other" silver stock, Apex Silver. After bottoming near $13 almost a dozen times over the past year, SIL has finally managed to push through strong resistance between $15-17 and is up more than 60% in 45 days or so. That of course is little consolation to those who bought the stock in the mid-25's early in 2006, but those who had the fortitude to buy at $13 when things looked pretty awful have now been amply rewarded. The stock may run a while longer although a subtle but potentially important prior peak lies at exactly $22.01. Traders should watch this level as price action around $22.01 will likely determine whether the momentum will reverse or continue.

From a fundamental perspective, Apex Silver continues to present too much risk for my taste. Investing in the company is primarily a bet on politics at this point and I hate politics. Unless and until the leftists start to retreat back under the rocks they came from, SIL will continue to have a dark cloud hanging over it. The only question is how worried investors will be about an imminent storm at any one point in time. Right now, they don't appear very worried, a fleeting sentiment they currently share with their compatriots over at Crystallex. But that, of course, can change with the next stupid comment made by loco numero uno, Hugo Chavez, or any of his protégés.

MAY 21 2007 5:00PM - It is encouraging to see silver and gold recovering today in the face of a rallying dollar, especially silver clamoring back up to $13, but so far the move remains technical in nature. Today's mild PM rally in spite of a stronger dollar was also supported by advancing markets across the board. I remain doubtful, however, that a short-term bottom in silver has been reached -- but as I've said before, this should be of little consequence to most silver investors whose best bet would be to hold strong at this point. On the other hand, those who are lucky and/or skilled at picking market bottoms are probably going to have an opportunity to do so in the days and weeks ahead. Finally, those investors who are just getting started in this market would be well advised to initiate an opening position and accumulate quality stocks over a period of time. The risk remains that any position established at current levels may take up to 18 months to simply recover to breakeven. Yet on balance, the risk-reward ratio is currently in favor of being overweight in silver investments.

Very little to report on the fundamental front as most indicators I monitor continue to remain comatose. Silver lease rates and the premium (actually, it is a discount at the moment) on "junk" bags of 90% and 40% U.S. silver coins, meanwhile, remain at very depressed levels not seen in a long time. One possible explanation for the junk bag pricing is that the silver ETF requires good delivery silver bars which is likely straining the capacity at approved refiners. At the same time, many bullion investors may not currently favor this form of silver for one reason or another. Two reason that professional investors may have are (1) uncertainty stemming from the U.S Mint's recent ban on melting or exporting 1-cent and 5-cent coins and (2) the aforementioned refinery capacity issues which effect the availability of junk bags of silver to non-investment uses vis-a-vis refined bullion bars.

MAY 18 2007 11:30AM - Silver and gold bounced today as the dollar's advance was halted. Technically speaking, most of the PM markets are sitting at or below their 200 day moving averages with the exception of gold bullion itself, which continues to trade somewhat north of that number. The situation with gold is no surprise given that a very large speculative position seems to be dug in, as revealed by the stubbornly high COMEX open interest. Regardless, there is a risk of further weakness, although it will hopefully be over very quickly. I expect that it will be difficult to trade or establish new positions during such a period and so my personal attitude remains that positions should be held or slowly accumulated during the rough patch that may face investors in the next few weeks.

From a fundamental perspective, there is one additional data point that I have not mentioned that is somewhat bothersome. It is the discount to melt of the "junk" bags of 90% and 40% U.S. silver coins that has existed for a few months and continues to remain in place even with silver prices well off their recent highs. This indicates that there is either little demand for this type of silver bullion investment (which happens to be one of my favorites) or a lot of supply (or a combination of the two). In any case, a market which is supposedly in increasingly tight supply should not be witness to this type of behavior. Meanwhile, the 12 month silver lease rate has just dropped back to near the lowest level since last fall when I started monitoring it on a daily basis. This also seems to indicate that supply is currently exceeding demand.

My guess as to why this is happening is that a rather large supply of silver has come to market recently; perhaps some hedge funds who had speculated in physical bullion have sold out of their position. Or maybe India or China have sold some government-held bullion stocks into the market. Who knows, but one thing that is obvious is that silver inventories at present do not appear to be in no danger of falling short of investor or industrial demand. This could change very quickly, but for now it is what it is. As a result, my conviction that silver will take a leadership position away from gold or base metals in the near future is quickly disappearing.

Finally, I wanted to point out Prof. Fekete's latest piece on the monetary metals, The Golden Thorn in the Flesh - Part 2. This latest paper continues to bring froth ingenious concepts about the role of gold and silver in the monetary system and I urge everyone who wishes to gain a better understanding of precious metals in history and the economy to read it.

MAY 17 2007 1:30PM - Silver and gold were predictably down as the dollar rallied today. I still don't think we are out of the woods but perhaps the precious metals will recover somewhat at this point. The move we are seeing here is the bull trying to throw off its riders so unless you have committed to walk away from this market for an extended period of time, it doesn't make much sense to be trading here.

I wanted to mention a company I haven't talked about in a while, Mines Management, which hit a low of $3.90 today on account of fear, uncertainty and doubt. This stock traded as high as $10 back when silver was around $6 and copper was $1.50. They still have the same deposit -- Montanore -- and have been (very slowly, which has resulted in many shareholders throwing in the towel) advancing it toward development. The project faces some significant environmental hurdles and is several years away from production, but you can't get metal in the ground for much cheaper than Mines Management. I am going to examine this stock in the next few days since I haven't looked at it in a while but assuming I like what I see, I plan to buy a few shares for the long-term portion of my portfolio.

MAY 16 2007 3:30PM - I continue to experience e-mail problems so if I have not replied to your e-mail, it likely means that I did not receive it so please send it to me again.

We had our drop through the floor in silver today as I feared. I hope we don't have a brutal decline ahead of us but my analysis indicates that it is an odds-on bet that the current move will not end until silver is in the high $11's. The best scenario might be that the move is over in a flash with a stab down to that level followed by a strong, immediate recovery. That would help cleanse some of the speculation and start the building of a new wall of worry. I won't trust the longevity of a recovery from these levels (without first a test of the high $11's) until silver seriously threatens to take out $14. There is still time for things to work out in the short term but the clock is ticking. So strange as it may seem, here is hoping for a quick $1 drop by silver in the next two or three days. And if silver doesn't instantaneously recover? You guessed it . . . another fantastic buying opportunity!

I wanted to point out the last in Don Hansen's series of Value Strategy in silver stocks covering Impact Silver is now available. I have had particular difficulty getting this one out to people so if you are an Impact shareholder and would like to see the story of this stock being told, I would encourage you to contact the administrator or editor of your favorite PM site to see if he or she would consider posting it. By way of disclosure, I own a sizeable position in Impact and personally feel that this is a pretty darn good entry point regardless of what silver prices do in the weeks, months and years ahead.

MAY 15 2007 11:30AM - The site is experiencing technical problems. Some e-mail between last Friday and today has been lost and I have been unable to update the site until now. Apparently two days of comments and other changes since May 7 have also been lost but I have been able to recover them. I apologize for the inconvenience and will be shortly looking for a more reliable web host.

Silver and gold were up today as the dollar returned to its swooning ways after the release of mild inflation numbers at the consumer level. Once again, as it has over the past several days, silver slightly penetrated its support level but subsequently found its footing and bounced moderately. Each bounce, however, has been somewhat lackluster and we must remain open to the possibility that further weakness lies ahead despite all of the strong fundamentals that have been developing over the past several months. Should these fundamentals start to deteriorate, the risk of a major decline in silver would increase.

I can see three signs that physical buying of silver may be moderating. First, deliveries in the May COMEX contract have been modest despite a nice buildup in warehouse stocks. Second, the NAV of the iShares silver ETF (SLV) has gone to a discount on most days -- redemptions of silver holdings may lie ahead. Third, silver lease rates have dropped very low: lower than what we might infer was due to a lack of leasing demand. In fact, silver lease rates have dropped to a level that indicates a substantial amount of silver may be available to the market. The above three developments can reverse very quickly but should they continue on the current path, it is only a matter of time before they start taking a toll on the price of silver.

Due to the above as well as the inability lately of the precious metals to capitalize on a weakening dollar, I have reigned in some of my exuberance (e.g., silver rocketing to $25 this summer). My attitude has changed to more of a wait-and-see and consequently I have slightly reduced my speculative exposure. More to follow.

MAY 10 2007 10:30AM - We have reached a critical point for silver and gold today with July 2007 COMEX silver closing right on the nose at $13.12, a very meaningful pivot point. In after hours on the GLOBEX, the contract managed to trade as low as $13.095 on a single tick, which portends poorly for an immediate bounce and changes the odds in favor of further weakness. The target of this move is down at $11.94 basis the July contract, or $1.18 lower. Should we plunge lower from here, I would not be a buyer until we approach that point, and even then I would be careful. On the other hand, if we do bounce strongly from this level between now and tomorrow, that would be a very encouraging sign. In any case, this is a very critical period from a technical perspective and what happens in the next few days may dictate the general direction of the silver market for many months. Fundamentally speaking, the market indicators have been frozen in time for almost 2 weeks and have not been very helpful in hinting at the market's next move.

MAY 8 2007 1:30PM - Silver in particular held up well today due in part to the reduced COMEX/CBOT open interest which leaves a lot of room for speculators to re-enter the trade on the long side as compared to gold. Fundamentals still appear frozen after several months of steady improvement and this presents some risk to the thesis that prices are about to explode to the upside. In particular, I am disappointed with the pace of delivery notices for May silver which total "only" 3,000 contracts or 15 million ounces so far this month. I should note that not every delivery notice turns into a physical delivery but with the May futures open interest having dropped to around 250 contracts as of yesterday, this latest delivery period, like March, has apparently turned into a dud. Silver will need to look for a different source of inspiration in the short term although we should continue to carefully observe the COMEX warehouse holdings for new developments.

MAY 7 2007 4:00PM - Not much accomplished today by silver or gold. Fundamental indicators seem frozen in time.

James Turk has devoted the cover page of his Freemarket Gold & Money Report No. 403 to my article on the Independent Audit of U.S. Gold And Silver Reserves Confirmed, concluding that I make a mistake in claiming that the gold reserves have in fact been audited.  Unfortunately, Mr. Turk displays little knowledge about auditing in this rebuttal to my work. I really wish that he and others who want to engage in this debate would consider hiring an auditor to consult for them so that they at least get the basic facts right. What follows is a portion of Mr. Turk's critique followed by my reply.

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Mr. Turk's Report:

Footnote #2 explains that some assets on the Mint's balance are for its use and are therefore under its control, while some assets are not. Using the terms "Entity Assets" and Non-entity Assets", the report goes on to explain this difference and concludes: "Thus, Treasury deep storage and working stock gold and silver are all considered non-entity assets."

This explanatory remark means that KPMG did not audit the gold reserves. It performed an audit of the Mint, and the assets within the Mint's control. It was not an audit of assets reported to be within the Mint's custody but not under its control. For example, when a bank is audited, the examiners do not verify the custodial assets of customers stored in the bank's vault.

So it seems clear from this differentiation between entity and non-entity assets that the US Gold Reserve was not verified by KPMG. It would be beyond the scope of the audit, which KPMG states is to review "the financial position of the Mint as of September 20, 2006...and its...custodial activity". KPMG is not verifying the existence or quality or status of the custodial assets placed with the Mint.

What's more, in general I am skeptical about the reliability of the KPMG report, for several reasons, including the following:

1) The standard achieved by KPMG is defined as follows: "The contract [for work to be undertaken by KPMG] required the audit be performed in accordance with generally accepted government auditing standards", which are not the same of those standards that would be applied to business enterprises.

2) KPMG also reviewed the Mint's internal controls, but did not "express an opinion on the effectiveness" of them. More troublesome were the 41 redactions in KPMG's letter, so it is impossible to determine whether the Mint's accounting is reliable.

3) In its report on internal controls and recommendations to the Mint's management, KPMG advises that the Mint needs to "Implement adequate security and physical control procedures to ensure that all assets [which presumably means the Mint's own assets as well as custodial assets] are adequately safeguarded and properly accounted for", which means that these assets are not presently meeting these basic requirements.

Nevertheless, on balance I think Mr. Szabo's analysis is useful. It is, however, more a work-in-progress rather than the final chapter of what has been an unending story. Even Mr. Szabo admits that point: "Can we really expect that KPMG will be present for the physical inventory at Fort Knox in 2007 and beyond? Well, I must admit that we won't know the answer with absolute certainty for a few more months."

Given the past record of the Treasury and its repeated unwillingness to be open and honest about the true status of the US Gold Reserve, I expect that we will be waiting for the truth for more than a "few more months".

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My Response:

First, the only distinction between "entity" and "non-entity" assets when it comes to government auditing standards is whether or not the agency has the right to use the asset in its own operations. Both "entity" and "non-entity" assets are under the reporting agency's control. If an asset is neither under control nor available for use in the agency's operations, it would not be reported in the financial statements. Furthermore, an asset which is not audited would be clearly marked as such (see page 52 of 2006 audit report for an example of how gold and silver reserves would be disclosed if they were not audited). The bullion reserves are presented as integral to the Mint's financial statements and therefore they were subject to the standard auditing procedures applicable to all assets, with the exception of the objections that I raised (no observation as yet of the physical inventory of gold held at Fort Knox).

Second, government auditing standards are at least as thorough and demanding as the auditing standards applicable to private enterprise. Besides, the Mint's audit was also subject to the additional standards applicable to federal financial statements and those promulgated by OMB and GAO.

Third, there should be nothing "troublesome" about an audit not expressing an opinion on the effectiveness of internal control. That is not the purpose of a financial statement audit and therefore you will see this exact language in every opinion letter. What really matters is that there were no material weaknesses in internal control (defined as a condition which could result in a material, undetected misstatement in the financial statements).

Fourth, the recommendation to safeguard and properly account for assets is not a generic statement but rather pertains to reportable conditions. The only assets discussed in the reportable conditions section are property, plant and equipment. Therefore, it would be inappropriate to ascribe any of the recommendations to bullion reserves.

Fifth, the "several more months of wait and see" with respect to KPMG's audit pertains only to a physical inventory of the gold at Fort Knox. At the same time, it is important to understand that KPMG has already observed the physical inventory of gold at West Point (50+ million ounces).

MAY 3 2007 5:00PM - Silver and gold buyers were in evidence today as a dollar rally once again failed to keep the precious metals down. Particularly encouraging is the NAV of the silver ETF, which has gone to premium and may indicate that silver is back on investors' menus. This is happening despite ongoing liquidation of COMEX/CBOT open positions, which have now reached a moderate level. In gold, on the other hand, open interest continues to remain at an extreme. What this means to me is that gold is witnessing more speculative buying at the moment whereas silver is being acquired by investors with a longer-term view. From a fundamental perspective, this places silver in the driver's seat and is one of the reasons I expect the paler of the two monetary metals to outperform in the coming months.

An astonishing development has taken place in silver stocks today with Coeur (CDE) announcing a friendly takeover of Palmarejo and its parent company, Australian Bolnisi for US$1.1 billion in stock. Assuming it can maintain the current share price, which is a big if in my mind, this deal would catapult CDE into the ranks of Silver Wheaton, Pan American and Silver Standard in terms of market value and resource base. Recently, I spoke of CDE's low price and P/E ratio as a possible opportunity to acquire a major silver stock on the cheap. The Palmarejo deal, however, creates a lot of uncertainty and dilution, essentially changing everything. I will have to analyze the implications in a bit more detail than I have so far, but for now I would say that CDE shares are likely to have plenty of trouble and resistance moving substantially higher in the next few months. With a growing universe of silver stocks to choose from, I just don't see any compelling reasons why CDE should be a major component of one's portfolio even when considering how cheap it is.

Here is what I wrote about this deal for Resource Investor:

MAY 2 2007 5:00PM - All in all not a horrible day for the precious metals as silver bounced pretty much exactly from the pivot point I had identified yesterday. In fact, both silver and gold fought a rallying dollar to a standstill as bargain hunters came out of the woodwork. Yesterday, the silver ETF added a million ounces despite a deep discount in the NAV which might be a sign that periods of strong buying interest are still present despite the recent flogging. Definitely not out of the woods yet as a retest of the $13.00 spot/$13.12 July 07 COMEX level might be in order, but the shrinking open interest on the COMEX and CBOT are highly encouraging.

MAY 1 2007 2:00PM - Another bad day for silver and gold as initial dollar weakness was never converted to precious metal strength. A late dollar rally following the release of stronger-than-expected manufacturing data sealed the monetary metals' fate for the day. Meanwhile, copper continues to rock, exceeding $3.75/lb. today as a labor strike in Peru threatens copper output. So far, Peruvian gold production appears to be safe but there are rumors that silver output may also be significantly affected.

Silver's fundamentals continue to remain solid although the latest downdraft in price has stalled the accumulation of metal by the ETF and COMEX warehouses. The ETF's NAV remains at a significant discount, indicating that investors are in no hurry to snap up physical metal at this point. Lease rates have dropped as well in a telltale sign that industrial users are not desperate for supply. Last but not least, the basis in both gold and silver are not telling us much we don't already know.

On the other hand, the COMEX open position in both futures and options has dropped quite a bit over the past few days and may have helped to position speculators for the next assault on the elusive $15 price level. Before that happens, however, there is a good chance that silver may have to fall a bit further -- to slightly under $13 on the spot market and around $13.10 in the July 2007 futures -- before commencing the next rally. Should silver fall through this price level, a quick decline to $12 would be in the cards with additional weakness not being out of the question. Long-term chart support currently lies around $10, which would represent a devastating 35% decline from the current price.. Don't rule out that possibility if you are going to make an investment decision involving silver in the near future.

Assuming $13 or so holds, the only thing that really troubles me at this point is that silver has not been able to take more advantage of rising copper prices and a weak dollar. In fact, silver has underperformed gold and just about every base metal during the past few weeks. Until I can make more sense of this, I will retain a short-term caution (yellow) mental flag to help guide my speculative and momentum trading in the silver markets. I probably won't turn green until I believe the $15 level can be convincingly taken out, and I won't turn red unless there is a significant risk of silver dropping and staying below $10 for a significant period of time. This mindset applies mostly to futures, options, warrants and speculative juniors.

My core, long-term silver portfolio continues to be fully invested and I am still looking for attractive targets to acquire for the medium term. Quite a few silver stocks are on sale at these prices and frankly this is probably not a bad place to accumulate as long as you recognize the distinct possibility that a serious correction may require holding your position for 6 to 18 months before being able to take a profit big enough to justify the risk. This may be a far-from-perfect entry point, especially for a short-term trade, but it might turn out to be the best one under the circumstances.

Unfortunately, I haven't had the time to report on the recent news and developments at silver companies but I plan to rectify the situation especially if the perfect buying opportunity presents itself. In the meantime, I will try to drop a few snippets here and there, such as this one:

Independence Lead (ILDM.PK) just announced a management-only private placement (insider buy) along with a 10% stock dividend purported to be an attempt to clean up the shareholder ledger in anticipation of a future declaration of cash dividends. However, there might be another reason why the shareholder ledger could be in need of a cleanup: a major shareholder vote. A vote for what? Well, I can't think of anything other than an acquisition (in this case, Independence being acquired). In such an event, the restricted shares recently purchased by insiders would be immediately freed up; otherwise, such shares will most likely remain restricted for 3 years.

And just who would buy a company listed on the Pink Sheets with no current revenue and no mining or exploration plan? For one, a little outfit by the name of Hecla, which currently produces several million ounces of silver subject to a lease from Independence. The royalty is approximately 18% of profits but will not be paid until all project development costs have been recovered, which looks to happen in the next year or two, if not sooner. At that point, Hecla will have to pay Independence 18% of its profits from an operation constituting roughly 25% of its worldwide production. Independence, in turn, has previously indicated to shareholders that it will distribute as cash dividends all of the royalties that it might receive.

Unless, of course, Hecla wishes to "capitalize" the royalty by acquiring Independence lock, stock and barrel. This would essentially allow Hecla to amortize the royalty expense over a much longer timeframe, a benefit which would accrue in part to Independence shareholders via a higher buyout price. If not Hecla, there is of course any number of royalty companies such as Royal Gold, although currently Royal has its hands full with the acquisition of Battle Mountain Gold. And don't rule out Silver Wheaton, who could attempt to re-negotiate the royalty into something more akin to its own format.

What has me excited about the possibilities is that I am not particularly enamored with the litigation antics of Independence management and I fully believe that a change of leadership or even of ownership would unlock a significant amount of locked-up value. How much? Well, let's consider that the royalty owed to Independence constitutes approximately 5% of Hecla's current production. Hecla has a $1 billion market cap (and a lousy 15 P/E), so one could argue that the Independence royalty should be "worth" at least $50 million to Hecla (before considering the aforementioned amortization benefit). That compares to a present market cap of $25 million for Independence. The 50% haircut is probably warranted at this point because the royalty will not be payable for at least another year, if not longer (or ever -- Hecla has been mining the property for almost 10 years and has never paid a royalty, which is the legal bone of contention between the two parties). To Hecla or another acquirer, however, now might be the perfect time to buy, if Independence is in fact for sale. Indeed, I would be surprised if this wasn't one of the reasons U.S. Silver (operator of the Galena mine acquired from Coeur d'Alene Mines) picked up a 5% stake in Independence a few months ago.

Even if I'm wrong and the private placement and attempt to clean up the shareholder register are not signs of an impending buyout, these actions do at least mean that management has become a lot more confident about the royalty and/or their West Independence property (which is not currently under lease to Hecla), noting that the recent maneuvers have come on the back of a rare visit (see bottom of page 3) between Independence and Hecla management. The commencement of royalty payments would mean the transformation of Independence into a high-yield dividend play (over 10% at current prices) with excellent leverage to silver and base metal prices. Such a development would undoubtedly support a doubling or even tripling of the share price in the next year or two, even if silver goes nowhere. On the other hand, please don't forget that Independence is a Pink Sheet company with very poor share liquidity.

[I currently don't own shares of Independence, but may look to buy as a medium-term position after conducting further due diligence].

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