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ARCHIVE: 2006

JANUARY 31 2007 12:30PM PDT - Silver and gold were up strongly today on a weaker dollar, stronger oil, rising geopolitical concerns, reports that Russia has been increasing its gold reserves, and good old fashioned buying. The silver ETF added 1 million ounces yesterday after dumping 3 million ounces last week. Both silver and gold are now within striking distance of breaking out of a trading range going back to last summer. Should they succeed, the momentum can certainly carry them for quite a bit, perhaps challenging the highs from this past May. On the other hand, the trading range could just as well reassert its control over the metals. For now, I sit tight.

JANUARY 30 2007 4:00PM PDT - Silver and gold up moderately as the dollar was mildly weaker and the energy complex got support from expected cold weather and OPEC production cuts.

I have given up on "free" statistical charts available on the Internet and have started my own charts of the COMEX warehouse stocks and London lease rates to be followed by other charts including ETF silver holdings, the basis, futures spread, etc. These charts are available by clicking on the small symbols next to each statistical figure in the Silver Alerts table on the home page.

Strategic Nevada vs. Sterling

Strategic Nevada Resources (SNS), the new owner of the Crescent mine in the Silver Valley of Idaho, received a glowing write-up by Bob Moriarty yesterday. In his piece, Mr. Moriarty compared Crescent management to Sterling, slamming the latter for ineffectual decision-making. Unfortunately, Mr. Moriarty is about 18 months too late in publicizing his candid assessment of Sterling. His timing is bad for other reasons too, being that SNS appears to be following in Sterling's early footsteps of mistakenly arousing high shareholder expectations only to have them bashed later as reality sets in. This could take some time for SNS as the full weight of reality has not yet hit Sterling shareholders after more than 3 years. Yet the value differential between the two companies has now become so lopsided in favor of Sterling that extreme speculators might consider taking an outright trading position in Sterling with a planned holding period of 3 to 6 months. I would base this speculation purely on property fundamentals as neither company has a man at the helm with exploration or mine development experience (well, actually Sterling's Ray De Motte now has over 3 years of experience but little good has that brought him so far).

Inflation?

In an article a couple of days ago titled Inflation, prices and economic growth, Paul van Eeden wrote the following:

In a hypothetical situation of monetary inflation with no change in the production of goods and services, prices would increase in direct proportion to the inflation rate: a 10% increase in the supply of money would cause a 10% increase in prices for all goods and services.

A little later, he also stated that:

The bottom line is that a 10% increase in money supply causes a 9% devaluation of your money.

I would like to provide some very basic caveats to these statements by Paul van Eeden in line with my recent discussions about the Fed, deflation and helicopter drops.

Goods and services are NOT the only items upon which a money supply can be "spent" and therefore the price of goods and services does NOT increase in direct proportion to the money supply. There are many keys to understanding this. I will discuss four of them below but these are only the tip of the iceberg.

First, the quantity of goods and services can increase solely because of productivity gains such that a growing supply of money will not necessarily result in higher prices. In fact, a growing supply of money will be necessary to keep prices from falling significantly. Falling prices are the functional equivalent of a rise in interest rates so they tend to curtail new business investment. As a result, monetary authorities try to prevent general price levels from falling. To consistently do so, they must target some rate of monetary inflation above zero. This is true even when deflationary depression is not a concern.

Few people seem to recognize that despite the technological advances of the industrial revolution, productivity gains occurred primarily during periods of positive monetary inflation. In turn, monetary inflation corresponded with the greatest increases in the general standard of living. People living in 1900 were materially not much better off than people living in 1800 or 1700. On the other hand, the average person living below the poverty line in 2000 had a higher standard of living on a historical basis compared to just about every one of his or her predecessors.

Monetary inflation was simply necessary to support a growing debt load which in turn was necessary to support a growing industrial infrastructure which could not be financed from internal profits. High technology in particular tends to be that way, often requiring a payback of many years or decades. I wouldn't be typing on this computer at the moment -- or any computer for that matter -- if it wasn't for monetary inflation.

I am not trying to justify the current debt spiral in the U.S. nor am I saying that monetary inflation is good. On the other hand, it is not inherently bad. Sure, over time you have to add extra digits to prices but if the world had a reason and the willpower to do so, there could be a systematic revaluation of all foreign currencies via a global drop of a digit or two. And I am decidedly not saying that a gold monetary standard is bad. What I am saying is that there needs to be an efficient system of expandable credit which encourages productivity gains and gold does not fit that bill.

Second, money can be, and is, spent on capital investments such as stocks, bonds, other paper assets, houses, etc. Prices of these assets can and do increase when there is more money chasing them so clearly some portion of an increase in money supply is not being spent on goods and services. What I am trying to say is that monetary inflation (and increase in the money supply) translates to price inflation for BOTH goods and services (CPI, PPI or some other measure) AND for capital investments. But since there is no way to accurately predict how each dollar added to the money supply will be spent, there can be no direct method for calculating price inflation for goods and services. This is why the government goes through a convoluted process of surveying consumers and producers.

So, is there any way to ballpark what portion of an increase in money supply is spent on goods and services vs. capital investment? Maybe, but in order to do so, we need to recognize that money supply can be represented in several ways. Traditional definitions of money supply start with the M0 monetary base (cash and currency) and then increase with M1 demand accounts, then with M2 time deposits and money market accounts, and finally with M3 (now unreported) large time deposits, eurodollars and repurchase agreements. Yet out of these components of money supply, only M0 and M1 are directly available for the actual purchase of goods and services with M2 and M3 increasingly distant from the transaction.

Were we to stop here, we might be led to believe that an increase in M1 (which includes M0) should result in a proportional increase in the price of goods and services. Well, we'd be closer to the truth than assuming the same about an increase in M2 or M3. But the fact is that currency exchange rates, the amount of imports and exports, labor and factory utilization rates and other factors have an important but largely unquantifiable effect on domestic prices. For example, the mobilization of underutilized labor in an exporting country with a low standard of living can result in a decrease in the price of some manufactured goods bound for an importing country even as its M1 money supply increases. Let's also not forget that checks can be written to buy stocks. Therefore, we must be careful to draw only general conclusions about changes in price levels resulting from an increase in transactional components of money supply.

A third key to understanding why monetary inflation is not the same as price inflation is that the world has changed in the past few decades. I am talking about universal access to credit: credit cards, home equity lines of credit, company credit facilities, aggressive point-of-sale financing, etc. This is a phenomenon which appeared in the U.S. only during the last 20 or 30 years but has played an increasingly important role as a source of transactional funds. It is just starting to make inroads in other countries. The old model of borrowing money from a bank, then depositing these borrowed funds in a demand account (M1), is largely irrelevant these days. Instead, transactional credits are directly accepted as payment in the modern point-of-sale environment. Usually, credit is more convenient than cash (M0) or check (M1) and sometimes it is even encouraged.

The effect of the increasing use of transactional credit is that consumer debt levels can grow as a direct result of the purchase of goods and services. This was not the case 30 years ago and therefore credit expansion may have become an important source of price inflation today as compared to when most economic theories on inflation where formulated and tested by fire. Simply put, the availability of transactional credit allows a higher level of demand, and therefore it results in higher prices, then would be the case without this credit.

Wait a second, not so fast! A transactional credit does in fact result in an increase in M1 money supply just like a traditional credit since the merchant who accepts a credit will end up with cash in his or her merchant bank account in a few days. Yet the important difference remains that the increase in money supply occurs BEFORE a cash transactions and AFTER a credit transaction. And why is this important? Because, as I stated above, we cannot determine how much of a general increase in money supply is spent on goods and services, but we can determine how much of an increase in consumption credit -- all of which represents an increase in money supply -- is spent on goods and services. In the latter case, it is close to 100%.

Yet some of this transactional credit boost to M1 -- in the bank account of a merchant -- is probably temporary as foreign trade imbalances tend to move transactional dollars into offshore reserves, some of which are later recycled back into various components of the money supply to the extent foreign central banks buy U.S. Treasury securities directly from domestic sources. A perfect example is Jim Bob using a Visa card at Wal-Mart to buy a product made in China. The net result is the Chinese owning Treasury securities, the repayment of which ultimately depends on whether or not the collective Jim Bobs of America pay their Visa card balances. Thus, the Chinese in this case have boosted demand for goods and services by fully subsidizing the purchase of their own product -- essentially providing in-house financing -- without an otherwise necessary change in the money supply.

Given the number of complex factors involved, it should be pretty obvious at this point that drawing a direct correlation between an increase in debt and price inflation is not possible but that it might be more accurate than drawing a direct correlation between the money supply and price inflation. But I still have one more point to explain.

A fourth key is recognizing that transactional credits has been fueled in part by the increase in stable monetary items in the form of some M2 and M3 components, namely time deposits and money market accounts. These components of the money supply, in turn, represent in part a net savings of real wealth held by what I will call net savers.

On the opposite end are net debtors who are actually the source of an increase in demand for goods and services caused by transactional credit -- an increase manifested in M1 at least over the short term. It makes no sense for a net debtor to have significant savings in the form of time deposits, money market and other accounts earning much less than the interest rate on credit cards and lines of credit. But there is a major exception: 401(k) and IRA tax deferred accounts. Money is funneled into these accounts even by net debtors since the incentive for doing so transcends the interest burden of debt. Namely, these accounts avoid the even greater burden of taxes. Thus, I will refer to net debtors with tax deferred accounts as "tax savers".

Net savers and tax savers -- excluding foreigners and financial intermediaries such as banks and true hedge funds -- are the primary holders of M2 and M3, and they are by definition risk averse to the capital markets since they would otherwise "spend" their money on capital investments. Now keep in mind that tax savers put most of their retirement funds into capital investments so it is only the smaller "cash" portion of their account that I am talking about. Still, this is a lot of money.

If you understand the above, you should be able to make the highly counterintuitive deduction that net savers and tax savers are actually contributing to spending on goods and services by placing their savings in banks and with other financial intermediaries. A good example of this is money market accounts which fund the extension of product financing by manufacturers. Without the money market accounts, product financing would not be as readily available and fewer purchases would be made.

So, how many net savers are out there and how much are they adding to the money supply? It is impossible to determine but, as traditionally calculated, savings is the difference between disposable income and consumption of goods and services. In recent years, the U.S economy has experienced rising consumption and stable disposable income. Therefore, economics tells us that savings must have fallen. I would presume net savers are not thriving in this environment.

On the other hand, there are legions of tax savers out there because the incentive to avoid taxes is greater than the incentive to avoid paying interest on debt. And since tax deferred accounts are a relatively new invention -- arriving on the scene like transactional credit less than 30 years ago -- they have had an impact on money supply which traditional studies of inflation and the experience of the 1970's simply cannot validate.

But here is the really important part. Both modern net savers and tax savers can easily move funds from cash to mutual funds and vice versa without using demand accounts (writing checks), something that was impossible a generation ago. These sentimental movements can now create major fluctuations in the availability of money supply -- without any apparent change in its size or composition -- to support spending on goods and services vs. capital investment. On the flip side, large changes in the money supply -- both up and down -- should be possible without a major fluctuation in the availability of money to support spending on goods and services vs. capital investment. Simply put, it takes increasingly more and more monetary inflation to be meaningful to price inflation. Or perhaps it would be more accurate to say that monetary inflation and price inflation are becoming less correlated.

Given the above, my personal suspicion is that the true rate of price inflation is not very different from the official CPI and PPI figures but that this only gives part of the inflation picture since there is no published figure for API (asset price index). If there was, we would likely see that API makes up some of the "shortfall" in CPI and PPI. In contrast, CPI and PPI were much higher during the 1970's, another period of rapidly advancing money supply, precisely because API was timid. Thus, gold flourished in the 1970's partly because it was a competitor to other asset classes at a time when the increasing money supply was going into the prices of goods and services and not investment capital.

Today, gold should not count on a lot of help from an increasing money supply if much of it is going offshore or into assets which are competitors to gold. Instead, gold should count on eventually becoming the ultimate stopgap to an eroding fiat whereby "full faith and credit" become meaningless because the central bank is willing to monetize all debts via helicopter drop. In such a scenario, only "true" money -- the monetary base -- would have any real value and that value would be measured by the amount of gold held in treasury. There would emerge a dual currency of sorts: (1) gold and the monetary base supported by gold and (2) a securitized currency backed by all credit dollars with the Fed acting as clearing agent. The former would be held by savers who sought protection from changing prices while the latter would be held by investors looking for income from changing prices. Thus, gold holders would become hedgers and credit holders would become speculators and all would be well with the world. That is to say, nothing would really change.

JANUARY 29 2007 12:00PM PDT - Silver and gold down in sympathy with the metal and energy complexes today despite a slight weakening of the dollar below 85 on the dollar index. Economic reports out this week should extend the see-saw action with a bullish bias for silver purely on technicals. Open interest in COMEX silver was up about 10,000 contracts over the prior week with a significant rise in commercial shorts. The commercial short position is nowhere near a record but the willingness to aggressively accommodate speculative longs is a bit troubling to bull fundamentals.

JANUARY 26 2007 3:00PM PDT - Moderate weakness in silver and gold today as the dollar punched through the 85 level. The metals continue to trade in a bullish mode although stiff chart resistance can be found directly above current levels. Commodities were also weak in general today although the energy complex was up.

Meanwhile, the basis and spread in silver futures recovered strongly yesterday following the past few days of the basis declining toward zero and spreads tightening somewhat. Tightening of spreads could mean that physical (fundamental) demand is outpacing speculative demand which is a good sign of a sustained rise in prices during a bull market (although spreads aren't very good at pinpointing the timing). As an example, the "observed" spread in the table above was mostly in negative territory around May of last year when silver was trading near $15 on the back of the silver ETF launch but this did not portend a sustained rise in price above the $15 level.

Rather, it probably meant that $7.50 silver (the level from which the rally had launched the previous fall) would probably not be revisited during the remainder of this bull market. In fact, one could make a pretty convincing argument that silver will not go much below $10 if ever again. In making such bullish predictions, we do need to keep in mind that silver's long-term uptrend is around $9 at the present and therefore the bull market would remain intact even if silver did trade for a while under $10 (but only a little while). Clive Maund in recent analyses has provided charts which show the long-term uptrend lines for gold and silver (see Gold Market Update and Up, Down or Sideways? - a Strategic Review). These are good charts to keep in mind.

Besides the above, are there uses for the futures spread in silver analysis other than to indicate a tightening of physical supply? Sure there is. For example, calendar spreads in futures can be a very profitable trading strategy if you learn how to use them properly, which requires studying the spreads themselves. These studies eventually lead to a deeper understanding of the various speculative and fundamental forces that drive silver prices. Even more powerful insights can be gained by combining the futures spreads with trading volume, open interest and commitment of traders data. In fact, I have been researching, paper (and sometimes real) trading and back testing various methodologies involving spreads and market data for a few years now and have uncovered what appear to be a few profitable setups.

JANUARY 25 2007 4:00PM PDT - Silver and gold retreated from an early rally but closed up for the day as the dollar recovered somewhat from a beating overseas. Metals in general were stronger today and silver in particular has been leading the charge. And even though the dollar sits just below the important 85 level on the dollar index, both gold and silver are significantly higher today than the last time the dollar vacillated around these levels in November. Clearly, silver and gold have detached somewhat from their dollar link, a development some believe is due to a flight to safety as geopolitical tensions are once again on the rise while others seem to think this is a result of renewed hedge fund speculation. Whatever the reason, none of my indicators have yet confirmed a fundamental basis for the move and therefore I am participating with suspicion.

Resource Stocks Popular?

Another report on the Vancouver show by Sean Brodrick of the Martin Weiss publishing empire confirms that attendance by both exhibitors and delegates was phenomenal and therefore interest in the resource markets continues to be high. This is important because investors are obviously looking for the next resource play and they appear to have additional funds to deploy into the markets. Meanwhile, the popularity of gold continues to grow as indicated by this commentary which has Google and Goldcorp sharing top spots among the recommendations of the best 100 amateur stock pickers over at www.marketocracy.com, a site similar to the Motley Fool Caps site where amateur investors recommend stocks as I discussed on December 7 of last year (see Archives).

My point was and is that popularity is a relative thing and there will be no easy way to determine the top of the bull market in silver and gold by simply looking at magazine covers or by listening to conversations at a cocktail party. By the way, I never did start tracking on a weekly basis the top gold and silver stock recommendations of the Fools but if anybody wants to know, it looks something like this today as compared to last December:

Number of Rated Silver Stocks: 6 today, 6 then

Total Rated Stocks: 3,588 today, 2,889 then

Most Rated Silver Stock: Silver Wheat (279) today, Silver Wheaton (293) then

Number of Ratings for Top Silver Stock: 242 today, 164 then

Most Rated Gold Stock: Goldcorp (135) today, Goldcorp (145) then

Number of Ratings for Top Gold Stock: 456 today, 300 then

Most Rated Stock: Apple (4,394 ratings) today, Microsoft (3,337)

And here are the key measures of popularity:

Rated Silver Stocks to Total Rated Stocks: 0.17% today, 0.21% then

Most Rated Silver Stock to Most Rated Stock: 5.5% today, 4.9% then

Rank of Most Rated Silver Stock: 279 today, 293 then

As a result of this somewhat tongue-in-cheek "analysis", it is clear to me that silver stocks have only marginally gained in popularity with the average investor since last December 7. Silver Wheaton continues to be the most popular silver stock out of the 6 stocks that are on amateur investor Fools' radar but there are still 278 non-silver stocks (among them only two gold stocks: Goldcorp and Northgate Minerals) which are more popular. Therefore, there should be little concern at this point that investors have an unhealthy obsession bordering on mania when it comes to resource stocks in general and silver stocks in particular.

Greenspan Admits to Gold Conspiracy?

I am going to go off on a tangent here to debunk a major fallacy among gold conspiracists which continues to rear its confused head. The latest telling appears in a KitcoCasey interview with Chris Powell of GATA in which a "famous" speech made by Greenspan in 1998 purports to be evidence of central bank manipulation of the gold price. Here is what Mr. Powell said:

GATA believes that the cover under which central banks have been acting has now been blown so totally that only the willfully ignorant can fail to see it. And they point to the public record to bolster their claim.

For instance, there were a few key words uttered by former Fed Chairman Alan Greenspan when he appeared before Congress in July of 1998. Greenspan was testifying as to why the Commodity Futures Trading Commission (CFTC) should not concern itself with regulation of derivatives traded in the over-the-counter market.

Greenspan argued that, “There is no reason to believe either equity swaps or credit derivatives can influence the price of the underlying assets any more than conventional securities trading does.”

One might think the chairman guilty of a surprising naïveté, or perhaps something a bit more sinister, but that’s a topic for another day. The relevance here is that gold, in addition to being a fundamental currency, is also a commodity, and as such the CFTC is responsible for oversight of its market.

Greenspan waved off the necessity for the CFTC to regulate gold derivatives, telling Congress to fear not, that the “central banks stand ready to lease gold in increasing quantities should the price rise.”

Oops. Bet he wishes he hadn’t let that slip. As Chris points out, “Greenspan was telling Congress that the purpose of gold leasing was not what the central banks had been telling the world—to earn a little money on a dead asset. The real purpose of gold leasing was to suppress the gold price. His remarks are still posted on the Federal Reserve’s Internet site.” [they are—we checked]

Now here is my reply.

The manner in which former Fed Chairman Greenspan's speech in 1998 -- the one in which he supposedly admits to central bank manipulation of gold -- became the "smoking gun" for the gold conspiracy camp is typical flawed logic. In the speech, Greenspan stated in part that "...central banks stand ready to lease gold in increasing quantities should the price rise".

Gold conspiracy advocates now simply quote this as "central banks stand ready to lease gold in increasing quantities should the price rise". But in the seemingly innocent act of truncating a sentence to its last few words, the theory-mongers have very effectively taken a concept out of context and corrupted its meaning for their own narrow purposes (to prove that central bank gold manipulation exists).

Taking the statements of an alleged participant or apologist of a conspiracy out of context and then turning the words around to make them seem like a slip of the tongue is a favorite tactic among conspiracy theorists. This same tactic results in selective focus on ambiguous bits of physical evidence in attempts to cast doubt on the validity of official explanations of complex events even though the vast majority of the evidence is conclusive. Thus we find that a few scattered incongruities and inconsistencies which can readily be explained by chance, circumstance or contrary evidence are instead held up as proof that sinister government plots were behind the Kennedy assassination, the terrorist attacks on 9/11 and the long suffering gold price.

In the latter instance, we are to believe that a supposed slip of the tongue by Mr. Greenspan has betrayed a tightly guarded secret of the entire financial establishment. And even though this secret is allegedly rotten, pervasive and long-standing, the conspirators have managed to hide all but a couple of similarly shaky bits of "evidence", each of which is also a purportedly damning slip of the tongue.

In the case of Mr. Powell, he correctly states that the whole point of Greenspan's speech was his assessment of risk in the unregulated over-the-counted derivatives market. But Mr. Powell fails to properly explain that Greenspan's assessment hinged on his belief that manipulators in the over-the-counter market are unable to effectively restrict supply and that is why they cannot influence asset prices. Instead of mentioning this very important tenet of Greenspan's speech, Mr. Powell instead finds it both surprising and relevant in his personal opinion that Greenspan may be naive about what influences asset prices and that all derivative gold transactions should be subject to regulation because gold is a commodity. Yet these points are completely irrelevant to the central message of Greenspan's speech; why Mr. Powell brings them up is beyond me.

What is relevant is that Greenspan was only talking about manipulation of the markets through attempts to restrict supply and corner an asset. This has nothing to do with "what the central banks had been telling the world—to earn a little money on a dead asset."  This is simple misdirection on Mr. Powell's part and represents nothing more than an attempt to substitute his own agenda (arguing that central banks have lied about why they lease gold) for Greenspan's agenda (arguing against derivative regulation). But this is Greenspan's own speech after all, so shouldn't at least his agenda be mentioned before being substituted?

Read Mr. Powell's words again and notice how he carefully and adroitly avoids the subject matter of Greenspan's speech altogether! He asks the why (as in "why the Commodity Futures Trading Commission (CFTC) should not concern itself with regulation of derivatives traded in the over-the-counter market") but instead of providing Greenspan's own answer, Mr. Powell substitutes his own while claiming that it is actually a slip of Greenspan's tongue ("Greenspan waved off the necessity for the CFTC to regulate gold derivatives, telling Congress to fear not, that the 'central banks stand ready to lease gold in increasing quantities should the price rise.'") Brilliantly, Mr. Powell implies that the CFTC does not need to regulate gold derivatives because central banks are already in control of the gold price through leasing! And were we to leave it at that, I would understand why many people might be duped.

But this time we are not going to leave it at that.

To start out, I'm going to wonder why Mr. Powell and others of his persuasion never mention that within this very same speech Greenspan invokes the example of the Hunt brothers' unsuccessful attempt to corner the silver market:

"Even trading on exchanges does not in itself eliminate all endeavors at manipulation, as the Hunt brothers' 1979-80 fiasco in silver demonstrated. The primary source of regulatory effectiveness has always been private traders being knowledgeable of their counterparties. Government regulation can only act as a backup. It should be careful to create net benefits to markets."

Greenspan clearly contends that regulation alone is not enough to discourage manipulation and often it is not even desirable. He makes a strong case for the free markets to be left to their own devices ("private traders being knowledgeable of their counterparties" ) with regulation acting as a backup, and then only when regulators "create net benefits to markets".

In this sense, it is completely nonsensical for Greenspan to have slipped on his tongue earlier in the speech by admitting that central banks actively regulate the over-the-counter gold price. After all, he is providing numerous examples of why institutionalized regulation of over-the-counter markets is largely unnecessary. To wit, Greenspan is arguing against government interference and for free markets! So why in the heck would he make a shocking admission that regulation of the gold price is necessary? The answer is that he isn't. Instead, he is actually saying that regulation of the gold price is unnecessary!

To claim otherwise that "central banks stand ready to lease gold in increasing quantities should the price rise" is really just a slip of the tongue would mean that Greenspan was intentionally repudiating the central, pro free market, argument of his speech! The equivalent would be a murder suspect trying to carefully construct an alibi during interrogation in the midst of which he suddenly pens a confession admitting he is the killer. That is exactly the type of insanity we must accept as realistic if we are to believe that Greenspan's tongue slipped (despite this being a prepared speech).

I will repeat this because it needs repeating, Greenspan made his comments about gold only in the context of manipulation of the most common and dangerous kind: the attempt to drive prices substantially higher by restricting supply and cornering the market. He did this for good reason since the history of commodity trading is replete with cornering attempts to the exclusion of virtually every other manipulative practice. This is the important part GATA won't explain to you in the hopes that you will feel stupid for believing otherwise ("only the willfully ignorant can fail to see it") and therefore you will likely avoid trying to figure it out for yourself.

I will repeat this again just so that I can't be accused of glossing over this point, it was only in the context of Greenspan denying the ability of derivative counterparties to corner the markets that Greenspan discussed gold. And he specifically singled out the yellow metal because it is an asset which has a finite available supply and whose market can conceivably be cornered by furious attempts to secure available bullion. The clear, and only logical, implication of Greenspan's statement about gold is that central banks would be a supplier of gold as a last resort if an otherwise successful restriction of supply were to drive the price to a level at which gold derivative defaults threatened the financial markets.

That is the only thing Greenspan said about gold. He made no general statement about central bank gold activity as might be implied by the fragment "central banks stand ready to lease gold in increasing quantities should the price rise". Don't believe me? Well, Greenspan's meaning becomes entirely, obviously, irrefutably, logically, sensibly, abundantly, truthfully and unambiguously clear as soon as his statement is put back into the context from which it has been ripped:

"Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise." [emphasis mine]

Now, please don't take the above words to the opposite extreme to argue that central banks have only leased gold, if ever, to thwart an attempted corner of the gold market. Or that central banks have never leased gold in response to a price rise which did not involve cornering the market. Greenspan said nothing of the sort and so his speech provides neither evidence for or against central bank leasing outside corner attempts when "private counterparties restrict supplies of gold". Indeed, central banks are not infallible and it certainly is plausible that bureaucratic hubris may have contributed to some gold leasing in vain attempts to regulate exchange rates via currency dominated gold prices. But there is absolutely no logical connection between this possibility and a claim that central banks have engaged in a concerted effort to suppress the gold price in all currencies as evidenced by an alleged slip of the tongue of the top central banker when he said "central banks stand ready to lease gold in increasing quantities should the price rise".

Perhaps the absolute simplest way to explain my point is that Greenspan did not in any way imply that central banks are concerned with a price rise in gold. Rather, the central banking concern revealed by Greenspan involves the risk to financial markets should a corner attempt on gold cause a derivative counterparty to be destabilized. In such an event, Mr. Greenspan is simply pointing out that central banks will use whatever means they have available to them. In the case of the LTCM crisis in 1998, it was to provide liquidity. In the case of an ongoing attempt to corner the gold market, providing liquidity would not make a difference and therefore "central banks stand ready to lease gold in increasing quantities should the price rise".

Let me illustrate the very real concern over cornering the market with a hypothetical example. Suppose that I approach various firms (counterparties) around the world that are known to deal in over-the-counter derivatives involving metals and with whom I enter into contracts pursuant to which I am promised the delivery of 20% annual mine supply of iridium metal within the next 12 months. I agree to pay twice the going rate for this iridium in exchange for haste and discretion. Suppose further that iridium is a tight market with virtually no inventory stocks or sources of supply other than mine output. Next, suppose that I go around to most of the world's platinum group mines and purchase 90% of their forward iridium production for the next 12 months. Again, I pay a hefty premium compared to the current market price but I don't mind because I plan to make the money back and then some.

How? Why, a good old fashioned short squeeze, that's how! By acquiring 90% of supply while at the same time contracting for others to sell me 20% of supply, I have cornered the market. Try as they may, my counterparties will be unable to acquire all of the iridium they are required by contract to sell to me in 12 months. In effect, they will have to buy it first from me -- being the only source of iridium -- just so they can turn around and sell it right back to me at the much lower, predetermined contract price. In such a scenario, my profits (and counterparty losses) would technically be infinite since I get to name my own iridium price even if the counterparties are short just one measly ounce of iridium. The effective contract-clearing price of iridium, however, is limited to my counterparties' combined net worth. Otherwise, I will end up as one creditor of many in bankruptcy if I'm not careful. Now, suppose my counterparties include many of the world's largest banks...

Well, a perfectly executed corner serves to transfer the cornered counterparty's net worth to the cornering counterparty. In turn, the perfect cornering asset is one with a small but active market and finite supply. In this sense, iridium is probably not a realistic example. In fact, Greenspan states in his speech that there are no realistic examples in the modern marketplace. That is, with the possible exception of gold, a risk which he trivializes by making his allegedly infamous statement.

In conclusion, Greenspan is explaining why the free market provides both a better pricing and policing mechanism than a market in which central banks and regulators constantly intervene. This is so axiomatic a concept that an admission of central bank control of the gold price is fatal to the argument. Therefore to consider Greenspan's quip about gold as a slip of the tongue must necessarily fall into the same category of insane logic which would have you believe it is realistic that a recalcitrant murderer intent on foiling a successful interrogation would accidentally pen a written confession.

JANUARY 24 2007 5:00PM PDT - Silver and gold recovered impressively from an early swoon with both closing marginally up for the day on the back of firming copper and oil prices. A stronger dollar did not seem to impede the metals' progress.

The silver ETF has dropped 3 million ounces from its holdings since Monday and is now 6 million ounces off the record 122 million ounces held as recently as January 12. Some of this appears to be dealers taking back out a portion of the more than 10 million ounces of silver they put into the ETF back in December. At the time I speculated that this silver was for dealer short covering -- a bullish indicator -- but now it is increasingly looking like it was meant for anticipated demand from ETF retail buyers, who simply may have ended up not being able to stomach that amount of silver. Of course it is not known what the ETF dealers did with the silver bullion once they removed it from ETF vaults and so it would be premature to conclude that the drop in ETF holdings represents a temporary source of silver supply. Regardless, this latest development may be one more feather in the cap of the speculative vs. fundamental nature of the latest rise in silver prices.

I did not have an opportunity to attend the 2007 Vancouver Investment Conference, but in Impressions of Vancouver, we find that the author observed a well-attended show with standing-room-only presentations and sold out booths but still not as strong in attendance as last year. Meanwhile, a private correspondent reported to me that Sunday saw record attendance, the show floor was packed with people and the main speaking hall was standing-room-only, that the new exhibitors were disproportionately represented by new uranium explorers, and according to his list there were about 500 total exhibitors this year compared to 350 last year. Based on these reports, it appears that investor interest in the resource sector is healthy but not frothy.

There is much to talk about in terms of silver stocks but I only have time to cover two topics today. The first is Esperanza, which reported that it has extended the strike length of the Ayelen vein at San Luis to 1,400 feet. Perhaps more importantly, two holes have probed deeper (more than 400 feet) and hit the Ayelen vein in high grade, if not spectacular, intercepts. This is important since I pointed out earlier that probing of the nearby Ines vein at depth failed to intercept any mineralization, creating some uncertainty as to whether these veins were open down dip or perhaps they were offset by post-mineralization faulting. This is no longer a concern down to at least 400 feet on the Ayelen vein and in the meantime the drills have started turning on the Ines vein to explore exactly what is going on over there. Esperanza also reported that prospecting has resulted in the discovery of four additional nearby veins.

The second item is with respect to Silver Wheaton and its right of first refusal on the purchase of silver from Goldcorp's Penasquito, a mega gold and silver project in Mexico. Royal Gold reported today that it has closed its $100 million Peñasquito Royalty Transaction consisting of a 2% Net Smelter Return, which comes on the heels of Goldcorp's announcement on Monday that it has obtained the Permits for Penasquito Mine. I previously discussed on December 29 of last year that perhaps Silver Wheaton is losing its edge on these types of transactions and that is why it has been acquiring stakes of junior silver exploration companies, the most recent being Strategic Nevada Resources which owns the Crescent mine in the Silver Valley of Idaho. Some correspondents have a slightly different take on the developments surrounding Silver Wheaton, one that argues a net positive for silver investors. I've morphed a few of the comments into a single explanation which hopefully does justice to these viewpoints:

Silver Wheaton is transforming the company from its original business model into something more similar to a conventional stock fund. Of course, it is obtaining rights of first refusal to buy future silver production from the deposits it is investing in, but it's not a given SLW will be successful in obtaining those rights.

And all this is good news, maybe not for Silver Wheaton shareholders, but for silver investors because it is an indication that silver hedging from mining companies may be over. Silver Wheaton may have just been a stop along the road.

The original business model was not that enduringly fantastic for long term investors in Silver Wheaton. The idea to buy future silver production from an established mine allowed SLW to present itself to shareholders, from a financial point of view, as a never ending call option on silver with a "nominal" strike price of 3.90 US$/oz. And, also, to be the only 100% silver company.

Furthermore, they could grow their silver production fast, without opening a new mine and so without adding to silver supply that could depress the price of the commodity.

What a fantastic idea, but...

Well, the strike price is "nominal" because the contracts SLW has with the miners (Luismin, etc.) also include up front cash and stock payments which are not reflected in the strike price. That is, SLW paid substantial sums up front to obtain the "nominal" strike price of 3.90 US$/oz. When combined, the up front payment and the strike price can be viewed as the "equivalent" strike price, which would undoubtedly increase in the case of additional or replacement contracts in unison with an increase in the silver price during a bull market advance. That is to say, the "nominal" strike price could only be maintained in future deals at 3.90 US$/oz if larger and larger up front payments are made.

So, what happens to early established positions in SLW if the company keeps entering into new contracts as the silver price rises? Shareholders will see their "equivalent" strike price rising from the current level to higher and higher amounts. They bought SLW because it was like an option at 3.90 US$/oz with an option premium - the up front payment - a financial model that is relatively easy to understand. But if management wants to keep growing the company based on its original business model, it will have to buy increasingly expensive contracts, and this dilutes the original shareholders who bought early (when contracts where cheap). SLW also eventually turns into a royalty play as the strike price becomes a smaller and smaller component of the total outlay which is increasingly dominated by a large up front payment. There is nothing wrong with royalty plays per se, but that is not the model advanced by Silver Wheaton and it does not appear to be one that management wishes to embrace.

In fact, when the "equivalent" strike price of new contracts exceeds the average cash cost of primary silver miners, Silver Wheaton no longer represents a compelling conduit for investor participation in a stream of silver production (even with silver from a by-product source). Instead, standard royalty financing might become more compelling for miners since they not only get more money in advance but they also get to retain most, if not all, of the upside from the higher metal prices about which miners are increasingly confident. This could be why SLW may have discontinued its initial business model, as it simply may not make sense anymore. This could also be why the Penasquito and Dolores projects recently got financed through royalty programs. Instead, SLW seems intent on growth by taking a stake in advanced stage deposits, which is increasing the risk profile and, as I said before, turning it into more and more of a stock fund.

But, do they need to grow? Not necessarily. Perhaps the relevant question should be, why do they still want to grow? Perhaps part of the answer has been given by Rob McEwen during his fight for a shareholder vote on the Glamis acquisition by GoldCorp: management may want to grow a company regardless of the best interest of shareholders simply because compensation rate and esteem within the industry are often seen as commensurate with company size.

JANUARY 23 2007 9:45AM PDT - Silver and gold both in upside breakout as dollar falls and commodities strong across the board. The rally may be the result of strong physical demand but my fundamental indicators have not picked up any major signs of a tightening supply. So I continue to believe the current move is speculative and technical in nature.

JANUARY 22 2007 12:00PM PDT - Silver showed surprising strength today as the gold rally was halted by a rising dollar. Silver is now near the top of its recent range and price action this week could be instructive.

There are a lot of topics I'd like to cover this week but I've been very busy so I haven't had much time to think, much less write, about them. I hope to do so later this week so please keep checking back.

JANUARY 19 2007 12:00PM PDT - In almost a mirror image of the move yesterday, silver and gold rallied as crude oil firmed. Gold was especially strong into the close with intraday charts indicating the shorts were literally "saved by the bell". In the meantime, fundamental silver data continues to argue against getting carried away just yet.

I have more to write but no time so I will be back over the weekend.

JANUARY 18 2007 12:00PM PDT - Gold and silver down on oil weakness and some economic data pointing to lingering strength in the economy which could keep interest rates, and therefore the dollar, steady for some time to come. I mentioned back in December that we could have a series of conflicting economic reports for a few months until a clearer direction for the economy emerges. This type of back and forth economic news is supportive of rangebound, aimless markets.

JANUARY 17 2007 2:00PM PDT - A few days ago I mentioned that the ultimate comparison of a silver stock should be to silver itself. Silver bullion cannot suffer a business failure but silver stocks can and often do. Therefore, there is no reason to own silver stocks unless they can compensate for the business risk by significantly outperforming silver bullion during the intended holding period.

One caveat here is that we must also consider enacted tax rates at the time of sale. For example, stocks held over one year are currently taxed at a maximum of 15% as long-term capital gains while bullion is taxed at a maximum of 28% as gains on collectibles. In 2010, the long-term capital gains tax is likely to increase to 20%, narrowing this gap somewhat. In the meantime, legislation could eliminate the tax gap entirely but current efforts appear to be floundering. I have little doubt that there would be positive investment demand due to opening "gold and silver to a brand new market of investors who may have been reluctant to purchase metals in the past based on the tax situation."  With enough grassroots support, this type of measure has a chance of passing despite the difficulty of overcoming the distinction between numismatics (which would continue to be taxed as collectibles) and bullion. Perhaps people like Mr. Gnazzo can help make a real difference by starting a letter writing campaign to support the re-introduction of this important legislation. It would be a shame to instead let the voice of the people go to waste on preposterous demands for a gold reserve audit.

Okay, let me get to the point of this missive. Sean Rakhimov over at www.silverstrategies.com has undertaken the effort of charting the comparison between the price of silver and each of the stocks featured on his site. The results seem to indicate that the silver-to-share price ratio might in fact be a useful investment tool. Whether a particular stock outperforms or underperforms the price of silver is important in itself, but perhaps these charts can also be used for more nuanced analysis. For example, many of the charts show flag and triangle formations on the verge of breakout while others show trend channels in command.

Many of the formations in Sean's charts are not visible on the stock charts themselves. This is because Sean's charts isolate some of the effect of changing silver prices on the stock price and the result is that we get insight into what the stock might have done in an environment of more stable silver prices. On the other hand, we need to keep in mind that fluctuating silver prices have a greater effect on the earnings of high cost producers than low cost producers. In summary, it would probably require a certain degree of sophistication to effectively use Sean's charts in a trading or investment strategy. Personally speaking, I'm going to experiment with them a bit, and I urge others who seek uncommon insight to do the same.

JANUARY 17 2007 12:00PM PDT - Silver and gold were up nicely today. They were aided by the dollar going lower after bouncing off the ceiling at 85 as well as a muddled picture on inflation provided by the PPI. It is possible that silver is establishing a trading range with a low of $12 and a high at $13. This is seasonally not a typical period for lengthy trading ranges, but if a trading range does persist through the spring, it could have a moderating to bearish influence on prices for the rest of the year.

ETF Drops 3 Million Ounces

In a reversal of dealer exuberance, the silver ETF dropped 3 million ounces of silver yesterday, the first decrease in several months. I suppose this is not very surprising given the moderate volume of trading in ETF shares which was apparently taking too long to gobble up the more than 11 million ounces added since the middle of December. As I previously speculated, some of the silver could have been used for short covering but apparently some of it may also have been a gamble on immediately higher prices. Those higher prices have not materialized a month later and so the trade was apparently abandoned. Should there be further unwinding of speculative positions, this could reinforce a trading range.

Silver Wheaton Bets on Strategic Nevada?

Now the rest of us know why Strategic Nevada Resources, the recent acquirer of the Crescent mine at a tax auction, traded up 24% yesterday on fantastic volume of 2 million shares. This morning came the announcement that Silver Wheaton is participating in Strategic's private place and as a result will own 13% of the company. Apparently, a few people may have found out about this development ahead of time and they all seem to have acted on this nonpublic information yesterday. Wouldn't you, especially since Canada's insider trading laws are virtually nonexistent?

Silver Wheaton or not, I will repeat my prior point that on a relative value basis, you would be crazy to not buy 4 shares of Sterling for every one share of Strategic. Please realize I am not saying that you should buy either stock but rather that you could turn a pure gamble into at least a decent speculation by gaming the relative market values of Strategic and Sterling. These market values are currently driven purely by extreme levels of sentiment which should eventually (I think sooner than later) shift to more reasonable levels. At that point, the value proposal between the Sunshine mine and the Crescent mine will become obvious to the market.

As for Silver Wheaton, this latest move could be revealing a chink in its armor. At this time, the chink may not look like anything to worry about since the stake Silver Wheaton has taken in Bear Creek, Revett, Sabina and now Strategic is a drop in the bucket in terms of its cash till and market cap. However, if Silver Wheaton continues down this path, its financial results will be increasingly subject to the vagaries of a portfolio of silver exploration stocks. As a result, Silver Wheaton will become less and less of a proxy for silver prices. In truth, Silver Wheaton was never just a proxy for silver prices since its silver comes from 3 mines. Therefore, Silver Wheaton is just as much a proxy for the operational success or failure of those 3 mines, a point which may be lost on many shareholders.

Adding junior exploration and mine development risk to the equation will result in less correlation and predictability between the price performance of Silver Wheaton and silver itself. This is because junior exploration and mine development shares often move independently of metal prices. So why is Silver Wheaton pursuing a strategy which appears no more sophisticated at this point than blindly taking a bite whenever a large private placement comes along in a company allegedly on track to develop a major silver-bearing deposit? If you or I pursued such a strategy, it would be a sign of inexperience or an insatiable desire to gamble. In the case of Silver Wheaton, I assumed that taking a stake in prospective silver plays could later put it in a better position (leverage) to acquire silver from newly developed silver deposits. But it's actually more complicated than that since Silver Wheaton, as an insider, would have its negotiating position compromised by the overarching need to structure a deal which is fair in both substance and appearance.

Now along come the latest two acquisitions -- Sabina and Crescent -- and I'm not so sure about the leverage theory any more. Rather, could Silver Wheaton be showing signs of impatience or even mild desperation after failing so far to lock up a deal on Penasquito and being recently beaten to the punch on Minefinders' Dolores by a more traditional royalty company? Only time will tell. In the meantime, my enthusiasm for Silver Wheaton is increasingly being tampered by a realization that it won't be easy to accomplish what it has set out to do.

JANUARY 16 2007 2:00PM PDT - A staggering 24% rise in the shares of Strategic Nevada Resources today on volume of over 2 million shares. I have calculated the number of shares outstanding after the private placements as totaling approximately 28 million, meaning that Strategic now sports a market cap of US$35 million. The company has now effectively parlayed a $650,000 silver mine -- for which nobody else would bid at a tax auction -- into more than 50 times that amount over the course of 30 days. This is probably one of the most successful junior exploration promotions that I have ever witnessed! And although I would urge extreme caution, there is the possibility of more action directly ahead given that Jason Homell has not yet touted this stock to his adoring flock of followers.

Let me just point out that Strategic now sports about half the market cap of next door neighbor Sterling, a company with fewer risks and uncertainties (although still some major ones). The main difference is that Strategic basically owns a $35 million well while Sterling has the Sunshine mine, mill and tailings pond. The Sunshine's chances of going into production are about 10 times higher than the Crescent's. Similarly, the Sunshine has about 10 times the land position and 10 times the potential resource of the Crescent. And just exactly where is Strategic going to have to mill the ore that it might produce, to pump the water that it needs to pump and to dump the wasterock that it generates? That's right, at the Sunshine.

It stands to reason that Sterling should sport at least a 10 times multiple to the market cap of Strategic. Instead the multiple is 2. Therefore, I urge anyone seriously considering getting aboard the Strategic train to instead put at least 80% of the money into Sterling. For example, if you are hellbent on buying $10,000 in Strategic stock, consider putting no more than $2,000 into Strategic and the other $8,000 into Sterling. That way you will stand to gain, or at least not lose as much, when the multiple reverts from 2 back to a more reasonable 10. I'm not saying that you will do well with such a ploy but you will definitely do better than plopping all your money down on Strategic. Good luck!

JANUARY 16 2007 12:30PM PDT - Crude oil and copper resumed their decline while the dollar steadied today, halting much of the enthusiasm in the silver and gold markets as the metals bumped up against overhead resistance.

Meanwhile, the corn market calmed down a bit as the grain complex gave back some of its gains from last Friday. But out in California, orange growers and other farmers were on edge as they hoped that a persistent blast of Arctic cold will not freeze and ruin their crop. Considering that California is America's fruit and vegetable basket, the prospects look grim for food prices in the next several months. This could offset the decline in energy prices which have been widely expected to reduce CPI and PPI figures in the coming months. Therefore, gold and silver are probably not going to see much of a negative or positive inflation situation during the first quarter of 2007.

Where is the Wall of Worry?

There were 2 polls out today regarding expert opinion of the 2007 gold price. The first, by Reuters, had 42 analysts predict a median gold price of $650 during 2007 with silver to supposedly outperform. Yet the experts predicted "only" a high silver price of $15 and an average price of $12.50 for 2007 so I'm not sure about the accuracy of the term "outperform". The second poll, by the Telegraph, announced that 29 "top gold prophets" made an average prediction of a $742 gold price for 2007.

At first glance, these two polls appear to have come up with significantly different predictions for gold's 2007 price performance. But when we look closer, we can see that the $742 prediction is actually the median prediction of the highest price gold would reach in 2007 whereas the $650 prediction is the median prediction for the average price at which gold would trade in 2007.

Combining these two polls, we can arrive at a sort of consensus where gold is expected to trade up to a high $742 during 2007 with an average price of $650.

Ostensibly, these polls were taken to gauge whether or not the bull market in gold (and silver) is still alive and well according to the experts. There appears to be a near consensus on this issue since the average gold price during 2007 is predicted to be higher than the gold price at the start of 2007. There also appears to be a consensus that in 2007 gold will reach and even eclipse its 2006 highs.

Recently I have heard that the gold market currently has a bearish sentiment and that this is very healthy since it allows the bull market to climb a wall of worry. Yet clearly, the two polls of experts and prophets shows that the sentiment is bullish and the consensus is calling for higher prices immediately ahead. In fact, the wall of worry appears largely absent from the consensus thinking as demonstrated by some of the expert comments in the Reuters poll. Also, consider this statement from the Telegraph poll: "Stephen Briggs, precious metals strategist at Société Générale, is a notable dissenter, warning that a recovery in the dollar could undermine gold's roles as an alternative currency and drive it back down to $500." [emphasis mine]

My simple point is that when the consensus is not worried, the contrarian should be. But perhaps the most worrisome thing of all is that some commentators who hold themselves out as contrarians are incorrectly claiming that the consensus shows a bearish sentiment. I would like to challenge these commentators to support their theories with facts. If they are unable to do so, perhaps they should consider revising the theories to conform with reality.

Another Silver Price Prediction

Meanwhile, another aspiring guru -- MKS Finance of Switzerland (who?) -- has chimed in with its own prediction for 2007 silver prices, this time speculating that silver could reach a spike high of $18 in a volatile trade that averages around $13.75. Once again, this is remarkably consistent with, if not a bit more daring than, a number of other recent high profile silver price predictions. It seems the wall of worry becomes harder to find the more experts we consult.

Dear Mr. Gnazzo

I would now like to address Mr. Gnazzo and his latest attempts to better understand the issue of the audit of the U.S. gold reserve. In his Gold Reserve Audit: Part II, Mr. Gnazzo appears genuinely confused and yet he nevertheless intends to write a letter to Congress regarding this issue. I have previously tried to help Mr. Gnazzo make the appropriate demands in such a letter, to no avail. I will try one last time in an upcoming piece after which I'm afraid any hope will be lost. Please stay tuned.

In the meantime, listen up Mr. Gnazzo! Your "Honest Money Gold & Silver Report" is factual, informative, thoughtful and useful when you stick to logic and reason. Most of the time you seem to view markets as a balance of many complicated factors driven by discernable realities. You also seem to have no trouble distinguishing relevant from irrelevant information. Why then are you so insistent on demonstrating to the world that you "can't see the forest for the trees"? I refuse to believe that this is true.

What I do believe is this. There will come a time when reality favors selling gold and silver (other than the 10% which you should always keep regardless of good or bad times). I also believe, however, that the ability to discern when to sell will be nearly impossible for those whose affinity to precious metals is based on unrealistic, conspiratorial and biased theories. Worse, followers of these theories could very likely be among the many people aggressively adding to their positions at the secular top for gold and silver.

How and why? The problem lies with the tendency of conspiracy theories to become their own proof as metals rise in price. In such a perverse outcome, gold and silver might be seen as more and more obviously undervalued even as prices move to overvalued levels. This would be the case, for example, in your typical financial or geopolitical crisis when things look the most bleak right before a resolution or breakthrough.

Consider the ultimate gold or silver bug invested 100% in precious metals over the long term. Will his or her investment returns in gold or silver come out ahead, behind or on pace with other investments?

Well, if gold and silver are the true inflation hedges they are purported to be, a simple buy and hold strategy will result in no investment returns whatsoever in the long run. That is to say, burying gold and silver in your backyard is not going to make you any richer (or poorer, unless looted) than you already are.

Even in the case of a last-ditch Fed attempt to reflate, which I have theorized could result in the value of U.S. gold reserves approaching the true monetary base (excluding money created through the multiplier effect of credit expansion), there would most likely come a time when gold and silver no longer represent an attractive investment class compared to other assets capable of generating interest income, dividends and other investment returns. Continuing to hold gold and silver at that point (again, I am talking about gold and silver above and beyond the "mandatory" 10% you should always keep) simply because they are "honest money" would be a bad decision for most people.

One of my goals at silveraxis is to discipline my own investment approach by trying to avoid common traps which can ensnarl investors, such as the cycle of greed and fear that buffets the markets between idioms such as "this time it's different" and "history always repeats". I don't claim to have achieved perfect discipline; my continuing efforts on this website are plainly visible for all to see.

At the same time, the markets need, by definition, bagholders at the very top and there is no way to prevent this. As a matter of fact, the best trading and investment strategies rely on the predictable behavior of the consensus. This is why I have expressed "gratitude" for the growing institutionalization and acceptance of conspiracy theories within the gold community even as I rail against them for their abuse of reason.

In summary, I am sorry that my and Mr. Gnazzo's efforts on the subject of gold reserve audits and conspiracy theories have so far resulted in more confusion and more questions instead of more clarity and more answers. I will try to rectify the situation very soon.

JANUARY 15 2007 3:00PM PDT - With U.S. markets closed today, silver and gold overseas managed to extend their Friday gains on the back of a slightly weakening dollar. Gold having risen above $620 and silver trading through the $12.50 - $13.00 zone, the metals now need to break out from their downtrend channel -- which they are currently on the verge of possibly doing -- and then continue on to take out the interim highs reached over the past two months. Doing so would be a very bullish sign.

In the meantime, a cold spell working its way across the U.S. could help halt and even reverse the drop in energy prices with the powerful rally in grains lending a hand to renew inflation fears. There is also the distinct possibility of a rise in geopolitical tensions thanks to Bush's latest gambit to referee the millennia-old struggle between Muslim sects. So all in all, there are valid reasons to believe that silver and gold can exceed the 2005 highs in the next few months even absent a collapse in the dollar. As such, even the most carefully-constructed precious metals portfolio -- one mindful of the major risk of a reversion of commodities to longer term, flatter up trends -- should continue to maintain strong exposure to the upside via quality silver and gold stocks.

On the other hand, there is still lingering doubt and only mild encouragement in the fundamental indicators that I follow. For example, COMEX open interest in silver showed a small decline over the past week with commercial net shorts liquidating against non-reporting speculative longs  (small traders). Both open interest and trading volume remain moderately high although with significant capacity for new positions based on historical levels of open interest near rally peaks.

Meanwhile, the silver ETF is apparently still digesting the 10+ million ounces added in the past few weeks. It remains to be seen whether these recent large additions represent an acceleration of silver uptake by the ETF or simply an anomaly.

Lastly, silver lease rates and the basis are indicating for the first time in many weeks the possibly beginning of a tightening in silver supply. Follow-through is required before jumping to any conclusions so we will closely track the developments in this area.

In the arena of silver stocks, a few that we have covered recently are making attention-grabbing gains in the past few days.

First up is Strategic Nevada Resources, which acquired the Crescent Mine in the Silver Valley of Idaho for $650,000 cash by being apparently the only bidder at a tax auction last December. Out of virtually nowhere, Strategic has gone from being a partner with Redstar Gold in exploring for gold in Nevada to being an aggressive silver exploration company. How aggressive? Well, starting on December 12 when the auction was held, Strategic has since conducted due diligence on the project, hired a mine geologist, conducted brokered and non-brokered private placements for up to C$8.25 million, added two directors to the board with solid credentials, established an exploration strategy and began rehabilitating surface facilities at the Crescent Mine. Not only that, each of these accomplishments have been beamed to the world through numerous advertising and promotional partnerships including the likes of Stockhouse, 321gold, Kitco, Jason Hommel and others.

The net result is that a $650,000 purchase which nobody else seems to have wanted to even look at a few weeks ago has been adroitly parlayed into a capability to raise 10 times that amount in private placement funds. Along the way, the groundwork has been laid to begin aggressive exploration. By way of comparison, Strategic and next-door neighbor Sterling will have roughly the same number of shares outstanding after the private placement. Sterling closed at US$3.08 last Friday while Strategic closed today at C$1.18, or about one-third of Sterling. Now please don't get me wrong, I believe both these companies have incredible challenges to overcome which simply do not fit inside any risk-reward investment model that I've been able to come up with. Yet if I had to speculate by choosing between Sterling, which is threatening to open the Sunshine within possibly a year or two and which has most of the infrastructure already in place, and Strategic, which has little more than a few outbuildings, a hole in the ground and some prospective ground, it should be obvious which is a better speculative value. In a rational world and all things being equal, the value ratio between these to companies measured in terms of potential should be on the order of 20:1. Does this make Strategic too expensive or Sterling too cheap? I don't know, I am simply pointing out this discrepancy since only the market can answer that question.

Next up is Mines Management, which seems to have climbed out of the gutter after trading down to $4.50 last week. I hope some of you took the opportunity to pick up a few shares at those levels. I don't know if MGN is done digging but I do know that $4.50 will be cheap in the long term even if copper and silver prices moderate substantially. How do I know this? Well, first off, the stock traded above $6.00 in late 2003 at the beginning of the bull market in silver and copper when these metals were still under $6 per ounce and $1.50 per pound respectively. And the share count wasn't much lower than today since MGN has one of the tightest share structures among silver stocks (thanks to management who at times has been too patient to get moving aggressively which has consequently meant investors losing their own patience). We can expect Mines Management to continue making slow progress with the greatest prospect for a rising share price coming from investment advisors and newsletter writers discovering the long-term potential of this company. Silver Wheaton started this off by taking a stake in Revett Minerals a couple of months back. I believe it is only a matter of time before Mines Management appears on a few radars. But even if not, this is one company which has a strong potential for appreciation even if silver enters a bear market and drops in price toward $6 an ounce.

Three other silver stocks on the move today are Silver Dragon, U.S. Silver and Excellon, all of which I have discussed recently. In the case of Excellon, I would like to add a little to last week's discussion. Here is a portion of what I e-mailed to an inquiring reader earlier today:

"The one thing that perhaps isn't very clear about this is that Excellon is probably looking for a possible open pit or at least bulk mine deposit where they can put out a huge resource number along the lines of Gammon Lake, Western Silver, Palmarejo, etc. However, those are silver-gold deposits and this one so far looks like silver-zinc-lead. Then again, if we look at Oremex that property is also primarily high grade silver-zinc-lead yet they managed to find an almost pure silver mineralization of 50+million ounces in a disseminated ore body. All in all, assuming that investors may not be aware of what exactly Excellon is trying to accomplish (not telling it's story as you say), those who know where to look have an opportunity to get in ahead of the pack if and when the right drill results come out."

Next, a quick point about Silver Dragon, which has turned a potentially losing hand as Chinese partner to the defrocked Sino Silver into a possible full house. It turns out there IS silver in the ground in China and the best way to explore for and mine it is to align your interests by partnering with the Chinese quasi-governmental entities. Still, I have many unanswered questions about Silver Dragon and their Chinese properties which preclude me from clearly defining an investment opportunity. I even wrote a tongue-in-cheek "expose" of some of the mysteries still swirling around this situation titled Pssst! PSSST! 40,000% Gains Over Here! Yet this should in no way imply that there is not a fabulous amount of silver here as many Silver Dragon shareholders clearly believe.

Lastly, U.S. Silver has, according to a David Bond article titled Dependent Independence, acquired during December on the open market a 5% stake in Independence Lead Mines (Pink Sheets symbol ILDM) which owns the Gold Hunter vein structure, the primary source of Hecla's current mining activity at the Lucky Friday mine in Idaho's Silver Valley. The Gold Hunter vein is subject to royalties due to Independence Lead which have yet to kick in but Independence also owns prospective ground immediately next door which is not subject to royalty. I have yet to get my arms around the new corporate structure of the Canadian U.S. Silver but will try to report on it shortly. In the meantime, suffice it to say that U.S. Silver appears to be serious in extending its activities in the silver-rich mountains of Northern Idaho. Along these lines, I'm not sure what it means that U.S. Silver did not place a bid in the auction for the Crescent Mine. As for Independence Lead itself, one could probably get a pretty good picture of its focus and management style by reading Mr. Bond's article referenced above. I sure hope U.S. Silver is able to help out in this department because ILDM shareholders stand to gain directly as a result.

JANUARY 12 2007 11:00PM PDT - Friday saw a strong rise in silver and gold prices as the dollar ducked back under 85 on the index. Yesterday I stated, "The risk is that liquidity starts rotating out of the resource sector..." Today, that risk seemed miniscule as grains, marshaled by corn as the apparent new leader of the commodity complex, exploded higher. Corn was limit up as were a number of other grains on a report that 2007 corn inventories are likely to be extremely tight as a result of increasing production of ethanol, among other reasons. With many futures markets closing early but the COMEX trading normal hours, silver and gold could very well have received the benefit of a huge flow of speculative money looking to buy corn, only to be rebuffed by the limit move of 20 cents, at which point some "desperate" traders might have "settled" on gold and silver as an inexact proxy.

In the meantime, sugar -- possibly the most direct proxy for corn because it too is used to make ethanol -- declined slightly on moderate volume. For its own part, sugar has already seen its price catapult to the stratosphere, reaching $20 in late 2005 before gradually working its way back down to the $11 level today. Ironically, part of the reason for this decline in sugar is in sympathy with moderating energy prices. You see, sugar is converted to ethanol more effectively than corn and therefore sugar is actually the more ready substitute for crude oil and natural gas. So why is corn currently seeing an ethanol boost while sugar stays in lockstep with the energy sector? The explanation is simple: government interference. Now before you conspiracy bugs get too excited, let me point out that this interference consists of a legislated mandate for cleaner burning and MTBE-free gasoline in cities and states throughout the U.S. with California being a prime example. But since very little sugar is cultivated in the U.S. compared to corn, the result is that corn is what's available, even if it's not the most economic source of ethanol. Meanwhile, it is not a significant issue for oil companies to add more expensive ethanol to the relatively cheaper gasoline as long as they can pass the additional costs to the consumer. And I assure you that they can, as evidenced by the sticker shock out-of-state drivers experience when they gas up in California.

Okay, this is not "sugaraxis" so let's get back to silver. I would like to pass along a few words about Excellon -- a company which I rarely discuss but is deserving of more attention -- from a reader who views it as a possible Mexican version of the Chinese Silvercorp as well as an attractive companion or alternative -- depending on your investment goals -- to Don Hansen's "value strategy".

But first, my take on this company. Excellon is hunting for silver elephants in elephant country and while it has not found a pachyderm, it is paying for exploration out of developmental paydirt in a similar fashion, as my reader points out, to the cash-flow positive development of the Ying deposit by Silvercorp. I think Excellon could turn out to be a fantastic story but highly disciplined investors who wish to take a large position in Excellon (say, over 5% of a silver stock portfolio) should be in a good position to be able to assess several important issues:

(1) Will early confirmation of a major discovery prevent opportunities to acquire Excellon at near current prices? Part of the answer may lie with the company's current market valuation and what it may say about shareholder expectations. Being able to make this assessment could point out the most effective time to take a position in a junior exploration company: before a possible discovery (in which case there is greater risk that no discovery will be made), right after a discovery (in which case there is still the risk that a discovery is not as large as anticipated, enhanced by the possibility that excited shareholders have overbid the share price) or after the size of the discovery is established (in which case the risk is that most of the gains have already been made).

(2) Although Excellon has a larger-than-normal number of shares outstanding, it has been able to avoid dilution recently due to its cash-flow positive test mining. What are the future prospects for avoiding further dilution? To answer this, it may be relevant to examine the so-called "silver debentures" and how they will be paid off.

Now, let's take a look at one perspective of Excellon courtesy a reader of silveraxis:

***

I don't look at Excellon as a pure exploration play. In 2006/07 they will produce about 3 million ounces of silver, the same amount that Endeavour Silver will produce.

They are expanding their resource base just like any underground producer would do. Underground deposit delineation is not like finding an open pit deposit and estimating its size. So, I put Excellon in the same category as Great Panther, Endeavour, Aurcana, and all the other mid/small Mexican producers.

Don Hansen is doing a great job showing the potential of the Endeavour Silver business model based on acquisition and reopening of old mines, and this model is now followed by others (Great Panther, First Majestic, ...)

Excellon's model is different, they are producing but they are explorers first and foremost. They can develop and expand the resource they have already found and the production they already have so they can grow just as the other Mexican producers can grow. But they have huge upside potential from exploration and this is something they don't share with the other Mexican producers I know of.

How to guesstimate is this potential? You must figure out your way, but I've listened to a couple of presentations from Dr. Megaw and as I understand they know there is a deposit out there but cannot tell where it is and how large it is. Time and work will tell.

In the meantime I see value at current P/E, P/CF ratios and the market cap is comparable with Endeavour or Great Panther.

You know, the parallel with Silvercorp really strikes me because Silvercorp is earning money from the exploration work they're doing because of the extremely high grades they have and Excellon is the closest company to Silvercorp I can find. Because of those high grades, the market is blessing Silvercorp with a market cap roughly equal to the whole in situ value as of today's 43-101 resources. And they have not found all the silver yet and, I would say, they never will because it's a large vein system.

Excellon's target, on the contrary, is a disseminated deposit so, if/when they'll find it, they'll be able to publish a global resource.

Here is the link to a recent presentation:

Mining, Metals, Oil & Gas Congress Dubai 2006

***

The reader would like to point out that he is a shareholder of Excellon and has no wish to promote the company. This is obvious in context of our e-mail communications and I would like to thank him for sharing a different, useful perspective.

JANUARY 11 2007 1:00PM PDT - As we ponder the immediate future for gold and silver, we should not ignore the psychological effect that the decline in crude oil and copper prices has had on commodity speculators large and small. The great industrial commodities -- copper and crude oil -- are now each close to 40% below the highs reached last year. If this happened in a stock market, it would be called an epic crash. The risk is that liquidity starts rotating out of the resource sector (but into what?) with the possible result of "throwing the baby out with the bath water". The "baby" of course is silver (and gold). A 40% drop for silver from last year's high gets you $9. For gold, it gets you around $450 (dohhh!) Perhaps not coincidentally, this is the approximately current price level of the long-term trend line support on the monthly charts for gold and silver. I will post these charts tomorrow but witnessing the drubbing crude oil took once again today, I wanted to remind myself and others that it is imperative to always keep track of perspective across different time frames.

JANUARY 11 2007 11:30AM PDT - The US Dollar decided to peek (peak?) its head above 85 on the dollar index this morning and gold and silver responded with "me no like!" However, both precious metals are hanging tough as there is an obvious zone of support just below current levels. Thus the dance continues and we patiently await developments. In the meantime, silver stocks seem to like what is going on as most appear to be up this morning while gold and other resource stocks are vacillating.

Some interesting stuff being written out there today.

First, another precious metal price forecast for 2007, this one from www.thebulliondesk.com as reported by Mineweb. The forecast predicts a range in silver during 2007 between $14.85 per ounce on the high side and $11.95 on the low with an average of $13.60. I personally have no problem with the average but I believe the trading range during 2007 might be wider than $3.

Second up, Pennaluna Prospector provides updated information on several silver stocks. Among them is U.S. Silver Corporation which has now completed its merger with Chrysalis Capital III Corporation (symbol USA in Vancouver). U.S. Silver is the brainchild of John Ryan, a former native of Idaho's Silver Valley where the producing Galena mine and the idle Calladay and Coeur shafts are located. These former properties of Coeur d'Alene Mines are now in the hands of aggressive developers and the results should be interesting to witness. I will take a look into U.S. Silver and report back soon on its prospects as an investment opportunity. Also mentioned is Strategic Nevada Resources (SNS in Vancouver) which has dropped its field database of gold projects in Nevada to concentrate on its recently acquired Crescent Mine in the same Silver Valley where U.S. Silver has made its home.

Next, in his heartfelt eulogy of friend Ken Riley, RIP, David Bond provides a unique look at the human side of the men and communities tasked with carving silver from the bowels of the Earth.

Finally, Rick Ackerman publishes additional material on Jas Jain's thesis regarding the coming collapse of housing and the credit bubble in 'Printing Money' a Stupid Fallacy. In this clarification, it becomes obvious that Jas Jain does not believe the Fed's activities through open market operations -- consisting of buying and selling securities -- has a notable effect on money supply. The claim that the Fed has only a single tool at its disposal, the setting of the discount rate, is repeated. In general, I think Jas Jain is right to focus on the discount rate as the key tool of the Fed because it is the most important in terms of the Fed's economic policy. However, the nuts and bolts of the Fed's monetary policy are actually comprised of the open market operations which add and drain banking reserves.

The Fed, in fact, can and does "print" money all the time but most of the money is printed with temporary ink. What I mean by this is that by far the most common action of the Fed in the open market is the repo or reverse repo, which by definition automatically cancels itself after a given number of days. Bob Moriarty's www.321gold.com carries a historic compilation of the Fed's open market activities which clearly confirms this.

But here is an important point to keep in mind. Even though most open market operations are temporary, there is a cumulative effect due to the number of these transactions outstanding at any one point in time as well as the manner in which a repo is settled. With respect to repo settlement, the major point to keep in mind is that a repo added to reserves and later removed from reserves will rarely result in a dollar for dollar impact on money supply. This is primarily because the multiplier effect which proliferates "true" dollars into numerous "credit" dollars (see my discussion yesterday) is not symmetrical. For example, if the "true" dollar being inserted into circulation finds its way to credit markets which are not limited by banking reserves, the multiplier effect can reach infinity (the same "true" dollar can be loaned and loaned an unlimited number of times). On the other hand, if the "true" dollar being drained from circulation is pulled directly out of banking reserves, the multiplier effect would indicate that the maximum multiplier reduction in "credit" dollars is $9 (under a 10% reserve ratio). In general, the longer the repo period, the greater this asymmetrical effect.

Finally, we cannot ignore the Fed permanently adding to, or subtracting from, the monetary base (banking reserves) by making outright purchases and sales of securities in the secondary market. If conducted on an aggressive scale in an attempt to stave off a deflationary credit liquidation, we can refer to such a process as the "Bernanke helicopter drop". I discussed the limits and possibilities of this process yesterday and will bring it up again from time to time as a way to better understand the monetary dynamics underlying a major pillar of silver's demand.

In the meantime, I urge everybody to read the summary of the Fed's activities in its own words. I think doing so will give you a much better sense of the actual roles and limitations of the Fed in the larger economic and monetary debates. A good place to start is the NY Fed's Open Market Operations page which is directly germane to my topic of discussion today. From there, you should surf around the rest of the NY Fed site as well as the other Fed sites when you have the time. Just a bit of poking around should lead you to accumulating the proper education to be able to eliminate outright a great number of the conspiracy theories being promoted by the various "monetary and banking" experts who seek to dominate the discourse in the PM community.

JANUARY 10 2007 4:00PM PDT - With the dollar clawing its way toward 85 on the dollar index, the gold and silver advance were halted today. The next direction remains unclear although the dollar is due for a rest as is copper and oil. On the other hand, we are in a period of seasonal volatility and there is certainly plenty of mystery surrounding the future state of the US economy to keep traders on pins and needles in the weeks ahead. This is just a long winded way of saying that I remain cautious with large amounts of dry powder at hand.

The chorus connecting the demise of housing to the commodity bull is getting louder with the latest piece coming from Jas Jain. The argument is that housing is largely a proxy for commodity demand and I would largely agree with the exception of nobody knowing just how the China card is going to get played. Meanwhile, the commentary also lays waste to a few random conspiracy theories including the discontinuation of the M3 among others. The reasoning is all sound but I am afraid most people not familiar with the financial markets will not grasp the importance of what is being said.

Perhaps I can summarize my take on it as follows. But before I do, please realize I am simply trying to follow a line of reasoning and not stating that this or another outcome is likely or even possible.

The Fed was not entirely responsible for the credit bubble although it could have taken steps at the expense of the economy and global financial stability in an attempt to contain the excesses. Regardless, the Fed is powerless to stop something the Fed did not directly create. Furthermore, the Fed has largely lost control of the money supply anyway, and therefore it is unable to prevent monetary inflation or deflation as a matter of course.

Realizing this, the Fed has settled on trying to keep the growth in the price index (price inflation) at a low positive number as a means of stabilizing GDP at a sustainable level. But even if this was possible in the long term, the ascent of the credit bubble to unsustainable heights threatens the consumption levels required to keep GDP afloat indefinitely.

The risk is particularly acute because the bursting of the credit bubble will likely lead to monetary deflation in the form of a collapse in liquidity. And try as the Fed may, just like it was unable to really target monetary inflation due to the proliferation of financial and credit instruments which are largely immune to the 3 tools the Fed has at its disposal -- the Fed discount rate, market operations consisting of purchases and sales of securities from dealers and banks, and setting the banking reserve ratio -- the Fed will also be unable to target monetary deflation. This is mostly because the Fed does not "print" money outright but rather it inserts money into circulation through the purchase of securities in the market or directly from member banks.

Unfortunately, the aggregate amount of the securities that the Fed could realistically purchase through its normal market operations would be insufficient to halt a major contraction of the credit bubble driven by debt liquidation. Put in a different way, the multiplier effect -- which normally proliferates each dollar inserted into circulation by the Fed's security purchases -- would tend toward negative infinity during acute debt liquidation whereas during manic debt expansion it tends toward positive infinity. The Fed cannot counter this because it cannot induce people to borrow in every circumstance, even if interest rates are negative. In a last desperate attempt to save the system, the Fed could resort to wholesale securities purchases ("printing money") but this would require literally trillions of dollars. At that point, any remaining confidence in the credit system would collapse. This is because repayment of all debts would be deemed unlikely and since the Fed is exchanging dollars for those debts, by definition the dollar would become as worthless as the debts that it purchased. Of course, this ignores debts which are collateralized by real assets to the extent their prices have not been inflated by the credit bubble itself, so the term "worthless" is both subjective and relative.

Now, I would say the above line of reasoning inspired by Jas Jain does not seem impossible to me, but it could be missing one factor which might make a substantial difference in possible outcomes. It is this. A liquidity drain will necessarily result in the discounting of credit markets against the dollar such that each additional dollar of security purchase by the Fed would be more effective in reversing the debt liquidiation cycle than the previous dollar of security purchase. So instead of the multiplier effect which takes place during credit expansion, we would have the "credit discount" effect which might create an equilibrium at the exact point where the marginal dollar put in circulation (by the Fed's purchase of debt securities) would in turn be used to pay off that very same debt. If such a point exists and can be reached, the Fed might possibly stop and reverse the cycle of debt liquidation.

But just when and where would this equilibrium level take place? Well, very possibly at the point when the U.S. Treasury's gold holdings priced in dollars equals the total dollars remaining in circulation. This is because a debt paid off with the very dollars used to purchase it essentially makes that debt worthless in fiat dollar terms -- the same reasoning as above applies, including the refrain that some debts are collateralized with real assets -- but very importantly it also leaves Treasury gold as the only remaining basis of value for the entire monetary system. Stated in a more provocative way, the Fed can monetize all dollar denominated debts by "simply" returning the dollar to 100% gold backing based on the amount of gold in the Treasury's possession. I say "simply" because the most straightforward way for the Fed to do this is to blindly buy all dollar-based debts until the desire to sell those debts for dollars is exhausted. I believe this is what the "Bernanke helicopter drop" really means.

The result would be a massive dollar devaluation against gold, real assets and foreign currencies which are not drawn into the same vortex. But perhaps this might be the only possible way to salvage the monetary system without starting over from scratch. And interestingly, such an outcome would make the inflation vs. deflation argument irrelevant. Both sides would be technically right but all that would matter is who owns the gold.

In a future commentary, I will attempt to calculate what the dollar denominated price of gold might reach in the case of a monetary close call -- or more accurately, halted credit collapse -- if the Fed goes all out to save the dollar.

You should own some gold (and silver of course) not because this or any particular crazy theory might turn out to be right but because some crazy theory will eventually turn out to be right. As long as mankind has a propensity to instigate -- yet a collective desire to end  -- self-inflicted financial and social crises, I can't think of anything more capable than gold and silver being pressed into service. "Demand" for gold and silver based on "crazy theories" is unlikely to show up in any one lifetime, but when it eventually does show up during somebody's lifetime, it could literally be a life saver. For that reason and that reason alone, please be sure to seriously consider holding 10% of your net worth in the form of silver and gold bullion under your own direct, discreet and secure control. Let go of it only when your life depends on it. Far from being sensationalist, doom and gloom advice, this is probably the soundest, most conservative recommendation about your financial well being that you will ever hear.

JANUARY 9 2007 4:00PM PDT - I have just posted Don Hansen's latest value strategy installment on First Majestic Silver. After spending several hours over the past few days reviewing the information to see if I can add to it (or subtract from it) without success, I am convinced that Don is on the right track and those who follow his strategy are bound to do very well. To think that First Majestic was trading under C$3.00 as recent as October 2006 makes me shake my head whenever someone bemoans the lack of outstanding investment opportunities remaining in this silver market.

On a related subject, recently I was asked by a concerned reader how it was possible that I am so positive on silver as an investment when I believe there might be the possibility of 1.5 billion ounces of stockpiled silver in just the good delivery bar form out there, which is several multiples of what every silver expert seems to think is available. I looked over the website, and sure enough, there is no succinct summary of my overall thinking on the prospects for the silver market. This is an omission I will be mending very shortly. In the meantime, and for starters, let me put it into 25 words or less:

Sources of silver demand are seemingly endless against finite supply. Investment and speculative demand in particular are very inelastic and can be sustained for long periods, driving prices well beyond the ranges observed for other investments.

Okay, that was actually 36 words but those extra 11 really help encapsulate the bottom line for silver as a compelling investment opportunity for the 21st century. When we add to that the ability to trade and hold silver in both direct and indirect forms and in various speculative to defensive strategies, it becomes easy to see this "second fiddle to gold" as a unique investment class all by itself. Alternatively, some people prefer to view silver as the steroid to gold's financial muscle while still others extol the combined virtues of silver and gold as a wealth protection measure against a systemic financial crisis. These ways of looking at silver are all valid and that is why I refer to "sources of silver demand" as "seemingly endless". Now if we could just get all those brilliant minds who are so pre-occupied with cloak and dagger conspiracy theories to help instead uncover and promote these many sources of demand -- while forgetting about supply which we cannot do anything about anyway -- in a manner that is credible, convincing and not intimidating, we'd really be getting somewhere. In the meantime, I'll continue in my small way to dedicate this website to investment opportunities in silver.

JANUARY 9 2007 12:00PM PDT - A nice jump in gold and silver today I can only attribute to physical buying and technically being oversold. The silver and gold stocks did not follow suit with some issues selling down quite brutally and as a result approaching a good buying zone for moderate adding or initiating positions. Otherwise, not much to do but watch until silver convincingly trades over $12.50 or under $12.00 at which point we could see the move accelerate in the respective direction of travel.

A reader commented on Mines Management's top 20 list of undeveloped silver projects which has been circling the Internet the last day or so, pointing out correctly that the list appears to be missing Silver Standard's Pitarrilla silver deposit in Mexico which hosts more than 400 million ounces of silver in combined measured, indicated and inferred resources. This in fact would seem to place Pitarrilla in the world's top 5 undeveloped silver projects. I don't know why Mines Management excluded Pitarrilla from its list but perhaps it simply used some old data in its recent presentation. Regardless, Silver Standard with its nearly US$2 billion market cap at its recent high buys you about half an ounce of silver for each dollar of share price. And although this is a very simple and rudimentary way to measure share leverage to silver prices, I would argue that it gets you in the ballpark. Which is to say, I don't consider Silver Standard a prospective silver stock primarily because of its leverage to silver but rather for its corporate philosophy, management and potential to convert resources to reserves and then to profitably mine them when silver prices are favorable.

Today I will wrap up my discussion by pointing curious readers to Silver Eagle Mines and Esperanza as potential additions to a silver stock portfolio for what may seem to be very different reasons, but in fact they are the same.

In the case of Silver Eagle Mines, last mentioned here in November, the company appears to be taking an unrushed, careful approach to exploring and developing its Miguel Auza silver property in Mexico. Four things among others stand out for me with this company: (1) the size of the land position at over 40,000 hectares (about 160 square miles); (2) the reported high silver grades of many drill intercepts along with solid by-product credits; (3) the proximity to existing infrastructure; (4) and the depth of management experience (bordering on overkill). This management knows they can mine the silver now but they seem to be taking the conservative approach of ask first and shoot later.

As for Esperanza, I recently urged caution pending further drill results based on the possible failure of four drill holes to intercept a nearby vein at depth. However, this does not mean Esperanza is any less prospective than its multi-ounce per ton gold intercepts would have you believe. In fact, even after the incredible move the stock has made during 2006, there is plenty of explosiveness and nervous anticipation tied up in the share price. The best way to demonstrate this perhaps is to look at the price action during the last 2 days, when the shares rocketed almost 20% between last Friday and yesterday on the anticipation of a news release only to give back most of those gains today when the news turned out to be a C$13 million brokered private placement. The private placement, at C$3.65 per share, appears to be a fabulous deal for Esperanza given the shares trading down to C$3.40 on numerous occasions in the last few days, so I wouldn't expect a lot of opportunity to buy at significantly lower prices in the days and next few weeks ahead. Like Silver Eagle Mines, I find it hard to find much to criticize about what this company is currently doing. And that isn't because I own both stocks, either.

JANUARY 8 2007 1:30PM PDT - Awaiting resolution of the latest move either by way of a drop below Friday's low or a regaining of $620 in gold and $12.50 0- $13.00 in silver. The fall in copper and oil and the rise in the dollar have moderated today so there could be some back and forth action for a while before this resolution takes place.

Please note the silver lease rate chart is on the fritz and shows lease rates collapsing whereas the underlying data actually has the rates declining gradually. Also, COMEX finally added a few thousand contracts last week and interestingly it took a declining market to do it. More on this development later. Also, the drop in the basis figures is due to the large price drop on Friday and was not confirmed by a decrease in futures spread but we will keep our eyes on it nonetheless. Otherwise, fundamentals continue on the same track as they have for the last several months.

A recent blog entry listing 20 of the world's largest undeveloped silver deposits according to Mines Management brings up some interesting things to ponder. First, the investment leverage with respect to the top 5, including Goldcorp's Penasquito, Barrick's Pascua-Lama and Apex Silver's San Cristobal, is probably not sufficient to warrant a significant allocation from a silver stock portfolio. Meanwhile, Silver Standard has 4 of the 20 but none in the top 10. Of the remaining projects with public company float, 2 companies stand out as having market capitalizations well below the others: Mines Management and Revett Minerals. Of course, this is the very reason Mines Management put together this comparison. But regardless, they do have a point.

A second and perhaps more relevant point is just how complicated it can be to pick through even the small field of silver investments that are out there posing as opportunities. Gold, base metals and even many commodities seem to provide simpler choices. What I am saying is that this top 20 list can go a long way to demonstrating that silver investment opportunities are high risk but high reward for those willing to put in the time to study and understand.

There are a number of other valid observations to be made from this list and I will keep referring back to it in the future.

And while we ponder COMEX open interest and volume, we should keep in mind things like CBOT Metals Complex Sets Volume Records. This highlights the trend in recent years of more and more options available for trading especially on electronic exchanges. It goes for gold and silver as well and shows that we cannot continue to rely on individual indicators and tools in isolation to judge or game the markets over long periods of time. In recognition of this, I have been trying to create a more inclusive tool to gauge regulated market exchange activity in silver and hopefully someday soon I or somebody else will succeed. In the meantime, the COMEX only is better than nothing but it is important to supplement this information at least anecdotally if not with periodic figures.

JANUARY 5 2007 12:30PM PDT - Dismal day for all things metal. The ETF added another million ounces which leads me to believe there is going to be strong price support at some point. But what point, wouldn't you like to know? Well, if any of us knew for sure, we would be lounging at the beach on our private island instead of racking our brains for bits and scraps of market wisdom, wouldn't we? But there are some things we know for sure. For example, many silver stocks are cheaper today (or at least were earlier this morning) than at any time in the past 2 or 3 months despite the companies having made substantial operational progress. Meanwhile, silver prices have gone to and fro and everywhere in between, only to arrive back at the starting point. Which means that some silver stocks might be a good buy compared to physical silver today while the opposite is (and was) true for others.

This brings up an important point that rarely gets mentioned, which is that the ultimate comparison of any silver stock should not be to other silver stocks, mining stocks or even to the general stock market but rather to physical silver itself. What I mean by this is that given all companies have inherent business risk, the only reason to ever invest in a silver stock is if you can make a good case that it presents better than 1:1 leverage to silver prices. If you or a trusted advisor are unable to make this evaluation for yourselves, you are better off with physical silver assuming of course you understand the risks inherent in owning silver. Leverage could exist for many reasons not directly tied to the valuation of in-ground ore deposits, such as the potential to make new discoveries, advance projects, start or ramp up production, etc. But unless these factors can be quantified and compared to silver itself, buying stocks is simply reduced to a momentum game of pure speculation. There is nothing wrong with that, mind you, other than not being aware of it.

The type of comparison described above can be difficult to carry out under the best of circumstances. I spend a lot of time studying silver stocks and the silver market yet I realize there is much more to learn and know. What I do know (or is it don't know?) is that the comparison is relatively easier for some companies than others. Take, for example, Don Hanson's Value Strategy for Investing in Silver Mining Shares, the most recent installment of which discussed Great Panther. Now here is a methodology clearly outlining the case for a higher share price, repeated four times (Endeavour Silver, Great Panther, First Majestic and Impact), each time showing (or will show) solid leverage to the silver price itself. The next installment of Don's series, featuring First Majestic this time, will be posted over the weekend or on Monday, so please be sure to look for it.

Now, I would like to toss out a challenge. If anybody can come up with a similarly compelling analysis for the stocks I mentioned yesterday as uncertainty-laden, please by all means have at it. I promise to remain open minded and I truly look forward to sharing and empowering the knowledge of others, even if I happen to disagree with assumptions and conclusions. But please, keep focused on knowledge and information because I intend to continue monopolizing the arena of rife speculation, within these pages at least.

JANUARY 4 2007 2:00PM PDT - I'd like to point out three articles to provide additional perspective on recent topics of discussion.

First, Clive Maund, whom I've mentioned before as batting about .500 while often making controversial contrarian calls (meaning his batting average is actually quite good), seems to think commodities have just loudly and disturbingly cracked. His piece, Commodity Implosion, challenges both the general consensus and contrarian consensus with its reasoning. The logic is certainly no more suspect than that used to justify an immediate and sustained collapse of the dollar. At a minimum, it should make you go "hmmmmmm...."

Second, an Australian news piece discusses the forward hedging of 3 years of copper, gold and silver production by the Swedish mining company Boliden. I recently explained away the seemingly outlandish COMEX short position in silver by describing how forward sales of silver through a series of derivative transactions are likely to result in the capacity for a significant buildup in commercial short positions on the COMEX in response to rising silver prices. I also explained that derivatives, especially in precious metals, end up being concentrated in the hands of a few world-class financial institutions for the simple reason that this minimizes counterparty credit risk premiums.

Meanwhile, Ted Butler continues to profess that nobody has provided a valid, credible alternate explanation to his stance that the large commercial shorts in COMEX silver are really naked shorts out to manipulate silver prices lower. Further, he states that shorts are trapped by their inability to ever deliver the physical silver underlying their futures position. Well, Mr. Butler, the latter may be true under certain conditions which I further discuss below, but you have been proven wrong on your main point. Even if I'm not necessarily 100% correct in claiming that most commercial shorts are hedging OTC long positions primarily originating from forward silver purchases, my explanation is still the more plausible one.

And don't even start bitching that the commercial shorts must have physical silver in hand to short on the COMEX -- that requirement does not exist for any other futures market. In fact, that is the very antithesis of a futures market. Here is a clue: it's in the name. Another hint: "futures". The only valid point to be made with respect to silver is that most producer hedging is related to near term production (especially and understandably in agricultural markets) whereas several years of forward silver (and also gold) production often gets hedged in near-dated futures contracts. But even there, one must take into account the ability of an OTC derivative to convert long-dated future delivery into a short-term maturity which can be properly matched to a near-dated futures contract. Besides, the large reporting speculators on the COMEX -- who are the main counterparties to the commercial shorts -- are not interested in long-dated futures. Nor are they usually interested in taking physical delivery. The importance of term "usually" will become obvious in a moment.

I guess if Mr. Butler had his way, he would prevent COMEX silver from being used for the very purpose it was intended -- to hedge future production -- simply because the contract maturities in futures don't approximately line up with the underlying producer forward sales hedged via the OTC marketplace. He would probably also bar the hedging on the COMEX of any production further out than one year although there are futures contracts currently trading more than 2, 3 and even 4 years out. Yikes Mr. Butler, you are indeed a market perfectionist if there ever was one! Such a "perfect setup" would likely lead to COMEX silver trading no more than a few hundred contracts a day and total open interest numbering in the low thousands.

The only real concern I see with respect to COMEX silver is if a sufficient number of longs were to stand for delivery as a way to take advantage of the lack of matching between the futures and OTC forwards. Such action, if carried on with determination and resolve through several contract expirations, could in fact trap the shorts. But this could happen whether they are naked short or legitimately hedging. Actually, in a strange twist, the commercials being naked short might actually reduce the systemic risk of exchange default since there would then be capacity to protectively hedge by securing forward production. Instead, the present existence of legitimate hedging has created a derivatives house of cards standing between the forward silver supply and the COMEX. This house of cards is capable of creating its own problems should the pyramid of paper collapse; the links between the COMEX short hedge and the forward delivery being hedged could be broken by a cascading default in the intermediary derivatives.

Unfortunately for hopeful longs, regulators have long recognized certain engineered short squeezes as "artificial" and "unfair" market manipulation. In this context, artificial means to take advantage of a market mechanism itself -- such as the delivery feature of some futures contracts -- to manipulate prices, as opposed to using the "natural" means of price manipulation through buying and selling. Futures exchange regulators, in particular, have effective tools for stopping artificial manipulations. Namely, they can suspend the requirement for delivery and force cash settlement. If that is not enough, they can restrict open interest or even force outright liquidations by raising margin rates above parity as they did with palladium a few years back.

Now mind you, a manipulation to short squeeze a market may very well be artificial but it is not illegal as long as no laws are broken. But then again, so aren't illegal the efforts to undermine such artificial manipulation. In fact, the exchanges are not typically interested in regulating any manipulation which is legal, fair and not artificial unless the very fabric of the market is threatened. To wit, buyers can legally attempt a short squeeze virtually at any time and in any market by simply bidding prices higher and higher. Yet, their eventual failure due to the weakening of resolve is a sign of mass psychology not the illegal actions of shorts to save their own skins. Indeed, the very survival of many markets depends in part on active manipulation, usually to maintain an orderly flow of trade, but often undertaken to achieve the specific objectives of individual market participants. This is easily demonstrated by the awesome power extended to market makers in the US stock markets. Similar arrangements exist in other markets.

Many incorrect conclusions can be drawn if we fail to keep the above basic ideas in mind.

Does any of this sound familiar? Yup, it was the Hunt brothers who first learned the lesson of how not to manipulate the silver market. And lo and behold, Mr. Butler also apparently learned it in the orange juice market some years later. I'm sure he harbors no ill will or bias against futures regulators as a result of his experience.

Finally, I'd like to bring this discussion of manipulation full circle by pointing out a third article today in which precious metal heavyweights Kitco and Blanchard allegedly face off on conspiracy theories but instead they talk past each other until the very end, when they finally both agree that the gold market needs more transparency. I think this is a very healthy angle in place of the standard gold conspiracy debate and I hope it continues to head in this direction. There are few things worse and more unfair in a market then participants who have unequal access to information, including data necessary to assess the extent of manipulation whether of the natural or artificial variety. This doesn't mean that we should hold out hope that the details of private contracts such as OTC gold swaps and other derivatives will ever be made public, but certainly we can expect improved reporting practices from quasi-public institutions like the various central banks and monetary authorities which participate in the financial markets. If GATA helps to bring this about in even a small way, we should all overlook the remainder of its current shortcomings and instead congratulate a successful effort to better the gold and silver marketplace.

JANUARY 4 2007 12:30PM PDT - Dollar up, gold down, copper and oil down . . . what's this, silver UP? Okay, let's not get too excited, the silver stocks are still getting beat up today so the move in the silver price itself is probably just some technical or trade squaring activity. In fact, in post-COMEX trade silver appears to be down as gold adds to its earlier losses.

An update on fundamentals shows nothing new to get excited about. Once again, either the LBMA is failing to update silver lease rates or otherwise they are flatlining, which would imply very little to no activity in the silver lease market.

Just in case we are headed for a January washout before a possible spring rally, I would continue to be cautious at this point with significant capital protection (cash) in place. Sticking to the higher quality and lower risk stocks would also be wise. In particular, I would avoid thinly traded issues at this point (as identified on my Stocks page) as well as companies with strategy risk or prospects which will take a long time to develop. By strategy risk, I don't necessarily mean that the stock is a poor investment, only that the company strategy adds to the typical risks of exploration and mining, swinging the risk-reward ratio out of favor in the short term. Sometimes the company can't change this situation such as shifting geo-political conditions in the country of operation but other times management simply refuses to deal with reality. Whatever the case, below is a partial list of stocks which may hold significant long-term potential but first management needs to prove that certain near term hurdles and risks are surmountable. There are others but this should be a good start. Of the stocks on this list, I currently own Mines Management, Oremex and Tumi Resources. Apex Silver, Apogee, Aquiline, Canadian Zinc and Revett Minerals might be interesting buying opportunities on a price break.

Apex Silver

Apogee

Aquiline

Coeur

Clifton

Canadian Zinc

Metallica Resources

Mines Management

Oremex

O.T. Mining

Revett Minerals

Silver Dragon

Sterling Mining

Strategic Nevada Resources

Tumi Resources

Please note that this is only a partial list and I don't mean to highlight or focus on these stocks as a group but rather I am trying to demonstrate an investment approach. Also, by no means should these stocks be avoided at all cost (after all, I own three of them). At the same time, investors should be aware that resolution of particular risks and uncertainties facing these companies may take years and there is a more than a remote chance of things going terribly awry. Yes, I realize this is mining and everything can and will go wrong, but realize that I am simply making comparisons here for the purpose of outlining an investment strategy.

JANUARY 3 2007 4:00PM PDT - Well, looks like my dubious little speculation about the silver ETF may be once again coming to a less-than-spectacular conclusion with the realization just now that the ETF actually registered its 16,822,727 additional shares all the way back on October 10, 2006, a mere 2 weeks after filing its corrected S-1 registration statement! This can be confirmed by a judicious study of the SEC filings and by pulling up the current prospectus on the Barclays website.

Seriously, I don't know why it sometimes takes me this long to find the correct information that has been staring me in the face all along, but it appears that baseless assumptions on my part have once again played a role. You see, back in July-August, Barclays filed to amend the original SEC statement under which it had registered the initial 13 million ETF shares. However, that was not the correct approach to increase the shares and it took until the end of September for Barclays to file a new S-1 seeking to register 17 million additional shares. Somehow, I missed the notice of effectiveness to this new S-1 which came out two weeks later. I likely mistook it as the approval of the final amendment from July-August -- reducing the effectively registered shares back down to the original 13 million -- which in fact did not require SEC approval since it was simply canceling out an earlier mistake. In effect, I thought Barclays was back at square one, having fixed its prior error and now awaiting SEC approval for the 17 million share increase.

In fact, it was already a done deal. I had incorrectly assumed that the 17 million new shares would require careful study and review due to their possible effect on the silver market. Wrong! Just like I was wrong the first time around in thinking that the SEC would give much thought to the impact on the silver market from the initial 13 million shares. You'd think I would learn. Oh well! The truth is, the ETF did not have a major impact on the silver market by accumulating close to 130 million ounces of silver other than contributing to a temporary but only moderate price spike. So the SEC and Barclays were right. Meanwhile, virtually every silver guru, expert and commentator was wrong.

What about the next 170 million ounces? The SEC and Barclays are still not worried since the increased registration was clearly a formality and rubber stamped. Will they be right again? Now, if the silver ETF can accumulate 300 million ounces of silver in good delivery bar form without turning the silver market on its head, it must mean that there is at least 5 times that much silver out there in such bullion form, or at least 1.5 billion ounces of good delivery silver in various stockpiles. If so, everyone but the most entrenched silver bear has been wrong about the available supply of investment grade silver. Most notably, the GFMS and CPM Group estimates would be proven wildly off mark. Let's not even talk about Butler.

So, here is the deal. The new "ceiling" on the silver ETF effective October 10, 2006 is just shy of 30 million shares -- almost 300 million ounces of silver. The increase was apparently approved by the SEC without so much as a blink nor comment from any media source, expert or pundit. This all makes the 9 million ounces of silver added to the ETF right before Christmas a little less exciting. Gone is the ability of hedge funds to manipulate the silver market by forcing authorized dealers in the ETF shares into a corner. Don't get me wrong, 9 million ounces is still a nice number but let's keep in mind that absent a "power play" or short covering, it is going to take the ETF dealers quite a bit of time to get these shares distributed to retail investors. In the meantime, the silver ETF will likely have a neutral impact on the physical silver market at best. Also gone is the possible disruption to silver supplies by the "indefinite" shutdown of one of the world's largest silver producers, Cannington, which in truth had reopened just two days after a fatal accident shut down the mine. These were the two main reasons for me to think that a very short term bullish speculation was in order for silver, but now these reasons have turned out to be bogus.

Therefore, as a disciplined speculator, I must exit this trade and look for new opportunities to unfold. Luckily, this was an easy lesson to learn since I'm right around breakeven which is not a bad result for such a leveraged play.

JANUARY 3 2007 10:00AM PDT - Clear sailing? No such luck. The dollar rose on stronger than expected manufacturing activity for December while oil dropped on warm weather and copper collapsed on rising inventories. Silver and gold were no match for such a negative climate and after a strong overnight and London open, both plunged and wiped out over a week of gains in under 3 hours. This action leaves us where we were at Christmas but with a less clear indication of where we are heading next. I continue to maintain a speculative long futures position in silver on the expectation that something is up in the market as betrayed by the silver ETF, but I am not so married to the idea that I would be willing to take a substantial loss. In fact, being able to close a position at any time day or night is the main reason I stayed in GLOBEX futures.

The copper market is now looking quite weak for 2007 and has implications for the other base metals. As I mentioned a number of times previously, base metals are highly subject to economic activity amid a cycle of metal inventory which fluctuates from severe drawdown to severe oversupply. I think it is too early to call the top in the bull market for base metals but the going is certainly going to be tough from here. I'm guessing that after some zig-zagging in the weeks ahead, prices will flatten out and later in the year begin a downtrend toward an equilibrium level, perhaps $2.00/lb. for copper, $1.00 for zinc, $0.50 for lead, etc. This could result in some fading of enthusiasm for base metal miners and projects but won't really change the fundamentals for many emerging producers which are still economic at such prices.. Instead, we could see lethargic and uninspired share price action. Thus, with a few compelling exceptions, I continue to believe that minimizing base metal exposure in a silver portfolio is a prudent action. In my own case, this mostly means a preference for silver-gold projects over silver-base metal.

But what about silver? How will it react to a moderation and even decline in base metal prices? Will silver also experience rising inventories and a leveling off of demand? Well, according to GFMS and CPM Group, the answer to the latter question appears to be a qualified yes. The saving grace might be a weaker dollar and resulting higher gold prices, but these effects are likely to be isolated and unpredictable in the near term. What this is all leading to is that the fundamental support for higher silver prices continues to be limited to silver's inherent connection to gold and negative correlation to the dollar. Absent some major revelation, this means that caution continues to be warranted with yellow flags in place. Buying and selling should be mostly limited to trading opportunities and short-term speculations with the holding back of significant dry powder. With that said, trading opportunities and attractive long-term values are always available if one looks hard and long enough.

Okay, quickly to some silver stocks. Esperanza and Silver Standard picked a bad day to report further drill results from San Luis, location of incredible gold-silver vein intercepts last October and November. The latest drilling seems to have extended the strike length of the high grade Ayelen vein while demonstrating its substantial grade variability. Most significantly, the highest grade intercept from these latest drill results is 2 ounces per ton of gold equivalent over 35 feet and this lies about 500 feet along strike from the previous "glory" intercept of almost 8 ounces per ton gold equivalent over 9 feet. Thus, there appears to be a substantial extent to the high grade mineralization approaching economic bulk. What there doesn't seem to be so far is a lot of proximate parallel stockwork veining, likely the result of the extreme effectiveness of the rhyolite dike which controls the gold mineralization in the Ayelen vein. However, there appear to be other parallel veins further out such as the Ines vein 200 feet to the east. However, it appears that 4 drill holes on the Ayelen vein have been extended to probe the dip of the Ines vein at depth without encountering mineralization. Absent a better understanding of what this all means to be confirmed by further drilling, I would caution against excessive exposure here.

In closing, almost every silver stock took a punch to the gut today with the worst performers being comprised of the momentum stocks showing the greatest rise in recent days, including Sabina, MAG and Impact. Just goes to show, momentum is a too way street. Don't get run over jumping in and out of the traffic.

JANUARY 2 2007 10:00AM PDT - Not surprised to see silver and gold ring in the new year with a doozy as last week created a lot of bullish impulse to take advantage of today's dollar weakness. My guess is that we could have some clear sailing up to the recent highs around $14 for silver. Anything beyond that would be too difficult to speculate about so I'll leave it to those who are out to make a name for themselves as fortune tellers.

It should be interesting to see how silver stocks will behave; so far today they are strong as a group with a few notable breakouts including Impact (along with Energold) and Sabina. Impact has a little ways to go before reaching its all time high while Sabina is in virgin territory. Meanwhile, several small juniors are chumping at the bits including Oremex, Silver Quest and Arian Silver. Assuming silver prices remain strong, they could do well simply because their market caps give them a lot of room to run. On the other hand, the likes of Silver Wheaton, Silvercorp, Pan American and Silver Standard may have to jump through hoops in order to keep pace. Mind you, each is capable of doing so, but it would not be unwise to worry about the short-term impact that lackluster financial or operational performance by any of these silver "giants" might have on investor enthusiasm for their shares. By short term, I mean of course the remainder of the current silver rally which historically has lasted until Spring.