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Archive of TODAY
IN SILVER
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ARCHIVE: 2006
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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.
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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.
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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.
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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.
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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.
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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.
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|
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.
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|
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.
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|
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.
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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.
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|
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.
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|
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.
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|
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!
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|
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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