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ARCHIVE: Feb 2007 | Jan 2007 | 2006

MARCH 30 2007 1:15PM - I just posted Prof. Fekete's latest paper on gold in which he ties together a number of economic and central banking loose ends. One thing I really enjoy about Prof. Fekete's work is that he has a realistic view of the gold "conspiracy". Instead of focusing on wanton greed and world domination, he is able to synthesize the disparate fields of human psychology, economics and social studies in conducting his scathing criticism of the worldwide repudiation of gold (and silver) as money. And while I think some of Prof. Fekete's work is more applicable to academic discourse, in my mind he is without question the foremost thinker and most credible proponent of a return to a bimetallic monetary standard. It is nearly impossible to read one of his commentaries without discovering a new way of looking at or thinking about gold and silver. In particular, his pioneering expedition into the mysterious world of the basis may be the most important development for gold and silver bugs since the advent of ETFs. Prof. Fekete will be conducting an educational series on gold this August which will also include discussion of the basis. I am hoping to have my own research featured as part of this curriculum. See this notice for more information.

MARCH 30 2007 10:00AM - Silver and gold jumped up in the last hour as the dollar and general stock market took a nosedive after the U.S. government slapped new tariffs on coated paper from China, in an apparent reversal of a policy not to penalize importers of subsidized goods.

Meanwhile, the silver ETF continues to gobble up silver in a now familiar pattern of additions every time the NAV turns to a premium, as it did yesterday. The silver ETF now holds almost 131 million ounces of silver, which is more than the original amount approved in April of last year. Perhaps now the various pundits can finally admit that the SEC approved a change to the ETF to increase the authorized ounces of silver by almost 170 million. I discussed this last December, noting at that time that the approval happened without fanfare just 2 weeks (October 10, 2006) after Barclays filed the amendment. Nobody noticed then (including me), but despite my efforts to inform other "experts" back in early January, they continued to express doubts. Well, we have official, undeniable proof now. And yes, the SEC did approve the amendment right after it was filed back in late September. See my commentary on January 3 of this year.

March is drawing to a close and the spot COMEX contract has just expired with only a moderate number standing for physical delivery. My review of daily warehouse data indicates that perhaps 5 million ounces were delivered, not a small number but nowhere near a record. I had predicted as much based on the slow but steady buildup in warehouse inventory during late February and early March. Now with the COMEX warehouses still holding 120 million ounces of silver, it will be very interesting to see what transpires in the May contract. Last year, May deliveries were quite active on the back of the then-recent launch of the silver ETF. Several forces may conspire this time around to outdo those prior results. More on this later.

I have a couple of additions to the stock discussion from yesterday. First, a reader informs me that the lockup on the PP for SNS Silver expires on June 16, 2007 according to this news release which was apparently not well distributed but does now appear on the company's website. This is actually a later date than what I was expecting and essentially means that there is more speculative room to run should the rumblings about the Bunker Hill changing hands become reality.

In addition, I wanted to note the company that is looking to acquire the Bunker Hill is not a major mining interest but rather a Canadian junior by the name of Azteca Gold Corp. See their news release here. The company is run by Matt Russell, who along with his family is/was involved in Idaho General Mines and Mines Management. I've met Matt Russell a few times in prior incarnations and found him to be brash, aggressive and charismatic in a Donald Trump sort of way, which is probably the perfect personality for what Azteca Gold has set out in its mission statement. In addition, Mr. Russell and associates have apparently invested significant sums of their own money in the venture along with providing themselves with performance incentives in the form of large blocks of stock options. On top of the potential deal with Bunker Hill, Azteca Gold also has several gold-silver projects in Mexico and Nevada of the type that one might expect others like Arian Silver to be interested in. As a matter of fact, many of the things that I stated about Arian Silver in this write-up can be said about Azteca Gold. One drawback to Azteca is that it is not cheap trading near C$0.70 with 66 million shares outstanding. On the other hand, these guys are thinking big and taking big risks. In summary, Azteca Gold might be an interesting new play to keep our eyes on. I currently don't own shares but I'm intrigued enough that I might pick up a couple of thousand just to keep the stock on my radar.

Finally, a bit more about Independence Lead, the lessor of the Gold Hunter deposit to Hecla at the Lucky Friday mine in the Silver Valley. I received confirmation yesterday from an in-the-know source that the management of this company may in fact be the shareholders' worse enemy as there appears to be no flexibility on moving in a different direction toward a deal and away from pointless litigation. There is definitely untapped value in the company but the big question is, will management sit down and do what is in the best interests of shareholders or will management insist on leading a crusade against perceived wrongs? If someone has some insight into the resolution of this impasse, please let the rest of us know because there is definitely a big opportunity here waiting to be unlocked. I'm sure many silver investors would be buyers if there were a clear path forward.

MARCH 29 2007 12:30PM - Gyration for silver and gold prices continues with silver in particular showing great resilience. In the background, geo-political tension is on the rise, the dollar can't seem to rally (although it also doesn't want to give up the ghost) and crude oil and commodities are showing strength in the face of uncertainty in the global economy. COMEX warehouse and ETF silver bullion continues to hover above a 250 million ounce aggregate while several other developments are also indicative of solid physical demand (recent Central Bank sales failed to make a dent in gold prices, the silver ETF is in a repeating pattern of movement from NAV discount to increasing premium until dealer additions of bullion satiate the demand for a few days, etc.)

At this point, I am building up my short-term exposure to silver at a slow and careful pace and have not formally turned bullish. I do, however, expect that there will be enough confirmation by late next week to either shake or strengthen my confidence in the rewards to be gained from betting on $25 silver by this summer.

In silver stock news, I would like to point out the recent piece by David Bond, Good On Ya, Robert Hopper, in which it is revealed that a major mining interest is in the advanced stages of sniffing around at the venerable Bunker Hill, a historic mine privately owned by the aforementioned Bob Hopper for the past decade plus, during which Mr. Hopper has been a painful thorn in the bureaucratic hind quarters of the EPA. The interesting thing about this development is the renewed outside interest in the Coeur d'Alene Mining District of Northern Idaho, of which the Silver Valley in Shoshone County is the centerpiece. There are a number of silver companies with operations in the Silver Valley, including Hecla (Lucky Friday Mine), Sterling (Sunshine Mine), U.S. Silver (Galena and Caladay, formerly owned by Coeur d'Alene Mines) and SNS Silver (Crescent Mine) to name the most prominent.

Of these, SNS Silver would probably be the major beneficiary of a well-funded mining concern taking over the Bunker Hill as there would be a source for the major financing required to drain the Bunker Hill (and Crescent) of its mine water. Also, the proximity of the two mines means that there could be an additional suitor for SNS Silver should a major new discovery be made at the Crescent. This is the type of strategic value I alluded to when I discussed the Crescent Mine last December before the usual suspects (newsletter writers who participated in the financing or bought shares in advance and thus had an incentive to tell a story) got the drums beating so loudly about imminent production at the Crescent that all common sense and reason were drowned out.

Now, it is curious to see that nobody is talking about a development which could truly magnify the value of a mine which was acquired just a few months ago for the paltry sum of $750,000. Oh well! I believe the current scenario provides nimble speculators with the opportunity to bottom feed on SNS Silver shares before the recent developments over at the Bunker Hill become obvious to the usual suspects. In the meantime, however, one should watch the calendar for the free trading shares from the private placement that closed in January (closing date was not announced, need to check with company) to hit the market sometime in May.

While on the subject of the Silver Valley, I've been looking for an opportunity to discuss a little, illiquid company with the awkward name of Independence Lead Mines, which is the owner of the Gold Hunter deposit currently under lease and being mined by Hecla. Independence Lead has a market cap of roughly US$20 million with approx. 5 million shares outstanding. I have been trying to calculate the present value of its 18.52% Net Profit interest (after recovery of development costs) in Gold Hunter, which has total (still growing) resources of more than 100 million ounces of silver, 500 million pounds of zinc and 1 billion pounds of lead. I come up with a number quite a bit higher than $20 million under several reasonable assumptions, which could be why U.S. Silver recently took a 5% stake in Independence Lead. In fact, by reference to Hecla's own market valuation of approx. US$1 billion, Independence is conceivable "worth" around US$50 million (Gold Hunter constitutes 25% of Hecla's operation and Independence has an 18.52% Net Profit interest in Gold Hunter). Thus, it would seem that management and litigation issues aside (see website for flavor), Independence might be an interesting opportunity for some silver investors looking for undervalued production plays in the U.S. proper.

[I currently own none of the aforementioned stocks.]

MARCH 25 2007 3:00PM - The website will not be updated for the next couple of days.

I did want to mention that the Silver ETF added another million ounces Friday despite a low NAV premium the day before (actually, the NAV turned to a discount by the end of the day). In addition, COMEX warehouse stocks of bullion increased by almost 2 million ounces. The silver lease rate remains low and the basis has turned tighter in favor of gold while both precious metals continue in contango, so supply tightness in silver doesn't appear to be on the immediate horizon. Given these developments, however, as well as the distinct possibility of a major increase in geo-political tensions as Iran attempts to bargain the freedom of 15 British seamen for 5 of its Revolutionary Guards captured by the U.S. a couple months back, there is a distinct possibility of silver and gold making a major break higher.

Yesterday, Jason Hommel put out his latest piece on silver which reiterates many of the same arguments he has made before but this time he also states that silver could double in price to $25 within the next year. As many of you know, Jason is bullish on silver to an extreme degree. I tend to be scathingly critical of much of what he has to say while agreeing with his bottom line conclusion that silver is one of the most spectacular investment opportunities in a lifetime. I also agree with him that the core of an investment in silver must be bullion held in your own secure possession and that stocks are speculative tools for leveraging the price of silver. In any case, I find it quite ironic that just as Jason was publishing his $25 prediction yesterday, I had also been thinking for a day or two that silver may hit $25 in short order -- not in a year as super-bull Jason expects, but rather in the next 3 months!

In fact, late last week I had decided to wait just a few more days for confirmation from the fundamental of the blazingly bullish technical picture for silver before officially turning my short term flag to green. If and when this mental flag does turn to buy mode, I will probably be in full swing putting together a number of short-term speculative plays including call options, calendar spreads, etc. as well as increasing my exposure to silver stocks. And even if I don't end up turning fully gung-ho on the near-term prospects for silver, the situation is compelling enough that I will be increasing my leverage to higher silver prices anyway. For example, I have already acquired a few choice call options and put in place several strategies which should do well if silver rises toward $15 an ounce. If it goes to $25, I presumably will make a killing (my goal is not to risk more than 10% of my portfolio on this short-term speculative strategy while looking to at least double it, not counting what the other 90% might do).

I'm still monitoring developments so none of this is set in stone, but day by day I am increasingly convinced that silver could be in a position to make a run to a level that will surprise even the most bullish silver prognosticators. In conclusion, this is my official notice that should we see $25 silver this summer, I will not be surprised in the least bit.

MARCH 23 2007 2:00PM - Today felt sort of like an ice-cold bucket of water being dumped on the head as silver shriveled (down 2%) while not even a little Persian Gulf intrigue (Iran holding a dozen plus British sailors hostage) could make gold happy (down 1%+). It's tough to say whether or not the dollar was the culprit since the world's principal fiat managed to log only minor gains on stronger-than-expected housing sales for February. But for a change, it was bullion that took it on the chin while the PM shares held firm (many individual stocks were up defiantly and even the HUI and XAU managed to stay in the plus column). I suspect, however, this is not quite what was envisioned by those who were looking for the rally stage where equity prices would lead the metals. In summary, the peculiar action today is consistent with a minor shakeout and not a change in trend.

COMEX warehouse silver declined a bit as if the previous day's jump had been some sort of mistake while the latest COT report indicates that open interest has actually increased slightly. In the case of gold, however, open interest did fall by a healthy margin from the prior week even as gold prices were on the rise. All in all, COMEX positions in both gold and silver are extended but not at extremes.

Have a good weekend!

MARCH 22 2007 12:00PM - Silver and gold were able to maintain most of yesterday's after-hours gains following the Fed announcement that it would leave rates unchanged, even as the dollar recovered most of its respective losses within the past hour (now trading at the same level as prior to the Fed release). As noted yesterday, the precious metals do not need the dollar to fall by a substantial amount before they can rally to challenge last year's high, although a strong dollar will probably cap whatever move is currently in store for silver and gold.

The picture remains positive for silver, with combined COMEX and silver ETF (SLV) holdings climbing over 250 million ounces for the first time yesterday as the COMEX saw registration of more than 2 million ounces of warehouse bullion. The COMEX build-up may be in anticipation of long futures standing for delivery, but it is probably not a factor for the March contract which currently has an open interest of just under 3 million ounces. The next prospect is May delivery, which at this pace could turn out to be a doozie. In any case, 250 million ounces is a nice amount of visible above-ground silver, and as CPM Group's Jeff Christian just pointed out, it may not take a slew of additional demand to propel silver prices much higher. Indeed, Christian estimates that just 20 million ounces of additional ETF silver could drive the shiny metal's price to $20 per ounce. While this is quite possible, if it does NOT happen, then CPM Group should be prepared to publicly up its estimate of hidden but available stockpiles of silver (which, nonetheless, the ETF is apparently having little trouble bringing out of hiding).

Another encouraging sign is that even as the latest metal rally has unfolded, both COMEX gold and silver open interest have continued to fall.

Further encouragement comes from the equities, which have underperformed bullion as stock investors seem to be bored and disinterested at the moment. Judging, however, by the number of analysts turning warm on gold and silver lately (see all the recent postings under "Silver Investment & Speculation Strategies"), the masses could be on the verge of a jubilant return to precious metal stocks. I myself have found it difficult in the past few days to keep an appreciable amount of powder dry. In fact, I have had a strong urge to turn my short term mental flag from "caution" yellow to "full speed ahead" green over the past few weeks, but I haven't pulled the trigger because I don't know if my recent courage is the result of greed (chasing momentum) or a bona fide realization that silver's prospects have greatly improved (the technical picture, as I keep mentioning, has been excellent for a number of months even as the fundamentals have largely remained corked up). In retrospect, had I turned officially positive last fall on the short term prospects for silver, I could have bought more of the best silver and gold stocks at substantially lower prices than today. The lesson here is that price action trumps the need for external confirmation in the short term. Cyclical rallies and pullbacks don't always need a reason.

On the other hand, many quality companies are still relative bargains today (while the prices of numerous speculative issues are actually lower than they were last fall) so a strategy of careful, cautious accumulation is probably not a bad one right now. I personally continue to consolidate away from the more speculative plays in favor of high quality, high liquidity shares under the assumption that the latter will outperform over the next few months while at the same time providing wider berth for profit-taking opportunities.

Turning to the basis, the late rally in silver and gold yesterday turned contango to backwardation as expected, with gold taking a turn tighter. My experience so far is that when silver and gold are in contango, silver is generally tighter but when they are in backwardation -- which has always been a very temporary phenomenon even during the late 1970's and early 1980's -- gold is tighter. Indeed, today's basis as measured by intraday prices has returned to contango.

There is a special reason to keep an eye on the basis right now because this time last year the basis in both gold and silver started to behave strangely while the spreads in futures (silver in particular) contracted. Should we get signs of a similar situation developing this Spring, a calendar spread in silver futures, say long May or July 2007 and short December 2008, could become a virtual cash machine. This is a variation of the "bull in bear's skin" play publicized by Prof. Fekete, but one which requires vitually no professional trading experience (or money, for that matter) to execute. Indeed the beauty of using such a calendar spread on silver in particular is that there is virtually no risk of a sudden flood of metal to the market which might depress only spot prices and therefore turn the spread against the speculator. The same cannot be said for any other commodity or even gold since "central banks stand ready to lease gold in increasing quantities" as Greenspan has warned the Hunt Bros. wanna-be's. More on this opportunity later.

MARCH 21 2007 11:30AM - Jousting for position ahead of the FOMC announcement, both gold and silver vacillated early on but as of 10 minutes ago both are zooming higher in apparent excitement that the Fed has decided to leave rates unchanged while painting a moderate yet cautionary picture about inflation and economic growth. The dollar has taken a corresponding hit even though currency traders appear to have been expecting this exact scenario.

We should note at this point that the dollar does not need to fall at all for silver or gold to rise substantially, as a chart comparing the Dollar Index and precious metals clearly shows. At last May's rally peak, for example, gold was proportionally 10% higher and silver was 20% higher compared to the current Dollar Index. This means that a repeat of last year's April-May rally could see gold prices of $725 and silver of $15.50 with the dollar maintaining its current level. I don't necessarily think this is what will happen but simply pointing out that it is possible.

On the fundamental indicator front, I have updated both the COMEX warehouse and silver basis charts. The basis appears to have settled down after some volatility with silver remaining the tighter of the two monetary metals (a Gold/Silver Basis Ratio greater than 1.00, when both metals are in contango, indicates silver is tighter). Monetary sentiment presumably favors the metal with the tighter basis although I don't have enought information at this point to understand what this even means much less to prove that it is true. So for now it should just be treated as a curiosity.

Moving on to the silver ETF, there doesn't appear to be much going on as the NAV premium continues to hover near zero. The implication of this is that ETF demand continues to be muted, something that is just as well according to a number of "pundits",  "gurus" and "analysts" out there who are increasingly sounding the alarm that ETFs are lending or leasing metal, and even if not, government confiscation of ETF bullion stockpiles is only a matter of time. My own misgivings about the gold and silver ETFs notwithstanding, this is utter nonsense.

The ETFs by law and pursuant to trust indenture MUST maintain their bullion holdings in an allocated, unencumbered fashion that makes any lending, leasing, etc. not only impractical (the trustee would have to be coerced at gunpoint) but highly illegal. This is 100% fact and anybody who says otherwise is either imagining things (stop smoking those funny-looking cigarettes, will ya?) or simply courting favor with the conspiracy crowd.

As to government confiscation, I would like to point out that in the case of both SLV and GLD, the bullion is held in London vaults far from the reaches of Uncle Sam. And please don't tell me the U.K. is going to take part in any gold or silver confiscation scheme -- the British detachment from gold and silver as monetary metals is so complete that they are likely to be the last nation to "throw in the fiat money towel". Besides, the odds of the U.S. ever trying to confiscate gold (again) and/or silver are very slim for a number of reasons, not the least of which is the fact that enforcement today would be much more difficult than it was back in 1933 (and it wasn't easy then).

There are valid reasons not to own the gold and silver ETFs as I've pointed out before, including the tax consequences, poor crisis protection (although 100% backed by metal, the ETF is still a paper asset and subject to all sorts of market risks including exchange halts, blackouts, trust amendments, etc.), no convertibility unless you are a very large investor, value erosion through management fees (over the long term), risk of custodial loss (the bullion is NOT insured), trading disadvantages with respect to ETF dealers who can create or decide not to close large NAV premiums or discounts, etc. But even with all of these risks, there is nothing wrong per se with using the ETFs in moderation as part of a precious metals investment strategy, especially over short and medium term trading horizons where leverage is not desired. For example, it would be silly not to use the SLV/GLD as the primary means to trade the trend back and forth in the Gold/Silver ratio. Perhaps most importantly, there are few alternatives to ETFs in a sophisticated portfolio allocation strategy.

In conclusion, it is safe to ignore the Chicken Little's as long as you don't substitute the ETFs for physical metal held as part of your core bullion portfolio (such as the 10% wealth allocation to gold and silver bullion which should be held in your own direct, secure control as recommended on my website).

Turning back to economics, I would urge anyone who likes to study the long-term macro factors that are contributing to the natural resource boom to read about the "4 Un's" facing China. In my personal opinion, dealing with these "Un's" is going to be extremely challenging with some major implications for the global economy in the years ahead, many of them not good. Particularly troubling to me is the possibility that China is beyond the point where economic, fiscal and monetary developments can be brought back under control without destabilizing what may in fact be the world's biggest -- and expanding exponentially -- house of cards (the possible collapse of which could be why no serious attempts have been made so far).

MARCH 20 2007 6:00PM - Precious metals in stealth rally mode. COMEX warehouse silver has just climbed over 120 million ounces which includes approx. 80 million ounces in the Registered and 40 million ounces in the Eligible category. Silver ETF NAV premium has dropped toward zero but is still positive. The current situation gives me the impression that a strong rally can launch from these levels as both speculation and investor sentiment are somewhat subdued and nowhere near extremes. At the same time, a substantial amount of money appears to be on the sidelines waiting for the opportunity to jump in. And although the risk of a short-term decline is still significant, there are some pretty good opportunities out there. In my own case, I am using this lull to further consolidate my silver stock holdings by increasingly moving into the more liquid producers with an emphasis on silver and gold. I am also taking a modest portion of the proceeds to speculate on COMEX silver call options (dangerous, don't try this at home!) I continue to maintain a healthy amount of dry powder, some of which I will most likely deploy into medium term plays over the next few months. Specifically, I have started to search for situations which would ideally allow me to book sizable profits toward the end of 2008 (for example, flagship silver-gold projects going into production in late 2008/early 2009).

I have an off-the-topic comment to make today on that rascal Jim Cramer, who back last December made some retarded statements about how he used to manipulate the markets when he ran a hedge fund. The synopsis of the interview is here and has also been pirated on YouTube here. I was going to comment on these statements when they first aired last December but didn't get around to it. Now, however, GATA seems to have taken this up as yet more proof of how all the markets are being manipulated all the time, so I thought it would be appropriate to provide a rational perspective.

First, some of what Cramer describes does no doubt happen on occasion (at some, but certainly not the majority, of hedge funds) especially at certain times of the trading day (e.g., pre-market, on the open, at the close) although it is not possible to do this in the simplified manner he lays out. "Take and bid, take and bid" and "hit and offer, hit and offer" -- give me a break, that's the shortest path to the poorhouse!

Also, he states that he used stock futures to create profits in underlying securities held long or short by "setting up the market". In reality, even if it was consistently possible to do this, the risk is too high and the payoff too meager to be a major part of any operation. More than likely, the gain would occur on the derivative side if the strategy did succeed at all, which would tend to create friction loss as the trade is exited (the door figuratively hits you in the ass on the way out). Besides, this trade when done in the manner Cramer describes ($5-$10 million committed over a very short term trading window) would paint the charts in such an obvious manner that few would be lured into the trap, while the regulators would be soon knocking on the door (despite his claims that "the Securities and Exchange Commission never understands this.") The fact is that the amount of money it takes to manipulate a market is directly proportional to the timeframe over which the manipulation occurs, meaning that Cramer's strategy might at best provide a few minutes of mayhem (see below). GATA, are you listening to this? This concept applies to the gold market as well. Perhaps Cramer is talking about a long time ago when hedge funds were less numerous, traders were less sophisticated, stock futures were in their infancy and market volumes were much lower?

But this isn't even the most ridiculous part of Cramer's "confession". He goes on to outline a strategy that losing hedge funds could use to spruce up their performance by knocking down market leaders like RIMM and juicing "ideal shorts" like Apple by spreading false rumors that neither AT&T nor Verizon are interested in the new iPhone. In all my years of following the markets, I have never heard a more idiotic, conceited or misguided statement (and that arguably includes most of the things that I have said). Does Cramer really expect anyone with a brain larger than a pea to believe an underperforming hedge fund manager can afford to put his/her precious ammo into a strategy that seeks to knock down outperforming stocks or that anyone would listen to such a Wall Street loser's supposed inside information about THE major technology story of the day??? As a frame of reference, Apple trades over $3 billion and RIMM trades over $1 billion on an average day, making it difficult for even the largest hedge funds to effectively manipulate these stocks for more than a few minutes at a time even if they were to commit most of their capital to just a single stock.

No, Cramer is just doing what he does best, which is to fantasize about the world he would like to live in. where uttering the first thing that comes to your mind, no matter how ridiculous, is the best approach to showing people just how smart you are. Don't get me wrong, Cramer is in fact a smart person, but it doesn't follow that everything -- or even a fraction -- of what he says is anywhere near the truth. Of all the things Cramer is an expert at, perhaps his greatest skill is to sensationalize a small, irrelevant aspect of the big picture in the pursuit of inflating his own ego. I should know since I have a tendency to do the exact same thing.

Near the end of the interview, the real reason for this episode of Cramer madness becomes obvious. He is apparently angry that brokerage houses are using his 'dirty' hedge fund strategies to drive stocks down by spreading rumors that start a "vicious cycle down", which is presumably the real reason why some of Cramer's picks don't do well. Yet the fact is that Cramer's legions cannot do a single freakin' thing about the alleged brokerage house shenanigans, even if his BS about them were entirely true.

MARCH 19 2007 9:50PM - Silver and gold both continue to look positive on a short-term basis although the shares are struggling. Economic news this week is likely to guide the markets. On the indicator front, not much to note. Daily clearing volume in London jumped by about 10 million ounces per day in February to a daily average of 108.1 million ounces, signaling a pickup in what has been flagging volume in the spot market over the past few months. This is an encouraging sign but the level of clearing volume in both 2004 and 2006, during which silver had a strong Spring rally, was much higher. On the other hand, the current level is higher than the Spring dud of 2005. Meanwhile, both the silver ETF and COMEX silver have behaved in a subdued fashion over the past few days. Lastly, silver quietly overtook gold today as the tighter of the two in terms of basis, both returning to a gentle contango.

Over the weekend, Coeur announced that its permit for a tailings dump (allegedly in an alpine lake) at its Alaskan gold project has been revoked (see Coeur Receives Ruling on Kensington Gold Mine). On February 22, I said that "it is difficult to imagine Coeur getting beat down much lower than it is already." Clearly I was wrong as it was the good ol' strategy risk that I mentioned on January 4 that had come home to roost. Perhaps foolishly, I will now reiterate my earlier statement of February 22: "it is difficult to imagine Coeur getting beat down much lower than it is already" along with "for some silver investors they [Coeur and Hecla] may represent an interesting investment opportunity". Disclosure: Not for me, at least not now. And please don't confuse this with a stock recommendation, which is something that I am not legally qualified to make (and even if I was, it would be inappropriate without understanding your individual suitability). It's just that some people like to gamble on beaten down dogs, or more precisely, their prospects for recuperation, and Coeur seems to fit that category.

I will now examine a recent statement by Congressman Ron Paul, a disciplined advocate of Constitutional purity who refuses to play politics, in which he blames the housing bubble on the Federal Reserve (Alan Greenspan and Ben Bernanke, in particular) as a result of its/their "manipulation of interest rates and the creation of money" (see Don't Blame the Market for Housing Bubble). Unfortunately, this is like blaming drug dealers, casinos, pornography, gun manufacturers and Planned Parenthood for drug addiction, gambling addiction, rape, gun crime and abortions, respectively. I purposefully mention some hot buttons to show that -- across the political divide -- the problem is not wayward social institutions but the failure to hold individual actors accountable for their own actions. So it is with the housing bubble, which was essentially caused by people living beyond their means and taking unreasonable financial risks.

Congressman Paul further states that when "credit is cheap, individuals tend to borrow too much and spend recklessly." I tend to disagree, my proof being the Japanese experience of the past two decades. The problem isn't cheap credit but rather a culture numbed to the risks and consequences of excess speculation.

Here is more from Congressman Paul:

This is not to say that all banks, lenders, and Wall Street firms are blameless.  Many of them are politically connected, and benefited directly from the Fed’s easy money policies.  And some lenders did make fraudulent or unethical loans.

But why not also blame the borrowers who took out these fraudulent and unethical loans?

In fact, the Fed has been doing its assigned job -- banishing the business cycle -- too well over the last 25 years. Not by "creation of money" which is more the result of evolving financial products (the Fed can only "create" money through open market and system purchases of securities and this has accounted for a tiny fraction of the growth in M2 and M3). And not by simple "manipulation of interest rates" as the inability of the Fed to influence long rates -- representing the vast majority of rated and mortgage debt -- has become abundantly clear to even the most recalcitrant monetarist. But rather, by softening the consequences of speculative blunders.

Indeed, the Fed since the mid-1980's has been the "forgiver" of all manner of market sins from program trading (1987 market crash) to hedge fund mistakes (LTCM), foreign debt crises (Argentina, etc.), financial upheavals (1997-98 Asian contagion), technological fearmongering (Year 2000 non-event), terrorism (9/11) and everything in between and since then.

No PPT (Plunge Protection Team) was needed, either. Instead, the evolution of our forgive-and-forget economy appears to have been the direct result of default risk being concentrated -- by the exponential rise in over-the-counter derivatives -- and intermediated by large international money-center banks which cannot fail at any cost. Simply put, financial transactions have grown so large in proportion to both global savings and production that failure is no longer an option (even though it is the unavoidable outcome).

Derivatives are nothing more than a rope that ties all of our financial ships together. The theory is simple: any one ship cannot sink due to the buoyancy of all. Yet nobody knows how many leaks can occur at the same time without dragging the entire fleet down into a deep-water grave. In the meantime, finance and banking insiders have recognized the present reality, fully entrusting their fates -- and all of ours by extension-- to the theory of eternal flotation. The manifestation of this in the consumer sector has been an affinity for risk and excessive tolerance of speculation. The housing bubble is merely the latest corporal form. There will likely be others before it's all over.

As a practical matter, the result of our global interdependency has been the immediate need (or urge, depending on your perspective) to banish the fat lady and restore hedonism at the first sign of trouble. We should hardly blame the Fed as the only or even primary instigator, however, since clearly the vast majority of Americans (and much of the global community) expect, if not demand, that their political representatives carry out a "don't worry, be happy" agenda. 

But in fact we should worry, for the economic cycle will return with a vengeance at a point when the Fed can no longer forestall the deferred suffering.

Personally speaking, I find it more productive to avoid the blame game in favor of playing my own small part in the effort to remind the citizenry that they are better off following the example of the ant, not the grasshopper. See here and here.

Fables and religious virtue aside, learning from the ant means owning physical gold and silver in your own direct, secure possession. Ideally, at least 10% of your net worth. Just as important, in the likely event that the financial reckoning will arrive posthumously, is teaching your children and grandchildren to never abandon this financial discipline until the value of gold and silver once again reflects their true monetary status. It might be difficult to identify when that time will have arrived although my collaboration with Prof. Fekete may some day provide a clue.

MARCH 16 2007 1:00PM - Silver climbed over a hump today with help from gold and a declining dollar, which faced a hotter-than-expected CPI reading on the back of a similarly lively PPI figure yesterday. You can't really have much better a situation for gold and silver than a weakening economy combined with rising prices and while it is too early to tell if there is a genuine trend developing in this direction, the winds of market sentiment are currently at the precious metals' back. Another encouraging development, in this case for gold, is a substantial decline in COMEX open interest yesterday, taking the metal of kings down to a more healthy tone below the shrillness of unbridled speculative exuberance. COMEX open interest in silver, meanwhile, has been more sticky but it too is no longer at speculative extremes.

Yes, COMEX warehouse stocks of silver grew again today and are now within a breath of 120 million ounces. On the ETF front, the NAV premium stands at 0.82% which is a healthy, neutral level. Positive silver price action next week could result in further additions to the ETF's silver holdings such that the combined COMEX and ETF stockpiles might for the first time exceed 250 million ounces.

Moving on, the gold and silver basis snapped back to contango after a one-day backwardation reading (as expected) with gold now taking its turn as the monetary metal with a proportionally smaller basis. This, however, isn't likely to be meaningful on a day to day scale.

Now for some pure speculation. I continue to believe that a distinct possibility exists for a rally in silver and gold in the next few weeks. This rally may yet ignite the exploration and mining equities and for that reason I have increasingly turned cautiously optimistic on metal stocks in the short term (although not enough to lower the yellow flag of circumspection). Let me give some flavor to what this means in my own investment portfolio: (1) I have placed limit orders at 25-50% above current prices to sell some of the more liquid, quality silver and gold stocks (most of these positions were established as a result of recently consolidating my portfolio) and (2) I am considering several highly speculative trades just in case bullion continues to outperform including out-of-the-money silver call options (which I have not seriously looked at for almost a year).

Silver Wheaton Revisited

Before wrapping up for the week, here is my reply to some observations made recently by Sufiy in Silver Wheaton: Propelled by the Subprime Meltdown:

I humbly beg to differ with the statement "There is no specific mining risk connected to this company", on the basis that Silver Wheaton acquires its silver from MINES and if any of them experience production woes, that will affect SLW as well.

Also, to the extent a mining company counterparty is unable to make mitigating compensation in lieu of silver deliveries required under the contract (e.g., the miner becomes insolvent), SLW has credit risk.

Furthermore, many investors fail to consider the upfront portion that SLW expends (cash and shares) to obtain these fixed price silver purchase agreements. In point of fact, SLW should be evaluated purely on the basis of NPV (Black-Scholes in particular) and not P/E or other multiples which might imply that the business model is anything other than an engineered leverage to silver prices (I'm ignoring the recent forays into speculating on junior explorers). All pure royalty companies should be evaluated in the same way as well.

I personally haven't found the time to construct the option models to do this but I'm fairly certain it would be a great way to determine at a specific point in time whether or not SLW is overvalued or undervalued vs. silver prices. Ideally, this model would allow each trader or investor to use discount and volatility rates commensurate with his or her personal assessment of mining risk and future silver prices, respectively. I would be willing to pay for such a tool either as a potential or current shareholder of SLW (and any of the growing legion of royalty companies out there).

MARCH 15 2007 3:00PM - Spot silver poked its head above $13 per oz. today but fell back somewhat as gold's own rally -- on the back of a higher-than-expected rise in wholesale prices -- eased into the close. The strength in silver appears to be in sympathy with metals in general, particularly copper, which were very strong today even as most commodities fell. Copper is now approaching $3 per lb. but I personally believe this is a counter-rally in the midst of a longer correction which will see copper at lower prices (closer to $2 than $3) toward the end of this year.

On just the second day of tracking a combined gold and silver basis, we got our first "screwy" reading as the silver basis went barely negative while the gold basis a little more negative (that is, both metals in backwardation). Before we get our panties twisted, however, I should note that this situation appears to be an artifact of closing prices -- the phenomenon does not appear on intraday charts. Indeed, the backwardation appears to be a one day anomaly due to the peculiarity of how gold and silver traded on this particular day (it has happened before and will happen again). As for the G/S Basis Ratio, it would seem to imply that silver is more backwarded but actually the opposite is the case: when basis is positive (contango), a reading over 1.0 means silver has a lower basis, but when basis is negative (backwardation), a reading over 1.0 means gold has a lower basis. If you think that's strange, wait 'til you see what happens when either gold or silver is in backwardation but not both. I alluded to this confused state of affairs yesterday and also to the fact that there are ways to deal with it. For now, however, the current rudimentary approach will have to do (and is frankly adequate as a general indicator once its shortcomings are understood). At the same time, perhaps the functional limits of using this website as a forum to make expositions about the basis are becoming obvious to some of you. Fear not, I will persevere here while I develop more appropriate "tools of the trade".

Turning to another topic, we note that the NAV discount/premium on the silver ETF has been bouncing around like a bronco the past few days with its latest showing being a 1.73% premium to NAV. If a NAV premium is sustained for a few days, it would break the general downtrend which started at the beginning of March and could indicate renewed ETF demand. This has implications for both investor sentiment (apparently not broken by the recent plunge) and physical demand (ETF may continue to add silver).

At the same time, COMEX warehouses continue to steadily add to their silver holdings particularly in the Registered category. Not enough to indicate that traders sense a run on COMEX bullion is imminent but sufficient to again imply that both investor sentiment and physical demand probably have not been greatly damaged by recent price action. COMEX open interest also seems to confirm this. As a result, I believe silver continues to exhibit an upward bias although caution is certainly warranted.

On a similar note, a number of silver and gold stocks are trading at levels much lower compared to bullion prices as a result of recent weakness in the equity markets and therefore moderate buying of select precious metals equities may (and I mean may, as in anybody's guess) reward prudent opportunists. In fact, it is quite possible that some stocks are trading not far from what may in retrospect be their lowest price over the next few years. I don't say this to encourage unbridled enthusiasm but rather to point out that maintaining generous exposure to the precious metals complex is not reckless (although admittedly risky -- but as they say: no pain, no gain).

In closing, I wanted to clarify a point I made yesterday: "One possibility is that some dealers are taking advantage of the low silver lease rates to borrow silver into the ETF." Some readers understood this to mean that I believe the silver ETF is involved in leasing silver. This, however, is not the case. I wasn't trying to say that the dealers would borrow silver from the ETF, but rather that they would borrow it from elsewhere and deliver it to the ETF. In speculating about this, I was merely attempting to rationalize why the dealers are adding silver to the ETF even as the NAV is at a discount (theoretically, they only make money adding silver to the ETF when the NAV is at a premium). In addressing this seeming incongruity, I wondered if low silver lease rates might provide an incentive for dealers to trade ETF shares even at a discount to NAV since borrowing the required silver means there is no upfront cash outlay. Specifically, here is how a dealer leasing transaction involving the ETF might work:

(1) Dealer leases silver in London from a third party with no cash outlay (note the ETF itself, despite some speculation by various pundits, does not have the capacity to lease or lend its silver because the metal is required to be held in Trust on an allocated basis in the name of the ETF).

(2) Dealer delivers leased silver to the ETF's London vault in exchange for ETF shares which are issued after a short processing delay. This increases the ETF's silver holdings as well as the number of ETF shares outstanding.

(3) Dealer uses the new ETF shares to cover an existing short position in ETF shares (which might have been established at a point when there was a NAV premium), to sell to ETF investors at a profit (either because silver prices are rising or in response to a NAV premium), or to indirectly arbitrage the COMEX/spot markets against the "cost" of the leased silver (this essentially locks in a spread between silver pricing on various markets). Conceivably, some of these activities may be carried out when there is only a slight premium or even a discount to NAV. More importantly, dealers may conduct these actions indepedently of actual silver demand by ETF investors.

(4) In aggregate, the dealer may be net short, long or neutral with the leased silver being one leg of the trade.

(5) As far as the ETF is concerned, the leased silver delivered by the dealer is not subject to a claim (that is, it is owned free and clear by the ETF) since it is the dealer who has the obligation to return silver at the end of the lease. It is possible that the dealer will withdraw silver from the ETF at such time, but that depends on whether or not and how the dealer is hedged (not to mention whether or not the ETF is the cheapest source of silver -- to the extent it trades at a significant discount to NAV, it just might be). End-of-lease activity itself may explain some of the fluctuations in NAV premium/discount.

I admit this is a rather complicated topic that suffers from the lack of actual information on what exactly the dealers are doing (and we must also assume that each dealer is doing something different). Still, nobody to my knowledge has even tried to understand the dynamics and mechanics of the silver (or gold) ETF, but this doesn't seem to stop anybody from claiming that a very basic and simplistic analysis of chart patterns and metal holdings is an appropriate market timing tool. Unfortunately, without a deeper understanding of the ETF itself, any prognostications about the silver and gold markets, and especially investment demand, are at best general indications of long-term investor sentiment and at worse no more than blind men trying to visualize an elephant by touching one body part. This is a shame considering that ETFs and similar financial inventions are among the most powerful influences on the present and future course of metal prices. Not only that, published metal holdings and daily NAV, volume, and pricing mean that ETFs are among the most visible and inherently suitable for analysis out of the many factors active in the precious metal markets.

MARCH 14 2007 5:00PM - Silver and gold prices firmer today as the dollar is weaker and markets in general are stabilizing.

The Silver ETF continues to carry a discount so it will be interesting to see if there is a pending drawdown in silver holdings. If not, I would hazard a guess that dealers are using the ETF as a sort of hidden speculative tool. One possibility is that some dealers are taking advantage of the low silver lease rates to borrow silver into the ETF.

Meanwhile, both COMEX open interest and warehouse bullion stocks have settled down, indicating to me that a March run at physical silver is unlikely to materialize. The next opportunity is May but would probably require some external stimulus to embolden speculators. With global tensions appearing to slightly ease, the most likely impetus would be a falling dollar and/or some sort of financial crisis.

Today, I have introduced the gold basis to the daily "Silver Alerts" and have modified both the silver and gold basis such that I am only reporting the relative figure at this time (the actual basis divided by the days to the option expiration of the most active futures contract). At the suggestion of Prof. Fekete, I am also tracking the ratio between the silver and gold basis daily while I conduct historical research on this ratio. The current G/S basis ratio is 1.99 meaning that the basis in gold currently carries a contango that is proportionally twice the size of the contango in silver. At the present time, this ratio is meaningless other than to provide a general feel because I have not performed sufficient analysis to put the number into historical perspective.

Should one metal or the other go into backwardation, this G/S basis ratio would become meaningless but I am already working on another means of presenting the data, one which would measure the relative difference between the gold and silver basis against a fixed standard. The cost of obtaining and the effort of crunching the data, however, is well beyond the scope of this website and therefore I am still trying to figure out the best way to proceed.

On a separate note, the deflation debate continues (or does it purportedly end?) with Inflation v. Deflation: Nothing to Debate. Basically, this latest round pits a couple of really smart guys against each other but they get hung up on the meaning of debt deflation. Well, although I'm not as smart as these two, my own opinion on this subject is that debt deflation will come about as a result of a Helicopter Drop by which the Fed will monetize a significant amount of d