SILVERAXIS

Home

Disclosure

Wisdom

Contact

Stocks

Bullion

ETF

New Postings Are Highlighted

® = SILVERAXIS.COM Feedback

ARCHIVE: Mar 2007 | Feb 2007 | Jan 2007 | 2006

APRIL 26 2007 11:30AM - It appears we are getting the much-needed break for silver and gold to recharge before a possible move higher to challenge the bull market highs. The inability of gold and silver to leverage a weak dollar or strong copper and oil appear, in retrospect, to have been an early sign of a (hopefully) temporary capitulation by the longs. Similarly, the drop in the silver ETF's NAV to a deep discount two days ago was an indication that silver investors were prepared to lighten up. On cue, the ETF's silver holdings dropped by 1 million ounces yesterday. One might expect another drop in the next couple of days although the NAV for the time being seems to have recovered. On the other hand, the unrelenting rise in open interest at the COMEX and CBOT (which just dropped its margin rates this week) over the past few days in the face of vaccilating gold and silver prices was perhaps the clearest warning that something was amiss in precious metals. Speculators needed a reminder to stay disciplined and use common sense. We shall see if today was lesson enough.

APRIL 25 2007 12:30PM - Looking at the dollar and gold/silver the last couple of days, one might be led to believe the two are correlated. When the dollar falls, gold and silver fall. When the dollar rises, as it has for the past hour or so, gold and silver follow! This collection of charts provides a pretty good visual of this strange phenomenon.

APRIL 25 2007 10:00AM - So far, I would call today another poor effort by silver and gold as once again a weaker dollar has failed to translate to higher precious metal prices. Meanwhile, certain economic doom doesn't seem to be bothering the general stock market or industrial commodities like copper, which rallied a massive 10 cents after the New York open. If that isn't enough to cause worries for silver, then there is the nearly 2 million ounces of registered silver removed from the COMEX warehouses at Brinks and the sudden turn in the silver ETF's NAV to a deep discount. At the same time, the silver basis is suffering from options expiration as we finally move out to the July contract today. A lot is happening behind the scenes but if we only looked at silver lease rates, we might think this is the calmest market in several years. If so, it is certainly the calm before the storm. But for now, more frustration and teeth-gnashing seems to be on the plate for silver investors. - Silver and gold were vulnerable to a sell-off even with a weak dollar as commodities in general, lead by oil and copper, fared poorly today. Still, I would like to have seen silver hold it together a little better. In particular, the fall off a cliff around the middle of the New York session did not inspire a lot of confidence that further short-term weakness can be successfully avoided. Perhaps this is the beginning of the last pullback before a march to historic highs. Or maybe it is the beginning of a selloff to long-term chart support at substantially lower prices. I'm prepared for both scenarios although my bet is on the former.

I want to highlight an observation by Ted Butler today in his discussion of Increasing COMEX Inventories. Mr. Butler states, as he has before, that an increase in silver at the COMEX warehouse should not be seen as a bearish sign of a supply overhang but rather as a bullish sign of silver coming out of hiding, or perhaps even an indication that silver is needed to meet above-normal deliveries in the May contract (which to me would be a bullish sign). Then Mr. Butler goes on to speculate that perhaps the COMEX is requiring commercial shorts to back their positions with more physical silver in the warehouse as opposed to paper silver.

Well, I have been stating for a while that a substantial increase in COMEX silver should indicate that there might be fireworks during the next delivery period. Yet I can't take full credit for having made this observation because it was Mr. Butler's own prior writings that gave me the idea to view the situation from such a perspective. So the credit should rightfully go to Mr. Butler.

With respect to a possible crackdown on COMEX shorts, Mr. Butler's work comes right on the heels of my own commentary from April 20 in which I pointed out one of the only documented instances where a paper silver position not providing for physical silver (thus leaving the short naked against forced delivery) might be used by commercial shorts on the COMEX. Interestingly, this paper silver has been arranged courtesy of the U.S. Mint, custodian of the U.S. gold and silver reserves that for the first time have been verified by an Independent Audit. More to the point, my daily commentary from April 20 discussed how the COMEX likely monitors and adjusts the types of hedging activities that qualify for commercial designation. Here is a relevant portion of what I said:

"None of this means that the COMEX does not carefully monitor the hedges used to obtain commercial designation since the very survival of the exchange depends on it. Similarly, the COMEX will undoubtedly act during wild market conditions when such hedges might be considered dangerously excessive. In such a scenario, some positions may lose commercial status."

Clearly, another alternative is that commercials might have to substitute hedging contracts that provide for physical delivery of silver in the near-term -- or even require commercial traders to deposit physical silver at warehouses as Mr. Butler speculates. In any case, Mr. Butler seems to have given some validity to my contention that the COMEX is actively reviewing the hedging activity of commercial traders in silver in order to protect the exchange from default. This could be an important factor previously not recognized by many players in the silver market given that the lenience or strictness of the COMEX stance toward what qualifies as a hedge would undoubtedly have a very substantial effect on the presumed supply of silver available to be shorted via futures. Seen from this perspective, some of Mr. Butler's allegations begin to make sense to me even though he might not have all the pieces of the puzzle in the right place. In particular, I don't believe the concentration of open interest in a few commercial short traders means much more than the likely domination of the U.S. silver market by a few bullion banks.

What may really matter, it seems to me, is the type of hedging activities that COMEX officials permit these bullion banks to use in their commercial-designated trading of futures. Clearly, the shrinking supply of physical silver during the past two decades has meant that commercial shorts have increasingly relied on forward contracts. And perhaps they have even relied on pure paper silver such as the contracts with the U.S. Mint, a practice that leaves them naked -- not to higher prices, mind you, but certainly to forced delivery. By forced delivery, I mean a particular market condition in which the vast majority of long positions stand for delivery instead of rolling their spot month contracts to a future date. Although this has never happened, not even during the Hunt Bros. episode of 1979-80, could it happen in the future? Sure, according to Prof. Fekete, at the exact moment when gold and silver regain their universally-recognized monetary status. Just as certainly, the gold and silver basis will be there to light the way.

APRIL 23 2007 4:50PM - Silver Wheaton is on a roll, just announcing this afternoon that it has acquired Silver Production from European Goldfields for a fixed price of $3.90 (subject to 1% annual inflation adjustment after 3 years) via an up-front payment of $57.5 million. The production will come from the lead-zinc-silver Stratoni mine in northern Greece. Once again Silver Wheaton's revolutionary business model, one that I had prematurely started to write off a few months ago, has taken by-product silver away from the commercials who would have loved to use a forward purchase to hedge a short position on the COMEX and elsewhere. This is a very powerful development for both the silver market and Silver Wheaton coming so close on the tails of the Penasquito deal announced just this past week. Everything seems to be coming together for both silver the metal and Silver Wheaton.

APRIL 23 2007 2:30PM - An e-mail from a fan (not!):

Are you really willing to trust KPMG with an “independent” audit?  Perhaps there is a reason this firm was selected.  If this doesn’t raise red flags, you need to do a little more research into this supposedly reputable firm.  Here’s a link to help you out.

http://en.wikipedia.org/wiki/KPMG_tax_shelter_fraud

The well known quote “Who will watch the watchers?” perhaps should be “Who will audit the auditors?”.  Can anyone say “conflict of interest”?

THE END

My reply:

**********

So, let me see if I understand the latest conspiracy:

KPMG ran a supposed tax shelter which allegedly cost the IRS billions. The Justice Department decided to go "easy" on KPMG with respect to the IRS in exchange for a sham audit of gold reserves under the custody of the Treasury Department (via the U.S. Mint). It's so obvious, how can you possibly argue against that? Don't you know the world turns on favors?

Never mind the $450 million in fines, numerous criminal prosecutions and civil lawsuits, monitoring program, etc. They were just slaps on the wrist, really!

Don't worry that the Justice Department is allegedly trading favors within the same division of government; namely, the IRS Commissioner reports to the Treasury Secretary! It's to be expected considering what a crook Alberto Gonzales -- the nation's top law enforcement officer -- is!

Forget about the fact KPMG and many former tax partners continue to face intense prosecution from the Feds; you should see what a mess there would be if the gloves came off!

You see, conspiracies are malicious business and you can never tell if your "favor" is going to soothe or sting. Either way, KPMG appears to have become the latest stooge of the gold cartel.

APRIL 23 2007 12:30PM - Silver zoomed past $14 today without skipping a beat even as the dollar was up and gold struggled. There is very strong physical accumulation currently with possibly 2 or even 3 new silver ETF's on tap as discussed in the excellent article by Roland Watson, Bring on the Empty ETFs? Mr. Watson is absolutely correct to state without hesitation that Barclays' silver ETF, the iShares, should be trusted to be backed by physical silver, despite the doubts being raised from various corners, the latest of which is Jason Hommel (How to Buy Silver, & Avoid Getting Scammed). Forgetting everything else, there should be only one reason needed to have a high degree of confidence that the silver is there: PwC, one of the Big 4 CPA audit firms, issued an unqualified opinion on its audit of the ETF's financial statements. In response, some people may allege that the latest Prospectus for the ETF has removed the term bullion in reference to the silver. Even if that's true, who cares? Here is how PwC describes the silver on the ETF's balance sheet:

"Silver bullion inventory (fair value of $1,562,765 and $18,278, respectively)(Note 1A)"

Furthermore, there is no disclosure of derivatives, contracts or liabilities involving the silver or otherwise. Therefore, PwC is staking its professional reputation on the silver being there, in allocated form (at least as of March 19, 2007, the date of PwC's audit report). Call it bullion or poppycock, this is physical silver. And while there should be absolutely no reason to avoid an investment in the ETF on the basis of paranoia, there are legitimate reasons for steering clear unless there are simply no other options, unless you understand all of the tax and market implications, and unless you do not believe a default in silver is in the cards. In this sense, Jason Hommel and James Turk are essentially correct: don't buy the ETF thinking that it will be there for you during a financial crisis that makes silver and gold (the physical stuff, in your hands) truly shine.

Okay, back to the important stuff. Despite the non-existent "confidence issue", the silver ETF surged forward last week and is now holding 136 million ounces of silver bullion. At the same time, the COMEX added 3 million ounces last Friday and has now reached over 131 million ounces of silver. At this rate, the combined total silver bullion held by these two largest of holders will reach 300 million ounces in a matter of weeks, and one truly has to wonder where the 2 or 3 upstart ETFs and/or bullion funds are going to get their own silver. Not only that, we have to consider the smaller stockpiles held at placed like Central Fund of Canada which are also growing.

I believe the pieces are now in place for silver to make a very substantial leap upward in price over the course of a few weeks as the pressure on the physical market seems to be mounting. Today's market action was a good indicator as buyers chased the price higher. Once again, I will state for the record that $25 silver in the next couple of months would not be a surprise; in fact, at this point I would be surprised if silver did not make a credible attempt to take out that number. So why am I still cautious on the short term? Basically, I believe another quick correction is in order, one that would recharge the current rally that is getting both long in the tooth and very top-heavy. For example, COMEX open interest (futures and options combined) has climbed back above 150,000 contracts without much of an increase in silver prices. Of course, this could indicate that the shorts are drawing a line in the sand around $14, but it could just as well mean that the window is not yet open for the pile-on effect to drive silver to the stratosphere. And of course some people are bound to fall off the pile as they wait for that window to open, creating the likelihood of (hopefully just) one last pullback before a historic rally can begin. Such a rally, should it materialize, could very well mean that this is the last time we might have the opportunity to buy silver at the "low" price of $14.

In stock news, Garibaldi Resources, one of the stocks I mentioned a few days back as a new silver player, was written up today by Bob Moriarty of 321gold. Predictably, the shares took off given the small market cap. The company has a long way to go before proving up any resources and that will likely present some future buying opportunities but given the large land position and the aggressive approach, it wouldn't be a bad idea to own it if you are looking at gaining exposure to grassroots exploration success in one of the world's greatest gold and silver mining regions. [I own shares of Garibaldi.]

I also wanted to follow up on Silver Wheaton which at long last has negotiated a deal with Goldcorp over the massive Penasquito silver-gold deposit which will allow Silver Wheaton to acquire 25% of the silver production for a fixed price of $3.90 (adjusted for inflation) plus an up-front payment of US$485 million. That is a lot of money, but Silver Wheaton is getting 427 million ounces of silver in all resource categories combined, essentially doubling Silver Wheaton's resource base. Another interesting development is that Silver Wheaton will finance this deal using bank debt, creating even more leverage (and some risk) for shareholders. I note that Silver Wheaton sports a $2.5 billion market cap and therefore it would not have been a big deal to finance this deal with equity, resulting in around 20% dilution. The fact that Silver Wheaton went with debt shows a high degree of confidence along with a keen desire to continue increasing shareholder value. In any case, this deal should propel Silver Wheaton forward while removing a lot of arrows from the silver shorts' quiver. [I own shares of Silver Wheaton.]

APRIL 20 2007 1:30PM - Encouraging comeback today, especially by silver.

Q: How can the COMEX guarantee the sanctity of the delivery mechanism underlying silver futures contracts if commercial shorts are permitted to use hedges that clearly do not provide for the delivery of physical metal?

A: Ultimately, the COMEX only guarantees that delivery conditions will favor exchange solvency (i.e., the ability of trapped shorts to roll spot month contracts). Otherwise, there is a risk that the exchange may go into default, the avoidance of which is the number one priority. Fairness to any particular group of traders comes in a distant second. This doesn't mean that the COMEX inherently favors one group of traders over another. It's just that sometimes the survival interests of the exchange align with the trading interests of a certain group of market participants. For example, the exchange wants to encourage trading volume and open interest during normal market conditions and will therefore tend to tolerate the commercial designation of hedges not backed by physical silver ready for immediate delivery during the contract month. This obviously favors the commercial shorts since it gives them a larger supply of silver to hedge. This doesn't mean the silver isn't out there, just that the commercial short may not be able to take physical possession of such silver to meet delivery requirements on the COMEX. Additionally, there is the risk that the hedged silver is already accounted for. An example is the use of leased silver to back a hedge. Clearly, such silver must be delivered at some point to the lessor, who may or may not make it available to the market. None of this means that the COMEX does not carefully monitor the hedges used to obtain commercial designation since the very survival of the exchange depends on it. Similarly, the COMEX will undoubtedly act during wild market conditions when such hedges might be considered dangerously excessive. In such a scenario, some positions may lose commercial status. Higher margin rates and lower position limits will apply. Observant traders can and have taken advantage of this type of situation in the past. But they would also know the risks of getting carried away because the COMEX at some point would have to moderate its cracking down on commercials in order to prevent a short-covering stampede. The substitute strategy would be the now-familiar ad hoc rules that encourage contract liquidation, as has occurred in silver in the past and palladium more recently. Thus, the tide will once again turn against the longs. The commercial shorts understand the concept of shifting regulatory focus very well and take full advantage of it in their trading. For the rest of us, the best way to deal with this reality is to stop whining long enough to learn from the professionals.

APRIL 19 2007 1:30PM - NEWS FLASH! U.S GOLD RESERVES AUDITED BY KPMG.

APRIL 19 2007 11:30AM - Another ugly day for silver technically speaking after a 30 cent drubbing from which the white metal could not recover. Gold also ended down but only to the tune of $4.20 and copper lost less than 1%. All of this was in spite of a weak dollar with an apparently overheating Chinese economy getting all the blame. Once again, the logic of the market makes absolutely no sense but that doesn't really matter since the market is always right, isn't it?

Today, I'm going to dispel a myth that the COMEX and ETF silver bullion stocks have not been independently verified as some people claim. James Turk's recent piece conveniently ignored this point (yes, still working on a reply). Regardless, I'm going to state my highly confident opinion here and now:

COMEX AND ETF SILVER BULLION IS ANNUALLY VERIFIED BY INDEPENDENT AUDITORS. THE SILVER IS THERE. THE END.

Of course, this is probably nonsense if you are so jaded that you won't even trust independent auditors to tell the truth about how much silver is stored in a vault. If so, do you also grow your own food because you don't trust the safety of supermarket produce, keep all your money under the mattress because you don't trust any banks, home school your kids because you don't trust teachers, never let your wife out of your sight because you don't trust her fidelity and never leave the house because you don't trust the people who drive cars? What about those 100 oz. silver bars of yours? Have you drilled them like Swiss cheese to make sure they don't contain lead plugs? Have you tested every piece of gold and silver you own to make sure they are 100% genuine?

Now the facts. Please let me know where my reasoning has gone awry.

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

Report of Independent Registered Public Accounting Firm

To the Sponsor, Trustee and Shareholders of

iShares Silver Trust:

In our opinion, the accompanying balance sheets and the related income statement, statement of changes in shareholders’ equity (deficit) and statement of cash flows present fairly, in all material respects, the financial position of the iShares Silver Trust (the “Trust”) at December 31, 2006 and April 21, 2006, and the results of its operations and its cash flows for the period from April 21, 2006 (date of inception) to December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

San Francisco, California

March 19, 2007

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

New York Mercantile Exchange, Inc. Online Rulebook

Metals Rules - NYMEX Division & COMEX Division

7.05 Licensed Warehouses and Vaults

(f) Each licensed or designated warehouse and vault shall cause an independent auditor to conduct an annual inventory of all stocks held and prepare a report certifying that the records of the warehouse or vault accurately reflect the stock held by the depository. Each report shall be filed with the Exchange within thirty days of the date reflected by the inventory.

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

In the case of COMEX warehouses, I suppose one might need to file a Freedom of Information Act request to receive copies of the independent audit reports and I highly encourage the ultra-suspicious type to do so. As for me, I have more important things to do like make money in the silver market.

APRIL 18 2007 4:00PM - Not the prettiest action as gold and silver struggle with overhead resistance while COMEX and CBOT open interest grow day by day. Silver in particular is not acting very convincingly as it has failed to keep up over the past few weeks with its poor cousins, the base metals. Regardless, we are getting close to the point where the precious metals will need to move in one direction or the other. As I'm not convinced it won't be down, I will be keeping my short-term mental flag in caution territory for now. And by "down", I don't mean a brief drop halted with conviction by aggressive physical buying (one more instance of which would be nice to see) but rather an "ugly" drop of $1 or more over the course of a couple of sessions.

On a brighter note, the ETF and COMEX continue to add silver with the combined total now over 260 million ounces. This level of identifiable stocks hasn't been seen in a number of years, perhaps all the way back to 1997 before Warren Buffett got involved in silver. Since we know the refiners aren't fabricating a lot of good delivery bars for investment purposes these days, what this effectively means is that a higher silver price is drawing metal out of hiding. And that is a good thing considering the opacity of the silver market.

Meanwhile, lease rates, basis and futures spread remain near historical norms. This is not at all unusual as we could be witnessing the calm before the storm -- price squeezes and liquidity crunches in particular are often preceded by relative calm. On the other hand, there is always the possibility that substantial unidentified stocks of silver are patiently being held on the sidelines with occasional bouts of "profit taking" supplying the market with enough silver to whet, but not quench, investors' thirst (this may apply to gold as well).

Focusing on the basis for a moment, yesterday's reading clearly shows the underperformance by silver compared to gold during the past few sessions. In fact, yesterday's was the largest contango reading for the silver basis since I've been tracking it (other than a brief spike a couple of months ago caused by option expiration). To be clear, I don't think this is necessarily bearish for silver as it could simply indicate that speculative interest (i.e., demand for futures) is building faster than physical buying. But if physical buying can match speculative interest at some point (as is the case with copper and base metals at present), silver prices may yet erupt in fireworks.

As a final observation for today, a rather useful perspective was recently provided by GFMS when they predicted that 2007 will see the highest average gold price on record, and that includes 1979-1980. Indeed, several commentators have recently pointed out that the gold/silver spike in January of 1980 was fueled by somewhat unusual events (Iran hostage crisis, Soviet invasion of Afghanistan, Hunt Bros. attempt to corner silver market). While we may not see anything that intense anytime soon barring an attack on Iran, the fact is that gold is on the verge of history when the average price is considered. For example, did you know prior to last May's high, cash gold had only surpassed $680/oz. on a closing basis a total of 29 times? During the current bull market, it has already achieved that feat 15 times, including today. And this way of looking at things gets even more interesting at $700/oz. -- only surpassed on 9 days previously as compared to 3 days so far during the current bull market! So 6 days of closing above $700 and gold will have put the ghost of 1979-80 in the past forever. Silver has yet to come this close to the threshold of history but undoubtedly it soon will.

APRIL 16 2007 10:30AM - Silver over $14, gold closing in on $700, this week could be exciting. Unfortunately I will be extremely busy over the next two days with little time to update. Fundamentals still look strong as the ETF will likely be adding more silver this week. Yes, I am still working on the reply to Mr. Turk's commentary of last week. I have also updated all charts through today's data. Hope to post in the next couple of days.

APRIL 12 2007 10:30AM - With the dollar down, silver and gold had a tough day as they clawed hard just to break even (marginally failing to do so) after a bout of profit-taking earlier in the day. Buyers seem to have temporarily dried up as even the silver ETF has gone to a NAV discount without new silver being added to the fund, something that has not happened in quite a few days. In addition, COMEX warehouse stocks shrank by about 650,000 ounces of silver as eligible bullion was withdrawn from ScotiaMocatta. In general, a single day of such odd behavior should not be troubling although if the dollar decides to stay down and the precious metals fail to rally in the next day or two, it could mean that overhead resistance is more formidable than I previously thought.

In silver stock news, Aurcana announced today that it has officially commenced production at its La Negra project in Mexico, where the 1000tpd mill has now been refurbished and is ready for the 50,000 tons of ore stockpiled over the past several months. Shipping of concentrate is expected to begin within a few weeks. Thus, Aurcana has today joined the growing list of Mexican silver producers. And although this development was expected, the company's shares are nonetheless enjoying a rally of 17% or so on the news, marking an all time high. I highlighted Aurcana on November 3rd of last year as one of a couple dozen silver stocks that could do very well in the following few months, and the fact that it has tripled since then should be as clear a demonstration as one can find of the gains that are possible as junior explorers graduate to junior producers.

I am still working on my rebuttal to Mr. Turk's recently publicized doubts about the integrity of the silver ETF and hope to have it ready before the week is out.

APRIL 11 2007 11:30AM - After a nice rise yesterday, gold and silver decided to take a break, closing near unchanged levels today. The silver ETF has added another million ounces while the NAV continues to sport a premium, indicating that ETF investors not only trust that it is backed by real silver but they are still on the lookout for more shares. I mention trust because I have gone through James Turk's Can We Trust the Silver ETF? and found it to be full of holes. A detailed response by yours truly is forthcoming, but in the meantime I would like to point out that even though the reasonable person can trust the ETF to hold physical silver, that doesn't mean it is a good substitute for a core investment in bullion. In this important respect Mr. Turk is completely right even though he arrives at the answer using faulty logic: the silver ETF is suitable for trading, speculation and stock portfolio allocation, not as part of a core holding of precious metals, unless of course the investor (mutual funds, etc.) for some reason cannot invest in the real thing itself. My forthcoming paper will explain in greater detail.

Precious metal stocks were generally weaker today in sympathy with the general equity markets. Notable standout silver stocks making moves higher included SNS Silver, Sterling, Silver Quest, Mines Management, Bear Creek, Excellon, Apogee, Canasil, Genco and Avino. The common ground among these stocks is that either they have recent positive news out or they are on the rebound from a significant recent beating. In any case, I mention this group because it represents a random but nicely diversified cross-section of junior silver stocks. A portfolio containing this junior group (or another group selected at random) should do at least as well over the medium to long term as any of the mainstream silver stocks, keeping in mind that the trading liquidity of juniors in the short term is inferior.

APRIL 9 2007 12:00PM - Things looked promising today until falling oil and a rising dollar got the better of gold, and although silver valiantly hung in there, it too succumbed after hours. The shiny white stuff did, however, show its mettle by outperforming gold on a decline, something that it rarely does. In recent weeks and months, a minor drop in gold like today had silver longs running for the hills resulting in 20, 30 or even 40 cent declines. That did not happen this time as silver passed its first test with flying colors. Now I am really curious to see how silver does at its "final exam", i.e., a more serious drop in PM prices. For now, I will maintain a modicum of caution by still keeping a (declining) store of dry powder, investing in the more liquid equities and selectively placing stop-loss orders on a portion of my growing portfolio.

As predicted last week, the silver ETF has continued to add metal as it now holds almost 133 million ounces of bullion. Meanwhile, the NAV remains at a moderate premium, indicating that more additions are likely in the near term. In fact, the last couple of times, the NAV did not even bother to fall to a discount as hungry investors apparently gobbled up all available ETF shares as soon as they became available. This continues to be a very bullish fundamental for silver in the short term.

COMEX warehouse stocks also continue to increase, standing at more than 127 million ounces, which is a level not seen in over a year. On a combined basis, the COMEX and ETF now account for almost 260 million ounces of silver, a number that most silver "experts" seem to believe is just about as much silver as can be easily had. Not wanting to be mistaken for an expert, I won't comment on this situation myself other than to note that if they are right, much higher silver prices must shortly follow. If they are wrong, silver prices may still rise but probably not on a sustained basis and not without a substantial addition to the stockpiles. Time will tell; until then this is purely a guessing game.

Several silver stocks are roaring ahead today, including a selection of those mentioned here recently such as Endeavour Silver (in a race with First Majestic and others to be the next world-class primary silver producer), Sterling Mining (now seemingly very intent on bringing the Sunshine Mine back into production ASAP in spite of recent clouds of doubt kicked up by backers of SNS Silver, which acquired for a song the Crescent Mine across the street from the Sunshine) and Silvercorp of China (a potential long term Ten Bagger according to my methodology). I consider these three companies special plays on silver mining, each with its own risks and rewards along with the ideal investor temperament for which each is best suited. For example, I recently noted that Sterling might be an interesting opportunity for speculative buyers when it got beat down to $2.75 in the wake of SNS Silver's highly-promoted arrival on the scene. Now, trading over $4.00, it is probably not as interesting an opportunity for speculative buyers (who would probably be best advised to book some profits) as it might be for patient, long-term investors looking to start accumulating a position with the understanding that some trials and tribulations still likely lie ahead.

APRIL 5 2007 2:30PM - Silver has achieved technical breakout on several chart formations, powering ahead today without much support from gold. The dollar looked weak but I wouldn't count it out just yet. No matter, it looks like gold can rise near $700 and silver well over $14 without the dollar breaking much lower.

Although I have increased my exposure substantially and have exhausted quite a bit of dry powder I've had in store since last summer, I am not quite ready yet to turn unabashedly bullish on the immediate prospects for silver. First, I am looking for silver to test its mettle against the inevitable down day or two. Should things develop at that point as I expect, I am prepared to go full-on green. What this means is that I will have a high degree of confidence that silver is going to be moving significantly higher in the next couple of months, not just $15 but much higher, perhaps as high as $25.

Not much on the fundamental front today as both COMEX warehouse and silver ETF suffered minor drawdowns (in the case of the ETF, it was due to payment of administrative fees). The ETF does, however, now sport a NAV premium of 1.49% so if recent history is a judge, we will see healthy additions in short order. Meanwhile, the silver basis actually turned slightly negative yesterday as the gold basis merely shrank, giving us yet another nonsensical reading. Clearly, however, the recent silver price action vs. gold is having some impact on the basis. In the immediate term, I view the silver and gold basis as telling us that silver will be outperforming gold (yes I know, that is a no-brainer during most PM rallies).

On the silver stock front, many shares are performing very nicely with some recent standouts such as Sterling Mining of Sunshine Mine fame. Sterling has gotten some recent attention from a newsletter or two and it appears that the progress toward mine startup, the excitement around SNS Silver and the Crescent (now somewhat abated), and the possible acquisition of the nearby Bunker Hill by a mining interest intent on development, have rubbed off on a few old shareholders and new investors. I pointed to the relative value of Sterling versus SNS Silver back in January and I believe there is still some room for Sterling shares to run, but investors do need to be aware of the risks. Among these are a pending lawsuit and disclosure issues which could create bad publicity in short order causing panic among investors and possibly punishing the stock down an elevator shaft. For this reason, I believe Sterling continues to be for speculators only: yes, the rewards are high but so are the risks. Of course, if you view major price weakness as an opportunity to average down, this may be the perfect stock for you. With patience, long term (in my opinion 3+ years) shareholders should be doing very well after some scary intervening moments.

I am going to close today by listing a few companies which may qualify as primary or secondary silver stocks -- not currently on my "official" list -- as a result of recent transactions or discoveries. This list is not an endorsement or in any particular order. I am simply pointing out some stocks moving into silver that you may not have heard about. I hope to write about many of these in the next few weeks and months.

Royal Gold

Battle Mountain Gold

Canadian Royalty

Garibaldi Resources Corp.*

Alberta Star

Alma Resources

Pershimco

Alexco

Oro Silver

Colibri

Enterayon

South American Silver Corp.

Exmin

Goldcliff

Marifil

DIA BRAS

Normabec*

Hi Ho Silver

*I currently own shares.

APRIL 4 2007 2:30PM - Silver and gold moved higher today as the dollar dropped although my charts seem to show that gold and silver moved first. If this is correct, could it be possible that the dollar went down because gold and silver were moving higher? At some point in the future, this in fact may be the way things work in the financial markets with gold and silver clawing their way into monetary contention. As for now, it was probably just an anomaly.

In any case, I continue to see positive fundamental signs for higher gold and silver prices. On the technical front, things are turning increasingly positive as well. The silver ETF has moved back to premium and if the past few weeks are any judge, we should see more silver being added in the next day or two. On the COMEX front, still more silver is being accumulated in the eligible category over at ScotiaMocatta. My updated chart clearly shows that something different is going on here. Although I don't have the historical data assembled to go back further than November of last year, my experience has been that a buildup of eligible silver prior to a contract month (May in this case) usually means that a lot of silver may soon be changing hands, typically accompanied by fireworks. I was anticipating this type of development in February for the March contract, but it is beginning to look like the real action is set for May.

I have continued to add to my silver positions in the last two days as the main risk right now may be the failure to participate to the upside of what may turn out to be the most remarkable move of this silver bull to date. There is certainly risk to the downside so getting carried away, for example, with outright futures positions, is too dangerous even for speculators. But the rewards of being near fully invested in quality, relatively conservative silver plays are probably going to exceed the costs over the next few months.

In the case of gold, the move will probably be no less remarkable although likely nowhere near silver percentage-wise. At the top of the current move, I would not be surprised to see a gold/silver ratio of 35 or less. At $25 silver, that implies a gold price of $875, although both may be reached on spikes of very short duration.

APRIL 3 2007 12:15PM - Silver stronger today than gold apparently based on some report that industrial demand for silver is growing, but the data cited is from 2005! Both precious metals are actually holding up rather nicely given the drop in oil prices and rise in the dollar, although one might expect the metals to give in somewhat during the next day or two. On the other hand, it could be off to the races at any moment.

My own attempt to increase leverage to short-term silver prices has been hobbled by typical fear but I have managed to buy a respectable number of call options while also adding to a select group of junior silver producers. I have also decided that it may not be the ideal time to deploy any spread trades at the moment since silver prices will probably be on the move for a while before the futures spread (which I track as a market indicator on the home page) will start to shrink appreciably. Right now, I am looking at the long May 2007/short December 2008 spread which carries a premium around 90 cents ($4,500 per contract) to the sell side. For an idea of just how extremely profitable this spread trade can be when executed at the right time, a similar spread around this time last year traded at a premium of 30 cents to the buy side ($1,500 per contract). Should we see a repeat performance, each spread position could be worth more than $6,000 in profits. All for $108 in margin, meaning that on a committed capital basis, gains of 6,000% are very possible. Of course, there is the risk of the spread moving against the trader by as much as 40 cents or more, meaning that anyone holding this position should be prepared to lose as much as $2,000 per position in the worst case. In practice, one would want to set a stop loss around 100 cents to the sell side (the level as of early December 2006) for a maximum loss of $500 per contract. Definitely not for the faint of heart but still much safer than holding a futures contract outright.

I wanted to revisit the strange happenings at the COMEX warehouse by noting that ScotiaMocatta received approx. 3 million ounces of eligible silver yesterday while around 3 million ounces of registered silver were removed from HSBC and Delaware Depository. What this means is that somebody likely acquired 3 million ounces of silver by delivery under the now-expired March contract and decided to immediately withdraw the silver from the COMEX warehouses. At the same time (perhaps the same party?), somebody deposited COMEX-eligible silver with ScotiaMocatta but has not sought a warehouse receipt for this silver. I am just speculating here, but it is possible that this new eligible silver delivered to ScotiaMocatta, along with the 5 million ounces of silver declared as eligible last Friday, belongs to the same party/entity who may be preparing to make a large delivery on the upcoming May contract. Of course, this party could have any number of reasons for doing what he/she is doing, but time and again a rapid increase in eligible bullion stocks has historically translated to a large number of contracts being subsequently delivered. Recall from my prior discussion that it is the short side which controls open interest, so a short intent on sellling silver by standing for delivery will get his/her wish -- the only question is the price. This episode bears watching, especially in light of the possible imminent move in silver.

APRIL 2 2007 2:30PM - After a morning swan dive, silver and gold recovered nicely to around breakeven with gold leading the way. Some lame explanations are floating around for the early selloff but to me it looks like normal speculative/trading shenanigans.

The fundamental picture continues to improve for silver. Let me count the ways.

First, COMEX open interest is moderating and while still high, there is plenty of room for new speculative money.

Second, COMEX warehouse stocks jumped by 5 million ounces on Friday due to a mysterious "adjustment" at the ScotiaMocatta depository. I called ScotiaMocatta and it should come as no surprise that they have no comment. I have been closely tracking the warehouse reports and in the last 6 months or so, ScotiaMocatta has typically held around 20 million ounces of silver with not much movement although the Bank of Nova Scotia, whose clients presumably store silver at ScotiaMocatta, has been active in deliveries on both sides.

Based on my understanding, an adjustment in the warehouse report can be due to any number of reasons other than the receipt or withdrawal of metal from the warehouse. That is, the "adjusted" bullion may in all likelihood be at the warehouse the whole time. I believe one common reason for an adjustment might be bullion moved between different types of storage accounts, such as private segregated storage (no COMEX warehouse receipt) to unsegregated or "eligible" storage (allocated or pooled COMEX eligible account). ScotiaMocatta would not confirm this.

Note that bullion eligible under COMEX specs must go through inspection, weighing and sometimes re-assaying such that not all potentially-eligible 1,000 oz. bars stored at a COMEX-approved warehouse will actually be reported as eligible -- only the bars which have been verified. For example, a client may have stored his/her silver at the warehouse for several years in a private storage account. The client may have rolls of American Eagles, 100 oz. bars and perhaps some 1,000 oz. bars that could potentially be eligible for COMEX registration. Once verified, but not until then, such bars are automatically counted as eligible. Because silver already at the warehouse requires additional steps of verification in order to be considered eligible (that is, "eligible" for becoming registered) as compared to newly fabricated bars arriving from COMEX-approved refiners, newly eligible silver of the former type may be categorized as an "adjustment" in daily reports (ScotiaMocatta did confirm that the COMEX warehouse report is the product of COMEX and the warehouse takes no responsibility for how activity is being reported).

Registered silver is simply eligible bullion listed on a COMEX warehouse receipt, which is evidence of exchange acceptance of bullion for delivery against futures contracts. The warehouse receipt includes the serial numbers and weights of the registered bars and so by definition is an allocated (although not necessarily segregated, which involves physical separation) form of silver storage. Registered bars are subject to a special fixed storage fee that is different from other storage accounts, which in contrast are typically charged a percentage-based fee on the value of the stored metal. Note that after being registered, bullion cannot be returned to private segregated accounts or other forms of storage unless the warehouse receipt is redeemed (typically, by removal of the silver from the warehouse, although I suppose the silver could also be moved into private segregated storage at the same warehouse).

There are a number of reasons why someone might want to (or not) hold silver in a registered vs. unregistered format. For example, silver held in private storage is owned outright while silver held as COMEX registered is owned by virtue of the warehouse receipt. Warehouse receipts are transferable -- although there is no "market" for them -- while private storage is not. As mentioned above and below, storage fees might be another consideration.

Could this 5 million ounce "adjustment" at ScotiaMocatta involve a long-term holder who is getting ready to sell his/her silver? Dealers would very rarely keep silver in private segregated storage because it is rather expensive (1.5% - 2% per year) so if the adjustment is due to existing silver being moved into COMEX-eligible storage, the holder is likely to be a wealthy individual or institution. Makes you wonder how much more silver is stored at these warehouses in a way that does not get counted in the COMEX warehouse reports.

Now back to more fundamental reasons to be excited about silver.

Third, the silver ETF continues to gobble up bullion as almost 132 million ounces were in the brig at the end of last week. More importantly, the NAV did not fall to a discount as apparently ETF investors remain unsatiated.

There are other reasons as well, and few arguing the other way. One is the silver lease rates, which continue at very low levels indicating that silver available for lease is plentiful, or alternatively, demand for silver leasing is tepid. There are, however, a number of factors which effect the leasing market including the requirements of industrial consumers and alternative sources of silver supply and financing, so that lease rates are not a very useful indicator by themselves.