Should I bail? (Updated)

Yesterday I wrote how we would probably see Silver, as options expired today, drop to $45.50 or even $45.00.

That prediction played itself out and Silver even dipped into the $44.80 region.

The high prices achieved over the weekend were nominal highs. Gold reached $1,518.30 per troy ounce, a nominal record, while silver climbed to $49.79 per ounce, its highest nominal level since the short term parabolic spike in 1980.

By dropping over $5, Silver has suffered a 10% correction and has people asking, "Is it time to bail?"

The fear, of course, is that Silver will quickly collapse in the same fashion it did after it's dramatic run-up in 1980.

But as I said to two colleagues last night, 2011 is not 1980.

In 1980, Silver's rising price was the result of the Hunt brothers manipulating the price upward.  When their ability to manipulate the price ended... Silver collapsed.

In 2011, Silver isn't being manipulated upward.

Quite the opposite.

In 2011 Silver's price is being manipulated downward via the price manipulations of JP Morgan and their unbacked paper silver contracts (their massive silver short position is a situation unparalleled in any commodity).

When the ability to manipulate the price ends, Silver will explode upwards not collapse.  And the pressures on that manipulation are so great that the price is rising dramatically despite the shorts.

As analyst Dan Norcini has said,  "Nothing will unnerve the paper shorts more quickly and do more to undercut their confidence than to strip them of the real metal and force them to come up with more hard bullion to make good on deliveries."

And it's the demand for the physical metal which is the key here.

Should you bail on Silver right now?

Ask yourself what, if anything, has changed to stem the demand for physical metal? 

• Has the United States resolved it's massive debt situation?
• Are China et al prepared to buy huge amounts of US Treasuries again?
• Have the PIIGS (Portugal, Ireland, Iceland, Greece, Spain) resolved their debt issues?

The answer, of course, is NO!

All that has happened is that unbacked paper short contracts to the tune of almost 10 years worth of worldwide annual mining production have been dumped on the market in the last week.  This has been combined with a hiking of margin requirements on those who use leverage to trade large amounts of Silver, forcing them to close out positions because they suddenly don't have the cash to meet the margin requirements foisted on them in the midst of a trading day.

It's a desperate, albeit temporarily successful, attempt to keep the price of Silver down. But has it stemmed the demand for physical Silver?

Consider Bill Gross's observations this week (Gross is pictured above).  The world's biggest bond manager (PIMCO) came out with these stunning comments:

• "Just as Charles Ponzi needed donuts to turn back a suspicious crowd of investors, the Fed needs “donuts” in order to fill the bellies of the literally millions of investors worldwide who worry about the alarmingly large U.S. budget deficit and the impact that the U.S. debt dilemma could have on their Treasury holdings...Their collective buying has created what we believe to be a profit illusion with many investors mistakenly believing they can continuously reap profits from perpetually falling bond yields and rising bond prices, just as they have had opportunity to do over the past 30 years, amid the great secular bull market for Treasuries and the bond market more generally...For many reasons, this “duration tailwind” for Treasuries can’t last, particularly because the United States has reached the Keynesian Endpoint, where the last balance sheet has been tapped."

Gross's comments come from his latest report, The End of QEII: It’s Time to Make the Donuts and it is an absolute 'must read'.

As I have said ad nausem, the financial earthquake we suffered in 2008 was of such breadth and depth that we still do not fully understand, nor appreciate, what has happened.

There is still many acts left to play out.

The foundation for the belief that Silver and Gold will continue to rise are still intact.  But it is going to be a wild roller coaster ride.

Silver's 'correction' will probably end by Thursday (at the latest) and the metals will start a rally that will probably carry on until Friday of next week when Silver will trade back near $50.

Then it will be gut-check time again. 

Many analysts think the metals will roll-over again and you will probably see Silver drop back to today's level of $45.

Everyone will be screaming that we have hit some sort of double-top and the rally is over and that YOU need to get out.

But the critical question will remain: what has changed on the debt front?

Until something does, worldwide demand for Silver as an investment will continue to surge and the price will be forced higher from the simply supply/demand dynamics we have outlined at lengths in other posts.

UPDATE

From COMEX analyst Harvey Organ:

• The total silver COMEX Open Interest surprised everyone, rising from 149,899 to 152,945 for a huge gain of 3046 contracts despite Part A of the raid. Part B was today... The options to purchase a silver contract went off the board tonight. The estimated volume today was very heavy, it came in at a huge 250,247. The confirmed volume yesterday was a monstrous 319,204 contracts. [Note: each contract represents 5,000 ounces of Silver.] This is an all time record volume at the silver comex. If the total Open Interest standing tomorrow is around the same number as today, the bankers will assemble for more [intervention]. They are getting quite exasperated.  

You should also take time to check out this article on Seeking Alpha.

Some excerpts:

• It was only a matter of time. Now the talk of silver price conspiracies has shifted from long buyers to those on the other side of the fence.
• [While] order was reestablished among the short side conspirators [when] the COMEX trading floor opened on Monday morning. After silver prices had temporarily risen to over $49 per ounce during Asian trading, they were beaten down again to about $47 in a flood of newly opened short positions.
• In practical terms, however, the only thing they will have accomplished is to cause a few speculators to lose money while helping well-financed market vigilantes to buy more bars of physical silver for the same money.
• The massive losses that short sellers have been taken has naturally led to some new urban myths. Some now claim that "evil" long side billionaires are out to "ruin" the market. Yet, even the Financial Times article points out the ridiculously paranoid nature of this theory. The author notes that silver prices were rising even as speculative positions at COMEX were reduced by 8.4%. This illustrates that the COMEX is now just a sideshow. A lot of people are simply buying physical silver.
• The silver buyers do include some billionaires, undoubtedly, but most of them are simply folks who realize The banks were ostensibly "selling" and then "storing" so-called "unallocated silver bars" for silver investors. In reality, they seem to have been maintaining a fractional banking system in which only one physical ounce is really purchased for every 100 ounces they supposedly sell.

• Let's go over that again...because once you understand the particulars, the reaction of the price of silver becomes perfectly understandable. 1) Bank sells silver, a very precious item, for big money; 2) Bank doesn't buy the silver it sells, or, if it does buy it, leases out or sells 99 ounces for every 1 ounce in the vault; 3) Bank gets paid "storage fees" from all its customers, even though their silver is not in the vault; 4) Bank profits are equal to 99 times what it sells initially, and then, the value of the stream of storage fees after that. Nice work if you can get it.
• But, then there's the downside. 1) The market might discover your scam and you'll need to deal with investigations; 2) Leverage so high that, if discovered, it is a recipe for disaster; 3) Courts may deem the arrangement a fraud, in spite of disclaimers that say otherwise, and whereby customers waive liability for fraud; 4) the market will inevitably punish you severely with heavy losses after discovery of the scam. 

As Seeking Alpha notes,  "Had the worldwide silver scam remained a secret, suppression of precious metals prices might have gone on forever. But the genie is now out of the bottle and mortal men, not even those who run casino-banks, cannot hope to put him back in. Once it became clear that the bullion banks were leveraged 100 to 1 in a silver based fractional banking scheme, it was only a matter of time before the market clobbered them. That is what is happening."

And that's what why this blog has been telling you. The scam has been revealed and, as a result, Silver has been such a great investment opportunity.

And it's another reason why you shouldn't bail on your Silver position.

Tomorrow I will outline details of that Silver storage scam mentioned in this Seeking Alpha story and how it is that this fraud has become public knowledge.

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