Gold, Central Banks and Canada

CTV's Question Period talks about Gold, Central Banks and Canada's official holdings with Eric Sprott.

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Wed Post #1: An interesting proposal for Silver Miners by Eric Sprott

Eric Sprott, and Sprott Asset Management, had an intriguing message for Silver mining companies in his latest update.

Since we focus on Silver investing on the blog, you might find it it worthwhile reading.

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Silver Producers:
A Call to Action

By: Eric Sprott and David Baker

As we approach the end of 2011, the silver spot price has admittedly endured a tougher road than we would have expected. And let’s be honest – what investment firm on earth has pounded the table on silver harder than we have? After the orchestrated silver sell-off in May 2011, silver promptly rose back to US$40/oz where it consolidated nicely, only to drop back below US$30 within a two week span in late September.

The September sell-off was partly due to the market’s disappointment over Bernanke’s Operation Twist, which sounded interesting but didn’t involve any real money printing. Like the May sell-off before it, however, it was also exacerbated by a seemingly needless 21% margin rate hike by the CME on September 23rd, followed by a 20% margin hike by the Shanghai Gold Exchange – the CME’s counterpart in China, three days later.

The paper markets still dictate the spot market for physical gold and silver. When we talk about the "paper market", we’re referring to any paper contract that claims to have an underlying link to the price of gold or silver, and we’re referring to contracts that are almost always levered.

It’s highly questionable today whether the paper market has any true link to the physical market for gold and silver, and the futures market is the most obvious and influential "paper market" offender.

When the futures exchanges like the CME hike margin rates unexpectedly, it’s usually under the pretense of protecting the "integrity of the exchange" by increasing the collateral (money) required to hold a position, both for the long (future buyer) and the short (future seller). When they unexpectedly raise margin requirements two days after silver has already declined by 22%, however, who do you think that margin increase hurts the most?

The long buyer, or the short seller?

By raising the margin requirement at the very moment the long contracts have already received an initial margin call (because the price of silver has dropped), they end up doubling the longs’ pain – essentially forcing them to sell their contracts. This in turn creates even more downward price pressure, and ends up exacerbating the very risks the margin hikes were allegedly designed to address.

When reviewing the performance of silver this year, it’s important to acknowledge that nothing fundamentally changed in the physical silver market during the sell-offs in May or mid-September. In both instances, the sell-offs were intensified by unexpected margin rate hikes on the heels of an initial price decline. It should also come as no surprise to readers that the "shorts" took advantage of the September sell-off by significantly reducing their silver short positions.

Should physical silver be priced off these futures contracts?

Absolutely not. That they have any relationship at all is somewhat laughable at this point. But futures contracts continue to heavily influence spot prices all the same, and as long as the "longs" settle futures contracts in cash, which they almost always do, the futures market-induced whipsawing will likely continue. It also serves to note that the class action lawsuits launched against two major banks for silver manipulation remain unresolved today, as does the ongoing CFTC investigation into silver manipulation which has yet to bear any discernible results.

Meanwhile, despite the needless volatility triggered by the paper market, the physical market for silver has never been stronger. If the September sell-off proved anything, it’s the simple fact that PHYSICAL buyers of silver are not frightened by volatility. They view dips as buying opportunities, and they buy in size.

During the month of September, the US Mint reported the second highest sales of physical silver coins in its history, with the majority of sales made in the last two weeks of the month.

Reports from India in early October indicated that physical silver demand had created short-term supply issues for physical delivery due to problems with airline capacity.

In China, which reportedly imported 264.69 tons (7.7 million oz) of silver in September alone, the volume of silver forward contracts on the Shanghai Gold Exchange was more than six times higher than the same period in 2010.6.

It was clear to anyone following the silver market that the physical demand for the metal actually increased during the paper price decline. And why shouldn’t it? Have you been following Europe lately? Do the politicians and bureaucrats there give you confidence? Gold and silver are the most rational financial assets to own in this type of environment because they are no one’s liability. They are perfectly designed to protect us during these periods of extreme financial turmoil.

And wouldn’t you know it, despite the volatility, gold and silver have continued to do their job in 2011.

As we write this, in Canadian dollars, gold is up 23.4% on the year and silver’s up 6.8%. Meanwhile, the S&P/TSX is down -12.3%, the S&P 500 is down -5.1% and the DJIA is up a mere +0.26%.

So here’s the question: we think we understand the value and great potential in silver today, and we know that the buyers who bought in late September most definitely understand it,… but do silver mining companies appreciate how exciting the prospects for silver are?

Do the companies that actually mine the metal out of the ground understand the demand fundamentals driving the price of their underlying product?

Perhaps even more importantly, do the miners understand the significant influence they could potentially have on that demand equation if they embraced their product as a currency?

According to the CPM Group, the total silver supply in 2011, including mine supply and secondary supply (scrap, recycling, etc.), will total 1.03 billion ounces.

Of that, mine supply is expected to represent approximately 767 million ounces.

Multiplied against the current spot price of US$31/oz, we’re talking about a total silver supply of roughly US$32 billion in value today. To put this number in perspective, it’s less than the cost of JP Morgan’s WaMu mortgage write downs in 2008.

According to the Silver Institute, 777.4 million ounces of silver were used up in industrial applications, photography, jewelry and silverware in 2010.

If we assume, given a weaker global economy, that this number drops to a flat 700 million ounces in 2011, it implies a surplus of roughly 300 million ounces of silver available for investment demand this year.

At today’s silver spot price – we’re talking about roughly US$9 billion in value.

This is where the miners can make an impact.

If the largest pure play silver producers simply adopted the practice of holding 25% of their 2011 cash reserves in physical silver, they would account for almost 10% of that US$9 billion. If this practice we’re applied to the expected 2012 free cash flow of the same companies, the proportion of investable silver taken out of circulation could potentially be enormous.

Expressed another way, consider that the majority of silver miners today can mine silver for less than US$15 per ounce in operating costs. At US$30 silver, most companies will earn a pre-tax profit of at least US$15 per ounce this year. If we broadly assume an average tax rate of 33%, we’re looking at roughly US$10 of after-tax profit per ounce across the industry.

If GFMS’s mining supply forecast proves accurate, it will mean that silver mine production will account for roughly 74% of the total silver supply this year.

If silver miners were therefore to reinvest 25% of their 2011 earnings back into physical silver, they could potentially account for 21% of the approximate 300 million ounces (~$9 billion) available for investment in 2011.

If they were to reinvest all their earnings back into silver, it would shrink available 2011 investment supply by 82%. This is a purely hypothetical exercise of course, but can you imagine the impact this practice would have on silver prices?

Silver miners need to acknowledge that investors buy their shares because they believe the price of silver is going higher. We certainly do, and we are extremely active in the silver equity space. We would never buy these stocks if we didn’t. Nothing would please us more than to see these companies begin to hold a portion of their cash reserves in the very metal they produce. Silver is just another form of currency today, after all, and a superior one at that.

To take this idea further, instead of selling all their silver for cash and depositing that cash in a levered bank, silver miners should seriously consider storing a portion of their reserves in physical silver OUTSIDE OF THE BANKING SYSTEM.

Why take on all the risks of the bank when you can hold hard cash through the very metal that you mine? Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals. And it serves to remember that thanks to 0% interest rates, banks don’t pay their customers to take on those risks today.

None of this should seem far-fetched. One of the key reasons investors have purchased physical gold and silver is to store some of their wealth outside of a financial system that looks increasingly broken.

The European banking system is a living model of that breakdown. Recent reports have revealed that more than €80-billion was pulled out of Italian banks in August and September alone. In Greece, depositors have taken almost €50-billion out their banks since the beginning of 2010.13 Greek banks are now completely reliant on ECB funding to stay afloat. The situation has deteriorated to the point where over two thirds of the roughly 500 billion euros that banks have borrowed from the ECB are now being deposited back at the central bank.

Why? Because they don’t trust other banks to stay afloat long enough to get their money back.

Silver miners shouldn’t feel any safer banking in the United States. Fitch Ratings recently warned that the US banks may face severe losses from their exposures to European debt if the contagion escalates.

There’s very little at this point to suggest that it won’t. The roots of the 2008 meltdown live on in today’s crisis. We are still facing the same problems imposed by over-leverage in the financial system, and by postponing the proper solutions we’ve only increased those risks.

We don’t expect the silver miners to corner the physical silver market, and we know the paper games will probably continue, but the silver miners must make a better effort to understand the inherent value of their product.

Gold and silver are not traditional commodities, they are money.

Their value lies in their ability to retain wealth in environments marked by

• negative real interest rates,
• government intervention,
• severe economic uncertainty,
• and vulnerable banking institutions.

Silver’s demand profile is heightened by its use in industrial applications, but it is the metal’s investment demand that will drive its future performance.

The risk of keeping all of one’s excess cash in a bank is, in our opinion, considerably more than holding it in the more enduring form of money that silver represents. It’s time for silver producers to embrace their product in the same manner their shareholders already have.

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Eric Sprott discussing Silver yesterday - 14 minute interview

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Eric Sprott discusses Precious Metals

Video was recorded yesterday, Oct. 19th, 2011.

Below is another youtube clip with a great exchange between Senator Rand Paul and Tim Geithner, particularly in the discussion about who was responsible for the low interest rates the created the housing bubble.

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Eric Sprott: Silver to hit $1,200 an ounce

Many of you already know about Eric Sprott.

A chartered chartered accountant who entered the investment industry as a research analyst at Merrill Lynch. In 1981, he founded Sprott Securities (now called Cormark Securities Inc.), which today is one of Canada's largest independently owned securities firms. After establishing Sprott Asset Management Inc. in December 2001 as a separate entity, Eric divested his entire ownership of Sprott Securities to its employees.

Sprott is a huge Silver bull and we have profiled his thoughs numerous times before.

And he remains resolute in his views on Silver which he reiterated yesterday:

• “It could be a wild ride here. As you know there are groups that are short silver and they’ve lost a lot of money already. I think they are very active in the market and create these days where there are sudden downdrafts, but sure enough silver always comes back. The physical buyers always wear down the paper pushers.”
  
  “I think silver will outperform gold in the next decade. If silver should trade at a 16 to 1 ratio (to gold), it will probably trade at 10 to 1 because things tend to overshoot. Let’s use Jim Sinclair’s $12,000 target, that would suggest $1,200 silver, which is a thirty bagger from here.”
  
  “The outlook for gold stocks is particularly exciting right now. I think we can get a 50% move out of the gold stocks between now and December 31st. And of course if gold and silver really get lit up here, I mean who knows? We could go up hundreds of percent in these gold stocks in the next eighteen months.”
  
  “It could be very explosive as more and more people worry about (1) fiat currencies, (2) sovereign debt and (3) bank deposits. It would take very little to spill into gold to make a dramatic difference in where the price will be.”

Sprott's comments are particularly poignant in light of yesterday's G7 announcement.

The G7 is in full panic mode. It is now certain that the G7 will attempt some major intervention over the next 48 hours to inject a last dose of hope into capital markets to avoid Monday becoming an epic collapse.

To that end the G7 issued a statement titled Tackling Slowdown, Supporting Banks

• “Monetary policies will maintain price stability and continue to support economic recovery. Central Banks stand ready to provide liquidity to banks as required... We will take all necessary actions to ensure the resilience of banking systems and financial markets. In this context we reaffirm our commitment to implement fully Basel III. We reaffirmed our shared interest in a strong and stable international financial system, and our support for market- determined exchange rates. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate.”

As we have said numerous times... not only is QE3 assured. So is QE4, 5 and 6.

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Two Silver items from Sprott

As you know, we have been blogging recently about the disconnect between paper prices for Silver and Gold and the physical market.

Coincidentally Eric Sprott was interviewed by blogger Chris Martenson on the topic of bullion prices today.

And Sprott makes it clear what is building in the precious metals market.

• "I think that the prices will continue higher. I mean the amount of money printing is unbelievable. I just think you have to take that initial stand in terms of buying it. I use the James Turk analogy: just keep dollar averaging. We have gone up eleven years in a row, this year it looks like it will be no exception; I would certainly think next year will be no exception. If we ever have QE3 announced, I think gold and silver will just go absolutely bonkers here. And so I just think you have got to step in there and own it; we’ve had these fears all the way along. You know, $400, and $500 and $700 and $800 dollar gold, everyone was afraid it was a one-time thing. I don’t think it is a one-time thing, I think it is a secular thing. It’s going to carry on for quite a while here until we find some resolution of these problems. And the resolution probably will be some form of default where people just have to expunge debts that cannot be repaid. So, you have got to be in some asset which will not be affected by that."

Sprott says he thinks the current markets are highly manipulated and that the wider outlook for the economy is grim.  In this environment the true value of Gold and Silver are highly underpriced; particularly Silver. 

There is more and you can click the link above for more info. A full transcript of the interview can be read here.

There was another item in the news today from Sprott Asset Management.

David Franklin, the chief executive officer of Sprott Private Wealth, was on BNN today (hattip to JK).

And while he echo's Eric Sprott's main message that the bull market in gold and silver has a long way to run, he tells BNN the best way to play the precious metals sector is to buying stock in miners - something this blog also believes.

You can see his appearance on BNN by clicking this link:

Why Sprott is still bullish on precious metals - BNN News

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Eric Sprott: Let the Silver Seller Beware!

It's been a while since we've done a post on Silver.  Since the big take down at the start of May, Silver has hovered at the $35 mark and the COMEX supplies of phyisical Silver have continued to diminish as the disconnect between the paper market and the Silver market intensifies.

As we have said before, it simply means Silver is on sale and the world is rapidly accumulating massive amounts at fire-sale prices.

Eric Sprott has come out with another excellent article in his Markets At A Glance newsletter. Here is the article:

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Caveat Venditor!

The recent bear raid on silver has left many concerned about the sustainability of its historic run. Silver, being a relatively obscure market for most mainstream commentators, attracted much attention in the ensuing days following the May 1 takedown. Indeed, though the 30% drop in silver occurred over only four days, seemingly all eyes were on silver, with commentators who could’ve cared less about the silver market only a couple of months ago, suddenly tripping all over one another to make the bubble call. Silver bubble 2.0?

Hardly. Anyone who has been fortunate to have been invested in silver over the past few years would unfortunately be used to such blatant takedowns. The Chinese don’t call it the "Devil’s Metal" for no good reason. With so much talk these days about the risks of investing in silver, we think that perhaps it may be timely for us to weigh in on the matter. The silver market is riskier than ever, but for reasons the vast majority of pedestrian commentators have failed to grasp.

There is no doubt that speculative dollars have been flowing into the silver market. We note that in April record trading volumes were registered in the SLV, Comex futures, LBMA transfers, and the Shanghai Gold Exchange futures. In fact, converting the average daily trading volume in the aforementioned silver instruments to the amount of ounces of silver they are supposed to represent, there were on average, over 1.1 billion ounces worth of silver traded every day in the month of April. Truly a staggering number when contrasted against the actual amount of silver available for investment.

To wit, the world will only supply about 979 million ounces this year from mine and recycling of scrap, of which it is estimated that 657 million ounces will be used up for non-investment purposes. So in effect, that leaves roughly only 322 million ounces available this year for investment purposes. Converting to days (recall that at least 1.1 billion ounces traded each day) it leaves only about 1.3 million ounces per trading day of available supply. So, we are essentially trading the amount of physical silver actually available for investment, 891 times over each day! It really begs the question; just what are people trading in these markets?

Consider the largest and most prominent of those markets - the Comex, which we believe has owned an effective monopoly on silver price discovery for decades. In fact, the Comex churned over 800 million ounces of silver futures and options on average each day in April. Indeed, notwithstanding the massive but very opaque over-the-counter silver derivatives market, trading on the Comex dwarfs both the physical and the other (known) paper silver markets, combined.

Despite its dynamics being relatively complex and generally not well understood by most, the world’s financial community continues to view trading on the Comex as representative of the fundamentals for the physical silver markets. A market built on a high amount of leverage, both the buyers and sellers of Comex futures and options contracts are able to establish a position in "silver" with pennies on the dollar in collateral and even more astonishingly, no physical silver backing the contracts at all. The following charts illustrate just how unreal these markets have become.

Chart A (click on all images to enlarge):

Chart B:

In chart A, we compare the total open interest in Comex futures and option contracts to the actual amount of silver held in registered inventories able to be delivered against those contracts, since 2009. In chart B, with the steeply-sloping line shows the ratio of open interest (i.e. paper silver ounces) per ounce of physical silver held in inventory. We believe the historical trend of rising open interest and falling inventories deserves considerable attention from anyone attempting to understand the silver market. And though we do note that since October 2010 the trend of rising open interest appears to have abated, the inventories have been evaporating steadily and thus the ratio of the two measures has continued to trend higher. In fact, since 2009 the ratio of paper silver to physical silver has increased fourfold from approximately 8 times to almost 33 times, where it stands today.

What is the significance of this discord between paper and physical supply on the Comex? Recall, that over 800 million ounces traded each day in April on that market. Further, consider that as at the end of April there were only 33 million ounces of registered inventories to back up all of that paper trading. Just imagine if a mere 5% of all of that buying actually stood for delivery; the entire inventories would be more than wiped out. Yet despite the steady erosion of these already scant Comex inventories - a characteristic which would surely be interpreted as most bullish in other commodity markets - the price of silver has actually declined since April. We endeavour to provide a framework for understanding this phenomenon below.

Those who were following the developments in the silver market in April and May (we note that there were many who were) will likely recall that the CME Group raised both initial and maintenance margins five times within less than a two week span effectively raising the minimum amount of capital required to participate in the silver futures market by 84%. This is significant due to the amount of leverage in the futures market and also due to the losses resulting from the precipitous selloff which began on Sunday, May 1st, when several thousand contracts were wantonly dumped onto the very thinly traded after-hours silver futures market causing the silver price to plunge 13% within the span of less than 15 minutes.

For example, consider a hypothetical speculative trader who went long, say 200 July 2011 SI futures contracts on April 28th. At that time this trader would have been required to post an initial margin of $2.565 million for a position of one million ounces of "silver" and thus would have been levered 18.5 times¹. Below we present what the trade blotter for this trader might look like over the next few days assuming he maintained his position.

Following the initial trade, each day the trader’s positions would be marked-to-market and any losses or gains would be applied against his account’s equity balance. Should the losses on the position bring the equity balance below the maintenance margin level, the trader would be required to deposit the additional capital required to bring the equity in the account back up to at least the initial margin requirement level.

While the margin increases alone would have forced a decision for this leveraged long to either post the additional margin or close enough positions to bring margin balances in line with substantially higher requirements, the trader was actually fighting a battle on two fronts. This is because in addition to the margin increases, the trader was also experiencing massive losses to his capital due to a rapidly falling silver price. So it is also important to consider the extent of losses to the trader’s equity following the precipitous drop which began on the evening of May 1st. In our scenario, before finding a bottom around May 17th, the cumulative losses would have amounted to over $14 million, or over five times the initial margin deposit of $2.565 million that was required to take on the position on April 28th.

This meant that with margin call after margin call, the capital committed to the position ballooned almost 700% by the time the silver price finally bottomed in mid May. The significance of such a dramatic erosion of capital on a leveraged position cannot be overstated, particularly in the context of rising margin requirements. The CME Group would know this very well, and so it strikes us as particularly suspect that they would continue to raise margin rates in the face of such a sharp selloff. A selloff, we might add, which emanated from highly unusual trading activity on May 1st that, in our opinion, just reeks of manipulation.

How else can one explain the dumping of several thousand SI futures contracts within the course of 15 minutes, in one of the most illiquid hours of trading, without seemingly any regard for price or a fundamental catalyst to speak of? Though we will let the reader connect the dots as to what the intent of the CME Group and the seller’s of SI futures contracts on May 1st really was, we can certainly observe what effect these actions had on the market by looking further into the weekly Commitments of Traders (COT) reports published by the CFTC.

The COT provides us with the weekly open interest held by various categories of silver futures market participants, and thus gives us clues as to how these participants reacted in response to these margin increases and ensuing volatility. We present the following table showing net open interest for the various categories, converted into silver ounces, which we obtained from the COT report for selected dates.

First, note how in the three weeks following the margin hikes, the speculative net long position dropped from 212.7 million ounces to 170.1 million. This very clearly indicates that the speculative longs, when faced with rising margin requirements and losses to capital, did close out a substantial amount of their long positions. The commercials who were short those 212.7 million ounces appear to have been taking every opportunity to cover their own positions. Rather than shorting further into the ensuing weakness, the commercials covered approximately 42.6 million ounces in the three week period.

Another piece of information gleaned from the COT data is that despite what many commentators were hailing as a bubble caused by excessive speculation in the futures markets, the net speculative long positions had in fact been dropping over time. Even during the April run up preceding the five margin hikes, the net speculative long position actually decreased by 23%.

That commercial short position deserves further mention. What is unique and of interest to many silver market observers is not only the size of the short position on the Comex, which is dominated by those "commercials", but also the concentration of the short interest. We provide the percentage of the total open interest held by the four largest short sellers on a net basis in the table above. Note that the net position of the four largest equates to 29% of the total open interest as of May 17th. Further we would also note that the concentrated short interest of the big four, though still quite high has actually dropped substantially over the past year coinciding with the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the resultant public discourse on position limits. Comments from CFTC commissioner Bart Chilton acknowledging the "repeated attempts to influence prices in the silver markets," and that, "violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted," perhaps have also had an impact on the behavior of silver market participants. And though the CFTC’s investigation into the silver futures and options market remains open after three years, we remain hopeful that its findings will further serve the interests of the investing public who rightly expect a fair and transparent silver market void of manipulative forces.

Could the drop in open interest and the reduction of the concentration in the commercial short open interest be perceived as an indication that those top four short-sellers are positioning for the inevitable imposition of position limits rules? Perhaps, and if so, it would follow that likely the short sellers seized the opportunity to further reduce their "liabilities" by buying up contracts in early May at a 30% discount.

Let there be no mistake, we view the current setup as extremely bullish. In our view, whatever froth and excess was present in the paper markets has likely been shaken out in the recent selloff. The remaining longs do not seem willing to part with their silver at these prices. These are the strong hands with longer time horizons that are likely not overly leveraged or are willing and able to withstand substantial volatility. Moreover, perhaps the "game" on the paper silver markets which has been meticulously documented over decades by Ted Butler¹⁴ and others, will soon be coming to an end.

What is perhaps most important is that despite what has recently transpired in the paper silver markets, the robust demand fundamentals for silver have not changed in our view. For confirmation of this, look no further than the physical silver market (i.e. the real silver market) which is providing us with evidence almost daily of a sustained bull market for physical silver. The US Mint recently stated that, "demand for American Silver Eagle Coins remains at unprecedented high levels." Likewise for the Perth Mint, the Austrian Mint and the Royal Canadian Mint as well. The Chinese, who were net exporters of silver only four years ago, imported 300% more silver in 2010 than 2009 and such large quantities of imports are expected to continue. Last year, Indian silver imports increased nearly six-fold, and this year consumption is expected to rise nearly 43% according to the Bombay Bullion Association. In Utah, silver (along with gold, of course) will now be accepted in weight value as legal tender. According to Hugo Salinas-Price, a prominent Mexican billionaire, there is now "very strong support for the monetization of silver" in the Mexican congress. We suspect the Europeans are likely to account for an increasing amount of silver purchases going forward as well. In fact, we just can’t imagine a better outlook for silver fundamentals. This really makes us question who could be short such massive quantities of silver and why? Particularly in those leveraged paper silver markets, where as we demonstrated, only a fraction of the outstanding notional ounces are actually available in physical quantity.

We have a very tough time understanding those bearish arguments against silver. We look at the real silver market, and based on the supply and demand data coming from the real, physical markets for silver, the fundamentals are only getting stronger.

And yet there exists another silver market, which as we’ve shown, is not very connected to the physical realm at all. And though silver investors have for decades suffered the tyranny of a rigged paper monopoly over silver price discovery, it appears to us that the tides are turning. In the age of QE to infinity, investors are being more scrupulous with their capital and as such they are demanding physical silver in quantity.

With more and more dollars flowing into the silver markets and a finite supply of physical to meet that demand, the theoretical losses for the paper silver short-sellers are near infinite. And with such a skewed and obvious risk/reward payoff vastly favoring the longs, we pose the following question. Who is most at risk in the silver markets: the buyers of a scarce and real asset that serves a growing multitude of purposes, or the sellers, who are short a quantity of silver which may very well not even be obtainable at anywhere near current prices?

 Let the Seller Beware!

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Eric Sprott on what happened to Silver last week... (Sat. Post #1)

And Bloomberg on a Gold/Silver outlook...

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We have liftoff...

If you click on the above image to enlarge it, you will see a side by side comparison for the closing price of silver over the past three weeks.  The first is on Friday April 8th ($40.01),  the second is on Thursday April 14th ($42.09) and finally you have closing price yesterday, Thursday, April 21st ($46.61).

What can you say other than... "Wow!" 

Last Thursday's close came after an impressive climb and this week Silver's charge continued unabated with a stunning gain for the week of more than $4.50.

But on the heels of such impressive and dynamic gains I would suggest, dear reader, that you haven't seen anything yet.

Last week I was having coffee with two colleagues in a local Tim Horton's (famous Canadian coffee/donut franchise), when our silver conversation was interupted by a patron sitting at the table next to us.  He enthusiastically gushed about the prospects for silver and gold.

This marks the first time I have observed the general public keen to not only talk about the opportunities in silver, but have Joe Q. Public actually quote the current spot price of the metal.

The next day, one of those two colleagues was at the Vancouver Bullion Exchange at Granville & Broadway to buy some silver bullion.  Silver had just surged over $40 an ounce and he was keen to purchase some physical.  He couldn't get close as there was a line-up of over 100 people eager to do the same.

This growing public awareness comes on the heels of Bank of Montreal (BMO) issuing a report talking about the "New Paradigm in Silver", which we commmented on in this post.

The BMO reports outlines the reason both investment demand and industrial demand are surging. Understanding the twin demands are essential to understand what is happening in Silver right now.  As I have often suggested,  people should take a look at this youtube video clip that, while a bit sensational, outlines the silver case quite well.

Increased industrial demand is coupling with declining supplies of silver. Both factors are coming to a head with the surging investment demand resulting from concerns about sovereign debt.

It's the perfect storm, a confluence which the commentors in mainstream media and on Financial TV have simply failed to grasp and understand.

But that dynamic has not escaped the attention of Eric Sprott of Sprott Asset Management. In his latest 'Markets at a Glance' newsletter, these factors are articulated and laid out extremely well.

• The fact remains that most commentators have failed to grasp the monetary shifts that silver is signaling today, and in doing so they’ve failed to appreciate just how high it could actually go.  The financial media’s failure to grasp the benefits of precious metals ownership continues to perplex us, and it’s not just the commentators who are prone to perpetual disbelief. The sell side analysts are equally as irresolute. According to Bloomberg, the ‘expert’ consensus silver price forecast for 2011 is $29.50, representing a 31% discount from the current spot price. This same group of analysts also predicts prices will decline another 25% in 2012 and a further 9% in 2013 to $20 an ounce.  When you consider that the silver price has appreciated by over 21% annually over the past 10 years, these forecasts suggest a very dramatic change in the long-term trend. Will this reversal come true? Probably not. These were the same analysts who predicted that spot silver prices would average $18.65 this year - so they’ve missed the mark by over 100% thus far.

Sprott notes that many are evaluating Silver with financial models that dictate equity valuations but they are ignoring the most rudimentary of economic principles – supply and demand.

This phenomenon means that Financial TV is often providing backward-looking forecasts that completely miss the mark for the future of Silver.  As the greater investment community gradualy comes to appreciate what is happening, the herd will  follow behind in due course as forecasts get ratcheted higher.

Sprott outlines why he can be so confident that the price of silver will continue on its upward trajectory while 'the Street' continues to forecast a price collapse.

One of the key indicators is the gold/silver ratio.

The last time money was synonymous with defined amounts of gold and silver, the ratio was set at 16-to-one. For most of the past millennium, one ounce of gold would have been convertible to somewhere between 10 and 16 ounces of silver - an amount roughly in line with the relative occurrence of each mineral within the earth’s crust.

For the better part of the past century, due to the world’s abandonment of bimetallism and then the gold standard, the gold/silver ratio has fluctuated widely, twice reaching lows near the 15-to-one mark and a high of 100-to-one back in the early 1990’s.

The most recent high reached in the latter part of 2009 was nearly 80-to-one. Since then the ratio has been tumbling to where it stands now at 35-to-one.  Sprott believes this ratio will continue to move lower, driven by nothing more than basic supply/demand fundamentals.

One of those fundamentals is mine production. In 2010, the world mined approximately 736 million ounces of silver and 85 million ounces of gold. The world also produced an additional 215 million ounces of silver and 53 million ounces of gold from recycled scrap. When you add both together you have a ratio of production where only 9 ounces of silver are being produced for every 1 ounce of gold. 

Interestingly, this 9-to-one ratio is very similar to the ratio of available in-situ (on-site) silver and gold reserves. The U.S. Geological Survey estimates that there are current in-situ reserves of approximately 16.4 billion ounces of silver versus 1.6 billion ounces for gold, or about a 10-to-one ratio.

It all says that mining production is not keeping pace with consumption. And when you add in the industrial demand for silver, you begin to appreciate the huge supply/demand squeeze that in being placed on silver right now.

• Last year, non-investment demand for silver (which includes industrial, photographic, and silverware demand) totaled approximately 610 million ounces. This represents approximately 64% of primary supply, leaving approximately 341 million ounces to satisfy investment demand. On the gold side, industrial usage totaled 13 million ounces, or about 10% of primary supply, leaving approximately 125 million ounces left over for investment demand. So, after netting out the industrial usage the primary supply left over for investment demand is about 2.7 times that for gold. However, if we convert those ounces to dollars at current prices, we’re left with $15 billion worth of silver available for investment versus $186 billion worth of gold, or a one-to-13 ratio of silver to gold! This means that in terms of primary supply, silver only has 8% of the capacity for investment that gold does despite having equal if not more dollars flowing into it.

Some critics note that as the Silver spot prices rises, some investors will start selling thier physical silver back into the market. But even if all the silver/gold held by investors was suddenly sold back into the market as the price leaps higher and higher, there is a  one-to-63 ratio of silver to gold inventories in the investment community. Under these conditions, Silver still remains extremely scarce.

As Sprott asks, how then is silver still priced at a 35-to-one ratio with gold?! The answer is... it can't remain at this level. Demand is going to collapse that ratio.

Current investment statistics show that there is an equal amount of money being currently being invested in Silver as there is into Gold on a dollar for dollar basis.

This is placing MASSSIVE demand on Silver, causing Sprott to observe:

• Although the price ratio of silver to gold has fallen substantially since the highs of 2009, our analysis strongly suggests that this ratio must move lower to restore a fundamental balance between supply and demand. Only time will tell how much lower it will go, but we would not be surprised to see it hit single digits before settling into a more sustainable equilibrium. 

As the Silver to Gold ratio drops to around 10:1 or less, it means that Silver, assuming that Gold doesn't rise a single penny, will hit $150/ounce as that Silver/Gold ratio narrows (Gold currently sits at $1,504/ounce).

But as we have talked about constantly on this blog, Gold’s continued appreciation vis-à-vis every currency is assured because of the great flight from fiat currency that has only just begun.

And on that note, mainstream media has been slow to comment on the latest statement from China. If you missed it, China's central bank Governor Zhou Xiaochuan made a significant statment this week.

After a speech at Tsinghua University in Beijing on Wednesday, Zhou spoke of the need to reduce an excessive accumulation of foreign-reserves as those 'reserves' have exceeded a “reasonable” level and the management and diversification of the holdings should be improved.

This, btw, is the way you diplomatically say “we are sick of the US Dollar and will be taking steps to lower our holdings.”

Remember, the US Dollar is China’s largest single holding. And China has already begun dumping Treasuries (US Debt).

This comes on the heels of China deciding (along with Russia) to trade in their own currencies, NOT the US Dollar. Not to mention the numerous warnings Chinese politicians have been issuing to the US over the last 24 months.

In simple terms, China is done playing nice and is now actively moving out of US Dollar denominated assets.

It means Gold is about to soar and the price could easily go to $2,000 an ounce. With the Silver/Gold ratio collapsing, that means Silver will not only leap up to $150/ounce, but will blast through that as Gold leaps higher. If Gold hits $2,000/ounce, Silver could well hit $200/ounce or higher.

Like Gold, Silver nvestors are now buying Silver as protection from the ravages of fiat currency debasement. Bring all the factors together and Sprott observes why you will see Silver soar over the next few months:

• When compared to gold, it is silver that offers the most attractive value proposition by virtue of the gross mispricing of its scarcity, which, we might add, has existed for many years. Thus, in our opinion, as this new bimetallic standard takes root, silver investors will continue to be justly rewarded with marked outperformance. We truly believe that this is the investment opportunity of a lifetime, and increasingly so, others are taking heed. What is clear to us is that with equal investment dollars now flowing into silver and gold, the current 35-to-one ratio is unsustainable and has only one direction to go: lower.

At just under $47/ounce, Silver is still very cheap. And with the Gold/Silver ratio closing (and the fact that, on a doller-per-dollar basis, equal amounts of money are flowing into Silver as into Gold) Silver has a much higher upside potential than Gold does. It means the foundation is being laid for some dramatic gains in Silver in the coming months and all eyes are now keenly focused on the COMEX delivery month of May.

How long before the wider investment community realizes this huge upside advantage that exists if you invest in Silver over Gold? How long before investment money, on a dollar-per-dollar basis, start flowing primarily into Silver instead of Gold?

It could be that the gains of the last two weeks are nothing compared to what may happen next month.

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Eric Sprott on Silver Manipulation

In a recent interview, Eric Sprott of Sprott Asset Management commented on the topic of Silver manipulation.

As we have discussed at length, the silver market is so small it lends itself to being held down artificially.

In our last post, Harvey Organ noted that 101, 076 contracts traded on the COMEX on Monday of this week (driving down the price of Silver significantly). Each contract is worth 5,000 oz's. This means over 505 million oz's traded that day!

To put this into perspective, there are only 800 million oz's of silver produced in any given year. The 505,380,000 oz's represents almost 72% of worldly silver production if you include China and 84% if you do not include China. The reason I put the figures for China is simply because China keeps every oz of silver it produces.

And the banking cabal supposedly flooded the market with 500 million oz's of unbacked paper contracts in one day!!!

Sprott was asked what measures might free up the market movement?

• As you probably know, all sort of lawsuits accused HSBC and JP Morgan of manipulating the price of silver in 2008 when it went down. In that situation, quite frankly, I was the most surprised and disappointed person in the world to see that in the middle of a financial collapse, the price of silver—and even gold—didn't rally. It seemed so unlikely that that should've happened. In my mind, that consequentially suggested forces might have been at work that weren't normal in those markets. But the manipulation will end, if there was manipulation. I'll explain why.
  
  On commodity exchanges, the majority of transactions never settle in physical delivery. Just as an example, of the 800 million ounces of silver produced in a year, there are days when the commodities markets will trade 500 million oz. Well, obviously, nobody is settling this stuff because you can't have an 800 million oz annual market and trade 500 million oz in a day. These are just people pressing buttons on computers—you know with their algorithms or whatever—but they're not taking physical delivery. Manipulation takes place when a person who has more money than another person can drive the price of a product up or down, and it's easy to manipulate a market wherein all you need is fiat currency.
  
  Manipulation will end when enough people say, "You know what? I'll take delivery of that product." I think that's what's happening in silver. More and more people are taking delivery. The dealers who are short something like 400–500 million oz. have like 42 million oz. in storage. Our organization alone owns more than 42 million ounces. That's not a lot of silver to cover a short bet of 400–500 million ounces. With every delivery period, those inventories keep going down. They're going to go down to the point where everyone realizes there is no silver left. As a matter of fact, for all intents and purposes, I think there might be no silver available today, as some mints are no longer taking silver coin orders because they just can't provide them. So, it's obvious to me that this supposed silver inventory doesn't exist anymore and that ends the manipulation.

Eric Sprott was then asked about the fact that there are far more investors in the silver sector right now than in previous decades and what impact that is going to have on those manipulating the silver market.

• (Are there more investors in the sector right now?] Absolutely. I think the phrase that probably captures silver's behavior, to which it's always been referred, is "poor man's gold." I think those who haven't bought gold are, to some extent, seeking refuge in silver. But anybody who's been a student of the silver market, as I myself might qualify, realizes we have a very tight situation here. And as this momentum builds to participate in the silver market, the shorts are just going to get overrun and the price could get excessively explosive.

I'll say it again. Silver is the opportunity of the decade, the shorting antics of this week notwithstanding.

Beware the Ides of Farce.

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Beware the Ides of Farce (updated)

As the stock markets and precious metals plunge, a little Ides of March humour courtesy of williambanzai7 (picture above).

One of the key dynamics to watch here is the US dollar index. The Japan disaster is your quintessential black swan event. And as such there should be a flooding of capital into the safe haven of the US dollar.

That isn't happening this time.

And in the midsts of chaos, the banking cabal is taking the opportunity to try and slam Gold/Silver.

As always, analyst Harvey Organ comes up with an excellent analysis of what is happening at the COMEX.

• "The banking boys showed up in London and in the USA doing their usual, by raiding paper gold and paper silver. The real stuff, they have problems getting. Silver fell by $1.70 to $34.12, as the bankers supplied massive unbacked paper in their attempt to show the world that everything is fine.
  
  The confirmed volume for Open Interest yesterday was quite good at 61,854. The estimated volume at the silver comex today was a monster: 101,076. That kind of shows you what kind of unbacked paper was supplied today and our regulators as always look the other way at this criminal behavior."

A farce to be sure. But the key dynamic is the lack of capital fleeing into the US dollar.

The COMEX is clearly stressed to provide physical silver. In a dual attempt to prop up the US dollar and shake silver from those holding it, the banking cabal is massively raiding the price of silver.

The intent is to create a panic and fear that the bottom will fall out from beneath these recent record high's. I suspect we will see another massive raid tonight to drive the price to the mid $33.00 range.

It's such an odd scenario. Make the price cheaper so that people won't buy more?

But with capital not flowing into the US dollar, will this tactic simply create a surge in precious metal buying?

We shall see.

On another note, on last night's Fox Business television network program "Follow the Money", five minutes were devoted to complaints of manipulation of the silver market by JPMorgan Chase and HSBC.

Cited specifically was the testimony of London silver trader and whistleblower Andrew Maguire at the March 2010 hearing of the U.S. Commodity Futures Trading Commission.

Video of the segment has been posted at the Fox Business Internet site under the headline "Wall Street Conspirators Driving Spike in Silver" and you can :
find it here.

Sprott Asset Management has also come out with an excellent article titled "Debunking the Gold Bubble Myth". You can read it here.

Eric Sprott has also done an interesting interview with comments on Silver Manipulation, I will be posting excerpts later tonight after 10pm PDT.

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Sprott on BNN: $100 Silver coming

Please note that this is our 3rd post of the day. Be sure to check out the previous two below this one (one is also on Silver, the other on local real estate).

Eric Sprott was on BNN today talking about Silver. You can read the reuters coverage of the appearance and the video clip on the interview here; Is this silver's decade?

Sprott made an interesting comment about the COMEX:

• "You're probably aware that when we launched our Silver Trust we had to go out and buy 15 million ounces. It took us about 10 weeks to get 15 million ounces delivered and I would point out that Silver trades 400 million ounces a day on the COMEX but trying to get 15 million ounces was very, very difficult."

Sprott predicts Silver going to at least $100 an ounce.

The comments on the COMEX are indicative of the pressures and the short squeeze currently going on. The reality is that the 'paper silver market' and the 'physical silver market' are experiencing a huge disconnect right now.

It the words of Trader Dan Norcini (you can see his blog here):

• "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. 'Stand and Deliver or Go Home' should be the rallying cry of the longs to the paper shorts."

If the paper market breaks down and the demand for physical overwhelms the COMEX, look for silver to shoot way past $100.

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Eric Sprott on Silver

Multiple posts on Silver for you today.

Many of you already know about Eric Sprott. Sprott is a chartered chartered accountant who entered the investment industry as a research analyst at Merrill Lynch. In 1981, he founded Sprott Securities (now called Cormark Securities Inc.), which today is one of Canada's largest independently owned securities firms. After establishing Sprott Asset Management Inc. in December 2001 as a separate entity, Eric divested his entire ownership of Sprott Securities to its employees.

Sprott Asset Management recently established the PSLV fund, the only closed-end ETF silver fund backed 100% by physical silver.

Recently Sprott made an appearance at Casey Research Gold and Resource Summit where in addition to providing a succinct summary of all his monthly letters from the past year (whose forecasts are all gradually panning out), he spoke about the prospects for gold, and particularly silver.

The key statement from his presentation possibly answers why more and more distributors are reporting indefinite lack of physical silver inventory:

"There's $22 billion of silver available in the world, of which the ETFs already own half, and between you guys and us we probably own the other half... Which means there's nothing left."

Above is a portion of his presentation for you.
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Foreclosure in Washington and Sprott on Silver

Interesting article in the Seattle Times.

Seems the largest condo development ever undertaken in the American Pacific Northwest, basically a two hour drive from Vancouver, has been foreclosed on.

Portland-based Gerding Edlen, the developer of Bellevue Towers, has turned over the development to their lenders, an entity led by investment bank Morgan Stanley. If the development wasn't turned over, Morgan Stanley would have moved to foreclosure.

The new owners announced price cuts to help spur sales at the 539-unit development, where just 118 sales have closed since the two towers were completed nearly two years ago.

The development is two towers of 43 and 42 stories. Gerding Edlen built them in large part with $275 million borrowed in January 2007 from a consortium of lenders led by Morgan Stanley.

"This is an acknowledgment that prices today aren't what they were," Ira Glasser, an adviser to Morgan Stanley, said Monday.

When Bellevue Towers opened in February 2009, condo prices ranged from $399,000 to $4.4 million. A Gerding Edlen principal predicted the project, at Northeast Fourth Street and 106th Avenue Northeast, would sell out in two years.

Five months later, with less than 10% of the units sold, Gerding Edlen cut prices an average 20%. With the additional reductions announced last week, average prices are 30$ lower than two years ago, Glasser said.

County records indicate just three condos have sold over the last three months.

Meanwhile 2 hours north, Vancouver preens about it's resilient housing bubble.

Sprott Asset Management and Silver

Silver trading continues to be incredibly strong despite the raids from the last two days. From the source who follows the Comex:

• "The total open interest on silver remained resolute at 136,931 up a huge 645 contracts with a huge pummelling of silver by almost $1.60 yesterday. I think the bankers were more frightened with this figure than with gold. I may be mistaken but the bankers have been trying for the past month to shake the silver leaves from the comex tree and they have failed time after time. The front options delivery month of January saw its open interest mysteriously rise from 55 to 59. The estimated volume on the comex today was a monstrous 83,889. The confirmed volume for yesterday was 88,172. This is a far cry from the 16,000 contracts traded during the last week of 2010."

But the big silver story of the day comes from Sprott Asset Management.

Sprott runs a silver fund that is completely backed by Silver assets. And Eric Sprott is having trouble getting silver. Yesterday his chief lieutenant John Embry was on Eric King and predicted, based on the difficulty in acquiring physical silver, that he see's the price of silver rising above $50 in 2011 (he sees Gold going to $2000 for the same reason).

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To infinity and beyond...

In a move that comes as a surprise to some, President Obama announced a tentative deal with Congressional Republicans on Monday to extend the Bush-era tax cuts at all income levels for two years as part of a package that would also keep benefits flowing to the long-term unemployed, cut payroll taxes for all workers for a year and take other steps to bolster the economy.

This extension will cost $900 Billion - equal to QE2. In essence we have just seen QE3. But how does cutting back on government revenue deal with the massive looming debt problem the United States faces?

It doesn't of course.

And as people like Jim Sinclair have been saying for years, the political realities both in taxation and quantitative easing make prediction here all too easy.

America (and Europe) have no practical way out of the debt problem – none.

They are going to inflate and spend continuously as the problem is kicked further down the road.

QE4, 5 and 6 are all but assured.

Which is why I believe you will see a rush into Gold and Silver in the foreseeable future. And faithful readers know I favour silver over gold.

Eric Sprott sees it too. The Toronto-based money manager whose Sprott Hedge Fund returned about 496% in the past nine years, outlines his thoughts in an article in the Globe and Mail:

• Why did you become bearish just before the Nasdaq stock market imploded in 2000?
  
  We had an 18-year bull market from 1982 to 2000. This is about the average length. You could tell from the almost insanity of the market at the time that it had to be over … We were valuing stocks at 100 times sales in the Internet boom. It was ridiculous.
  
  How long do you expect a bear market will last?
  
  I have always thought it would be a long bear market – about 15 to 18 years. It started in 2000, but it might even be longer this time because the powers-that-be keep manipulating the financial market. Having a zero interest rate policy is manipulation. Having quantitative easing is manipulation of what the market would otherwise do. …They are delaying the liquidation phase of a bear market. Almost all governments keep bailing out their financial systems.
  
  You have been a bull on gold from the get-go. Is its price over $1,350 (U.S.) unfolding as you expected?
  
  It’s been the investment of the decade. When I bought gold, I was buying gold to hold [as a long-term investment]. As it turned out, it quintupled. I didn’t think it would go that far because no none would have imagined that the central banks and governments would get themselves in a position where they are printing money.
  
  The printing of money makes gold more valuable. You don’t have to be a genius to figure this out. The Johnny-come-latelies – the Paulsons, Einhorns and Soros – all figured out, when [the Fed announced the first round of quantitative easing], that they should own gold. It becomes more obvious every day as you see these financial challenges that we have in Europe.
  
  How high will gold go?
  
  I think gold is the reserve currency today. There is not a currency in the world that it hasn’t appreciated against by at least 300 per cent. And it has beaten every stock market. You can’t even rent a safety deposit box in Germany because they are all full of gold and silver … I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it. It could go to $2,000 an ounce. I could imagine it at $5,000. I am not giving a time frame on that, but I could certainly see that happening. But the real story now is silver.
  
  Why are you more bullish on that metal?
  
  Gold has traded at a ratio of 16-to-1 to silver in terms of price, but today it trades in the range of 50 to 1. I think the gold-to-silver ratio is going to go back to 16 to 1 given the passage of time, say three to five years. And I bet you that silver overshoots. The gold-to-silver ratio may even get down to 10 to 1. I believe that the price of silver has been suppressed.
  
  How much of your wealth outside of Sprott Inc. shares are in bullion and precious metals stocks?
  
  I only own funds and gold and silver. I am probably 90 per cent in precious metals personally. And I don’t lose sleep over it.

As I have been saying for almost 2 years now, a huge opportunity lies ahead.

Seize it.

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