Archive for the ‘Silver’ Category

Something fishy happening in the physical gold and silver market

Thursday, December 9th, 2010

Have you noticed something fishy going on in the silver market? Take a look at this chart:


This chart shows the ratio of gold to silver prices over a period of a year. As you can see from the trend, silver is getting more and more expensive relative to gold since before September. If you extend the period to 36 years, you will see this:


The latest move is pretty major, even when you see it from a time-frame of 36 years.

So, what is the story behind this major move? Remember what we wrote in page 59 of our book, How to buy and invest in physical gold and silver bullion? There, we wrote about the possible fuses that can ignite silver prices. In that section of our book, we mentioned the colossal short silver positions of JP Morgan.

Well, according to J.P. Morgan and the Great Silver Caper,

?A viral campaign (Crash JP Morgue Video [below]) to buy a physical silver and ?crash? the bank is now spreading like wildfire on the Internet,? SFGate reports

Even more fishy is that the futures market for gold and silver are in backwardation (see Investors to Silver: ?Let?s Get Physical?). In case you do not know what "backwardation" means, you may want to take a read at How futures price affect market price. What does this mean?

Well, in theory, backwardation is not supposed to happen. But if it happens in reality (as it is happening right now, which is rare), it is a sign of distrust in the paper gold/silver markets as traders/investors are queuing up to take physical delivery of the precious metals.

Another interesting observation: as you know, we are an affiliate partner of We noticed that all the customers that we referred to them are buying silver. We have yet to see a gold purchase.

Note: This article is not financial advice. Take it as a piece of juicy ‘gossip’ from the financial markets that we are passing to you.

Silver question on “How to buy and invest in physical gold and silver bullion”

Tuesday, July 20th, 2010

Yesterday, we were very delighted to receive this email from one of our readers regarding our book, How to buy and invest in physical gold and silver bullion:

I have been reading through your archives for the past few weeks, and also have just finished reading the gold and silver ebook. It is a wonderful resource, and I feel for the first time that I now have some educational starting points that will make any investing I do more of a strategy and less of a gamble.

I wanted to ask you about a point that came up in the gold and silver book – when talking about storage there was plenty of practical information about the security aspects, and a glancing mention of the fact that silver will corrode/tarnish and so will need to be kept in a “sealed” environment.

Could you possibly add some detail to that point? How sealed should it be? Absolutely airtight? Is there any way to clean it or reduce this problem without detracting from the value of the bullion/B Coin? Over what length of time will this be an issue?

Thanks again for a great e-book and for a very accessible and educational journal. I’m enjoying learning how to think again.

If you want to know the answer, you can look up this article on our other web site: More details about storing silver.

Will there be an influx of silver coming to market?

Sunday, July 4th, 2010

With all the influx in the gold rush that we are having, with prices rising and currency flooding into it, do I see a whole lot of new mine supply coming to the market eventually?

Mike Maloney has some opinions in that…

When will silver prices explode?

Friday, June 25th, 2010

David Morgan of Silver Investor Report is a well-known expert on silver. Naturally, he is bullish on silver prices. But for many investors, after having seen silver prices languishing for so long, they feel like giving up.

As we wrote in our book, How to buy and invest in physical gold and silver bullion, there are many reasons why silver is a better choice than gold in terms of price speculation. This is because it is a hybrid between monetary and industrial metal. In terms of supply and demand fundamentals (in the context of industrial use), silver is much stronger than gold (because it has hardly any industrial use).

However, for whatever reason, silver prices are languishing for a very long time. But for David Morgan he has a theory of when silver prices will see its day of vindication. The theory goes like this:

  1. Assuming that one day, people will lose faith in fiat money, gold will be hoarded by more and more of the masses.
  2. Unfortunately, gold is relatively expensive and rare and that means the majority of the masses will miss out on getting some gold for themselves.
  3. When that happens, they will notice that silver is dirt cheap relative to gold (since silver prices have been languishing for a very long time).
  4. Therefore, they will surge towards getting silver.

Given that silver prices are at a far lower base than gold, it doesn?t take much for silver prices to rise in absolute terms in order for it to rise a lot in percentage terms.

That?s when David Morgan believes that we will see silver prices soar. Will that day come? We don?t know, but this is a very good Black Swan trade to get into. If you want to speculate in silver prices, just make sure that the ?silver? that you hold are not empty promises.

How should you go about investing in silver?

Friday, July 10th, 2009

After having read our series of articles on silver, you may wonder how you should go about investing in silver. Knowing about the potential for silver prices to sky-rocket is one thing. Benefiting from it is another. Today, we will go into that.

First, as you may already have known by now, when we used the word “silver,” we mean physical silver bullion. Financial assets disguised as silver (e.g. silver ETF, silver certificate, etc), at the end of the day, are just paper assets- they are not the real thing. This is especially true for silver ETFs. For example, in the SEC filings for the iShares Silver Trust, it has clauses that say something like “the liquidity of the iShares may decline and price of the price of the iShares may fluctuate independently of the price of silver and may fall” and the “iShares are intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver.” Silver paper assets are great for trading silver, but you may not want them as long-term investments.

Next, if you are very sure that silver prices will roar mightily in the future, should you pour all your life savings acquiring it?

To answer this question you have to understand that investing in silver falls under the Black Swan investment category. For those who haven’t already, we urge that you read Failure to understand Black Swan leads to fallacious thinking first. We encounter frequent and stubborn misunderstanding of the concepts of Black Swan. As we wrote in that article,

As we talk to more and more people, we encounter a very frequent lack of understanding of Black Swans (for those who wants to learn more about Black Swans in detail, we recommend this book: The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb). As a result, many people have this erroneous belief that contrarians are predictors of gloom and doom. The more entrenched this lack of understanding (of Black Swans) is, the deeper the fallacy one will fall into. This lack of understanding will degrade the quality of one?s thinking, which can translate to severe financial loss when investing.

Today, we will again attack the stubborn entrenchment of this conception black hole.

Many people have heard of and read Nassim Nicholas Taleb’s book, The Black Swan: The Impact of the Highly Improbable. But not many really understand it properly. It took us a few re-readings of Taleb’s winding meandering prose to fully grasp the concept of Black Swans. If you have not read Failure to understand Black Swan leads to fallacious thinking, please read that first…

… now that you have read that article, you should be able to appreciate this fact: when we talk about the potential of silver prices to explode, we are not making a ‘prediction’ of the future. As we wrote in that article, a parachutist packing a backup parachute is not making the ‘prediction’ that his primary parachute will fail. The backup parachute is there to ensure his survival should his primary parachute fail, which is unlikely based on statistical probability. In the same vein, based on statistical probability, it is improbable that the silver fuses (that we wrote before) will light up because it had not happened before. But should the fuses light up, you can be sure that the price impact will be massive.

Therefore, to profit from Black Swan investing, you have to implement an asymmetric pay-off strategy. This idea is very similar to the one that we wrote in the guide, How to profit from a stock market crash?. As we wrote in this article in that guide,

The basic idea behind the asymmetric payoff strategy is simple. First, you structure your bet in the market such that if you lose the bet, your loss is very tiny, but if you win, your gain is very massive. Next, you bet that the market will crash within a specific period of time. If you lose that bet, place another bet for the next period of time. You do this repeatedly until the day of the Black Swan event when your profit overwhelmingly overshadows your accumulated small losses.

Obviously, the disadvantage of this strategy is that it requires fortitude to absorb small losses indefinitely while waiting for a highly rewarding final vindication in the end.

In the same vein, investing in silver means accumulating it slowly, bit by bit and patiently waiting for the silver fuse day. Because you are investing one tiny bit at a time, it should not have any material financial impact on your day-to-day life. In other words, you are investing with your ‘loose change.’

Maybe the day of silver fuse will never come. In that case, the most you will lose are your ‘loose change.’ But should the day of silver fuse arrives, your ‘loose change’ is going to be worth many times over, maybe even a fortune.

Remember, do not bet a large chunk of your life savings into the silver fuse story.

Possible fuses that can ignite silver prices: ETFs

Wednesday, July 1st, 2009

Today, we will talk about another long fuse that can propel the price of silver further-the rise of ETFs. In fact this applies to precious metals in general.

A precious metal ETF is basically a financial instrument that trades on the stock exchange and is designed to track the price of the underlying precious metal. As many funds, institutions, money managers, insurance companies are forbidden to own physical commodities, the only way for them to gain an exposure to commodities is via ETFs. Some experts believe that this is the primary purposes of ETFs.

Precious metal ETFS have enjoyed tremendous growth over the years. As this article reported,

Bullion held in depositories on behalf of gold exchange-traded funds investors is at record levels . . .  and, in recent days, has been growing by leaps and bounds.  Worldwide total gold ETF holdings now exceed 1325 tons (42.6 million ounces).

To put this number in perspective, ETFs now hold more gold than the Swiss central bank. Strikingly, gold held by ETFs now account for more than 40 percent of identifiable gold investment worldwide.

A very big question to ask is this: how much of the ETFs are backed by the physical precious metals? As David Morgan of said,

… that the “daisy chain” involved in SLV [stock code for the silver ETF] makes it complex and convoluted because, as stated above, the SLV investor owns the iShares [an ETF] (not silver–silver can never be redeemed). The shares are issued by the Trust (Bank of New York), which hires a Custodian, which can have any number of Sub-Custodians, Agents or Depositories, where the silver is purportedly held. Compare this “daisy chain” with the true silver owner, who owns and controls his own silver.

Let’s say there’s not enough silver to back the silver ETFs. Then the situation will be very much like what we mentioned in the previous article, Possible fuses that can ignite silver prices: unbacked silver certificates.

On the other hand, if the ETFs are 100 percent backed, then such explosive growth in the ETFs will consume a lot of precious metals for investment purposes. Assuming that as price inflation rages over the coming years, precious metals investments will become more and more mainstream. This will result in more and more funds and institutions entering the precious metals ETF bandwagon. The question is, how much of these ETFs will be fully backed?

Possible fuses that can ignite silver prices: unbacked silver certificates

Thursday, June 25th, 2009

In our previous article, we talked about the silver leasing rort that has the potential to ignite silver prices. Today, we will talk about another rort- silver certificates.

There are many trusted financial firms that provide precious metal storage to their customers who have bought the precious metals from them. For example, you may buy 2 kg of gold from XYZ Bank. In return, XYZ Bank will issue a certificate to officially state that you own 2 kg of gold in their storage facilities. In return for storing your gold, you have to pay XYZ Bank storage ‘fees.’ Sometimes, these ‘fees’ are ‘paid’ by running down your gold balance over time. For example, after 10 years, you will find that you own, say 1.65 kg of gold.

The problem is that these financial firms are selling imaginary precious metals. Ted Butler, in his article titled “Money for Nothing”, reported that Morgan Stanley was sued for not really storing the precious metals that they charge their clients for the storage ‘fees.’ Worse still, Morgan Stanley had the gall to even not bothering to refute the claim! Instead, they claimed that there’s nothing wrong with it as it is a “widespread industry practice.” In other words, a silver certificate that charges their client storage ‘fees’ is fraud.

It is possible that some of these un-backed silver certificates are backed by silver futures. If, for whatever reason, physical silver prices spike up (could be due to the other silver fuses that we mentioned in previous articles), there could a run on the physical silver. Since there is not enough physical silver to match the silver certificates, the next best thing the banks will do is to demand physical delivery on their long silver futures position or buy the silver at whatever price in the spot market. This will tighten the short squeeze on the silver futures market even more, exerting more upward pressure on physical silver prices.

Those who hold physical silver will laugh all the way to the bank (note: in reality, you may not want to bank your silver profits).

Possible fuses that can ignite silver prices: silver leasing

Wednesday, June 24th, 2009

In our previous article, “Possible fuses that can ignite silver prices: price manipulation“, we discussed about one Black Swan that may possibly ignite the prices of silver in future. Today, we will discuss about another possible price bonfire- the leasing of silver.

This is one of the most commonly unheard of practice. It takes place when a silver producer has buyers but does not have silver on hand to sell. To solve this problem, the silver producer borrows the silver from some entity who has a huge silver hoard (e.g. central banks used to have) and sells it to the buyer. The silver producer then has an obligation to return the silver with ‘interest.’ This is similar to the gold leases that we discussed in Get paid to borrow gold and silver?.

The problem with gold and silver leasing is that the loans are never repaid- they are simply rolled over. By some estimates, if all the gold and silver leases are to be repaid, all mining production have to be fully devoted to task for 2 years. If that happens, that means  the world can forget about producing jewellery, iPhone, Blackberrys, laptop computers.

As Ted Butler pointed out in his article, that there are 150 million ounces of gold and 1 billion ounces of silver on loan. There are currently no supplies to use for repayment. Thus, these loaned silver is a phatom supply which surpresses prices.

What if (or rather, when) the leasing system collapses? This is another Black Swan.

Possible fuses that can ignite silver prices: price manipulation

Sunday, June 21st, 2009

We will continue our silver series today from our previous silver article. The full guide in our silver series can be found here. This article will assume that you have already read all the previous articles in our silver series.

As you know by now, we believe that silver prices are severely undervalued.

In fact, it is likely that it is manipulated. It seems that certain entities are using the New York Commodities and Mercantile Exchange (COMEX) to use it to offload a lot of paper silver into the silver market. To do that, it sold a lot of silver futures into the COMEX market (that is, it sold a lot of promises to deliver physical silver in the future). As we explained in How futures price affect market price, the futures price have an effect on the spot prices (market prices). By manipulating the futures prices, the spot prices of silver can be manipulated.

The problem is, the paper silver that is being sold through the futures market is unlikely to exist. Why? Commodities traders on COMEX have made bets in which they promise to deliver more than twice the amount of silver known to exists! If the traders who bought the promises to deliver silver in the future demand the physical silver, the rest of the world have to be starved of silver for more than a year. That means all production of iPhones, Blackberrys, netbooks, notebooks, etc has to be ceased for a year. No other commodity has such a large short position. In contrast, the amount of gold sold through the futures market amounts to only 2.5 percent of known inventory.

Even more suspicious, of all the commodites, silver have the largest proportion of futures contracts held by the smallest number of traders. Only 4 traders hold the vast majority of the silver short (sell) positions, of which just one or two hold more than 50 percent of all of them. This means only couple of entities are controlling the price of silver for the rest of the world. These 4 traders have sold, for future delivery, more than 4 months of worldwide silver production.

The market for paper silver is far larger than the market for physical silver, with the prices of physical silver determined by the prices of paper silver. That means that the prices of physical silver are artificially set far too low. This means that with such artificially low price, the consumption of physical silver is much higher than what it should be had market prices been allowed to find its price level. Couple that with the declining supply and constrained production of silver, it will only be a matter of time before the paper silver market will fail (i.e. all these ‘promises’ to deliver physical silver fails), sending prices of physical market soaring. As this Time magazine article reported (in 2001),

Still, the jump in price spread chaos across the market as Buffett called for delivery of more than 42 million oz. of the silver he had bought–after already having some 87 million oz. in tow. Panicky short sellers, who had borrowed silver and sold it in the expectation that the price would fall, had to swallow huge losses to complete the deals. Major buyers of silver like Eastman Kodak, which processes millions of ounces a year into film, faced big increases in raw-material costs. And everywhere families began eyeing grandma’s precious flatware as a possible source of cash. “We think we may see the spike reach double digits–maybe $10 an ounce–but one doesn’t really know in this rarefied territory,” says Nick Moore, director of Flemings Global Mining Group in London.

In 2001, Warren Buffet reported buying up 129.7 million ounces of silver. His demand for physical delivery caused chaos in the market.

This silver price fuse is a Black Swan event

Can mining supply of silver fulfil global needs?

Monday, June 8th, 2009

In our previous article, How much has the silver stockpile been depleted?, we wrote about the depleted supply of government silver stocks. Today, we will look at the mining supply of silver.

The first question to ask is, if there is little silver, why don’t miners just mine more silver?

Well, the first problem is that most mined silver does not come from silver mining operations. Around 75% of mined silver comes as a by-product of mining other metals like copper, lead, zinc and gold. The silver is a ‘bonus’ to those miners. Therefore, what is the implication? These miners will not increase mining copper, lead, zinc and gold just to take advantage of any rise in silver prices. Their businesses are not dependent on silver prices. For example, if a copper miner gets 1 percent of its income from silver, it’s not going to dig up ten times more copper to increase its silver production of silver by ten times. So, the burden of increasing silver production falls on miners who mine silver as their primary metal. These miners are a rare breed. They produce only 125 million ounces per year, which is 25% of silver mine production.

The next question is, why don’t more silver mines be opened?

As we said before in Real economy suffers while financial markets stuff around with prices, starting a mine from scratch is an extremely capital intensive project that can take up to several years. Including strict environmental laws, the process can take even longer. Not only that, with precious metals coming from the bottom of a secular bear market in around 2000, there is a severe shortage of workers with specialised knowledge required for mining operations.

Then there’s another problem with the supply of below ground silver. According to Ray De Motte, president of Sterling Mining, the ratio of minable silver to gold may be less than 8 to 1 today, compared to 12 to 1 in the past (that can explain the 12:1 historic silver:gold ratio- see What determines the gold-silver ratio?). Also, buried within the facts of reports by the United States Geological Survey (USGS), at the current rate of production, the two metals that will run out first are gold (30 years) and silver (25 years). Given that silver has much great industrial use than gold and assuming that its usage will increase along with the rise of China and India, it is likely to run out much sooner than gold.