Archive for June, 2009

Pre-empting strong states

Sunday, June 28th, 2009

On our previous article, one of our readers David, commented that

The situation you describe is just the kind of thing that makes me wonder what will happen when the squeeze occurs. I wonder if all of a sudden the government will come in and change the rules of the game to hide this or prevent it from happening. All of a sudden the rules might just change and FRNs might be substituted for physical Silver in contracts that require physical Silver delivery, just for the sake of the system, and like preferred debt holders at GM silver ?holders? will not get there silver and not have their day in court either.

I can?t remember the source of this quote but it goes something like this:?its not necessarily good to be right when you are betting against the government.? This goes again to the deterioration of the rule of law in the USA and the capital flight this will cause. Will laughing really be the right course of action when Silver defaults happen and the price starts to rise?

This situation mentioned by David is the major Black Swan concerns that bullion investors have. As we mentioned in the reply,

Yes, that quote comes from Marc Faber.

Government intervention to change the rules in the middle of the game is the fundamental uncertainty of silver play (in fact, it is a play on all precious metals/commodities/real assets investing). It is a Black Swan (rule changing) on a Black Swan (silver defaults).

A question we have to ask ourselves is whether we think the future is one of the strong state or a weak state (see Gold and the strong state). A strong state is one in which it has the coercive power to change the rules and enforce obedience to the rules on pain of death. The weak state is one in which the free market forces overrule the powers of the coercive state. There are good arguments for either case.

In either case, we have to be vigilant and take pre-emptive steps in the event that we see the rise of the strong state.

This reply prompted another of our readers, pb, to ask,

I was wondering if you could elaborate on the ?pre-emptive? steps you mention above?

Also would you consider Australia to already be a strong state?

Today’s article will answer this question. For this, we will assume that you’ve already read Gold and the strong state. Otherwise, this article will not make sense.

First, we will address the question of the strong state. Our idea of the strong/weak states comes from this book from the Strategic Studies Institute of the United States Army War College- From the New Middle Ages to a New Dark Age: The Decline of the State and U.S. Strategy. The author believes that the world trending towards the New Dark Age whereby…

Underlying the change from traditional geopolitics to security as a governance issue is the long-term decline of the state. Despite state resilience, this trend could prove unstoppable. If so, it will be essential to replace dominant state-centric perceptions and assessments (what the author terms ?stateocentrism?) with alternative judgements acknowledging the reduced role and diminished effectiveness of states. This alternative assessment has been articulated most effectively in the notion of the New Middle Ages in which the state is only one of many actors, and the forces of disorder loom large.

We remain agnostic on the author’s view. Will the state reign supreme? Or will, as the author believes, the “state is only one of many actors, and the forces of disorder loom large?”

To set you thinking, let us pose you a couple of scenarios:

  1. Let’s imagine you had bullion in Stalin’s Soviet Union in the 1930s, and let’s imagine that Stalin issued a decree that all bullion owners must turn in all the physical gold in their possessions. Otherwise, the consequences will be torture and death in the gulags. Would you comply?
  2. Let’s say you have bullion in Afghanistan today. Hamid Karzai’s weak central government issued a decree that all bullion must in the possession of the state. Would you comply?

These two scenarios are at polar opposites. The question of whether Australia is a strong state or not is rather subjective (and besides, geo-politics/law is not our cup of tea). Arguably, Australia is a stronger state than China. That’s because assertion of central authority is constantly an issue in China’s long history. Today, we still read of stories of the Chinese central governments’ decrees getting watered down as they passed through the provincial governments to the local officials, down to the grass root level. In another sense, China is a stronger state than Australia because there are more democratic checks and balances that limit the power of any entity in Australia. As to whether Australia is a strong state or not, we urge our readers to take a look at Section 42 of the Banking Act here.

In essence, if we see (1) the trend towards stronger government power, more government interventions, greater concentration of power, rise of Big Brother and (2) government debasement of fiat money, then bullion investors should better watch out and take pre-emptive actions. What do we mean by pre-emptive actions? This is a rather left-field question, involving all your wit to remain a step ahead. Here we offer you some ideas (note: we do not necessarily endorse all these ideas):

  1. In 1933, when the US government nationalise gold and silver, 77% of citizens retained them, illegally.
  2. The government will nationalise bullion if the free market are using them as money. If the free market are using them as money, it means hyperinflation would have occurred. If hyperinflation have already occurred, it would already mean that wealth have already been transferred to the bullion holders. If wealth have already been transferred, then there’s no point in holding bullion. By the time this occurs, sell your gold to the government and immediately use the proceeds to buying something else tangible (e.g. real estates, farm land, office blocks, bribes to skip the country on a boat, etc).
  3. There’s always the black market, which is essentially the free market going underground to assert itself against the government’s unsound interventions.
  4. Buy and store your bullion overseas (this may mean you have to make an overseas trip to do that).

It should be clear by now, investing in physical gold (and silver) is not just a mere financial decision. It is also making a political statement that you care for liberty and freedom. It is also a vote against the financial oligarchs, who derives its power from the fiat monetary system (see The Quiet Coup by Simon Johnson, former chief economist of the IMF).

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

Rare earth: an introduction to a tantalum and niobium mining company

Thursday, June 18th, 2009

In Chinese strategic plans: control of the supply of rare earth metals, we gave a short introduction to the rare earth metals. In response to that article, we received this email from a rare earth mining company:

Thought our story would be of interest to your readers:

Commerce Resources Corp. is developing a rare metal deposit, of tantalum and niobium, in central British Columbia.  While many have not heard of these metals, they are essential for the functioning of our modern economies.  Tantalum is critical for the production of microelectronic capacitors that are necessary for the production of cell phones, laptops, digital cameras, airbags, and other electronic devices. It is also used for specialty applications in the aerospace, medical, and nuclear power industries.  Niobium, on the other hand, is used as an alloy in steel and super alloys.  It is used, for example, in the manufacture of bridges, buildings, and oil and gas pipelines.

Demand for tantalum has been increasing since the 1990s as more microelectronic devices are adopted and global economies expand.  Tantalum supply on the other hand is under stress.  Within the past six months the three largest suppliers: Talison from Australia, Noventa from Mozambique, and the United States Defence Logistics Agency have either shut down or exhausted their supplies.  Over 50% of the worlds tantalum supply, and almost all of the stable ethical supply, has been removed.

Since most of the world?s supply has been shut out, the majority of tantalum is now coming from the Democratic Republic of Congo where it is mined as ?coltan? produced in unethical and inhumane ways and the profits of which fund the ongoing wars that have plagued the country for years.

Commerce?s Blue River project is in the development/pre-feasibility stage and we are working towards becoming a stable, ethical, and reliable source of tantalum supply for the world market.  Since its IPO in 2001, Commerce has been led by David Hodge, a veteran resource executive with over 20 years experience.  David, a dedicated and colourful character, is available for interviews for articles.  I have also included a link to our latest presentation.

Kind regards,

Ryan Fletcher
Corporate Development
Commerce Resources Corp.
Suite 1450 – 789 W Pender St.
Vancouver, BC V6C 1H2

Please note that this should not be seen as a recommendation for this mining stock. Instead, we see this as a good chance to learn more about rare earths.

We will be conducting an interview with David Hodge soon. If you have any questions that you would like to ask him, please submit them in the comments section below. We will collect them as part of the interview questions.

Chinese strategic plans: control of the supply of rare earth metals

Tuesday, June 16th, 2009

Our long time readers will know that we keep a watchful eye on big picture secular trends. One of the big-picture secular trend is the rise of China. As we wrote before in Example of a secular trend- commodities and the upcoming rise of a potential superpower,

It has been said that today?s 21st century will see the secular rise of China. During the 20th century, China endured non-stop revolutions, civil wars, invasions, social upheavals, ideological experiments (e.g. Cultural Revolution, Great Leap Forward). It was the last couple of decades of the 20th century that China began to slowly emerge from her self-imposed shackles to catch up with the West.

As we observe China, it becomes clear that the Chinese government has a deliberate and long-term plan for the nation. Unlike its democratic Western counter-part, it does not have to worry about winning elections every few years. Since winning elections involves some level of populism, the short-term interests of the ballot vote can clash with the strategic long-term goals of the nation. By the way, please don’t get us wrong- we are not praising China here and political ideology is not our cup of tea. Our goal is to observe in the context of becoming a better investor.

So, for today’s article we will look at one aspect of China’s long-term strategic plan- the monopolisation of the rare earth supply.

First, what are rare earths? As this article explains,

Rare earths are the 15 elements within the lanthanide series of the periodic table, plus the elements yttrium and scandium. The best known are lanthanum, cerium, neodymium, praseodymium, gadolinium, europium and samarium.

Rare earths have a lot of vital industrial and electronic applications. Without them, many of the modern way of life that we enjoy today will not exist. The fact is, there are no substitutes for rare earths in some of these applications. Here are some examples:

  1. Petroleum refining- large amounts of lanthanum and cerium have been used here, “with the result of increasing yields from each barrel of oil by about 10% while extending the life of other expensive catalysts like platinum.”
  2. Aerospace super-alloys
  3. Rechargeable batteries (NiMH).
  4. Powerful permanent magnets in information technology products (e.g. hard disks, DVD, DVR, iPods, smart phones, computers), giant windmill assemblies, hybrid vehicles (a typical one consumes 50 pounds of rare earths).

Rare earths are particularly vital in the clean energy applications. Without them, there can be no clean energy industry. Also,

It?s also important to keep in mind that almost none of the rare earths used in large power systems (like windmills) or electric vehicles (such as with NiMH batteries) are currently being recycled. The long lifetimes of the magnets and batteries, coupled with the lack of recycling technologies and dedicated facilities, means that any increase in supply can only come from new mining.

Now, here comes the focus on China. China is the largest producer of rare earths. In fact, it is said that China is the Saudi Arabia of rare earths. This graphs shows the rare earth production over the past half-century:

Global rare earth metal oxide production

The Chinese are in the process of cornering the supply of rare earths,

Another factor is that there appears to be an official Chinese policy to slow down export of rare earths. Chinese exports have decreased by 8% or so each of the past three years. Chinese suppliers have placed foreign customers on allocation, at reduced quantities from years past. The Chinese explain that they have closed mines for environmental reasons. Yet the Chinese also promise adequate supplies of rare earths if foreign users will move their industrial facilities into China.

By encouraging foreigners to move their industrial facilities, high teach factories and research centres to China in order to gain access to rare earths, there will be technology transfer to China.


While about 42% of worldwide rare earths resources are outside China, there are NO non-Chinese sites with any significant processing or refining capacity.

Mr. Sato has stated, ?Many people are looking at establishing alternative refineries and sources outside China, but the investment is not necessarily a sound one because of the threat of price revenge by China. If new projects emerge, as they have recently in Malaysia and Australia, China could just drop its prices and force rivals out of business.?

In other words, the Chinese are engaging in predatory pricing. Predatory pricing is an anti-competitive practice by monopolies to bankrupt their competitors by slashing price so much that everyone makes a loss. Since the loss-making monopoly will eventually outlast their loss-making competitors, it is only a matter of time competition is eliminated and the monopoly can increase prices. Anti-competitive practices are illegal under the anti-trust laws. Though this law can be enforced on individual corporations, it is not possible to do so against a nation.

As for investors, this is a tricky investment theme. The rare earth mining company that you are investing in can be a victim of predatory pricing!

What should the ‘evil’ savers do?

Sunday, June 14th, 2009

In our previous article, What goes in the mind of the Rudd government as it extends FHOG?, Rebecca asked the following question:

I was wondering, can you guys make any suggestions on what potential first home owners OUGHT to be doing INSTEAD OF leaping upon the FHOG [free cash (of around $14k to $21k) that Australian government gives to first home buyers]? This reader may, uh, be personally invested in the answer to such a question 😉 but I bet a lot of others are in the same boat: people who’ve been saving saving saving only to have the cheese moved $21,000 ahead again (thanks KRudd!), and now face the possibility of having their hard-saved future deposit decimated by inflation because it’s still liquid rather than sunk into bricks and mortar?

Assuming stable employment (easier said than done, but run with me here), isn’t the property market almost a safe bet now just because Kevvie’s obviously bailout-happy and presumably knows he’s not going to be very popular if he lets all the first home owners he made go under, so is likely to keep on bailing?  Does the traditional advice that a person save a good deposit apply any more when the only way to save your money is to have it invested in property or some other format that’s not going to get devalued should inflation occur? What else can one do to escape being a victim in this whole mess simply through being on the poor end of the spectrum and trying to do the right thing and be responsible?

Basically, as Rebecca asked, let’s say these 3 conditions are satisfied:

  1. Assuming you have a guaranteed stable job (if we read Rebecca correctly, other people are not in this envious situation).
  2. The government will succeed in enticing people to go deeper and deeper into debt to bid up property prices higher and higher.
  3. If those who are enticed into debt default, the government will bail them out.

Wouldn’t this result in property price rising further and immune to a price crash? If that’s the case, should savers gouge themselves in debt instead because the government is committed to moral hazard?

[Note: some parts of what follows are a bit of sarcasm and humour- so, don’t take them too literally.]

Sure, it can be very cheap and easy for the government to engineer further property price inflation. The FHOG is an example of that. The government needed to fork out a relatively small outlay to result in a much larger increase in borrowing, which helps to inflate property prices even more. To see why, imagine a borrower has a $1000 deposit. At 90% LVR, he can buy a house that cost $10,000. Let’s say the government give the borrower another $1000. At the same LVR, this borrower can now pay $20,000. Thanks to the powers of leverage, a $1000 outlay from the government result in an increase of $9000 in debt.

Sure, in the event that the sh*t hit the fan for the Australian economy, the government can bail out defaulting sub-prime borrowers willy nilly and prevent a property price crash. They can print copious amount of money (until Australia runs out of paper), invoke emergency powers to prevent repossessions, confiscate the wealth of savers to bail out irresponsible defaulters, nationalise banks, and so on.

The problem is, if the sh*t hit the fan for the Australian economy AND the Australian government engage in such extreme moral hazard, Australia will become a big banana republic and the Australian dollar will have less value than toilet paper. Foreigners lend a lot of money to Australia and they will readily punish any extreme moral hazards. In that case, all Australians will lose big time, especially savers. And also, a property is not recommended in such an environment because:

  1. One cannot carve out a tiny fraction of his property in exchange for food.
  2. There are much better hedge against hyperinflation than property- gold and silver. The reason is because credit will be scarce in a hyperinflationary environment because lending money is a losers’ business. If credit is scarce, what do you think will happen to property prices in real terms?
  3. As lenders raise interest rates to match the rate of hyperinflation AND one loses his job, one is essentially stuffed (unless the government bails him out).

So, if you believe Australia is going towards that route (it may not be as extreme as the scenario that we painted, but you get the idea) and you want to protect your savings, you may want to diversify part of your savings away from Australian dollars (as well as any assets denominated in Australian dollars). Ideally, such diversification should transfer your wealth to foreign countries, where the foreign government is in a position to respond with a “stuff you” to any Australian government’s demands for information about your foreign assets. For example, you may want to consider foreign currencies (preferably in foreign banks out of reach of the Australian government), physical gold and silver (stored overseas or buried in some secret treasure island guarded by dragons), foreign assets and so on. Lastly, if the masses and government persecute the evil savers the same way the Nazis persecute the Jews, be prepared to migrate.

Please note that we are not trying to be unpatriotic here. Our point is that, if politicians resort to extreme stupidity, they can easily turn a nation into a banana republic in record time. Just ask how Robert Mugabe did it by turning the bread basket of Africa into a starving and improvished nation.

Are improving consumer sentiments ‘good’ news?

Wednesday, June 10th, 2009

In today’s 7:30 Report, Kerry O’Brien reported of a good news on the Australian economy. The good news, as it turned out to be, was a surprise jump in consumer sentiment as measured by the Westpac-Melbourne Institute index. It was the largest jump in 22 years. Words to describe this rebound include, “remarkable” and “surprise.”

What was the reason for the jump? According to Bill Evans, chief economist of Westpac, it was “very likely that the dominant factor behind this extraordinary rise was the release of the March quarter national accounts last Wednesday.” Other reasons include the lowering of interest rates, stock market rally and so on.

The fact that economists got excited over something so meaningless shows that shonky economics is practiced here in Australia.

As we quoted Wilhelm R?pk in his 1936 classic at Why is the market so easily tossed and turned by dribs and drabs of data?,

It was indeed an ingenious idea to apply the principle of nautical astronomy to economic forecasting, but there was one fatal flaw. For as long as we have not made a thorough investigation into the causal relationships between the time-series, the mere temporal sequence does not tell us any more than that something has happened in the past which might not happen in the future if some variables in the causal mechanism should change. But in investigating the causal relationships we are thrown back from statistical empiricism to ?theory? in the deductive and analytical sense.

By the statistical method, we ascertain facts, but we cannot explain them, i.e., bring them into logical order so that we ?understand? them. Only analytical theory can do that, and if there has been, in recent years, any furthering of our insight into the mechanism of crises and cycles, this has been the work of the theorists and not of the empiricists.

Where is the critical thinking by those mainstream economists?

It is very easy to understand why consumer sentiments improved. Today, many people’s ‘wealth’ are tied to the asset markets. Many have their retirement ‘savings’ invested in superannuation funds, which in turn pour the money into the stock market. Also, many have most of their ‘wealth’ tied to their primary asset, their home, which in turn depend on the property market. To put it simply, people’s sense of financial well-being are tied to asset prices. For those deep in debt, if their asset prices collapses, it’s curtains closed for them.

Naturally, if

  1. One’s sense of financial well-being depends on asset prices and
  2. Having read about “green shoots,” recovery ‘hopes,’ Chinese appetite for Aussie dirt, and sustained stock market rallies on the mainstream media daily and repeatedly,

… it is easy to feel optimistic as an indebted consumer. As the Nazi propaganda chief, Gobbels once remarked, if you repeat something long enough, eventually people will believe it as truth.

Allegedly, the stock market, in response, rallied hard upon this ‘good’ news. In some ways, this rally will feed back into consumer confidence. This reminds us of this story at Do sentiments make the economy or the economy makes the sentiments?,

It was autumn, and the Red Indians on the remote reservation asked their new chief if the winter was going to be cold or mild. Since he was a Red Indian chief in a modern society, he couldn?t tell what the weather was going to be. Nevertheless, to be on the safe side, he told his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.

But, being a practical leader, after several days he got an idea. He went to the phone booth, called the National Weather Service and asked, ?Is the coming winter going to be cold??

?It looks like this winter is going to be quite cold indeed,? the meteorologist at the weather service responded.

So the chief went back to his people and told them to collect even more wood. A week later, he called the National Weather Service again.

?Is it going to be a very cold winter??

?Yes,? the man at the National Weather Service again replied, ?It?s definitely going to be a very cold winter.?

The chief again went back to his people and ordered them to collect every scrap of wood they could find. Two weeks later, he called the National Weather Service again.

?Are you absolutely sure that the winter is going to be very cold??

?Absolutely,? the man replied.

?It?s going to be one of the coldest winters ever.?

?How can you be so sure?? the chief asked.

The weatherman replied, ?The Red Indians are collecting wood like crazy.?

This Westpac-Melbourne survey result is like the Weather Service man ‘predicting’ cold weather ahead by observing the Red Indians collecting firewood like crazy, who in turn did so on the Weather Service’s ‘prediction.’

It doesn’t take a genius to deduce that another panic in the stock market will cause consumer sentiment to tumble again.

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.

How much has the silver stockpile been depleted?

Friday, June 5th, 2009

During the Great Depression, President Franklin Roosevelt signed the Silver Purchase Act of 1934. That started the world’s greatest stockpile of silver, peaking at 3.5 billion ounces in the 1950s.

As we wrote in Third turning point for silver, the US government sold down its massive silver stock in the 1960s in an attempt to keep its price down. Also around the same time, as we wrote in What determines the gold-silver ratio?,

… scientific discoveries in the 1960s saw the widespread industrial applications of silver.

The problem with industrial use of a metal is that it gets ‘consumed’ and used up in microscopic amounts, thrown away and eventually ends up in the landfill. Therefore, unlike gold, most of the silver ever dug out from the earth are lost through ‘consumption.’ Only jewelery and silverware preserves the silver.

By 1980, only 2.5 billion ounces of silver are left. By 1990, 2.1 billion ounces are left. As in late 2008, only 20 million ounces of silver are left in the US government’s stockpile. Other government around the world did likewise. Today, government stockpiles around the world hold only 0.016 percent of the original 3.5 billion ounces that the US government used to hold!

In other words, the amount of silver left in the world that is available for investment is less than gold! Gold, on the other hand, has a rising quantity of stockpile. If all mining activity are to stop today, the aboveground stocks of silver will only last 4 months!