re: silver to go nuclear
G'day There are 2 types of investors, those who are silver bulls and those who haven't done enough research. :-) Another good article this one. cheers Rod
http://www.silver-investor.com/nuclear.htm
SILVER TO GO "NUCLEAR"?
by Alex Wallenwein
In the world of physics, silver is too high up on the table of elements to be considered a radioactive substance, but in the world of finance, the economic 'powers that be' have discovered an - entirely unintended - way to pressure-cook this precious metal to the point where is may soon serve as the economic equivalent of weapons-grade plutonium.
What is this all about?
Silver, widely regarded as gold's "little brother" or "the poor man's gold" is today far more rare than its yellow cousin. While almost all of the gold ever mined in human history still exists above ground in one form or another, world silver stocks have been depleting at an alarming rate because of it intensive use in industrial and other processes (photography, X-ray films, superconductivity, catalytic converters, computer hardware, etc.).
As a result of its high importance as a (preferably cheap) raw material to big business, big business appears to have formed a cartel that has widely colluded to keep the price of silver from rising in accordance with free market forces. Big business found it opportune to create the "Silver Users Association" composed of huge companies, the principals of which promptly proceeded to heavily lean on silver manufacturers and dealers to support them in keeping the price down.
This "support" came primarily in the form of the use of various exotic financial instruments (so-called "derivatives") and the practice of "forward selling" by silver producers, which is essentially short-selling of silver in order to lock in an advantageous price as a hedge against possible future price declines. According to precious metals experts, this practice has consistently trounced the metal's price whenever the price dared to rear its ugly head too far above the industry-preferred $5.00 per ounce water mark.
"Short-selling" is a bet that the price of a stock or commodity will be lower in the future. It works like this: a commodity trader borrows physical metal and sells it at market price, in the hope the price of the metal declines in the future. If the trader's bet was correct, he can turn around at the time the silver is due back to the owner and pay less for the same quantity of silver, return the metal to its owner, and pocket the difference.
This practice has been especially lucrative since those willing to loan the metal out to the traders (usually governments) do so at ridiculously low interest rates - around one or two percent. None of this is illegal, of course. It is all "above board." Lots of traders and investors do this.
The problem comes in when too many extremely powerful traders do this in concert in order to make sure the price goes lower - or at least stays low. For, every time this is done, physical silver is "dumped" or sold into the market, driving the price lower because of the increased supply. If there are not a comparable amount of bids to buy the metal at the same time, prices fall.
This practice results in the creation of lease contracts which in effect are paper claims to having the borrowed silver returned at a future date at the stated price. These lease contracts themselves, along with other paper claims to silver (like options), are then sold in the options markets, further flooding the market with "paper-silver."
The charge by experts, like Ted Butler of Butler Research, is that some of the most powerful financial houses (and some government institutions) have colluded over the past several decades to control the price of silver in this fashion since the people who sit on their boards are the same as (or have close financial and/or family ties to) those who control the fat-cat companies that make up the "Silver Users Association." Think of the biggest names in world business, and you can be sure they are in there.
This collusive practice has apparently received staunch support - in the form of turning several blind eyes to this practice - from US government agencies such as the CFTC (Commodities Futures Trading Commission) which is charged with overseeing and preventing just such collusive practices on the COMEX (US Commodities Exchange).
The resulting artificially low prices have caused excessive demand to prevail, which in turn has created a continuing, year-after-year production shortfall that had to be met out of existing silver stocks. When testing whether this hypothesis is in fact true, sure enough, we find that above-ground, known, silver supplies have dwindled at an alarming rate. For example, 60 years ago the United States government owned nothing less than 6 BILLION ounces of silver. Only last year it was announced from on high that this staggering amount of silver is now forever gone.
Annual mine production was around anywhere from 500 to 590 million ounces during the last ten years. Old silver scrap reprocessing accounted for about 150 to 190 million ounces of supply per year during that time. Total industrial and other fabrication varied between 700 and 900 million ounces per year. (Total fabrication demand in 2001 was 863 million, for example). This is according to figures provided by the Silver Institute at its web site http://www.silverinstitute.org/demand.html.
The resulting deficit of roughly 100 to 140 million ounces had to be made up (and continues to have to be made up) from above-ground silver stocks. And those silver stocks are now nearing total depletion. Yes, there are a lot of Indian women who wear a lot of silver and gold around their ankles and necklaces, but how many of them do you think are willing to sell it to the world's industry giants at $4.50 per ounce?
On top of that, the most important thing to realize is that silver is above all an industrial metal today. While most of the gold ever mined in human history still exists and is available above ground, most of the silver ever mined has been processed and is effectively lost forever. The silver contained in photography paper is probably the best example of silver that will never be recovered. It's the same with x-ray film, mirrors, and other uses.
Now, here comes the kicker: COMEX and CFTC statistics show that there are total "short" positions in silver out there in "traders' land" in the amount of 335 million ounces - more than twice the amount of the yearly production shortfall. According to Ted Butler, who in the precious metals industry and investing community is widely regarded as the world's foremost expert on silver, this amount of net "short" positions (i.e., silver that has been borrowed in a speculative short-selling transaction and must eventually be returned) can never be repaid. 200 million ounces of this "short" position is held by only the four largest traders out there.
This staggering figure in the face of the previous statistics proves beyond any doubt that this leasing and short-selling game is the true reason why the price of silver is (and has been) this low in the face of these extremely bullish supply and demand fundamentals - not flagging silver demand "because we are in a recession", not "over-supply" by mining companies and scrap recovery. (However, for some strange reason the latter two are always the reasons cited in the financial press whenever silver gets knocked down again after trying to climb out of the $5.00/oz.-level pool it is trapped in.) Wonder where they take their cues.
We've seen the "kicker" and now comes the clincher:
According to Butler, today's known (identifiable) silver stocks amount to no more than 150 Moz.- the Silver Insitutes alleged numbers claiming 296 Moz of unverifiable "European dealer stocks" and 170 Moz of "government" stocks" (which governments, please?) notwithstanding
Let that sink in for a few minutes.
Digest it thoroughly.
Take a deep breath, and now look at all of the above figures and the short-sales positions again:
The CFTC has allowed the four largest COMEX traders to amass a 200 million ounces short position; and the total amount of identifiable above-ground silver stocks is 50 million oz. less than that - AND there is a 150 Moz. per year production shortfall!
If all that is true, this means these silver loans can never be repaid. It also means that, at the current rate of depletion, the world's identifiable silver stocks will be gone before too long. When that happens, no amount of "paper silver" can make up the difference. Paper just isn't that good a superconductor. It doesn't make very pretty jewelry, either. (But it could be that all those paper fibers may twist themselves into a nice, tight, rope by which these bullion traders may soon hang themselves when the fecal matter hits the fan.)
Apply some deductive reasoning, and you will see that only three conclusions can be drawn from all of this: (a) the silver markets are rigged; (b) the rigging will end sooner, rather than later - when the first actual physical silver shortages occur; and (c) these actual physical shortages are due to occur very, very soon. How soon, nobody can precisely predict. But there is no arguing that this is an investment opportunity of a lifetime for average families the world over.
As this is written, the fuse has been set. The first nucleus has split and has released its two neutrons, which will soon each hit another nucleus, which will in turn each release two more neutrons, and so on. The nuclear chain reaction has been set in motion: Barrick corporation, the world's second largest gold producer and one of the very largest silver "hedgers" (forward sellers) has announced on February 12th that it will no longer increase its hedge book but will deliver its production of physical silver into its hedges.
This means that Barrick knows very well the jig is up. They are deep in the gold forward selling morass already. Heck, theyalmost singlehandedly invented the forward selling of gold game. They know that silver will blow up very soon, and they do not intend to be be caught anywhere near ground zero this time.
Since Barrichk made its announcement on February 12, 2003, the lease rates for silver have begun a steep and sudden upward trajectory. If that trajectory continues unabated, the price for continuing to borrow and sell silver short will become "uneconomical" to the short-sellers, and the practice may stop altogether. When that happens, other silver hedgers will stop hedging and will start delivering into their hedge books, and so on. Neutron will hit proton and knock off two more neutrons in the process ... Kaboom!
There is more than enough "fissionable material" (the total number of hedgers, short-sellers, and silver "lessors") out there to sustain a nuclear silver price chain-reaction of historic proportions.
As noted before, silver has always been labeled "the poor man's gold". When the moment of truth comes and this precious-metals nuclear device called "the silver price" goes off, this "poor man's gold" is likely to make a lot of astute, ordinary investors very, very wealthy - and may just leave the financial infrastructures of the price-riggers a radioactive wasteland.
But then again, the price riggers always have the government, supported by taxpayers like you, to bail them out, don't they? Well, this time even the quasi-official commandeering of taxpayer resources may not be enough to put the genie back in the bottle. And what a genie it is!
