I Don't Trade Futures
(Get Real Physical Silver!)
Silver Stock Report
by Jason Hommel, April 4, 2008
An acquaintance of mine lost $34,000 in silver futures these last few weeks. It was an awful story. He started out with just a few contracts, and added more as he started to do well in them. Then, the dip caught him, and he got a margin call. He initially invested $20,000, which went to $12,000, and then to $50,000 in silver. Then, he had to put up an additional $17,000 just to maintain his position, and he lost all of that and had to bail out before he had to put in more money, and his account was down to $3000. Expensive lesson.
He wanted to see what he could to to "get back" what he lost, but his money was gone. You can't "get it back", you can only wisely invest what you have.
That's the trouble with futures and options; you are trying to invest and control what you don't own. You are not taking dominion over what you have, you are trying to take dominion over what another has.
I don't want to condemn anyone who trades futures; as I see it, God has allowed it (he allows usury); even though I don't feel they are perfectly fitting with free market principles of Biblical Capitalism.
I buy futures contracts, in a sense, when I bought silver last week with a wire; I got my silver in the future, about a week later. I buy futures, in a sense, when I get my Propane; they fill the tank first, and within a month or so, I pay the bill.
The main trouble with futures is that they are a promise, not payment in full. Promises can be broken. Promises can lure you in to making obligations you cannot fulfill.
Silver is volatile, more than gold. In Gold's last bull market, gold dropped nearly 50% in 1975, from about $250 to $125, and didn't recover for 4 years.
What if silver did that? Or worse? Could you sustain that kind of loss in futures? Could you ride it out? Not in futures that only go out 2 years.
How can you protect yourself from such an event in silver, in this bull market? Would you have to use less leverage? Or buy longer dated options that don't exist? Should you put down 75% of the money for your silver position, but not hold the silver and still risk a delivery default?
Futures and Silver are fundamentally different things.
Futures expire. Silver does not.
Futures can cause you stress as you might have to pay more than you put down.
Options are worse, since 90% of them are worthless as they expire. I've known several people who tell me sob stories of how they made a successful option trade and made a few hundred percent, but then forgot to sell it before the expiration date because life's unexpected emergencies distracted them from exercising the option on time. When that happens, and the option expires, even if it was worth a lot of money, the value of the option goes to zero, instantly.
Silver can never go to zero value.
You can leave silver to your children's children, and they will have something of value--probably much greater value. People ask me about stocks from before the Great Depression in the early 1930's that are probably worthless. (You should send them to a broker; they may be able to research them for you.) That just doesn't happen to silver.
With futures, there are the moral problems, too. Your wins come at the expense of another, rather than through creative & fruitful productivity. It's like gambling, but worse. If you and I were to gamble on a football game, we'd each put $20 into a hat and have a third party hold the money during the game. But with futures, neither party puts down the full amount that they are willing to bet. The Long does not put down all the cash, and the Short probably does not have the silver, either. So each one is "on the hook" and has to sweat it out and worry as the prices move all over the place.
What's worse about futures is if you win! People tend to try to do the same things that were successful once. They buy more at higher prices, right before the market turns. And then it's easy come, easy go. And that lesson can be very expensive.
But if there ever was a time to buy silver futures or options, it's probably now. But I still won't do it.
I mean, what happens if the other party can't pay, or deliver silver? Supposedly, the broker has to pay, if the trader cannot meet their margin calls within 24 hours. And if the broker goes belly up, like Bear Stearns, then another Broker like JP Morgan would have to pay. Actually, the exchange has to pay. But now that NYMEX went public, they have transferred that liability already, and now have what is called "limited liability" protection of stock ownership. And recently, the NYMEX was acquired by the Chicago traders, the CME.
You would have done way better by buying stock in CME than listening to me over the last few years. CME went from $41 in 2003 to $714/share! But I don't think that run can continue.
The CME just bought itself some liability, and the NYMEX stock holders just got a liquidity event, and can now sell out, and dump all of their liability to the CME. The few large commercial silver shorts at the NYMEX are short up to around 400 million ounces of silver.
If the silver shorts can't deliver silver, their broker will have to find the silver to buy it and deliver it. If their broker goes belly up, the CME will have to pay. Or change the rules or close the trading in futures or default or something.
I believe there will come a time soon when futures will be discredited, through defaults in the contracts, or a cash settlement instead of silver delivery.
In 1980's run up, they could "blame" the Hunt Brothers, but the Hunts failed because they used excessive leverage of futures and options.
What primarily sets the price of silver? I believe it is the futures markets, where the largest trades happen, as long as they can deliver silver when needed.
What if you hold paper futures contracts, and you try to cash out during a time when you cannot find silver anywhere due to a shortage of silver in the coin shops or refineries? What if you have to wait to get silver for a month or two, and you don't know how much you will have to pay, and in the meantime, silver spikes up a few hundred percent?
If the shorts can't find silver to deliver, and that's their professional job and they are the largest traders, how easy will it be for you to find silver?
By the time the futures market size up and default and you get a cash settlement, it will be too late to try to buy silver, I think.
So, the truly ironic thing about the futures market is that it seems like it must fail, in order for silver to do really really well. So the irony is that those who are in futures, instead of physical silver, will be the least likely to benefit, as promises and leverage are no substitute for the real thing.
In gold, in U.S. history, prices exploded after delivery defaults in the metals. In 1933, banks were going bust due to failure to deliver, and then gold was revalued from $20 to $35. In 1971, they stopped redeeming gold to foreigners, and after that failure to deliver, the gold price took off over the next ten years to $850.
Today, silver's still cheap. From $5 to $17, silver's tripled. Ok. Great. But my Propane bill for a single tank went from $350 to $950! And gas went from $1.25/gallon to $4. Where's my capital gain in that?!
My point is that although silver is up, it has yet to really take off. I expect silver to really soar after I expect NYMEX/CME to default on silver futures contracts; the biggest market for "silver promises".
I feel that part of my job to be able to find physical silver for you to buy, and for me.
It's my understanding that fidelitrade.com last week had about 1000 bags of 90% silver, selling for about $12,000 per bag.
Investment Rarities, I heard, was selling similar bags for about $18,000.
I'd like to know when fidelitrade.com runs out. Please keep me informed.
90% silver has several advantages and disadvantages.
90% silver U.S. coin bags are very liquid, with a low spread between the buy and sell prices. They can also be split up easily into smaller amounts for easier trading; silver is money because it helps make change for gold!
Size: A full $1000 face value bag weighs about 55 pounds, and is about the size of a large bowling ball. It takes up about two-three times the space as 100 oz. bars.
Price swings: 90% bags have typically sold at a small premium to spot silver prices all during this bull market in silver. Except now, when you can sometimes find them below spot prices. During the Y2K scare, premiums for 90% bags went up 25% over spot, as people wanted "practical" silver, recognizable silver, that can't be counterfeited, that could be easily traded for smaller items like food in case of societal breakdown. During the 1980 run up to $50/oz., so many bags were sold to the refiners, they could not keep up, so premiums dropped to 30% under spot.
Rarity & Availability: Some suggest that as 90% silver has been melted down, they may be getting rare again. But 90% silver is typically more easy to find right now during this time period of silver shortages, and 100 oz. bars right now are harder to find, and are selling for more over spot now, too, about 60 cents/oz. over spot.
Again, fidelitrade.com seems to have 1000 bags of 90%, worth about $12 million.
I just read that India is finally exporting some silver, about 2 tonnes per day in the last two months, or about 64,000 ounces/day.
But our silver shortages in the West, and around the world in Canada and Australia and Dubai just got a lot worse about 2 weeks ago, and are continuing. I wonder where India's silver is going. Maybe to the futures markets? But they'd have to export that much for 18 years in order to back 400 million ounces of futures.
A friend emailed me Jon Nadler's bio.
Nadler writes bearish views on gold and silver for Kitco, who sells the Perth Mint certificates.
If Perth has all the silver they should have, they should be able to take a $300 video camera, and make a 5 minute youtube video showing a guy walking from outside the Perth Mint right to the vault and video all the bars.
"Mr. Nadler has extensive and long-standing ties in the global precious metals community and has consulted on marketing and product development issues to government mints (US Mint, Royal Canadian Mint, Perth Mint), precious metals retailers (Kitco, GoldMoney, ASI), as well as to trade and membership organizations, (The World Gold Council, and The Industry Council on Tangible Assets)."
For me, that really explains Nadler's bias, as he seems to have consorted with the worst of the bunch. The World Gold Council (WGC) is the nemisis of GATA.org. WGC is that awful industry group who couldn't market gold if their life depended on it; and who tried to sell the merits of gold as jewelry by showing "ordinary-looking" women wearing it, and who refuses to talk up gold's virtues as money, and who purposefully ignores and distorts the information about how much gold the central banks have really sold; as Nadler similarly ridicules. A few years ago, GATA caught The World Gold Council flat out lying about how gold hedging by miners was increasing as it was actually decreasing, and while gold derivatives on the books of the bullion bankers were increasing.
No wonder Nadler despises us who advocate that you take full delivery of your metal as "the tinfoil hat" guys. We're the ones talking down the "products" he's helped "develop" and "market".
My preferred product, real physical silver, has been around for years, and doesn't need me, and doesn't need you, either. Instead, we need it.