Jason Hommel's Free E Book
Reasons why it's always good to own gold (gold is money & why it is
by Jason Hommel, SilverStockReport.com
1. Gold is
money. It is the most liquid asset (property), universally
accepted around the world, easily portable, easily hidden.
Private property requires privacy.
2. Why is
gold particularly useful as money? Gold is valuable & portable
because it's rare & not easily counterfeited. Gold is fungible
& exchangeable because every bit of .999 fine gold is similar
enough to be like another. Gold does not rust or decay as it's
imperishable. These properties make gold a good store of value, a
medium of exchange, and a unit of account. Therefore, gold is easily
tradable with a narrow spread, meaning it has a small price between the
bid and ask--the prices to buy and sell. Gold is therefore the ultimate
liquid asset, a luxury, and is why gold is money.
3. The value of
gold can never go to zero. Paper money is a promise to pay; gold is
payment in full. Promises can be broken or defaulted. Gold
is not a promise, gold is wealth. Currencies can devalue to zero,
and all paper currencies in the history of the world have devalued to
zero in time.
4. The total
amount of gold that has been refined throughout man's history is
estimated at about 145,000 tonnes. (Source: World Gold
Council). See http://www.gold.org/discover/knowledge/faqs/index.html
This is about 4.7 Billion
ounces. At $400/oz., that's about $1.9 trillion
dollars. This amount of gold has remained relatively
constant in relation to population growth, each growing about 2% per
year. There is about seven tenths of an ounce of gold per person in the
world, which remains constant.
Historically, only the wealthiest people have been able to afford and
possess gold, because gold is the ultimate representation and form of
enemies say, "gold does not pay interest". However, from 1970 to
1980 gold went up in price from $35 to $850. This was a 24-fold
increase. Calculated another way, (although there were dips along the
way from about $200/oz. down to about $100/oz.) this was an annually
compounding 34% increase for 10 years straight.
7. Gold is
inherently private, and protects one's wealth. It cannot be taxed away
(if they don't know you have it) or inflated away (because government
can't create more of it).
ownership fosters a sense of personal responsibility. Gold owners tend
to support the Second Amendment to the U.S. Constitution. Both gold and
guns create freedom for the owner.
9. Gold is
beautiful, and gold is sexy. Women have a strong affinity for gold.
Women will appreciate that you own gold. The women of the world
buy gold jewelry, and many say the women of the world have cornered the
gold market. As gold is sold by central banks or leased out by
bullion banks or to finance gold mine construction, that gold has been
purchased by women in the form of jewelry. Thus, that gold is no
longer available to the market at low prices to repay any gold loans or
deliver into any futures contracts.
10. A gold coin
is a great conversation starter; and coins make great gifts. Most
people have never seen or held a gold coin and will be impressed and
amazed as they hold it for the very first time, amazed by both the
weight and color of real gold.
19 Reasons why the year 2005 is a great time to buy gold.
1. "Buy low & sell high." Gold is at a historically
low valuation. Adjusted for "money-creation" inflation of the U.S.
dollar, gold is very cheap. If the U.S. gold reserve still exists, it
would only provide about an ounce of gold to back every $37,164 dollars
that have been printed or exist as electronic demand deposits in bank
Source of M3 http://www.federalreserve.gov/releases/h6/Current/
$9,700,000,000,000: M3 (money in U.S. banks) July., 2005.
Source of U.S. Gold http://www.fms.treas.gov/gold/index.html
261 million oz.
However, bonds are also "money". If you add in the bond market to
M3 the numbers change significantly.
$20,200,000,000,000: U.S. bond market, yr end, '02: Source: http://tinyurl.com/vr7g
In that case, there are $112,264 U.S. dollars and bonds out there for
every one ounce of gold held by the U.S. government.
2. The gold bull market is in it's 4th or 6th
year, from 1999 or 2001. At $425/oz., Gold is up 67% during
that time from it's low of $255 in July '99 to Feb '01.
3. Mines are producing less gold, due to increasing
costs, such as labor costs due to the shortage of skilled labor; lack
of mining geologists, mining engineers--all a result of the long bear
market in gold. The lack of gold mining profits, even in the face
of mildly rising gold prices, has caused a drop in the prices of the
shares of gold mining and exploration companies since the prior peak in
the gold share market on about Jan., 2004
Rising oil prices, from $10 to $60/barrel, have
increased mining costs, since mining is an energy intensive
business. The average, historic, oil to gold price ratio of 16 to
1 also says that at $60/barrel of oil, then gold prices should be at
about 16 times higher, or $960/oz.
4. Since 2003, the large mining companies like Barrick,
Anglo Gold, and Newmont have begun buying back their hedges, reducing
the gold they sell forward at locked in prices. This means they wish to
participate in any rise in the spot price of gold, and they expect gold
to rise. Buying back their hedges also creates upward pressure on the
gold price. As of the end of 2002, mines have 2700 tons of gold in
hedges to buy back. Buying back this much gold will cause prices to
move up. The major miners still have not reduced most of their
hedges as of 2005!.
5. The supply and demand fundamentals are great for owning
gold right now. About 4000-5000 tonnes are consumed each year, and
about 2600 tons are mined each year. To keep the price low, banks and
price manipulators must make up the difference with increased gold
sales or loans feeding 1500 tons of gold to the market each year. This
gold deficit cannot continue forever, the banks will run out of gold to
sell, and when they do the price MUST rocket much higher.
6. Another default in gold contracts is imminent. See my
essay, Impending Gold Futures Default. When gold contracts are
defaulted on, the value of gold tends to skyrocket. The last time gold
contracts defaulted was when the U.S. stopped redeeming gold contracts
(called dollars) for gold in 1971. After that, gold rose in price from
$35 to $850/oz. over the next 9 years.
7. There is a huge short position in gold that cannot be
paid back at prices anywhere near to the prices that the gold was lent
out. This will be the cause of the coming and imminent gold default.
Some of these gold contracts are called "futures" or "options", and are
traded in New York at the COMEX. Most gold contracts, however, are
traded "over the counter" and are not reported. The size of gold
shorted into the market is upwards of 15,000 tonnes, or about half of
the gold of the world's central banks. The central banks typically
report gold as still being "on the books" after it has really been
swapped or leased out and is no longer in the vaults.
8. Those who have sold gold are finding it increasingly
difficult to find any more gold to lend out. Default is coming. Those
who own "paper gold", or contracts, may not benefit financially during
a default. They can change the rules for holding gold contracts at any
9. Keeping a portion of one's portfolio in gold not only
helps to reduce risk of defaults which cause deflation, it actually can
dramatically increase returns, especially during inflation. Gold stocks
increased tremendously during the years after the great depression in
the 1930's. Gold stocks have rallied strongly since Jan. 2002. Several
"unhedged" gold stocks have increased from 200% to 1500% since the year
10. Some people who have studied the gold market strongly
suspect that the U.S. gold reserve is long gone. The last time our
nation's gold has been audited was in the 1960's. Even then, it was 1/3
the size it was at its greatest, down to about 7000 tons from 21,000
tons. Even if the 7000 tons were evenly distributed among the
population of the U.S. who really own the gold, there would only be
about 7/10ths of an ounce of gold per person in the U.S., no more than
the 7/10ths of an ounce of gold there is in the world for everyone in
11. The U.S. dollar is not immune to devaluation or inflation.
It devalued 8% overnight in international trading at one point in the
mid 90's. From 1913 to today, the dollar has already lost over
95% of its purchasing power. Is the last 5% somehow sacred or
different? If anything, the trend will continue.
12. The dollar is overvalued. Many foreign nations have huge
positions in U.S. bonds. If they sold these bonds, the dollar could
plummet. Bonds are a class of investment that directly competes with
gold as an investment choice. The bond market is huge, massive. The
gold market is tiny. As the dollar decreases in value, the value of
gold in dollars will increase. Talk of dollar devaluation is increasing
rapidly in the media.
Since Jan. 2005, the dollar was supposed to devalue
against other currencies by as much as 20%. However, the dollar
staged a mini-rally instead. The dollar collapse is set to
continue, and when it does, expect gold prices to rise by more than the
inverse of the 20% loss of the dollar's value.
Since Jan., 2005, foreign nations that have been
large buyers of U.S. bonds, such as China and Japan, have stopped
purchasing U.S. bonds, starting around Jan, 2005.
13. The U.S. Trade deficit, which many are calling the "current
account deficit" may help to cause the dollar to fall. They say that
when a current account deficit reaches 5% of GNP, that typically, a
nation's currency will end up devaluing significantly to help balance
out and end the trade deficit.
14. Alan Greenspan said the following in a speech to the
Economic Club of New York on 19 December 2002:
"Although the gold standard could hardly
be portrayed as having produced a period of price tranquillity, it was
the case that the price level in 1929 was not much different, on net,
from that of 1800. But in the two decades following the abandonment of
the gold standard in 1933, the Consumer Price Index in the United
States was doubled. And, in the four decades after that, prices
quadrupled. Monetary policy, unleashed from the constraint of domestic
gold convertibility, had allowed a persistent over-issuance of money".
15. In late November, 2002, Federal Reserve Governor Bernanke
had the following to say when discussing the possibility of deflation:
"The U.S. government has a technology,
called a printing press (or, today, its electronic equivalent), that
allows it to produce as many U.S. dollars as it wishes at essentially
no cost. By increasing the number of U.S. dollars in circulation, or
even by credibly threatening to do so, the U.S. government can also
reduce the value of a dollar in terms of goods and services, which is
equivalent to raising the prices in dollars of those goods and
services." He went on to say that, "If we do fall into deflation,
however, we can take comfort that the logic of the printing press
example must assert itself, and sufficient injections of money will
ultimately always reverse a deflation".
16. Congress is not using standard accounting practices. They
stopped counting interest on the debt as an expense, but it still has
to be paid to those retired people and foreigners who own bonds. There
never was a surplus under Clinton, because the national debt has always
continued to increase every year. The real deficit (annual increase in
the debt), due to the war on terror, and reduced tax receipts due to
the current depression, is now estimated at over $500 Billion.
Source of Federal Debt http://www.publicdebt.treas.gov/opd/opdpenny.htm
17. Congress will continue to spend more than it takes in, in
taxes. This is a recipe for inflation. The war on terrorism and the
spending appropriated for the twin towers has increased the money
supply. This is inflation. The effects of inflation are increased
prices. We will likely, therefore, see increased prices for gold.
18. China has recently legalized gold ownership, and continues
to open its gold market. China is growing increasingly wealthy, and, as
all of Asia, their people have a very, very strong historic desire to
own gold. Mongolia, the nation just north of China, spent 10% of its
GNP on gold imports in 1999. It is estimated that the people of China
may demand as much as 500 tonnes of gold per year, an increase of 300
tonnes! China owns over $300 billion in bonds. If China
sold those bonds for gold, at $500/oz., that comes to a total of 600
million ounces of gold. That's 18,661 tonnes! But the
market can barely handle 5000 tonnes of annual demand! If China
alone bought gold, I estimate that the dollar could devalue by
75%. What that means is that everything, in dollars, could cost
nearly 4 times as many dollars, or more. (Of course, if you owned
gold or silver, things would get cheaper, as your purchasing power
19. JAPAN! Japan's economy is continuing to falter, but they
still have enormous buying pressure. The Japanese have plenty of yen
that is worth multiple Trillions of dollars that is getting less
valuable as time passes, while gold's value is rising. In 2002, Japan
was increasingly BUYING GOLD IN A RISING MARKET. This is extremely
bullish. Japan bought 10 tons of gold in the first two weeks of
February 2002, and they bought even more in March 2002. Then,
Japanese buying cooled off, but there is a bull market in gold in the
yen! Japan's potential buying power exceeds U.S. potential buying
power. If 1% of U.S. dollars, or M3, which is 85 Billion dollars,
bought gold, at $400/oz., that would be 212,500,000 million ounces, or
6609 tonnes. Japan's gold price, in 1980, was twice as high in
yen than it was in the U.S. The Japanese people are even more
bullish on gold during gold bull markets than Americans are.<
All the monetary reasons for owning gold also apply to silver, but
silver has other features which make it even more attractive.
8 Reasons why silver is
a better investment than gold!
1. The historic silver/gold price ratio was 15 or 16:1,
but in recent years, silver is relatively cheaper ranging from about
40:1 to 80:1. On Jan 24th, 2003, with silver at $4.89/oz. and gold at
$368/oz., the ratio is 75:1. This means that silver is currently
undervalued, and cheaper than historic norms, and thus it is a better
investment than even gold if you want to "buy low and sell high".
2. The supply and demand fundamentals for silver are
extraordinary. There has been an ongoing supply/demand deficit in
silver for 12 years. More silver is consumed by industry than is
produced by mining and recycling combined. Some say this deficit
reaches back 60 years, and has consumed virtually all the known silver
ever mined since the beginning of the world. The annual deficit has
recently ranged from 100 million to 200 million ounces per year. Annual
supply is about 650 million ounces, and annual demand is about 800
3. Considering refined and mined known silver reserves,
there is far less silver in the world than gold. About 150 million
ounces of silver vs. 4000 million ounces of gold.
4. Most silver, 70-80% brought to market, is mined as a
by-product of copper mining, gold mining, or zinc and lead mining.
There are very few silver mines in the world, since most are really
copper or gold mines. Therefore, mild increases in the price of silver
will not bring substantially more silver out of the ground. Much silver
is consumed in photography; by Hollywood and medical photo imaging.
There is so little silver used in each photograph, that price increases
in silver will probably not reduce demand. With a relatively inelastic
supply, and relatively inelastic demand, it will require a dramatic
explosion in price to bring the supply and demand deficit back into
5. Famous Billionaires have bought silver in recent years.
In 1997, Warren Buffet bought 130 million ounces of real silver, due to
the favorable "supply and demand fundamentals", and although he bought
as much as they would let him legally buy, his purchase was with about
2% of the value of his portfolio. Another Billionaire who tried to
follow in his lead would be unable to do so since there is less silver
now available in the world to buy at the COMEX than what Buffet has,
and less than that in known, reported silver reserves in the world.
George Soros owns a large percentage of Apex Silver (SIL). Bill Gates
owns over 10% of Pan American Silver (PAAS).
6. In the gold market, there has been a large increase in
paper futures contracts which are used to suppress the price. See my
essay, Controlling Gold with Paper. In silver, the relative amount of
paper contracts is much larger. In other words, there are more paper
shorts who will be caught in an impossible situation when the price of
silver really begins to rise due to the fundamental supply demand gap.
They will be forced to buy silver or go bankrupt. Either action will
cause a dramatic rise in the silver price. If they default on the
silver contracts, that will signal to the world the severe shortage of
silver, and signal a great investment opportunity.
7. One of the cheapest ways to buy silver: You can buy
U.S. coins dated 1964 or earlier, $1000 face value (4000 quarters, or
2000 half dollars, or 10,000 dimes), in a "bag" of "junk silver", which
contain 715-720 ounces of silver, depending on how worn the coins are.
In the early 1980's, when silver was $30-$50/oz., a bag of silver could be used to
buy a house! Imagine buying the money for your next house for
$3500 today by investing in silver!
8. But historically, a silver dime was a day's wage,
whether 100 years ago, or in Roman times when a denarius was a day's
wage. This means that a dime of silver, worth 50 cents today,
could be worth over $150 (which is a day's wage in today's money.) or
more, now that silver is scarce. Actually, in 1926, a silver dime
could pay the rent at a 5 star hotel for a month! That's worth
about $6000 to $10,000!
9. You get so much silver for your money. A bag of junk
silver weighs about 55 pounds, and is the size of a bowling ball. If
you invested $100,000 into junk silver coins, at $3500/bag, that would
give you 28.5 bags each weighing 55 pounds, or 57 bags weighing 27
pounds each, or about 1571 pounds total. Could you imagine moving that
much around your house if you had to move? Silver is so cheap it
creates physical problems for investors today!
You will sometimes find quarters in a bag dating back to the late
1800's. In the early 1900's, you could work ALL DAY for a wage of ONE
SILVER QUARTER. Imagine being able to buy a day's wage of real money
for less than a dollar of today's money! Today, in 2004, a day's wage
is over $100. Another way to put it is that the dollar has lost over
99% of it's purchasing power over time, yet, due to silver being
undervalued, you can get 100 times the value of your money and labor if
you invest in silver. Imagine if they paid a day's wage today of $100
in silver quarters; they would have to give you about 100 silver
quarters today. The implications are that if silver returns to its
historic valueations, silver will need to go up in value about 100
times, to $450/oz. Silver is truly a bargain.
I recommend that you visit your local coin shop in your local metro
area to buy "junk" silver coins. Look up "coin dealer" in the yellow
If you want to learn more about silver, I suggest you read the works of
the following people who have also written up good reports on the
David Morgan at http://www.silver-investor.com
Ted Butler at http://www.butlerresearch.com
Doug Casey at http://www.kitcocasey.com
Jim Puplava at http://www.financialsense.com/stormwatch/oldupdates/2003/0702.htm
T. Stein and S.
McIntyre at http://www.safehaven.com/article-2115.htm
Douglas Kanarowski at http://www.gold-eagle.com/research/kanarowskindx.html
I have studied
about silver. I discovered that the silver price is being
manipulated and kept artificially low. This presents an investment
opportunity of a lifetime.
Actually, it is more likely that silver today is the
greatest investment opportunity in the history of the world.
Never before in human history, has the entire world left using silver
Never before in human history, has the entire world consumed nearly
all the silver for use in electronics.
Never before in human history, has silver become so cheaply valued.
Soon, never before in human history, will investors compete with
industrial users to acquire silver. The industrial users must
obtain silver or shut down their factories, in an era where the
industrial users alone continue to consume more silver than is mined
What follows is a bonus silver report by "Kazvestor". It is very
complete, with good references, from mid 2003, and so, it is appended
THE MERITS OF BUYING $ILVER NOW by Kazvestor
Here is most of the Silver "story" below with many web site references.
It encompasses the use of logic and common sense to analyze the factors
which help determine the value of $ilver.
I. Silver Supply/Demand imbalance: The #1 reason to buy Silver is
because there has been consistently more user demand than producer
supply for 14 years. During this time over 1500 Moz. (Million ounces)
has been consumed from the world Silver stockpiles and used for
industrial applications (mostly electronics), photography, jewelry
& Silverware, and coins & medals. Last year 586 Moz. was mined
from the Earth and 185 Moz. was recycled (mostly from photographical
Silver applications) for a total supply of 771 Moz. Meanwhile the total
demand was 838 Moz. Therefore last year 67 Moz. was consumed from world
stockpiles of Silver. After 14 years of deficits the world stockpiles
are extremely low. It is impossible for this deficit to continue much
longer. Supply must soon come into equilibrium with demand. Either
demand must fall substantially and/or supply must increase
substantially. Silver is essential for our electronics rich world with
new applications and uses for Silver consistently being discovered (as
you can see at http://www.silverinstitute.org/newsdesk.html
such as http://www.silverinstitute.org/news/pr10oct02.html
) with very little likelihood of a significant decline in industrial
demand going forward. Therefore supply must increase to meet the
demand. However, starting new mines to produce Silver costs $7-$10+ per
ounce. Therefore the price of Silver MUST go up to encourage new mines
to be tapped. It is smart to own something which has and will continue
to have more demand than supply at a given price. This simple
supply/demand disequilibrium analysis is mentioned by Warren Buffett as
the main reason he bought a large chunk of the world stockpile of
II. Silver is scarce: There is very little physical Silver that can be
purchased for less than $5/oz. possibly less than 10 Moz., definitely
less than 100 Moz. which is small change in today's investment world.
Even up to $10 there is most likely less than 500 Moz. available for
Proof of scarcity:
1. The U.S. govt. had 2500 Moz. of Silver left after it
discontinued making 90% Silver dimes/quarters/half dollar coins over 30
years ago. As of the end of 2002 it had none left. In 2003 the U.S.
govt. is making market purchases averaging almost 1 Moz. per month to
mint it's now popular American Eagle 1 oz. coins. http://www.silverinstitute.org/news/pr06aug02.html
2. The official Comex warehouses for investor Silver
storage in the U.S. used to have over 300 Moz. 10 years ago http://www.silverinstitute.org/news/prsinv.htm
Now the Comex has 107 Moz. http://www.nymex.com/jsp/markets/sil_fut_wareho.jsp
3. European bullion bank vaults had over 550 Moz. in 1990
and less than 300Moz. at the end of 2001 (of which 129 Moz. is owned by
4. Total world government stockpiles of Silver is
estimated to be under 100 Moz. after 4 years of very heavy selling
(mostly by China). I expect there will soon be publicized shortage of
Silver. You definitely want to own Silver before any shortage is widely
III. Silver is cheap: Despite the scarcity of Silver that has developed
from 14 years of supply deficits the price is at all-time real lows
($4.55). At its peak in 1980 Silver went over $50/oz. (equivalent to
almost $150 in today's dollars) when a small group tried to corner the
market in it. You can review price data charts for the last 20 years by
going to http://www.kitco.com/charts/liveSilver.html
Silver is especially cheap relative to gold. At various times in the
last 30 years 20-100 ounces of Silver could buy you 1 oz. gold. Right
now you need 80 oz. Silver to buy 1 oz. gold; thus making Silver
relatively cheaper. http://www.cairns.net.au/~sharefin/Charts/AuAG1lt.gif
One of the main reasons why Silver remained cheap in the 1990s despite
big supply deficits is because most investors were selling their Silver
holdings to buy into the popular stock market companies. This selling
of Silver peaked in 2000 along with the stock market. From 1999 to now
governments (mostly China) have helped fill the supply/demand gap by
selling their holdings. Going forward, China should curtail its selling
of Silver since it realizes it's rapidly growing economy will soon be
needing more Silver that it can produce internally.
Another important reason why Silver prices have remained low is because
most mines that produce Silver produce it as a byproduct. Mining
companies that primarily produce zinc, lead, copper, and gold often
extract Silver as well. In fact 70-75% of the Silver mined around the
world is a byproduct of mining other metals.
This results in the supply of Silver being inelastic to the price of
Silver. Whether the price of Silver goes up or down substantially its
supply will not vary much. Effectively the supply of Silver is governed
more by the prices of zinc, lead, copper, and gold. If the prices of
those metals are lower, some mines will reduce mining activities and
thereby mine less Silver as well; and vise versa. So, although some
primary producing mines have closed operations over the last 13 years
due to being unprofitable operations under $5/oz. the supply of Silver
has not been significantly affected since primary Silver mines make up
a minority of Silver production. A price of over $7 is needed to
encourage new primary production of Silver.
IV. The smartest people own Silver now: At major turning points of
asset prices the overwhelming majority of investors are always wrong.
After a 23 year bear market in Silver, most investors have sold their
holdings. Those that remain are disciplined savvy long-term investors
like Warren Buffett that bought 129 Moz. in 1997 at $5.05/oz. http://www.berkshirehathaway.com/news/feb03981.html
Other billionaires that are invested in Silver include George Soros,
and Bill Gates who own shares in various Silver mining stocks and
possibly Lawrence Tisch as well. So if we look at the 105 Moz. that is
in storage at the Comex warehouses as mentioned above; it is likely
that over 90 Moz. maybe 100+ Moz. is owned by people that will not sell
anywhere near these prices. Most will not sell even if Silver goes to
$10 next month.
V. Major short positions in Silver: Another major reason for the
incredibly low price in Silver is that there have been massive amounts
of shorting of Silver in the last 15 years. There have been 2 major
reasons for Silver short selling over the years.
1. Silver producers enter into forward sale contracts to
make delivery of future production at prearranged prices. For example,
the biggest U.S. producer and shorter of Silver is Barrick Gold
(ABX:NYSE). They produce 20 Moz. of Silver per year but were short
almost 50 Moz. in Silver at the end of 2002. Effectively that's 2.5
years of pre-sold production which limits future supply. In February
ABX made a press release that included the mention that they would
start reducing their short position in various ways including making
delivery on their forward contracts using current production. This
means most of their 20 Moz. production will not be supplied to the
market this year but will go to fulfill their previous delivery
contracts. Thus adding to this year's supply deficit numbers.
2. The leading independent Silver analyst Ted Butler (http://www.butlerresearch.com/archive_free.html)
discovered Silver leasing around 7 years ago. With Silver leasing, an
institution leases Silver from a major holder (mostly government
central banks) and pays them a small interest rate of 1-2%. Seemed like
easy money for the central bank that had the Silver collecting dust and
storage fees so they loved the idea. For the institution that leases
the Silver they simply sold the Silver into the marketplace and used
the proceeds for investments yielding 6-10% thereby making a nice
profit spread. A problem here is that most of these leases will never
be repaid since the Silver has been sold and consumed and there is not
enough Silver left out there to repay these leases back with Silver.
Then we have a massive short position on the Comex futures exchange.
Each Comex Silver futures contract represents 5000 oz. and there are
around 80,000 open contracts. That's 400 Moz. which is more than what
the world has today. The thing is most of these contracts are simply
rolled over into the future when they come due. Few of them end up with
the long side of the contract demanding delivery from the short side.
The detailed analysis of short activity in the Silver market is very
complicated but the result is that it has caused the price of Silver to
stay at an artificially extremely low price. It also means that future
supply will be curtailed due to these pre-sales.
VI. Renewed investor demand: After a 20+ year bear market in Silver the
average mainstream investor has had complete apathy for Silver as an
investment since its been "dead money" for so long. Plus there have
been no brokerage firms "pushing" Silver as an investment. Until about
10 years ago a portfolio allocation of 5-10% in gold and Silver was
considered prudent by almost all financial advisors and brokerage
firms. The 90's mega stock market bull wiped that allocation off
everyone's sheets. However, since the pop of the stock market bubble
investors have started moving back to gold and Silver as defensive
investments. 2003 has shown an acceleration in investor demand for
Some proof below:
1. Data from the U.S. mint showing a big increase in
demand for the American
In 1999 sales doubled to 9 Moz. from an
average of 4-5 Moz. in the 1990s due to the Y2K scare. But that
increased pace stayed with us....
2000 sales were 9.1 Moz
2001 sales were 8.8 Moz.
2002 sales were 10.5 Moz.
2003 1st Quarter sales were 3.656 Moz.
which is an annual rate of 14.6 Moz http://www.usmint.gov/mint_programs/american_eagles/index.cfm?action=sales&year=2003#silverTotals
2. The most respected name in precious metals fabrication,
Johnson Matthey, started producing 100 oz. bars for retail investors
for the first time in 15 years to meet the renewed investor demand for
3. One of the most popular low-cost retail dealers
was often temporarily sold out of parts of their Silver inventories
early this year. In March they even had to switch their primary
supplier mint from Northwest Territorial Mint to Amark because NWTM was
not able to keep up with the huge increase in demand for Silver from
Tulving customers. I have also seen notes that some local Silver
dealers around the U.S. keep running out of inventory as well.
4. There is a closed-end mutual fund (CEF) that invests in
physical gold and Silver. Closed-end mutual funds always trade at a
discount or premium to the actual Net Asset Value of the fund. The
degree to which a fund trades at a discount or premium is directly
associated with the enthusiasm for that type of an investment by the
public. During the precious metals major bear market from 1980 till
2001 CEF mostly traded at a discount. Since the end of 2001 CEF started
trading at a premium and has remained that way. This shows us the
renewed investor interest in Silver and that we are most likely at the
beginning of a major bull market in Silver.
5. Mexico (the largest Silver producing country) is
considering adding Silver coins "Libertads" in mass to be used as money:
VII. Negative real interest rates: Historically, times of negative real
interest rates (when inflation is higher than short-term interest
rates) are very bullish for precious metal investments. There is simple
logic behind this. Precious metals generally go up with inflation. Now
investors are offered 1-2% short-term rates while inflation is 3-5%. So
some investors recognize that they should own precious metals that
should appreciate at least 3-5% to match inflation compared to only
earning 1-2% interest. This investor appetite should increase greatly
if capital gains on precious metals are taxed at 15% compared to
interest income that is taxed at up to 35%.
VIII. Silver IS MONEY: The 2nd best reason to own Silver is as
protection against inflation. The benefit of owning Silver (as well as
gold) during inflationary times is that it will hold its purchasing
power. Silver (and gold) has been considered MONEY in most places for
all of human civilization. In fact the word for money in many languages
is the same as the word for Silver. While gold was used to settle large
transactions (mostly between nations) Silver was used for everyday
transactions. Silver is real money that cannot be inflated without the
heavy costs of mining and refining it out of the Earth. This is in
sharp contrast to the currencies around the world today, especially the
U.S. dollar. It is very easy to "print" dollars out of thin air which
is being done consistently. In fact here is the dictionary definition
of inflation: "A persistent increase in the level of consumer prices or
a persistent decline in the purchasing power of money, caused by an
increase in available currency and credit beyond the proportion of
available goods and services". Over 30 years ago the United States went
off of the gold and Silver money standard and increased the printing of
dollars. The money supply almost doubled from 1972 to 1978. Common
sense tells us that the more dollars exist, the less the value per
dollar. This is the basic meaning of inflation. During this period of
unabashed increase in money supply the price of Silver went from under
$2 in 1972 to over $6 in 1978. Then it defied a "normal" price of
$7-$10 and continued to a high of $50/oz. when a group tried to corner
the market on Silver. Of course this corner failed and the price
crashed to more normal levels. Meanwhile our government (through the
Federal Reserve Bank) woke up and decided to cease the massive
expansion of the money supply. This was the beginning of the 20 year
big bear market in Silver. The last time Silver traded over $10 was in
We are at the very beginning of a renewed period of hard asset
inflation. The Federal Reserve is conducting a highly inflationary
policy of low interest rates and heavy new printing of dollars. This
manipulation of dollars has already devalued our dollar by 30% against
the Euro currency in 1 year. Gold is up 15% in 1 year. The average
commodity is up 20% in 1 year as measured by the popular Goldman Sachs
Meanwhile Silver is actually slightly down over the last year. This
offers current buyers an extremely low price entry point.
Inflation in our dollars is simply a hidden way to tax holders of
dollars. The spending habits of our government are gluttonous and ever
growing. The citizens of the U.S. are already very heavily taxed. Our
government already has accumulated a colossal debt load by borrowing
$trillions in the debt markets. Yet govt. spending is increasing while
its revenues are decreasing. So what happens? Effectively the govt. is
now printing dollars out of thin air to pay for the shortfall in
revenues versus expenditures. This process will now be accelerated with
the new tax cuts. This excessive printing of dollars is devaluating the
dollar at a rapid pace. This is very appealing politically. The tax
cuts make the citizens happier and shift the burden of the monstrous
government budget deficit on all holders of U.S. dollars. Since almost
half the holders of dollars (especially U.S. govt. bonds) are not U.S.
citizens, the burden of the dollar devaluation is partially put on the
backs of foreigners. As the dollar depreciates, it follows that the
price of Silver (which is stated in dollar terms) must appreciate over
The U.S. is now running a trade deficit of around $500 billion per
year. This essentially means that we are importing more goods and
services than we are exporting. The deficit is filled by exporting
dollars (mostly in the form of debt) to other (mostly Asian) countries.
We are literally exporting dollars at almost $1,000,000 per MINUTE.
Thus far these Asian exporting countries (mostly China now) have been
"suckered" into taking unbacked paper dollars to finance our
consumption oriented culture. Now they are being suckered in even more
by accepting extremely low interest rates on their dollar holdings. It
is probable that these foreign countries awash with low yielding IOU's
(dollars) will stop accepting dollars as payment by quickly selling
dollars to buy hard assets as new dollars come in. This will accelerate
the devaluation of the dollar, causing inflation.
Additionally, it is politically easy to engineer inflation because the
overwhelming majority of Americans are in debt (usually heavy debt).
Holders of debt embrace inflation since their repayments will be easier
to make. In the United States: consumers, corporations, and the govt.
have racked up immense amounts of debt. This massive debt is increasing
at a huge pace due to the (manipulative) low interest rate environment.
In fact our culture strongly encourages debt. Everyone gets endless
credit card promotions in the mail. The American net savings rate is
near zero. It is almost unheard of to purchase a new car outright let
alone a house. Debt has become a huge part of our society. The current
American very high standard of living is financed by and very dependent
on debt. How many people would be driving $40,000+ cars if they were
not able to finance them? Who will cry foul as high inflation takes
hold in the dollar? Most of the net creditors of dollar debt are
foreigners. Why would the govt. politicians care what they think or how
they get hurt? What are they going to do to the only super-power left
in the world?
As you can see, the path of least resistance is high inflation. Silver
(and gold) is your best protection against this rapid devaluation of
the dollar. In the 1970's real estate also protected investors from the
inflation of the dollar. However, today's situation is very different.
Today's real estate valuations are already inflated due to the
credit/debt bubble. Today's real estate prices are very dependent on
buyers getting credit at a low interest rate to fund the purchase. When
strong inflation takes hold and interest rates are forced higher there
will be a triple whammy for real estate (especially homes). First, most
potential buyers will walk away from the market when faced with 8%+
rates compared to <6% rates. This will be a big decrease in demand.
Second, banks will be more cautious on making low down payment loans.
Third, banks will become more cautious about making any types of loans
with long-term fixed interest rates since they will be getting repaid
with rapidly depreciating dollars. If you imagine yourself in the shoes
of a banking entity you will see how dangerous this is to the currently
high housing prices that are completely based on debt.
In the very long-run the whole basis behind having a currency without
any hard asset backing it up is flawed and fraudulent. There is nothing
stopping our govt. from printing unlimited amounts of dollars. In fact
this printing power is necessary for a govt. that often buys votes
through unmerited handouts. The extreme of this is a socialistic or
worse a communistic govt. that takes money from productive individuals
and gives it to unproductive "needy" individuals (minus taking a
percentage for itself) without regard to merit. This is the opposite of
capitalism based on freedom and liberty. Our paper dollars are now
essentially worthless except for our faith in the govt. As our govt.
moves more away from capitalism there will come a time when its motives
are publicly put into question. You certainly do not want to own
dollars at that time. Ironically, our popular Federal Reserve chairman
Alan Greenspan understands the inherent fraud of dollars unbacked by
gold or Silver as you can see by the very interesting article he wrote
40 years ago that I strongly advise reading:
Most likely there will come a time when most of us will be billionaires
but a gallon of milk will cost $25,000! A new currency will have to be
issued that is backed by real gold and Silver. Since currently all
world currencies are not backed by hard assets the same will happened
worldwide. The biggest losers will be holders of fixed-income credit
securities (mostly bonds) and cash.
The inflationary risks all by themselves warrant Silver (and/or gold)
ownership at 10% of your net worth if only as "insurance".
IX. Silver going to $50+/oz.: I believe Silver's intrinsic value is
worth around $15/oz. right now. As a value investor I love buying
undervalued good assets then selling them out around what I think they
are worth without regret when they go much higher. However, in the case
of Silver I expect to sell much of my holdings at prices well above the
intrinsic value. Below are the reasons why Silver should catapult well
past its intrinsic value for a period of time. All are based on the
development of a Silver shortage:
1. Silver industrial demand and mining supply is
inelastic. That means the amount demanded and supplied is barely
affected by changes in the price of Silver. I explained the
inelasticity of mining supply at the end of part III. Silver industrial
demand is almost completely inelastic. Silver is an essential and
irreplaceable part of many electronic devices such as computers. The
amount of Silver used to make each electronics device is miniscule. A
$2000 new Dell computer has nowhere near 1 ounce of Silver in it so it
does not matter to Dell whether it costs $1 or $20 worth of Silver to
produce 1 computer. Dell would even pay $100 for the tiny amount of
Silver it needs for each computer since without that Silver it is
impossible to build that computer. The same is try for Silver
application in photography. Also most of the cost of Silver jewelry is
based on the labor it takes to make it into various shapes so a price
of $50/oz. may only result in a doubling of the price of Silver jewelry
which is inexpensive anyway. So the overall fabrication demand for
Silver should hardly drop at all even with a tenfold increase in the
price of Silver. While the mining supply of Silver will not increase
greatly since 70% of the Silver mined is a small byproduct from mining
other metals (assuming the prices of those metals do not rise
2. Most users of Silver operate under Just In Time
inventory management. JIT was an innovation by Japanese firms 25 years
ago and made a standard in corporate culture in the 1980s to reduce
capital expenditure costs. Companies no longer keep large amounts of
raw materials that are needed to manufacture their products. They have
efficient arrangements with suppliers to make delivery "just in time"
for production thus freeing up capital that used to be just sitting
around in the form of raw materials that would not get used for many
months. The Silver shortage will be a serious problem for them since
some will fail to receive all the Silver they need from their usual
suppliers. For many companies a lack of Silver would result in a halt
of production. This situation will probably encourage most Silver using
companies to aggressively buy up as much Silver as they can for fear of
delays in production. Most companies will pay ANY PRICE needed to
obtain physical Silver right away. Wouldn't you do the same in their
3. When a shortage of Silver becomes widely publicized and
the price races over $10/oz. an immense group of momentum
traders/investors whose strategy is to "buy high & sell higher"
will be looking to buy into it. Tens (maybe hundreds) of Billions
dollars will be chasing after less than $5 Billion of Silver.
4. Most investors naturally do not quickly sell an asset
that is quickly appreciating in value thus adding to the shortage.
5. Recognizing the shortage, enough money will want to buy
physical Silver by looking to take delivery on Comex Silver futures
contracts to cause the failure of shorts to make delivery of Silver on
their obligations against these contracts since they do not have enough
Silver. The result will be that Silver futures contracts will trade at
a substantial discount to physical Silver because no one will know when
deliveries will actually be made.
6. When Silver goes over $10 there will be a lot of new
(and old) primary Silver mines that will be started. However, it takes
1-3 years from the time a decision is made to start a Silver mine till
the first ounce of Silver is sold into the market. Therefore this
future supply will not help the immediate Silver shortage situation.
7. As prices approach and surpass $50/oz. there will be a
flood of small coin holders looking to cash in their coins. They will
look to sell them to local dealers who will then sell them to smelters
that convert them into Silver suitable for industrial uses and/or to
make delivery on the Comex. However, there will be a bottleneck since
the few smelting operations that exist can only smelt a limited amount
of Silver per month. Therefore the large quantities of Silver coins
will not impede the price rise in Silver immediately.
All these reasons combined make it quite possible that Silver will go
to well over $100/oz. at its peak. It is impossible to say how high
Silver can go.
Now is the perfect time to buy Silver. Not only does it offer explosive
potential due to scarcity and protection from inflation, but it is now
so cheap that the downside risk in price is negligible. It is better to
own Silver a year early than 1 week late. Silver will still be good buy
at $6, $7, $10 per ounce; but the risk/reward ratio will never be this
low again. Ownership of Silver does not offer you interest/dividends
while you hold it and it incurs storage costs of up to 1% per year but
these negative factors are tiny compared to the positive ones.
Ways to Invest in Silver:
There are several ways to participate in the coming rise of Silver
prices. Each has advantages and disadvantages. The best ways to invest
are dependant on individual situations.
1) Silver mining/resource company stocks: Since the majority of people
today are very familiar with stocks, many will choose to purchase
Silver stocks to speculate on the price of Silver. There are only 3
major primary Silver stocks. Their symbols are SIL, PAAS, and SSRI.
Additionally there are 2 more companies that produce a lot of Silver
but also produce gold. Those are CDE and HL. SIL has George Soros as a
major investor and his brother Paul Soros is on the board of directors.
PAAS has Bill Gates as a major shareholder. The company web sites offer
a wealth of information about Silver in their annual reports
There are also many tiny companies that own Silver resources which can
be reviewed from the Silver stocks links that can be seen here:
I believe direct physical Silver ownership is better than owning Silver
mining/resource company stocks if the Silver shortage situation that I
am expecting forces the price to explode very high and very fast. These
companies cannot take advantage of a fast run-up in prices like an
individual holder of physical Silver can since they cannot increase
production substantially in a short period of time. Plus their mines
are mostly located in countries that are not politically stable and may
make detrimental moves against a mining operation that is making
windfall gains by selling Silver at $30-$100+ per ounce. Some of those
countries may increases taxes and/or tariffs or even nationalize the
mines yelling that these natural resources belong to the people of the
country. These mining stocks are better suited towards a gradual rise
in price that stays high but not too high. Plus you have the risk that
management will make poor decisions on your behalf and/or take extreme
bonuses in the form of stock options and dilute your ownership stake.
Also if inflation becomes a big factor it will make the costs that go
into producing Silver (especially energy costs) go up as well thus
limiting the profit potential of mines. Additionally Silver stocks are
not pure plays on Silver, they are a diluted way of investing in Silver
since they mine other products such as lead, zinc, and gold.
Meanwhile despite many people's belief that Silver stocks are leveraged
to the price rise of Silver, during the only Silver sharp price rise in
15 years the Silver stocks significantly underperformed Silver itself. http://finance.messages.yahoo.com/bbs?action=m&board=18184314&tid=paas&sid=18184314&mid=8583
On August 10th I made a post summarizing the above:
2) Central Fund of Canada. I mentioned this closed-end mutual earlier
that owns physical gold and Silver. It trades under the symbol CEF and
is as easy to buy as any other stock. The main disadvantage of the fund
is that only 40% of its assets are in Silver (the rest is gold). While
gold will do great in protecting you against inflation, it should
significantly under perform Silver especially when the Silver shortage
hits. So an investment in CEF is a "diluted" way of investing in
Silver. The other disadvantage is that it now trades at a premium
(which fluctuates daily) to its net worth. At 10%+ premium it becomes
significantly overvalued relative to the underlying precious metals it
owns. You can check the premium at: http://cefa.com/scripts/fundstat.asp?id=cef
3) Physical Silver at stored Comex: Silver that is stored at Comex is
grouped into Comex warehouse warrant receipts. Each warrant consists of
5 1000 oz. bars of .999 pure industrial Silver (each bar varies in
precise weight and has a unique serial number). For many people this is
the best way to invest in Silver. The easiest way to buy Comex Silver
is through a precious metals brokerage firm such as HSBC bank or http://www.fidelitrade.com/
that charges around 1% commission. You should request the Silver be
deposited at Comex and the warrants of ownership be mailed to you. It
costs around $20/month/5 1000 oz. bars to store your Silver at Comex.
Since 75% of the total Comex Silver is stored in New York City which is
clearly a target for terrorist attacks it may be wise to have your
Comex Silver stored at the only warehouse outside of NYC which is in
Delaware. Fidelitrade deals directly with that Delaware warehouse.
Since recently, you are allowed to purchase 1000 oz. bars in your IRA.
The biggest IRA custodian that specializes in this is http://www.churchtrust.com .
Another IRA custodian that I came across which looks better is http://www.sterling-trust.com/irabasic.html
The most cost effective way to buy Comex Silver is by taking the time
to open an account with a futures/commodities brokerage firm and send
them money. Buy a nearby Silver futures contract(s), pay around $15-$35
commission per contract. Pay an extra $50-$100 per contract to take
delivery of the warehouse warrants of ownership. It comes out to a cost
of less than $.02 per ounce compared to up to $.05 per ounce by
purchasing the bars directly. Another good broker for 1000 oz. bars is
Amark.com which is probably the biggest Silver wholesale dealer and has
been around for a long time.
If Silver goes to $50+ you should have no trouble selling these bars at
the spot price with a small commission.
4) Silver futures: This is the most efficient way to actively trade
Silver; which I would not suggest doing. If you want to speculate in
Silver using high leverage this is the way to go. You can control 5000
oz. of Silver with less than $2000. This effectively gives you more
than 12:1 leverage if you want it. I believe this type of Silver
investment is not good for most people since it encourages buying more
than one can handle and possibly taking big losses on small pullbacks
in price. More importantly in a major Silver shortage Silver futures
contracts will be trading at a big discount to physical Silver prices.
5) Silver coins and bars: http://www.nwtmintbullion.com/SilverBullion.htm
This is "retail" Silver in many forms ranging from 1 oz. coins to 100
oz. bars. This is a good way to own Silver if you want to keep some of
your holdings privately for whatever reason. Also some Doom & Gloom
people (not including me) own a lot of Silver (and gold) because they
think a financial collapse is coming whereby regular purchases would
only be made in Silver and gold. As an investment, retail Silver is
very poor. You have to pay more than a 10% premium when you buy. Then
you have to accept a discount when you sell if prices go up a lot. In
1980 when the price of Silver went to $50 people that wanted to sell
their Silver coins were usually offered only $20-$25 per ounce. http://www.geocities.com/porfiry2000/silverbags/1980stories.html
For the price of Silver to move we definitely need investment demand to
get the price higher sooner. A big problem is that today's investors
are securities oriented and commodities shy. A whole generation has
been taught how to easily buy stocks at the detriment of hard commodity
We have seen big interest in ALL the Silver equities yet the actual
metal is unchanged.
The capitalization of Silver stocks has ballooned at least 3 fold since
the end of 2000. Though the total cap. is still tiny, it has made this
move without a rise in the price of Silver.
There has been a significant increase in demand for retail type bullion
and possibly industrial bars as well but nothing compared to the
interest in Silver stocks.
People are understanding the value of investing in Silver but they are
neglecting the metal itself in favor of the "easier" stock plays. This
was most evident in February when CEF traded up to a huge premium of
32% to NAV then remained at around a 25% premium for weeks. This would
have been fine had CEF's management done a lot more issuing of shares
and used the proceeds to buy the precious metals. But unfortunately
they mostly sat on their hands, issuing relatively few new shares.
I am just surprised the medium and large investors are not stepping up
to the plate as much.
I think a big part of the problem can be characterized by the response
I got from a big investor whom I tried to convince to purchase Silver.
"I'm not a commodities guy", he said.
So the current rich investors of the world obviously made their money
in stocks (and real estate?). All the commodities guys (especially PM
guys) have nearly gone broke and have certainly lost credibility. So
only the very few flexible investors are moving into Silver bullion.
But going back to the Silver stocks. The huge interest in those shares
results in high valuations that naturally encourages the management to
issue more shares and use the cash proceeds to:
1) increase production
2) explore for new mines
3) develop current mines that are not cost viable yet
All are bad for the Price Of Silver in their own ways. #1 is bad in the
more immediate sense with primary producers like CDE and PAAS rampantly
increasing production. #2 and #3 are bad as companies like SSRI and SIL
are itching to go into production as soon as prices go over $6 (though
it will take them a couple of years to actually start producing).
Owning Silver stocks ultimately provides an investor profits based on
the future production of Silver at the FUTURE price of Silver. In
effect, if there is a shortage that propels Silver to $30-$50+ in 2004
Silver stocks can do almost nothing to benefit because the price of
Silver 2 years into the future (when their production will start to go
online) will most likely not go over $15-$20. This is because the mine
production of Silver will increase well over 100Moz. at over $10/oz.
Therefore while a physical Silver owner can benefit by selling
potentially at $50+, the mining companies that will have Silver in the
FUTURE have no way of taking advantage of spot Silver prices. Plus you
should consider that the future costs of producing Silver will likely
go up significantly thereby eating into the Silver mining profits.
As an extreme case it may be possible that the huge demand for Silver
equities will continue encouraging those companies to dramatically
increase production to the point that the world supply/demand imbalance
is closed. These Silver stock investors are hurting themselves and all
other Silver investors by bidding up the stocks to unreasonable levels.
Meanwhile Silver stock insiders have been selling shares.
So all these modern day stock investors correctly seeing a high Silver
price potential for appreciation go and buy Silver stocks. This becomes
a self-defeating process!
The very bulls that would love for Silver to rocket up are causing
production to rocket instead! ! !
Of course while Silver may stay flat or go down a drop the Silver
stocks will get creamed as it becomes obvious that production is
growing tremendously thus filling the world deficit while the companies
continue to post losses.
It is ironic to see PAAS and CDE flaunt how their production is and
will continue to rise quickly while this process defeats the main
reason Silver should rise.
Hopefully new uses for Silver will materialize to keep demand up with
this potential supply increase.
There is little doubt in my mind that even if production does increase
dramatically the bullish factors still favor Silver as the best place
for your money today. However, the merits of investing into Silver
stocks at high valuations eludes me.
Most Silver stock investors think their top reason for owning Silver
equities instead of the metal itself is for leverage. Leverage has
costly drawbacks if Silver stays under $5.
I am not against leverage in and of itself; if you want leverage you
can simply buy physical Silver on margin/borrowed money.
CDE and PAAS are HURTING all types of Silver investors because they
insist on greatly expanding production even while POS is below $5. This
is a self defeating process that plays right into the hands of the
mega-shorts because it helps keep the price low as more physical Silver
is made available. They are using part of the proceeds of stock sales
to increase production. People that are buying Silver stocks to
participate in a Silver price rise are indirectly reducing the
possibility and extent of the price rise they wish to participate in.
Investors and PM advisors need to understand that at certain valuations
(especially now) they are much better off investing in the physical
precious metals directly even if it is a bit of a hassle.
My comments again: I slightly disagree with Kasvestor in that I
believe investing in some silver stocks is rather prudent, and not at
all contrary to my best interests. True, some silver companies
that continue to produce silver at a loss are acting contrary to their
own shareholders' interests, but I don't own those companies. I
also believe that silver companies that hold paper cash, instead of
holding physical silver, are acting contrary to their shareholders'
best interests. As of Sept, 2005, about 80% of my portfolio
is in silver stocks, and 10% is in physical silver bullion.
Furthermore, I believe in obtaining physical silver more strongly than
does Kasvestor, who, last I spoke with him, trusted in holding silver
at the COMEX.
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