ChrisGraley (31.57)

The Silver Swan - The event that will change Global Economics forever will occur in the near future!

September 18, 2009 – Comments (8)

Everyone already knows that I'm currently a silver bug, but what they don't know is that in real life, I own a ton of physical silver, but not much else that is silver related. I own very little silver mining stocks. I own absolutely no ETF's. I did have a ton of futures and options and still do play some options on different miners, but overall 95% of my silver investment is physical silver. I do have some stored silver, but no silver certificates. The only silver that I store at the place I bought it at, is a small direct deposit account that I keep at goldmoney.com. When the Silver Swan event occurs, my entire paycheck will be direct deposited into this account because we will have already been in hyper-inflation. I don't keep silver in a safety deposit box (the government would eventually seize it) and I don't keep the bulk of my silver at home. (I would get robbed) I'm not going to share where I keep it for obvious reasons, but it isn't buried anywhere. It's safe and anonimous

Why? Because the inevitable has to happen with pretty much all precious metals and I think that silver will be the most affected of all the precious metals. Mainly because of the gold/silver ratio, but also because it doesn't get the attention that gold gets and that allows it to be manipulated by a far smaller group of individuals.

I can tell from my All-Star pitch for First Majestic, that I've got a few of you investing in silver and the whole purpose of this post is to make sure that you are doing so safely and responsibly. What you think may be a good investment, may not be one in real-life. Here goes...

First I need to explain the Silver Swan event. The Silver Swan event will be an investor response to a government created bubble. It's that simple. I'll explain further. About the last 30 years or so, our economy shifted from an industrial economy to a service based economy. Actually it was starting the transition before that, but I use 30 years ago, because that was about the time that government started using inflation to support the transistion. About the same time, the government decided that it might be a good idea to try to hide the fact that inflation was the driver of the economy and not a result of our prosperity. The easy answer was to manipulate the value of precious metals since most investors look at metals for the first signs of inflation.

So why do I focus on silver and not gold? Well, I gave the answer above, but let me talk about the gold/ silver ratio here. There was a time when gold and silver weren't just backing the currency, they were the currency! This is actually when the gold/silver ratio was invented. The ratio back then was about 12/1. That was based on the rarity of each metal. The governments had 12 times as much silver as they did gold, so 1 piece of gold = 12 pieces of silver. Pretty simple so far. As long as gold and silver were the currency, the only factor in determing the ratio was how much we had. Then things started to change. Industrial uses were being found for silver and silver was starting to be consumed. Today 95% of all the gold that was ever mined still exists, but since 1942, silver has been consumed at a faster rate than it has been mined. The historical gold/silver ratio fell to about 9/1. This is a pretty big change when you consider it as an average over history. An even bigger change occured when huge deposits of silver were found in many different countries. This changed the historical ratio to about 20/1. (I dispute this ratio, because by that time metal prices were being manipulated and silver has been historically easier to manipulate than gold.) Over time countries went from using the metals as currency to using them to back a paper currency. This allowed them a little manipulation in the begining, because they could set the amount of precious metals that their paper currency was worth. Soon, market forces took over though, and governments were forced to de-couple their currency from precious metals. At this point, metal prices were routinely manipulated and we've gotten better at it over the years. The consumption of silver alone should cause a drop in the gold/silver ratio over time. A scan of any chart though shows a rise in the gold/silver ratio over time.

So how much silver is out there really? The truth is that I don't know the answer to that question, and believe me, I have researched it a ton! I do know that the amount of silver should be going down and not up, and although the amount of gold should be going up, it should be going up at a much slower pace. I do know that back in the 1950's the peak amount of silver held by the US government 3.5 billion ounces. This was mainly due to FDR signing the Silver purchase act in 1934. Since we had a couple of times where it was smarter to melt a quarter than to spend a quarter, so the public bought a lot of the US silver reserve and by 1980 it was around 2.5 billion ounces. By 2008 it was about 20 million ounces. Above ground silver is actually rarer than gold at this point, but we are still producing silver at a much faster pace than gold. I'm not sure how acurate it is, but I've seen a projection that if we stopped mining silver today, we would have enough to last for 4 months. I'm sure that the consumption numbers for silver are as fictitious as the production numbers for silver, but given a current consumption of a billion ounces of silver a year, a current estimate for above ground silver would be 333 million ounces, which would mean the world has 13% of what the US held in it's own reserves in 1980.

But you mentioned that we still have a huge amount of silver below ground! Well yes and no! A big problem with silver right now is that there is a bunch of it below ground that is not minable. Ray De Motte of Sterling Silver estimated the current amount of minable silver to be 8/1 to minable gold. It is possible that we get better technology to mine it, like we did with oil and natural gas, but that won't be pursued until the price of silver rises enough to spur innovation. I'm not sure if any of you knew this, but both minable gold and silver are projected to run out in most of our lifetimes. Silver is projected to run out in 25 years, and gold in 30 years. China may extend the lifespan for silver a little while longer, the US is literally paying China to take silver at this point. Most of the computers and electronics that we throw away, wind up in China. We pay China to deal with our toxic nightmare. China soon discovered, that there is more silver in a ton of computers than in a ton of silver ore and is currently recycling silver.

So what will cause this Silver Swan event? Well a bunch of things, but I'll start with price manipulation.  A lot of paper futures sold through COMEX sell silver that simply does not exist. Commodities traders have promised to deliver about twice as much silver that is reported to exist. Remember that I'm skepticle on the amount that actually exists anyway. If the traders were all called on this bluff at the same time, the rest of the world would not get a single ounce of silver for over a year. Even more amazing is the small amount of short sellers of silver on the COMEX market. 2 traders hold more than 50% of all the short selling of silver on the market. 4 traders have short sold more than the amount of silver known to be above the ground. This would take a ton of guts if it was done short term, given what we already know about the rarity of silver, but they have been doing this long term, which suggests institutional sponsorship that can only happen with major governments. Given the amount of effort they have to go through to short more of something than there actually is, when given the amount of info that suggests that the commodity should skyrocket is overwhelming. The only conclusion that I can come to is that a few major governments are shorting silver for a purpose. In 2001 Warren Bufffet tested the silver market. He bought 130 million ounces of silver and demanded delivery. This created a lot of chaos in the silver market. I'd like to compare this to a warning shot over the bough, but Warren never followed up. He had enough money to expose the entire silver industry as a fraud and he didn't follow up on it. Warren could have accomplished what the Hunt brothers wanted to do with a lot of money left over. He chose to make money without destroying the economy. The rest of you may respect his economic sense, but I respect his restraint more than anything.

The next thing that I want to talk about is silver leasing. The government in it's infinite wisdom, has pursued a course of manipulating silver prices. The easiest way to manipulate the price is to sell more silver than what exists. The game plan is simple. Find a silver miner that needs money. Explain to them that instead of diluting their own stock, you will loan them some silver to sell out of the central bank. They have to promise to give you that silver back later. he companies, (especially the juniors) jump at the chance, because the silver sale looks a lot better on the financials than a dilutive stock offering. Currently, there are about 1 billion ounces of silver being leased. That is about 3 times the amount of above ground silver.

Silver certificates- Ok, so you buy silver at your favorite bank. At least you think that you do. They charge you storage fees for the silver that you think that you bought. Later you find out that they take some of the proceeds that you you gave them to buy silver and invest it in silver futures. They are charging you storage fees for silver that they never had to begin with. If the price of silver goes down, they come out ahead because they never really bought the silver. If the price of silver goes up, they still come out ahead, because they are charging you fees that they don't have to pay since they bought futures. They really don't care that the futures that they are buying are worthless, because they get a bonus as a banker even if they destroy the bank or you the customer.

ETF's -  Where did the banks learn the dirty tricks above, to sell you silver that they don't have? Well, from the ETF's of course. They have been selling you silver that they don't have for quite a long time. They know that the futures are worthless, but they get a lot of bonus money by making transactions that look good on paper. Like a lot of things in this country, it's just another ponzi scheme that doesn't get exposed until a major event hits.

Ok so some take-aways for the investor...

1) Invest in physical silver and hide it. I can't  tell you how I hide it on the internet, or my silver would be taken away from me.

2) Understand that when the dollar loses worth, your only hope is to be fully invested in commodities.

3) Try to understand the amount of effort being done to devalue silver. I am under the opinion that silver should realistically be at least 8/1 with gold. That would put silver at $125 an ounce. For risk management, I plan for $60 an once.

4) Don't invest in anything that raises your silver risk. A lot of people don't understand why investing in precious silver coins is a bad idea. The truth is that when inflation hits hard, people will sell what they have that is worth anything. Numismatic value with coins gets lost when the melt value can put food on the table. Don't count on your investments of silver miners panning out if they have silver leases. The leases just keep getting rolled over and before you know it, a junior miner has a commitment of a couple of years worth of production to a central bank. This is like a credit card for miners. The banks are happy to put them more and more in debt until a crisis hits. Once it hits, they expect payment in full.

5) This is a scary time to invest in anything, but I believe that silver investors can come out ahead due to the fraud in the past.

Am I right? The truth is that I don't know about that either, but I've thought about it a lot and I'm risking my own money. I think that I'm safe due to the ratio alone, but I'm counting on fraud to make me richer.

Credit - A lot of facts were taken from www.cij.inspiriting.com. He seems to have a good blog about investing in general.

I really do hope that this helps your investment perspective. I always feel that understanding what's going on is about 3/4ths of the battle.