Commercial Signal Failure

Silver closed for the day at $19.81, so I came within 19 cents of entitling this entry "Where did the 20th century go?"  We are that close to reaching my 2008 target for silver with ten months to spare.  Gold has done well too, at $974.30, but as I had hoped, silver is outperforming gold as it should.  There will be pullbacks along the way, and volatility will increase, but I expect gold and silver to go MUCH higher from these levels.

Why?  Because the COMEX has been ground zero for manipulation of the commodity markets.  A group of large commerical traders are short roughly 300 million ounces of silver.  To put it mildly, they are really in a pickle.  Each time silver goes up $1/oz (which was almost every day this week) they lose another $300 million.

This group of bullion banks and other financial institutions have made out like bandits for the past ten years.  They sell short silver contracts to the hedge funds, which come in on the long side. The funds drive up the price of silver until their buying power is exhausted.  Then the commercials continue to sell short, driving down the price until the funds start receiving margin calls and have to liquidate their positions. This selling drives down the price still further, and it ends in a rout.  Then the commercials buy back some of their shorts at fire-sale prices.

This happened over and over.  The open interest (total number of outstanding contracts, long and short) would expand as the price went up, and collapsed when the commercials crash the price, and the funds sell out.  Now I will say the four most dangerous words in investing:

This time it's different.

But it really IS different.  The silver open interest climbed as the silver price climbed.  But now the price went vertical, and the open interest is dropping.  To me, this means the commercials are getting overrun, and they are selling out.  I believe the weakest of the commericals are getting margin calls, and was forced to liquidate with huge losses. 

For several years, the size of the commercial short position and open interest were good indicators of the safety of the silver market.  When those numbers were low, it was safe to own silver contracts.  But when those numbers were elevated, silver was due for a correction.  The signal always worked.  But not any more.  A couple of weeks ago, silver appeared overbought by past standards, but now the commercial signal has failed.

It is possible that this is only a short term spike in the price of silver.  But if there were a temporary shortage, and the market expected prices to come back down, we would see backwardation, i.e. a spot price higher than futures prices.  That is not the case.  We still have a normal contango, and all futures prices are higher than the spot price.

I believe the silver bull still has a long way to run.

Where did the 19th century go?

Yesterday silver opened at 18.01 and this morning it's at 19.09 as I type this.  One day I'm thinking about the Battle of Trafalgar and maybe Waterloo, and the next day the American Civil War goes by in a flash, along with the rest of the 19th century.  Maybe some of the big shorts on the Comex got overrun and had to cover.  Given the lack of transparency we may never know.

But here's what $19 silver DOES mean:  Pirquitas will be extremely profitable.  I have looked at the numbers again, and this project was updated a few months ago with silver projected at $9.35, tin at 3.65/lb and zinc at 1.02/lb for the life of the project.  At the time, silver was actually at 14.55 and tin at 7.28 (now $8+)  Because of the base metal credits, the cost of silver is negative.  Not just the cash cost of producing silver, but all costs.  Pirquitas would be profitable even if they never found an ounce of silver there.  As it stands, Pirquitas is expected to produce 10 million ounces of silver a year for ten years, all of it for free, since the base metal credits cover the costs of production, and then some.

So given today's silver price,  whoops it's 19.15 now, Pirquitas could throw off nearly $2 billion in cash flow.  So the increase in capex from $140 to $220 isn't really that big a deal, nor is the company losing up the $57 million on that ABCP exposure.  A couple of years ago at a shareholder meeting, we asked RQ to keep some more of the company's liquid assets in silver bullion, but he wouldn't listen.  I guess no one's perfect. 

And Today the French Revolution

Early this morning, silver blew through $17.89 (Liberty, Fraternity, oh never mind.)  The French Revolution and the Reign of Terror were in the rear view mirror as silver surged past $18 into the nineteenth century.  It was just last month I was talking about the Spanish Armada, and here we are in the Napoleonic Wars.  How time flies when you're making lots of money.

One stock that didn't make money today was my bellweather, Silver Standard.  It fell a couple of points on 2.6 million shares traded, very heavy volume.  It appears the verdict is still out on the proposed convertible bond offering.

Another company that should be reporting news soon (always next week, it seem) is Eastmain Resources (EANRF or ER.TO in Canada.)  This one isn't on my list of recommendations, but it is in my portfolio, big time.  The core samples they sent to the lab a couple of months ago had dozens of veins of visible gold, and the assays should be out soon.  The stock was around 70-75 cents then, and they did a placement of 100K shares at $1, all of which was taken by officers and directors of the company, at a hefty premium above the share price.  The president himself bought 50K shares.  If they have that much confidence, so do I.

Today the American Revolution

Today silver hit $17.76, marking the beginning of the American revolution.  Actually, as I write this, silver just traded at $17.83, thereby completing the entire Revolutionary War.  It's nice to see silver making up for lost time.

Speaking of silver, I just received an e-mail from Silver Standard to the efffect that they are issuing $120 million worth of convertible bonds.  They have not set the terms yet, but this bears watching.  Depending on the terms of conversion, this security could offer the best of both worlds.  An interest payment and the ability to convert to common stock if SSRI goes to the moon.  Details to follow.

IMF gold sale...who are you kidding?

Gold continues to work its way higher, and silver is doing even better, while the global stock markets have staggered through the new year.  So there's only one thing to do...sell the International Monetary Fund's gold reserves!

I have seen our government do some stupid things in the past, but this ranks up there with the best (or worst) of them.  It is clear that the government will try anything to hold down the price of gold as long as possible, but this won't help much.

More likely, they are threatening to sell gold, and hoping to shake out some speculators from the long side.  But what would happen if the IMF actually sold its gold?  As I write this, gold is $908/oz, which is about $29/gram, or $29 million/ton.  I'm not sure how much gold the IMF really has.  I have heard 3200 tons, and they claim 4000 tons.  I will give them the benefit of the doubt and when I multiply 4000 tons by $30 million/ton (it's late so I'm using round numbers) I get $120 billion.  So the IMF proposes to raise $120 billion by selling off ALL of its gold.

This assumes the IMF really has 4000 tons, and that none of it is encumbered, i.e. already covertly leased or sold with the usual lack of transparency.  It also assumes that selling 4000 tons won't crush the price of gold, and the IMF will collect its full $120 billion.

Now consider that China has about $1.5 TRILLION worth of US Treasury bonds that are worth less almost every day, that they would love to get rid of.  Then consider the other Asian countries (except Japan, which has large $ reserves, but is beholden to us, so it plays its part as US Fed East) and Russians and Arabs that would jump at the chance to diverify their reserves out of the US dollar.  How long will that $120 billion worth of gold last in this economic climate?

This proposed sale reminds me of Gordon "Goldfinger" Brown selling half of the Bank of England's gold reserves a decade ago, after first telegraphing his intentions.  The sale went through at the lowest gold price in a generation, and he cost his country billions of pounds, but there was a happy ending.  He was rewarded for his efforts by being elected Prime Minister.  I'm not kidding, this really happened.

This IMF sale is ten times larger, and about a hundred times stupider.  At least the dollar was strong when Goldfinger sold England's treasure.  Now there is no excuse.  So if there is a temporary decline in the gold price, load the boat.  All the IMF sale would do is hasten the world's ongoing transfer of wealth from West to East .

 

Final Score: Giants 17, Patriots 14

As upsets go, this one was somewhere between improbable and impossible.  If it had been an earthquake, it would have measured 7 on the Richter scale.  As 13-point underdogs, no one expected the Giants to beat the Patriots, except me, of course, but I'm way too modest to point that out.  (see previous blog entry from ten days ago.)

Eli Manning, Super Bowl MVP.

Now those are word we would never have expected to see in the same sentence even a year ago.  Even a month ago, for that matter.  Maybe the Eli-haters will finally give him a break.  If that kid's last name were Smith or Jones, or he played anywhere but New York, everyone would be talking about that good young quarterback in say, Cleveland or Denver.  Now the critics will have to complain about someone else.

And the funny thing is the best team won today.  The Giants outplayed the Patriots and deserved to win.  New York controlled the line of scrimmage, out-rushed and out-passed New England.  More importantly, the Giants made the big plays when they had to.  Manning's scramble out of trouble to throw a bomb that David Tyree caught with his HEAD is going to be on the Super Bowl highlight reel forever.

Prior to the Super Bowl, the Patriots trademarked the words "19-0."  As they say, pride goeth before a fall.  And to quote that eminent philosopher Osi Umenyiora, maybe they can trademark "18-1" now.

Give the Patriots credit; the players were gracious in defeat, with even Randy Moss saying they couldn't match the Giants' intensity.  Even Bill Belichick was no more grumpy in defeat than he usually is in victory.

On paper, the Patriots should have won by two touchdowns, but that's why they play the game.  Congratulations to Tom Coughlin, who could easily have been fired after last season, and the rest of the underdog Giants.

Once again, as strange as it may seem, final score:

New York Giants 17, New England Patriots 14