4-digit gold

Today for the first time ever, gold reached $1,000 per ounce.  So it reached my 2008 benchmark with 9 1/2 months to spare.  The bad guys drew a line in the sand at $985 gold and $20 silver, and both of them got blown away.  What's next?  Well, you have to get to $1,000 before you can get to $2,000.

Oil reached $110/bbl today, and silver nearly $21/oz before it pulled back.  The Fed just "created" $200 billion worth of liquidity (I don't want to call it money) to purchase dodgy securities that banks can't sell and don't want on their balance sheets because they are worth little or nothing.  So I see more inflation, and higher gold and silver prices ahead.

All is well at my favorite stock, Silver Standard.  The Pirquitas mine construction is well underway, and there are no issues to keep it from completion in the 4th quarter.  By this time next year, the stock should be re-rated from developer to producer, so it looks severely underpriced in the mid-30s.

The company held a conference call yesterday, so I had the chance to ask the president about the Snowfield project.  This is a gold deposit with 3.5 million ounces of gold defined, which is great, but I wanted to know if the company intended to monetize the asset or take it into production.  The response was what I hoped for, that it would either be sold or operated as a joint venture, but the company would continue to focus on providing leverage to the price of silver.  It is a rare thing to find an exploration company that makes a successful transition to an operating producer, but this company is on track.

The Guennol Lioness

Which country had the best performing stock market in the world last year?

Answer: Zimbabwe, up 12,000%.

But since the Zimbabwe dollar trades at 25 million to the U.S. dollar, it doesn't mean very much.  You can be a billionaire in Zimbabwe and still be impoverished.  That is an extreme example of inflation.

Of course in America that could never happen.  Our stated inflation rate runs 2-3% per year at the most.  In reality, the inflation rate is more like 8-10%, but there are very good reasons for understating inflation.  Millions of Social Security recipients and Federal retirees have their pensions increases tied to the inflation rate.  So if you understate the CPI, you save a lot of money.

In addition, the Gross Domestic Product is computed by backing out inflation.  So if the economy grew at 6% in nominal terms, you deduct the official 2% inflation rate, and conclude that the real rate of economic growth was 4%.  Then everyone yells, "Horray!" and buys lots of stocks.  In reality, the inflation rate was 8%, so that 6% nominal growth translates to a negative 2% economic contraction.  The simple fact is that the economy has been in recession for at least the past two years.

You would never know this from listening to the cheerleaders on CNBS.  The financial analysts assure us that all is well.  If you've tried to buy groceries or gas lately, you know better.  Or health insurance or college tuition or anything but a big-screen TV.  But the official CPI is constantly reformulated to remove food, energy costs, or anything else that might be going up.

To make matters even worse, the anemic growth of the past seven years was accomplished only at the expense of enormous monetary and fiscal stimulus.  The M3 money supply (if the govt would publish it) was climbing at the rate of 16.7% in February, an all time high.  Zimbabwe, here we come.

What little growth we have seen since 2000 was underpinned by massive consumer spending made possible by mortgage refinancing.  Anyone with half a brain could have seen that this was unsustainable, but it wasn't until last year that someone actually stopped to ask whether a crappy one-bedroom condo in a bad neighbrorhood was really worth half a million dollars.

So now the Fed has to lower rates to reliquify the banks.  The banks have to be able to borrow short at 1% to lend longat 4% (doesn't that have disaster written all over it, and didn't they learn anything from the 70's?) to make enough money to stay solvent.  By the way, that thing you saw falling off a cliff was the value of the U.S. dollar.

Which brings me to the Guennol Lioness.  This is a miniature sculpture, barely 3 inches tall, and its legs are broken off.  But when Sotheby's auctioned it in December, it was expected to realize $14-18 million.  That's in U.S., not Zimbabwe dollars.

It actually sold for $57 million.  I don't know what its historical significance is, but unless that little thing can cure cancer, it ain't worth $57 million.  No, we don't have any inflation.

George F. Bush, you're doing a fine job.

Back to the Future

This entry concludes my historical silver game.  As I write this, silver trades at $20.36, having already met my target for 2008, and then some.  It is one thing to reference history events, but no, my crystal ball will not try to predict events 28 years in the future.  Predicting the Giants to upset the Pats in Super Bowl 42 was the absolute limit of my forecasting power.

As silver continues its parabolic rise, one has to think about the possibility of a short squeeze.  With platinum above $2200 and palladium pushing $600, and most of the base metals near all-time highs, it is clear that silver and gold are still undervalued, even at these levels.

The analysts and pundits who say silver has gone parabolic, and this uptrend is unsustainable are correct.  At some point there will be a sharp decline.  It could start tomorrow, or when silver reaches $25, or perhaps silver will run all they way to $30 before we see a significant sell off.  But in the long run, demand for physical metal will overwhelm the games being played on the COMEX.  I think the danger of being out of the market and missing the rest of the bull market is much worse than the potential of even a waterfall decline in the short term.

As they say, get in, sit down, shut up, and hang on!

The end of Flight Service

Effective today, Oakland Flight Service will only provide preflight weather briefings; no other services.  No inflight services, no en route flight advisory service, no flight data, no NOTAMs, no coordinator, no air-to-ground services at all.  The facility is part-time now, which isn't so bad (no more midnight shifts) but from now all everyone will do is to brief pilots.  Hour after hour, day after day, month after month, nothing but briefing.

That ought to do wonders for morale.  It is amazing how LockMart has this uncanny knack for doing everything wrong.  The equipment still doesn't work, the employees at OAK are now glorified call-center reps, and Flight Service has lost half of its traffic by giving the pilots poor service.

Not that LockMart cares.  If fewer pilots are calling in, the company has a better chance of answering the phones and radios in time to meet their performance levels and get their bonuses.  Back in the FAA days, the administrator claimed the system needed to be fixed because it cost more than $25 to provide a pilot weather briefing.  They told us that competition with the private sector would make us more efficient.

First of all, that $25 figure was completely bogus.  It ignored all of the radio contacts, NOTAMs and so on.  I guess we provided all of those for free.  I wonder what the cost per briefing is now, since half of the traffic is gone.  Chances are it's at least $25, and rising.

Not content with driving the pilots away from Flight Service, I'm guessing that LockMart's next moves will be 1) Make part-time briefing-only facilities out of the other "legacy" facilities, and 2) Eventually close all of those facilities and move everyone to the three hubs.

And given the bean-counter mentality at LockMart, they may also decide that since the specialists only provide weather briefings, and no other services, their pay should be downgraded.  After all, why should they get paid so much just to answer the phone?  For that matter, why bother paying the rent and utilities on 19 stations when you only need the three hubs.  And they call this "equal or better service."

So if a pilot takes off from Oakland, and calls Oakland Radio to activate his flight plan, the voice on the radio that answers as Oakland Radio will be a specialist in Prescott, Arizona.  But don't worry, he will have studied the area knowledge for the west coast.  He might even know where the coastal range is, and that some of those low lying stratus clouds may have mountains inside them.  During the summer months, there are some are some very hard clouds here in the Bay area.  But if anything happens, it won't be LockMart's fault.  They will blame the specialist, and you can take that to the bank.

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.