Thursday, October 28, 2010

The Investment of all Investments

The purpose in writing this is to give an overview of the information that I have come to understand, and which has pointed me to accumulate silver over the last years over gold. (I do suggesting owning both). Making silver in my opinion the investment of all investments. All the information in here can be searched and confirmed, sorry I am not providing all up-to-date links for each of these points, CFTC chairman Chilton’s comments are what prompt me to write this today (and in a hurry, so I apologize for any possible errors in advance). These points are interconnected so it’s a bit hard to put them in point form. There are many reasons 3 main being; 1. Regulatory change  2. Investor demand   3. Industrial use. Each point could, and most likely will, set off the other points.

1. Regulatory Changes & the coming ‘Short Squeeze’ in the Futures commodity markets
-the COMEX has been the epicenter of metals trading, on the COMEX the commercials (bullion banks) hold the largest ‘SHORT’ (selling) position in silver than any of the commodities markets, much larger than world production and present deliverable inventories. They either BUY to close their trade for a profit (at lower prices then they first SOLD) or they are forced to buy at higher prices for a loss (at higher prices than they first SOLD). Either way there is buying pressure.
-Even if they don’t liquidate, as long as the commercials don’t add to their SHORT trades, the price will rise (as seen over October). If they are forced to sell (for reasons listed below) then there will be panic buying, and the ‘short squeeze’ of these commercial banks. See the COT Chart here
-The Dodd/Frank financial reform bill requires position limits; by all accounts the Commercials bank’s positions need to be brought to a much lower level.
-The CFTC will determine/enforce position limits. Silver specific; there is presently a 2 year ongoing investigation, on which CFTC Chairman has finally commented; 'There have been fraudulent efforts to persuade and deviously control that price. Any such violation of the law in this regard should be prosecuted.' Its only a matter of time now.
2. ‘Paper Silver’ Market vs ‘Physical Market’; Investor Demand
-Over the decades precious metals held by central banks, earning nothing by storing the metal, have been ‘Leased’ and sold to the worlds ‘paper markets’ and the amount of ‘paper precious metals’ certificates does NOT reflect actual silver/gold inventory’s. All of this ‘leased metal’ will not be available to return to those who ‘leased’. When this becomes fully understood an avalanche of Physical redemptions by banks would begin. See GATA for lots of info
-There are some institutions that issue ‘paper silver’ certificates, that because of the above mentioned leasing (and other reasons), has led many to question their backing, and the obvious counter-party risk. Because of this many are taking delivery of their metal, thus pulling it out of the present system (thus straining present inventory further).
-As world silver inventories have decreased (for last 70yrs), fiat money, and credit has expanded to historic proportions. Investors & Central Banks of the World have historically low exposure to precious metals. Central banks of the world are now reversing decade’s long trends and becoming buyers of precious metals rather than sellers. 
-The Worlds population continues to increase, and a portion of this population will always turn in their fiat money into precious metals, with or without crisis’s. This pattern will only be accentuated as people’s faith in central planning & in their fiat decreases, which we are witnessing today.
-‘Quantities Easing’ (money printing), Currency Intervention (BOJ in Sept), Currency Pegs (Yuan), Bail Outs (US & EU), all expand the money supply, diluting the fiat money’s value already in circulation (inflation). Promises made by Governments of the world (Social Security, etc) are unfunded liabilities that will have to be papered over again, meaning more dilution of your purchasing power.
-If silver were to hit its 1980 nominal high it would be at $50 per oz, if it reached the same high in today’s inflation adjusted dollars it would somewhere near $130.00 per oz.
            -The Gold to Silver ratio is stretched to historic levels, meaning silver has a lot of catch up to do. See this video

3. Industrial Use
-Besides Petroleum, Silver is the most used commodity in the world, (thousand of applications) and when it is used for industrial purposes it is for the most part, destroyed & unrecoverable.
-It is estimated that over the last 70 years 95% of the world’s entire inventory has been consumed, this is roughly 10 Billion ounces accumulated over hundreds, if not thousands of years, consumed in the last 70 years.
-Industries that use silver will continue to purchase silver no matter what the price, as for most products it used in, the amount is a small percentage of the total cost, however if they don’t have it they cannot produce their product, and would have to shut down assembly.
            -When panic buying begins, industries will join in buying to secure inventory to secure future production.

4. Future
            -One of the results of unfolding debt, currency crisis, will be governments of the world being forced to deal in something more tangible than fiat paper and their ‘promises’, which currently require ‘faith’. Market forces will dictate this result (Gresham’s law)
-Money should have (as Aristotle pointed out) a store of wealth quality; be durable/consistent, divisible, portable/convenient, & with intrinsic value, historically Gold/Silver have been used, those who see the paper mess unfolding, and the inability of governments to fund their promises, would do well to put their fiat money into real money.
            -The Collapse of Bretton Woods with Nixon cutting the Gold connection the USD (1971’s), has been the sole cause of many of the worlds problems (War!), fractional reserve banking & debt financing increased money supply, assets values rose, all was well, this great experiment, gone global, has gone on for decades now, and has finally exhausted itself & is coming to an end, as all fiat money has come to an end. In the western developed economy’s there are no more ‘assets’ to inflate to allow the ‘consumer’ borrow against to continue his ‘consuming’ (Think HEW Home Equity Withdraws), and now the great de-levering ensues. See this video that debunks that we can continue indefinetely having 'growth'
            -With the Bailouts (& FED, Treasury deals) much of the private sector debt (there is still much more) has now moved to the sovereign level, temporarily buying time before the next leg, there are political, fiscal & monetary limits to how much can be borrowed & monetized ("Quantative easing", running the printing presses) by governments, as Greece showed it can all transpire in a very short period of time. With silver if the economy's of the world continue without a hitch it'll do well, and if there is a hitch it should also do well.

Conclusion: Nearly everything seems to point to a silver shortage in the near future, based on present inventories, industrial use, and Investor demand, meaning substantially higher prices. Get some exposure now, use lower prices (and expect this volatility) as an opportunity to buy more, hold positions that you can't be forced out of (Not on Margin, unless your prepared for volatility with deep pockets) for these reasons and more I believe that this will be the investment of all investments.

For those in Asia, where countries have Current Account Surplus your fiat money purchasing power is eroding slower than the USD (but all fiat currency’s buying power is eroding), now while it is strong is a good time, in my opinion to move a good portion into metals. Every fiat currency ever issued in the history of the world has come to its intrinsic value of 0.

            -There are 2 positions one can take in a market 1. Buyer (Long/Bull/Bullish)  2. Seller (Short/Bear/Bearish).
            -In order to close the trade, you have to 1. Buy back if you first Sold, or 2. Sell if you first Bought.
            -All trades on the futures market are required to post a deposit, if a market moves significantly against you (if you BUY and it goes down, or if you SELL and it goes up), at some point you are required post more of a deposit to keep your trade (Called a MARGIN CALL), if you don’t post additional funds your position will be liquidated for a loss). When this happens en-masse it is a called a ‘SHORT SQUEEZE’.

No comments:

Post a Comment