[ECON] Gold and silver in 2002 and beyond

[Ed]

Jan 7, 2002 7:54 pm
Update on Silver (via e-mail)

Well, anyway, my attitude towards silver has changed and I find myself in the bull camp on silver, even if just for a short time. Here is why.

Silver has been driven down by short sellers as well as a fall off in industrial demand due to the recession. We at Centennial could not figure out who would be selling short at such low prices ($4.50 and lower) until the bankruptcy of Enron occurred.

Then all the dirty laundry came to light. Apparently, Enron used Rudolf Wolff as its commodities broker to clear its trades. And so did Warren Buffet. And good old Warren deposited his physical silver with Rudolf Wolff and Enron helped themselves to it through the leasing program. Everything was going along just fine until Enron went bust.

The story out on the street is that Warren Buffet now wants his silver back--approximately 50 million ounces of his 130 million ounces total. The problem is that Enron sold it into the market and now it is gone. Normally, that would be the end of the story because bankruptcy discharges all obligations. But in silver and gold leasing deals, a third-party guarantor is required just in case things go sour. That third-party guarantor is one of the major bullion banks. (Take your pick from Goldman Sachs, Deutsche Bank, JP Morgan Chase, et al. Nobody knows for sure because nobody is talking.)

My "deep throat" source who tipped me off back in November has been 100% correct so far. As the silver price broke above the downtrend line at $4.24, an acceleration occurred up to around $4.50. Then a minor selloff back to $4.30 before its recent advance to $4.72 (London spot). Yesterday's and today's action moved silver right up to and slightly above the 200-day moving average at $4.66. Comex March futures are at $4.65 which is a 7 cent discount to spot. So depending on whether we use spot or March futures, as far as this indicator goes, the jury is still out. It is entirely possible for a sharp selloff to occur from this level. It is my personal belief that silver will punch through the 200-day moving average before it falls back towards $4.50. (Today's low in Comex March futures was $4.52 early in the session). And here is the real kicker.

Silver trades in both London and New York. The upward pressure is now occurring in the London spot market, most probably because that is where Warren Buffet had delivered his silver initially way back in 1998. You all remember the story of "someone" draining the Comex warehouse of silver and then shipping it to London. It took a lawsuit by "injured" parties against Phibro Salomon before Warren Buffet emerged from the shadows as the client. And I presume that the leasing arrangement took place in London as well. This makes sense to require the borrowers of Buffet's silver to return it to London, not New York. And here is where it gets interesting.

I have been tracking the Comex warehouse silver stocks since the third week of December where they stood at roughly 103 million ounces. Silver lease rates in the meantime have fluctuated between 7% (bid) on the low side and 29% (ask) on the high side. As the price of silver has risen in both New York and London, so have the New York Comex warehouse stocks. This increase is most likely attributed to the high lease rates. Where else can you earn 20% on your money (silver) annually? As a result, there are now 2 million more ounces of silver in the Comex warehouse (approx. 105 million ounces) than just two weeks ago on December 20, 2001. Normally, more supply drives down prices and not the reverse. How could this happen?

The answer lies in the fact that the silver on this side of the Atlantic Ocean does not meet the specifications for delivery in London. So it is not simply a case of loading a bunch of silver bars onto an airplane and flying it to London. The bars must first be refined and then delivered. In the meantime, there is an appearance of a glut of silver in the U.S. which could be drawn down to meet demand. I am sure that the "monied interests" on Wall Street who are short silver up the wazoo are very happy to see rising silver warehouse stockpiles. Furthermore, I am sure these same people want every silver speculator to sweat it out and have sleepless nights, fearful that the spot price could crash without notice.

Bottom line here is: until sufficient supplies of deliverable silver arrive in London, we will see the spot price trade about 7 to 10 cents above March futures. For a change, we will see the spot physical market leading the futures market, i.e. the dog wagging its tail and not the tail wagging the dog. Also I think silver will breach the 200-day moving average and go higher. Technically, the weekly trend has turned up and silver just completed a 114/115 week cycle low in mid-December. Thirdly, when (not if) events in Argentina spin totally out of control, both gold and silver will jump dramatically. I expect this to happen in January, maybe next week. Note Argentina's defaulted debt doubling to around $270 billion. ( I bet the banksters did not count on this happening.)

Now add to the foregoing points the introduction of the Euro as a real trading currency on Tuesday; the burgeoning M3 money supply (over $1 trillion increase last year); the rising consumer and government debt with the need to raise the federal debt ceiling another $750 billion (so say the Republicans); the lowest interest rates in almost 40 years; political and military confrontations (India v. Pakistan, Israel v. Arab world) around the globe which could lead to a major war at any time; now we have the real makings of a bull market in gold and silver to be accompanied by a collapse in the U.S. Dollar. I seriously doubt that foreigners (and especially the Arab oil interests) will want to hold Dollars exclusively especially when we are now running huge deficits and there is an alternative (the Euro) which is partially backed by gold. I consider the arrival of a real physical Euro to be the final piece in the puzzle. In short, all of these events coming together at this time is truly prodigious and it augers well for gold and silver in 2002 and beyond.

[Troke]

(Sigh) Still praying for a collapse of the dollar. Who ARE these guys?

The Euro is partially backed by gold? Really? Is that actually true? Just where is the gold held, and who decides?

[wrs]

Ed,
Do you post there? If not I will cross-link it if you don't mind.

[Ed]

wrs,

I cross posted this from Bear Claws
forum. Please do cross post it again.
I think its a very good read.

The Euro is partially backed by gold? Really? Is that actually true? Just where is the gold held, and who decides?

Troke, I don't think it really matters where
the gold is. It is a matter of perception.
If people see the euro as gold backed
but see the dollar as backed by promises
only they will gravitate to the euro.
Also european countries other than GB
are not dispised the way the US and GB
are. Some nations will choose the euro
over the dollar primarily for this reason.

In any case the dollar is toast in my opinion.

[Ed]

Is this how grown men say I'll
just take my marbles and go home?

By Andrea Hotter

London, Jan. 8 (OsterDowJones) - The London Metal Exchange has suspended its
silver contract with effect from close of business on March 1, 2002, and
therefore, with immediate effect, no trades in this contract will be permitted
if they have a prompt date beyond this time, the Exchange said.

The last day on which cash trading will be permitted is Feb. 27, with Feb. 28
to be the last day on which cash today trading will be permitted, the LME
added. The contract will be suspended in the LME matching and clearing system,
or MCS, and on the Exchange's electronic trading system LME Select at the close
of business.

The last day on which deliveries can take place will be March 1.

The LME will continue to keep the silver contract under review, either in its
current form or in a modified form, it said.

In order to implement the suspension of trading, the London Clearing House
will reset each clearing member's parameter file to prevent entry of LME silver
trades into MCS. However, the contract details remain within MCS should a
resumption of trading take place.

Andrea Hotter, OsterDowJones (ODJ), +44 20 7979 5740, ahotter@fwn.com


(END) Dow Jones Newswires 08-01-02

1323GMT

[kiwi]

Thanks for that timely post ED
cheers form New Zealand home of the America's cup

[Ed]

January 8, 2002

THIS YEAR WILL BE WORSE THAN LAST

By James R. Cook



SILVER



We don’t know the future, but we do know the things that didn’t work in the past. Most of the economic policies adopted by the U.S. have failed when tried elsewhere. There’s an eerie similarity between what’s happening today and the events in 18th century France that ruined their money and economy. There’s also a deadly parallel in this country between today and 1930.

That’s why silver or gold make good sense these days. They hold value in a monetary crisis. In the past they rose and protected those that held them when events reached extremes. That’s why we have always pushed the same advice. Keep 10% of your net worth in silver or gold.

We especially like silver. Lately the price has moved on what appears to be tightness in the physical supply. Look at some of the many reasons to own silver:

Silver has strong demand by industry.
People around the world hoard and desire silver.
Silver is in short supply.
The price is historically cheap.
The downside appears limited.
Silver is used in everything electrical.
It’s primarily a byproduct of other types of mining.
It’s historically a monetary metal.
Financial companies have sold it short and must buy it back.
Most of the great silver deposits are exhausted.
People flock to silver in a crisis.
Most of the silver ever mined is used up and gone.
The cost of mining silver is twice what it’s been selling for.
Silver has a history of dramatic price rises.
A lot of silver has been leased and must be repaid.
Silver is so crucial to industry it must be purchased at any price.
Most of the silver that people currently own will only be sold at much higher prices.
It takes five years to ramp up silver mining production.
Silver has more useful properties than any other metal.
Public interest in silver is growing.
Search as you may, no story carries as many positives as does silver. Last year we sent out over one and a half million mailers spreading the word about silver. Now there’s every indication of tightness in the physical market. Lease rates are high and rising. Silver analyst Ted Butler will bring you up to date on the latest market factors in our next newsletter. For now he sees the potential for a price breakout. He claims that only the most outrageous manipulation by Wall Street brokers and banks can weaken the silver price. He urges people to buy silver now.



SILVER OFFER



From 1916 until 1947 the U.S. mint struck the Walking Liberty Half Dollar for general circulation. These were 90% silver coins and were considered to be one of the most beautiful coin designs ever minted. In fact, the new U.S. Silver Eagle first struck by the U.S. mint in 1986 adopted the exact design of the "Walking Liberty" for the new Eagle.

In 1948, the Franklin Half replaced the "Walkers" as they are called. However, these coins could still be found in circulating coinage up until 1964 when they completely disappeared. Subsequently, a number of these coins have been melted down and used up by industry.

We have $1,000 face value bags of Walking Liberty Half Dollars available now. There are two thousand coins in a bag. The silver content weighs 715 troy ounces. Most of the dates in these bags are from the 1930s and 1940s. The bags have been combed through to remove any culls or slicks (heavily worn coins). The coins in these bags are those that you often see sold on television or in the newspaper at double or triple what we charge. A bag currently sells for $5,875.00, but the price can fluctuate.

Individually these old silver coins sell for much higher prices and, in the Red Book coin guide, some sell for double what we charge. Grades range from Good to Very Fine. These are coins that people like to collect and put into date sets or rolls. In other words, with these coin bags you’re buying silver with a small premium for the old U.S. collector pieces. As these coins become harder to get the premium can easily grow. Bags of the scarce Walking Liberty Half Dollars in uncirculated condition sell for $56,000 each.

This represents an excellent method of capitalizing on the potential increase in silver prices. You have historical old U.S. silver coinage that refiners want to buy and melt down, and you have collectors who want these coins individually for coin sets. Today the biggest demand is coming from silver investors who are buying up these bags. That’s why we don’t have unlimited quantities of Walking Liberty coin bags. But we do have a small supply of bags and we urge you to get a few while they are still available and still seem cheap. Call us today at 1-800-328-1860 and order now.



P.S. Despite what you hear in the media, the economic indicators show no solid evidence that the economy has launched a recovery for 2002. Profits remain in a disastrous fall, capital investment has gone net negative, when depreciation is figured in. The level of corporate debt staggers the mind, while balance sheets are weak. Net savings by businesses and consumers has virtually disappeared while delinquencies and bankruptcies are rising sharply. Long-term rates are stuck at the high end and the likelihood of a credit crunch grows by the day. There is not even a remote possibility of a recovery now.

Meanwhile, stocks are massively overvalued and have no solid foundation for improvement. The overleveraging is insane and the derivatives risk profound. The dollar stays grossly overvalued, while foreign indebtedness and the trade deficit reach painfully high levels. Such imbalances and economic maladjustments, the world has never seen.

Going forward there can only be disappointment. The markets will not react favorably to the news ahead. Forewarned is forearmed. As the great economist Kurt Richebacher points out, "Downside risks remain overwhelming. For the time being, the markets are buoyed by trust in the predicted, imminent V-shaped U.S. economic recovery. Its failure to materialize will come as a tremendous shock to everybody with shattering effects for all segments of the financial markets – stock, bonds and the dollar."

[my2scentsathome]

My readings on the Euro seemed to point to this -
The Euro has a 15% gold backing - held by the Central banks of each country. Some of the selling in recent years was caused by those countries having to get their holdings DOWN to the required levels.
The Euro countries are also limited by the agreement to keeping their deficits down to a percentage (3%?) of GDP and their National debt down to a percentage of GDP (60%).
(All in all, as a reserve currency it sounds more attractive than one that is strictly fiat with no limitations on how much the central bank creates or what the level of debt is. -- However, when one looks through these restrictions to the actual numbers, it seems the good old USA is still in better shape then the Euro countries.
This could change if our Govt stays on the recent path of debasing the currency. It would seem that a cross-over point is still years in the future.

http://www.asiamedia.ucla.edu/Deadli...ll/Mundell.htm