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Silver Update

By: Jason Hommel, Gold Is Money

-- Posted 23 April, 2004 | | Source:

This week, I'm not producing an updated weekly report, because I'm headed to Calgary, and I will not have the 5-7 hours of time to go through each company by hand and do the math.

But due to the drop in the price of silver, some people have wanted me to issue an emergency comment. So, here it is.

I believe the lowered price is being driven by paper futures contracts, not physical supply. There has been no significantly bearish news for either gold or silver in the last week or so since the price drop began. There has been no major new supply of silver coming to market.

What I read on the internet from second hand sources was that the open interest for silver has remained nearly the same by the time silver dropped to $7/oz. I thought this was extremely good news, since it means that the shorts still have not been able to close out their positions, and that they still have yet to cover. I take that to mean that they will likely be covering their shorts and buying back silver at much higher prices than $8.40/oz, say, up to $15-$30/oz.

But, then again, the shorts may still believe they can get the paper longs to turn sellers. After all, if the shorts are trapped, and cannot buy silver that does not exist except at much higher prices, why shouldn't they make even more paper promises? If they are bankrupt by promising to deliver 500 million oz. of silver that does not exist, they can surely promise to deliver up to 800 million ounces of silver, in a desperate attempt to fool the majority of paper longs into turning sellers. This is the game these shorts have been playing for 20 years, and they are certainly good at it.

It is like they are credit card junkies, who are only able to pay off the interest on their credit cards by going further into debt, but their game is to always transfer the debt to the card with the lowest interest. But in this case, they are always transferring their silver debt to a future contract month, as the contracts are "rolled over".

The problem is the paper longs who continue to extend them credit!

The other problem is that the shorts are not limited as to how many contracts they can sell, but the longs are limited as to how many each long can buy. I believe the limit is 1500 contracts for each long. Therefore, the shorts can overwhelm the large longs, who cannot continue to buy to infinity. But the shorts can continue to sell, sell, sell, without limit. Limitless selling always drives the price down. But only so long as people believe the paper promises.

Since the paper longs are unable to overwhelm the shorts at the paper game, due to restrictions, the best way to beat the shorts is to not play that game, and to buy physical silver!

Now, undoubtedly, the paper shorts do have physical silver that they can sell. Reports are that Penoles has sold up to 2 years worth of production, perhaps at prices under $6/oz. This may be as much as 70 million ounces per year! And undoubtedly, other large producers have sold silver at locked in, low prices, as well, such as Barrick (who may have covered with paper options.)

This means that the paper shorts make money if they sell this silver into the futures markets at prices anywhere higher than $6/oz. This is their "limited ammunition". But in a market where industrial demand is already out pacing mine supply, there is not enough silver for monetary and investment demand on top of the very small existing market dynamics. And the "limited ammunition" is certainly not enough silver to cover the 500 million oz. of silver in futures contracts.

The issue is that the bullion dealers who are short may trust that the miners know what they are doing when they lock in silver at low prices. But this trust is certainly misplaced, in my opinion. Large miners who were heavily hedged, such as Ashanti and Cambior nearly went under back in 1999 when gold spiked up in response to the Washington agreement.

The smartest silver companies are the explorers, who are buying silver properties at low prices.

The paper longs must sell if they get a margin call they cannot meet. This may be happening right now. This is also why you must avoid debt, and have a fully paid for position of physical silver. I have not lost a single ounce of silver. And if I think in terms of silver, then, I have lost nothing.

True, my portfolio of stocks is down about 20%, which may be less than most. Perhaps the reason why that damage has been so minimal is because so many people who own the stocks that I own are very confident in the long term market outlook for silver. And if silver is down 28% from $8.40 to $6.00, and my portfolio is down 20%, then in terms of silver, my silver stocks are still ahead!

I do not have the experience of trading for 20 years, but I do know this. As my portfolio of silver stocks has run ahead by hundreds of percent, I've had to endure losses of up to 50% of my overall portfolio, at times, along the way. And thus, if I were trading on margin, then by now, I'd have nothing! So, you must avoid margin, avoid debt, and avoid futures contracts.

Now is the time to buy silver and silver stocks!

I have a list of about 400 people who are interested in Private Placement (PP) opportunities. In a PP, you can often buy a stock at 80% under the share price on the day prior to the PP announcement.

It is very profitable for me to tell my list about PP opportunities, because I may earn a finder's fee. However, for the last 6 weeks, I have not been able to present any PP opportunities to my list, because there are not any that I know of at the present time. It seems the companies do not want to give away stock at these low prices!

And these prices are, indeed, low, as many stocks are more than 50% off their highs! Several stocks are low right now because those who participated in private placement opportunities about 4 months ago are now selling to "lock in" profits of 50% to 100% gains or more.

Therefore, one way to look at the current situation is that the best "PP" opportunity right now is the open market, where stocks are 50% lower than their recent highs! In fact, it's better than a PP opportunity that's only 20% off, because if you buy now, there are no hold times, where your shares are restricted from re-sale for 4 months to a year or more. And if you buy now, you can sell later at any time--such as when raising money the next time the silver stock market is hot, and up 100% from here, perhaps one-three months from now, and you need to raise money for your next private placement.

Shop as a wise housewife, and buy when the stocks are up to 50% off. That's now. 

-- Posted 23 April, 2004 | |

Last Three Articles by Jason Hommel, Gold Is Money

The Dollar is Done - Deal with It
7 November, 2011

BIS Changed Silver Data (From $203 to $93 Billion in Silver Liabilities?)
6 July, 2011

Dear Capitalists of the World
26 May, 2011

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