-- Posted 13 June, 2008 | | Discuss This Article - Comments:
(A Primer on Usury.)
Silver Stock Report
Many people expect me to comment on this essay that has gotten wide internet publication:
"Putting Loincloth on the Naked Bogeyman" (A Primer on the Silver Basis)
By: Antal E. Fekete
You should read his essay first. Today's article is my reply.
First, thank you Antal for honoring my work and Ted Butler's work with a public essay to teach us about basis, and why the silver shorts might not be naked.
Although Antal and I agree on many things, there are areas of disagreement on this topic that I would like to highlight for the sake of learning and discussion. Since I like him and his work so much, I'll try to go easy on him, but I've always found it hard to be kind while in disagreement, and I'm known for not being very tactful. Sorry, I guess that's why I'm such a geek and like to research and write this kind of stuff, and not so keen on dealing with people.
My overall reply can be summed up very simply: In my view, "Basis" is another word for "usury".
Silver Traders who try to make money on the basis are usurers, and thus extortioners and harlots according to my understanding of Scripture (Proverbs 28:8, Ezekiel 22:12, Revelation 17-18).
For more of my views on usury, see my three essays here:
Usury Enslaves Jan 19, 2004
Freedom from Usury Jan 23, 2004
The Great Harlot of Rev 17-18 is Jerusalem, & what that means. October, 2002
I'm not trying to call Antal a whore-monger or pimp daddy (bank apologist?), I've just had a viewpoint about the nature of usury since 2002. It's nothing personal, Antal.
I believe that usurers are called harlots in the Bible because they turn to men and the promises of men for security, rather than trusting in God's ways such as the free market process. Usury is harlotry, because we are to be married to Christ. When we trust another more than God's ways, it's spiritual adultery, or harlotry.
According to the Bible, the promises of men are vain things, and we ought to not make such promises, nor trust them. Anything more than a "yes" or "no", such as a contract, or oath of performance, can lead to problems.
James 5:12 But above all things, my brethren, swear not, neither by heaven, neither by the earth, neither by any other oath: but let your yea be yea; and your nay, nay; lest ye fall into condemnation.
Further, since we don't and cannot know our future, we must be cautious about it, and not be so arrogant as to make promises.
James 4:13 Go to now, ye that say, To day or to morrow we will go into such a city, and continue there a year, and buy and sell, and get gain:
14 Whereas ye know not what shall be on the morrow. For what is your life? It is even a vapour, that appeareth for a little time, and then vanisheth away.
So, when men make promises to deliver metal that they don't have, their positions are said to be "naked", I think because they are "exposed" to market price fluctuations, and are taking a risk.
But I have purposefully exposed myself to the higher price potential of silver, and my physical silver holdings are not called a "naked" position. Interesting, isn't it? But I suppose it's because I've made no promises, and thus, I'm not exposed in such a way as to be compelled, or forced to perform any promise I've made, which is unlike the naked shorts!
And that further illustrates that my position is the one of freedom, and that their position is contrary to the free market, because they enslave themselves into performance through their vain promises.
In my view, men in the mining industry who fail to understand and trust free market processes and prices will seek security, instead, by trying to get security by "locking in" prices through forward sales of metals. But locking in prices in terms of dollars, in a world heading into hyperinflation, is financial suicide worse than slavery.
So, since I try to avoid usury, I have no use for studying "basis".
Besides, I think the basis on silver is low, and that the risk of default is extremely high, higher than Antal thinks, I think.
I would not trust futures contracts, and thus, if everyone had my viewpoint, silver futures would enter severe backwardation, with no bids on futures, as Antal suspects may happen.
Since I don't trust futures, I would not buy them even if they offered me 25% more silver one year in the future than today (a 25% interest rate).
Why wouldn't I accept 25% interest on my silver? Because I think there is about an 80-100% certainty that the markets will default at some point in the next 1-4 years. Therefore, if that's the case, I'd not even get my silver back, let alone any more. But I know that if they promised me 25% more silver (or more) in a year, I think that would be an unrealistic promise, that it would have to be a scam, and thus, I would still not buy it!
In fact, I could sell all my silver today, and take all the cash, and buy only silver options. And if silver prices go up 35% per year like I think, I'd be a lot wealthier, and I could buy a lot more silver, maybe even 10 times as much silver. But I'm not interested in that, because I don't trust the contracts, I don't trust the exchange, and I don't trust that I could get delivery, and I don't like the process.
And finally, setting aside the monetary risks and incentives, there is the moral problem of enslaving others to perform to meet their unbacked promises, and so, I'd still not buy futures contracts in silver, regardless of how much the bribe of usury would be!
So, that's the big area of disagreement. The rest of my disagreements with Antal, are merely details by comparison.
I understand, for example, that if spot prices are higher than futures, then you can sell silver spot, buy the futures, and pocket the price spread, or basis, in silver. However, this does not eliminate price risk, it transfers it into default risk. Somebody else may fail to deliver silver to you, in a shortage.
I understand also that if spot prices are lower than futures, you can buy silver spot, and sell in the futures, to pocket the difference in dollars. While there appears to be no default risk of a failed silver delivery in this case, this does involve price risk, the value of dollars can go down, and you can end up receiving dollars that are worth much less than you thought you would get, even if you get a bit more than a typical bond! This is the kind of trade that Antal feels dominates the silver futures market, and hence, the silver futures, he must feel, have little risk of default, because they are not "naked", meaning, being without silver.
But I don't think that's likely. As we know, the major banking institutions offer to hold silver for you, or put silver into your trading account, but they do not necessarily go into the market to purchase actual silver. The banking institutions, not surprisingly, practice fractional reserve silver banking, just like they practice fractional reserve lending with dollars. They don't have the silver they say they hold for you, as they admit.
Ted Butler writes:
"I found it appalling that Morgan Stanley would claim to store silver that didn't exist and even have the chutzpah to charge for the storage."
"In fact, in the court documents summarizing the proposed settlement, one of Morgan Stanley's defenses was that they were not doing anything unusual by charging storage on metal that didn't exist, as this is a widespread industry practice."
That's the smoking gun. They are naked, because they admit they are naked.
Furthermore, the London Bullion Market Association (LBMA) market trades about 100 times as much paper silver in a year as actual silver is mined, but has been decreasing in the last ten years. These must be paper promises of silver, and not real silver bars. The 2008 CPM Group yearbook, on page 19, lists LBMA silver trading volume for 2007 as 30 billion ounces of silver, yet annual silver mine supply is 0.5 billion ounces of silver. On page 16, the yearbook lists Estimated Silver Inventories in London and Zurich at about 75 million ounces for 2006. It is beyond my own level of comprehension and understanding how 0.075 billion ounces of silver can support the trade of 30 billion ounces of silver in a year without there being unbacked silver promises being traded at the LBMA. (30/0.075=400) In other words, they trade 400 times as much silver as they have! LBMA members, I believe, are short silver.
Does anyone know a stock that traded 400 times more than the float in a year? Or several times more than all the issued and outstanding shares every day? The only stocks I know of that come close to that are micro penny stocks trading for 0.001 penny and are clearly scam companies being shorted into the ground by further scammers who sell stock that does not exist! Come on, people wake up!
The LBMA Market Making members, who must offer to buy and sell silver to their own clients, include:
- The Bank of Nova Scotia - ScotiaMocatta
- Barclays Bank PLC
- Bear Stearns
- Forex Inc.
- Deutsche Bank AG
- Goldman Sachs International
- HSBC Bank USA
- National Association, London Branch
- JP Morgan Chase Bank
- Mitsui & Co
- Precious Metals Inc, London Branch
- Royal Bank of Canada Limited
- Société Générale
- UBS AG
It is my contention that you will never see any of these banks, or any other major bank, issue a real bullish report on silver. If they do publish a bullish report, it will be to suggest only that silver may go up 5 to 10% in a year or so, to be followed by a "surplus" in following years, and they will never mention potential monetary demand (nor will even the CPM Group!) Or, they will constantly "revise upward" their prior price estimates of silver price projections for the year, and claim they are bullish, while projecting next year's prices to be about 5-10% under the current spot price!
Fortunately, the LBMA also publishes a list of all the major refineries in the world that produce silver bars that are good for London Delivery, which are probably much better sources for silver than the banks, which are middlemen, who always charge higher prices.
THE GOOD DELIVERY LIST OF ACCEPTABLE REFINERS: SILVER
Antal says that silver sellers don't wish to reveal their identity, and that is true, technically. But I just did.
We actually cannot find out who the 4-8 silver shorts are who hold a concentrated short position that dominates 80% of the NYMEX silver futures market, but I have no reason to believe it is anyone other than those LBMA members, and that it is most likely a revolving list among those 14 LBMA market making members.
In the recent May 13, 2008 CFTC Report on Large Short Trader Activity in the Silver Futures Market, on the top of page 9, they note that the major silver shorts are a group of 10 traders.
"For the period as a whole, there were a total of 10 different traders who at some point were counted among the top four in terms of their net short futures position."
It is astounding to me to note, at the present moment I'm just realizing this, that Bear Stearns is on the LBMA member list, and yet, they just went bankrupt or were taken over by JP Morgan Chase Bank, and then immediately thereafter, precious metals prices collapsed. At the time, I did not realize that Bear Sterns was a LBMA member. I thought they were forced into bankruptcy because they were "outside the club".
it is my hope that you will learn to distrust promises of silver in the future, and that you will distrust anyone who says they will hold your silver for you. I hear the Mogambo Guru would love to hold your gold coins for you, send them to him!
The essential nature of silver is that it is not a promise, it is payment in full, and you only receive payment in full when you take physical delivery of your silver.
The essential nature of silver is that it is a protection from default, a protection from the bankruptcy of others, a protection from the broken promises of another. To protect yourself from those promises, you need to get silver in your own possession, in your own safe.
I don't even like the idea of selling my own silver, to buy someone else's silver for a one week delivery, if such a thing were possible in today's market. I don't do that because I know there is a time coming when you won't be able to get silver. For example, there is an industry wide delivery delay of 6-8 weeks for 100 ounce bars, as I keep repeating. Border Gold in Surry B.C. Canada is now reporting an 8-12 week delivery delay for 100 oz. bars!
The significance of these delivery delays is explored well in a very insightful essay by Steven Kovaka, "Silver Delivery 'Delays'"
Key excerpt from Steven's essay:
At this point we could expect to see some combination of shortages and price increases, and probably chaotic market conditions. We should not expect anyone to ring a bell or make an authoritative announcement when this point is reached. Far from that, those involved could be expected to do all in their power to deny and disguise the shortage of deliverable silver, for two very strong reasons:
1. Powerful interests in the government/banking cartel community do not want the price of silver or gold to rise because this amounts to a fall in the value of debt money around the world. It is visible, undeniable evidence of decades of past monetary inflation.
2. The amount of promises to deliver silver greatly exceeds the amount of deliverable silver. Shortages of deliverable silver bring the credibility of these promises into severe doubt and may disrupt the market in promises.
Interestingly, the "spot" price of silver might be more accurately reflected by the U.S. Mint, which is selling silver Eagles for $23.50 each, with a 5 coin limit! That's both a shortage and price increase, as Steven predicted!
But as Bix Weir noted, the U.S. Mint is supposed to sell silver Eagles at the spot price plus marginal minting costs.
(1) Sale price.--The Secretary shall sell the coins minted under subsection (e) to the public at a price equal to the market value of the bullion at the time of sale, plus the cost of minting, marketing, and distributing such coins (including labor, materials, dies, use of machinery, and promotional and overhead expenses).
If you are outraged at the U.S. Mint for charging such high prices, and imposing limits, and rationing to dealers, you can email their customer service department here
Your email may shame the U.S. mint into doing a better job.
In other silver coin news, France may start minting gold and silver bullion coins again. Will this continue of the trend towards remonetization and much higher precious metals prices? It was France who first stopped trusting U.S. paper dollars in late 1960's, which led to the end of the gold standard in 1971, and the following rise in the price of gold.
For those of you who want to trust promises, why not trade puts or options on futures for bonds?
It's hilarious. The dollar used to be a promise to pay in silver, or gold. Bonds are thus like an old defaulted version of gold futures contracts. Futures contracts in bonds are a third form derivative on bonds which are defaulted gold contract futures, and options on futures on bonds for dollars are like a 4th form derivative on defaulted gold contracts. The bankers have just gone wild!
Anyone want to buy an option on options on futures on bonds in dollars that can't pay in silver? Insanity! Get silver!
Oh yes, people often ask me about IRA accounts, since they can't take delivery. Maybe some people should cash out some, and get some silver. I have a rather large IRA, and I use it for the mining stocks.
For the price of just a few ounces of silver per month, you can look at my silver stock portfolio. Once a month, at the end/beginning of the month, around the 31st or 1st, for paying subscribers, I update the stocks I own and the percent of my portfolio. It's very simple. Very revealing. Very useful. It's not trading advice. It's not a model portfolio. It's my portfolio. Sign up here:
Paying subscribers have access to the members forum where some very, very smart people discuss silver, stocks, economic issues, growth rates, the possibility of machine intelligence, whether peak oil & global warming are frauds, and many other things.
-- Posted 13 June, 2008 | | Discuss This Article - Comments:
Last Three Articles by Jason Hommel, Silver Stock Report