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-- Posted 9 April, 2004 | | Source: SilverSeek.com
Alan Lunt
Contributor
Tactical Investor I'm going to come at this topic from the top, the bottom, the sides and from straight on. The naked short position in silver on the Comex is nothing short of a disaster waiting to happen. But first I will talk about money and the process of it's existence through the fractional reserve banking system. The reserve to all intents and purposes is the amount of money held by the banks in the form of unencumbered money, this money is held in reserve at the central bank. It is there because people do want to have access to their funds, and historically only 2% of people want their money out at the same time. The rest is a gamble by the banks that there will not be a run on their funds, so they loan it out 7 or 8 times and collect interest on it, not once, but 7 or 8 times. It is the process of fractional reserve banking that leads to the business cycle of boom and bust. In effect what happens in a recession is that the banks try to cover some of their naked short position (lending) by placing a squeeze on liquidity. They are quite happy to squeeze hard because they know that the central bank will front up with new funds for them to play with, as the government cannot be seen to be "doing nothing". All this money creation, and destruction, is with money that never really existed in the first place, they were "paper" entries. When I think of the money pool I think in terms of a drum. Is it full or is it empty. In the case of a balanced economy the drum is always full. In order to put more money into the drum the size (value) of the money already in the drum has to shrink. It looses spending power. There's a growth in the total money supply, which is inflation, but the drum is the SAME size. All that has happened is that there has been a redistribution of money to the various sectors, be it household, farming, or the production of goods as well as services. The Comex is nothing but a drum with the contents reducing in number. There is deflation in silver. The shorts have been playing the fractional reserve banking system game with silver, betting that the longs (buyers or depositors) would not all take their cash (silver) out on the same day. It is the job of the Comex to make sure there is enough silver in inventory to cover the "reserve" position. They are the central bank of silver. It is the Comex who must ensure that there is not "a run on the bank". Who said silver is not real money? There has been a major miscalculation by the shorts using the fractional reserve banking system model and applying it to silver. Fiat money is only able to come into creation if someone takes on a liability. The only way to make more silver is to get out there and dig it up. There is not a computer on earth that can put 1 troy ounce of silver into my bank account. It has to be physically delivered, and once delivered it is no-one else's liability. I am inclined to think that the battle for silver could be the beginning of the end of the fiat money fractional reserve banking system, as we know it. The naked short position that the banks have taken on will be recognised as a disaster when the depositors want to see their money. It has been an experiment in unregulated greed perpetrated on society by the banks under the guise of "helping" the economy to grow. True growth comes from production, not inflation through the increase of monetary aggregates. When silver breaks free of the Comex it will be of such value that it's "spending power" will be greater than it was under the gold standard for the simple reason that there is a lot less of it. The populations of the Eastern nations understand the true value of silver and gold. Those of us in the West have been duped into believing in paper. Does that make you want to take your money out of the bank and buy physical silver for protection? © 2004 Alan Lunt
www.tacticalinvestor.com
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The Silver Story
Sol Palha Tactical Investor The Silver story is one that many will call a filthy rotten stinking scandal as the price of Silver has been illegally suppressed for so long, however screaming and make empty threats has not changed much. Now we have something new, the US has admitted that they don’t have any more silver and basically will have to buy it on the open market. As of march 30th 2004, commercials are short 95,630 contracts, each contract represents 5000 ounces, so effectively they are short approx 478 million ounces of Silver. In 2002 Silver production came in at 585.9 million ounces, take time to think about that for one second and compare it to the total number of ounces the commercials are short. However on the demand side we have an interesting situation, 838.2 million ounces were used in 2002, which is approx a deficit of 253 million ounces. This was met by dipping into reserves (the table below illustrates this point nicely); the US has no more reserves to dip into, so the ship is one step closer to sinking. World Silver Supply and Demand
(in millions of ounces) | | | | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | Supply | | | | | | | | | | | Mine Production | 469.9 | 451.4 | 479.5 | 487.9 | 523.1 | 543.6 | 542.9 | 582.8 | 589.2 | 585.9 | Net Government Sales | 6.0 | 17.6 | 25.3 | 18.9 | -- | 40.9 | 95.2 | 78.2 | 87.2 | 71.3 | Old Silver Scrap | 148.5 | 151.9 | 162.7 | 158.2 | 169.1 | 193.7 | 181.2 | 180.8 | 182.7 | 184.9 | Producer Hedging | 26.7 | -- | 7.5 | -- | 68.1 | 6.5 | -- | -- | 18.9 | -- | Implied Net Disinvestment | 120.4 | 145.4 | 94.6 | 147.9 | 84.8 | 43.8 | 65.4 | 94.2 | -- | 20.9 | Total Supply | 771.6 | 766.3 | 769.6 | 812.9 | 845.1 | 828.5 | 884.7 | 936.0 | 878.0 | 863.0 |
http://www.silverinstitute.org
2002 World Mine Production of Silver by Source | 
| Note: Totals may not add to 100% due to rounding. |
http://www.silverinstitute.org The main source of Silver in 2002 was generated as a by-product of other metals. The above pie chart illustrates the point very nicely. There are not many pure silver mines; this indicates the scarcity of Silver. It is said that the Comex only holds between 100 million to 150 million ounces of Silver, if this is true one large buyer could effectively bankrupt the exchange. Even if they had 500 million ounces of Silver, one large player could still take them out. Someone like buffet could do this in one second. One day perhaps someone might try, though they would have a hard time taking delivery of that Silver, as I am sure the boys in charge would find someway to prevent the owner from taking delivery. ConclusionSince Silver is the poor mans Gold and is in reality a currency, though most try to deny that it is one, it will do much better than Gold in terms of % gains. The reasons are simple one of them is Psychological, people always want to get the biggest bang for their buck and Silver allows them to do this. In addition there is a really terrible scandal waiting to unfold one of these days in regards to Silvers price suppression that has gone on illegally for decades. When this Scandal unfolds the consequences are going to be extremely huge and sadly negative. How negative these effects will be is just too difficult to predict. Furthermore, Silver unlike Gold has industrial uses other than just being seen as currency. It is metal that is of outmost importance to many applications and we have no substitute to date. In addition most of these applications destroy Silver, so unlike Gold that is basically circulating around the world in one form or another, most of the Silver used in industrial applications is destroyed forever. In the mean time one should look to take positions in silver on any major pull back. If you look at our last essay the Silver Lining , it graphically illustrates that Silver is in a true bull market. Silver has broken out in almost all the major currencies of the world. The real war is not going to be the war between the Feds and Gold but between all the central bankers and Silver. When it begins the only question that will form in those individuals’ minds that are standing on the wrong side of Silver will be “to run or not to run”? © 2004 Sol Palha
Tactical Investor
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-- Posted 9 April, 2004 | |
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Last Three Articles by Alan Lunt & Sol Palha, Tactical Investor
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