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SILVER ALERTS

UP

DOWN

NO CHANGE

ALERT FLAGS (explain)

Speculative Term (less than 3 months)

Take Profits

 

05/29/09

Short Term (3 months to 1 year)

Buy

 

05/29/09

Medium Term (1 to 3 years)

Buy

 

05/29/09

Long Term (more than 3 years)

Buy

 

05/29/09

MARKET INDICATORS

 

 

 

COMEX Open Interest Futures & Options

122,978

 

04/14/09

Ounces Held by Silver ETF SLV

270,484,575

 

04/21/09

Ounces Held by Silver ETF ZKB - SWISS

45,708,356

 

04/17/09

Ounces Held by Silver ETF PHAG - LSE

15,762,374

 

04/19/09

Ounces Held by COMEX Warehouses G D

116,402,298

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04/21/09

Ounces Held by Central Fund of Canada

58,648,793

 

04/21/09

Ounces Held by BMG BullionFund

5,318,839

 

04/21/09

Ounces Daily Clearing Volume LBMA

105,800,000

 

02/28/09

Silver LMBA 1mo/12mo Forward Rate

.07 / .21 %

 

04/21/09

Silver 12-Mo Rel. Interest ("Lease") Rate

1.78%

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09/17/08

Silver Price Basis Daily Cents/Oz. | Ann % (explain)

0.08 | 1.71%

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02/14/08

Gold Price Basis Daily Cents/Oz. | Ann % (explain)

6.15 | 2.47%

 

02/14/08

G/S Price Basis Ratio | Difference

1.44 | 0.76%

 

02/14/08

Silver Futures Spread Cents/Oz. (explain)

Dec'08

Dec'09

Dec'10

Dec'11

  Mar 2008 COMEX Futures | 02/14/08

35

72

113

151

 

TODAY IN SILVER | Archives

PLEASE SEE CURRENT COMMENTS HERE (CLICK)

 

JANUARY 27 2009 10:30PM - I don't know how, but somehow I was able to recover the blog site and get it working again. Please go to http://silveraxis.com/todayinsilver/ for future comments.

 

JANUARY 23 2009 10:20AM - Late last night, I posted the following commentary to the new Editorial Forum for The Metal Augmentor subscribers. I'm very inclined to think this is becoming solid evidence that the basis, at least as I've been interpreting it, has some predictive abilities. Note that the trades mentioned have now been invalidated but it may still be worthwhile to establish new positions near the $888 (spot) level in gold and $11.74 (spot) in silver with a stop just slightly below those levels. The monetary metals will need to hold these respective prices until the end of next Tuesday in order to maintain upward momentum.

 

****

Those who attended the GSUL session in Canberra last November know that I like to use the gold and silver ETFs, the SPDR Gold Shares (GLD) and Barclays Silver iShares (SLV), to keep tabs on the basis in gold and silver. I'll be posting some historical charts and information later, but for now I wanted to provide a sneek peak at the current situation.

First, however, I'd like to provide a bit of a background for those who have not seen my work in this area before.

The "ETF Basis", as I call it, is the difference at any moment in time between the metal ETF price on the stock exchange and the spot price on the cash exchange where the ETF issues and redeems physical metal. GLD trades on the New York Stock Exchange big board and SLV on the NYSE Alternext (formerly AMEX). In the case of both GLD and SLV, the cash exchange is the London Bullion Market.

The difficulty in calculating the basis has always been capturing the precise price differentials at each moment in time and that is why I developed the chart overlay process. I've mentioned and demonstrated a few of these chart overlays to GSUL attendees as well as on the SILVERAXIS website. To my knowledge, there are few better ways to get a visual sense of what is happening with the basis.

The below charts represent the basis of the gold and silver ETFs as of yesterday, January 22, 2009. Click on them to enlarge. [Charts avaiable only to The Metal Augmentor subscribers -- Sign up here: http://www.metalaugmentor.com/subscriptions.php].

As can be plainly observed, the ETF price is higher than the spot price for both gold and silver. [Here is a hint. I like to look for changes in the charts after the London market closes at 11 AM EDT. This is because arbitrage by Authorized Participants (see below) between the two markets becomes somewhat more difficult once the London market is no longer open. Can you spot some differences in these charts after 11AM?]

In effect, the gold and silver ETFs are in backwardation against the spot market, meaning that there is an apparent excess of ETF demand over the amount of spot demand. Another way to state this is ETF investors are willing to pay a premium to spot prices in order to acquire the shares. This is not necessarily a preference for shares over the metal but rather represents a preference by both large investors (especially institutional investors who cannot purchase bullion) and general equity market participants to gain exposure to the monetary metals. In any case, the natural result of "ETF backwardation" should be that the ETF's Authorized Participants (trading arms of bullion banks authorized to deliver physical metal to, or withdraw from, the ETF trust in exchange for ETF shares) will create demand in the spot market. Obviously this tends to be bullish for both gold and silver prices.

Indeed, it has been quite rare for the gold and silver ETFs to be in significant backwardation against spot prices since they have been launched. One of the most prominent instances occurred early last September in the midst of the credit crisis as AIG was being bailed out. In that instance, about a week after the ETFs went into substantial backwardation, the gold price exploded by almost $150 in less than 2 days. Perhaps not coincidentally, that was the most spectacular rise in the price of gold during the current bull market. Silver also did very well, rising more than $2.50 over the same period.

The current ETF backwardation has been sustained for more than a week, gradually increasing to today's level. Although it is not a surefire indication of an imminent price rally all by itself, there are some corroborating factors present. One of these factors is the pattern of higher highs and higher lows that I discussed last week over at SILVERAXIS (unfortunately the blog is down at the moment). This is a recent chart pattern that started in late October and it would become dominant if gold could surmount $888 and silver $11.74, wiping out a longer term bearish pattern that goes all the way back to last March.

For the above reasons, I believe there is a substantial chance that gold and silver could be days or even hours away from an explosive move higher. In particular, I would look for an acceleration higher should the aforementioned $888 and $11.74 levels get taken out. On the other hand, if gold were to break $800 and silver $10.25 on the downside, the potential would be eliminated.

One way to trade the above scenario would be using your favorite gold or silver trading instrument whether it be the ETFs or otherwise, with a stop below $800 for gold and $10.25 for silver. Ideally, a significant move should materialize by the end of next week at which point it would be a good idea to take profits. If there is no rally and especially if $888 proves to be potent resistance, then it would be time to re-evaluate the trade.

A more speculative play would be to purchase the near expiration February COMEX or GLD call options. The COMEX options expire next Tuesday but the 900 strike price seems cheap enough ($150 per option at the close today). It could get even cheaper Friday should gold drop below $850. Ideally, I'd look to buy these call options under $100 later today (forget buying them on Monday regardless of how cheap they might get since there will be less than 48 hours until expiration). The GLD options, expiring on February 20, appear to be an even better deal at $135 for the 900 strike. They are still highly speculative but in my opinion they represent great bang for the buck.

Finally, it may also be worthwhile looking at March COMEX silver call options although these are likely to be more of a long shot. We've already been burned by the $18 strikes acquired last October (the archived report discussing this speculative trade will soon be posted at www.metalaugmentor.com/updates.php), which are now nearly worthless, and I am hesitant to add more fuel to a fire that appears to be pretty well smothered. There might, however, be some merit in the $15 strike call options especially if they can be acquired for under $250, as these could appreciate to perhaps $1,500 or more on a bold move in silver within the next week. Needless to say, this is very speculative as was the original purchase of the $18 call options.

JANUARY 22 2009 7:45PM - Please see important update below.

Just a couple of days after I was able to get most of the spam attacks on the site under control, the company that hosts this website, IPOWER, was apparently hacked and many accounts including mine may have been compromised. The passwords for some 700,000 websites had to be changed as a result. I've thought very hard about changing hosting companies at least 3 times in the past couple of years but this looks to be the last straw. Fortunately I noticed the problem fairly quickly but any site visitors on Tuesday January 20, 2009 should make sure they are using updated virus software (I use Bit Defender which immediately alerted me).

 

Meanwhile, IPOWER has apparently implemented some security changes that are preventing me from updating the blog and blocking user comments as well. I'm trying to get the blog back to working but for now it is completely frozen. In the meantime, I am going to try setting up a different blog while I decide what to do long term. As a last resort, I will be posting comments on this page.

 

One bit of good news for subscribers of The Metal Augmentor is that we are finally starting to provide some updated content for the service although the website is still not fully functional yet. Please go to www.metalaugmentor.com/updates.php for the latest information and content. We are going to try running a blog over there as well, and I don't expect the same problems as I've had here because we selected a much more reliable hosting company for that site.

 

Fortunately, the blog itself has been backed up and all posts and comments are preserved. I'm not sure, however, that I will be able to fully restore everything. The blog archive content is not available while this page is displayed but I will be taking down and putting back up this page over the next few days so more readers will be able to see it.

 

For your reference, here are the links to the current pages with information:

 

Main Site Index Page: http://www.silveraxis.com/index.html

 

Blog Page: http://silveraxis.com/todayinsilver/

 

If I am not able to get the original blog going again, I will have to start with a new blog in which case I will be posting the links to the new blog on this page.

 

SEPTEMBER 5 2008 1:30PM - Stupid hosting server has been up and down all day. Silver got crushed today and it was not just the markets at work. Collapsing copper prices set the sentiment but this was simply not normal market action. Heck, gold was up $7 (+1%) while silver was down 60 cents (-5%). No, not normal at all. It was three steps back in the two-steps forward, one-step back bottoming process for silver. I just hope it wasn't the beginning of a stumble down a long fllight of stairs.

 

AUGUST 28 2008 6:00PM - I am only posting administrative comments here since August 13. Please see comments in new blog format at http://silveraxis.com/todayinsilver/ .

 

AUGUST 20 2008 8:15PM - The 12 contest winners have been picked and e-mailed, congratulations to each of you! We continue to move forward with getting the subscription service up and running and in the meantime I hope the new comment/blog format is useful. If you haven't noticed, it's made it much easier for me to write and thus the recent prolific outflow. Also, I will be able to post remotely while out of town.

 

AUGUST 13 2008 9:14PM - I am making a major change effective immediately. For over 2 years I have been writing comments here while refusing to use a blog even though it would have been so much easier and would have allowed reader interaction. Why? For one, because I did not want to be known as a "blogger". I know, stupid. Also, the blog format didn't allow a huge amount of flexibility. Or at least not until recently. Also, I had no reason to "promote" myself so I didn't need the blog features like easy linking to articles, tagging or social networking. For obvious reasons some of those things are going to change as I launch the subscription service.

 

Thus, effective immediately, my comments will now appear at http://www.silveraxis.com/todayinsilver/. That location may yet change, but that's it for now. For a while, I may post brief summaries of my comments on the homepage here after I have posted them in the blog but for the most part the comments will appear there first, and only there. That assumes everything goes smoothly, of course. I plan to improve the blog functionality in the days ahead so ignore everything for now other than the comments themselves. Also, I would appreciate if you would still come to the homepage first to check out any "service announcements", posted commentaries from others, the Silver Alerts, etc., some of which may or may not be integrated in the blog. I haven't figured it all out yet, but I'm working on it. I'd appreciate if you would e-mail me if you see any major technical glitches, can't access the blog, etc.

 

AUGUST 13 2008 8:05PM - Confirmed: As of this afternoon CNI is sold out of all silver but the 90% bags. Thanks LC! If anybody knows of a source that still has inventory, please let me know. Tulving is now sold out of everything as well except for 90% bags of Half Dollars (less than 10 left) at 20 cents over spot and they also have in quantity the 2008 silver Philharmonics, which is the first true bullion coin in silver with a face value in Euros. At a premium to spot of $1.89, the Philharmonic purchased from Tulving with silver more than 2 dollars below its 200 day moving average is a very interesting option. Heck, if I was buying these days I'd pick up 500 of them to go with 500 Maple Leafs and 500 Eagles. And I'd do that every year. Say, that's not a bad idea. Unfortunately, the U.S. Mint is apparently going out as far as Christmas on dealer allocations of the 2008 silver Eagles, so if you don't have yours yet you might be out of luck (and you might be out of luck even if you did already order but haven't received them). One last thing, many dealers are also out of a number of gold bullion items so this time it's not just silver.

 

AUGUST 13 2008 5:20PM - Good thing I got some of those September 550 corn call options, even though I was a bit too early. I planned to bid at 12 ($600), actually filled at 7 3/4 ($375) and traded down to 1 ($50). Corn and most of the other grains closed limit up today and so far corn is up another 13 cents in the Globex session, making the calls worth about $1,000. This is the bounce I was looking for and in less than 24 hours it has already gone far enough to close out at least half of the trade. I'm going to try using Globex to sell some these corn call options, something I haven't done before. I guess that's another blessing for Globex for those who are keeping count of the score. If it doesn't work, I'll be selling early in tomorrow's session with the hope corn doesn't retrace much of the limit up move before then. Oh yeah, this out-of-nowhere reversal by commodities is not a bad thing for silver, either.

 

AUGUST 13 2008 4:15PM - It looks like many of you have taken my and other stalwart bottomfeeders' advice and bought silver at these stupid levels, with the result being that bullion dealers are once again sold out of just about everything. For example, www.tulving.com only has 1 oz. generic rounds and 90% pre-1964 junk bags of U.S. coins at the moment. Meanwhile, it looks like www.APMEX.com has limited supplies of silver Eagles but the minimum premium is $4 per coin. More importantly, they just announced yesterday that they are seeing a gold and silver shortage in the secondary retail market. Yet at least one dealer, CNI (www.golddealer.com), shows it has inventory with decent premiums. But how deep is the inventory, I wonder? If some of you aim to find out, please let me know.

 

I take it as quite a positive sign for the continuing strength of the bull market in silver that both a strong rally and now a strong correction have left the retail silver bullion shelves mostly empty. All within the same year. More proof of my observation from a few weeks ago that physical silver is being bought when the price is up, when the price is down, and when the price is flat. Eventually, that kind of thing will catch up with overall supply, even if it may have always been pretty much adequate to meet both industrial and investment needs in the past. Those idyllic times may be ending soon!

 

Meanwhile, SLV has held true to form, giving up only 3 million ounces of silver on the slide from $19.50 to $14.00. Clearly, this selloff was not due to dumping on the physical market. On the other hand, if there was significant latent physical demand (such as the need to cover a naked short position of 15-40 million ounces of silver owed to SLV), I don't believe prices could have collapsed the way they did.

 

So why did the price collapse so violently that it was even uncharacteristic for silver? Surprisingly, it wasn't due to net liquidations in the futures markets, which is the usual suspect. Open interest in COMEX silver, unlike COMEX gold, has held steady at around 130,000 - 140,000 contracts (futures only) since the crash began. So, if nobody was selling, how is it that the price could fall so much? Well, I didn't say nobody was selling, I said there were no net liquidations. In other words, somebody was selling at a low price (likely in a panic) while somebody else was buying at even a lower price (probably with a smile). And I doubt there was a lot of commercial short covering in silver, because that should have reduced the open interest (we'll know better when the COT report comes out this Friday afternoon).

 

Instead, I believe a trader or group of traders may have goaded the silver selloff into its extreme state of violence by attacking obvious support zones where many stop loss orders are expected to be sitting. This may have triggered the domino effect that each time took silver down by about 50 cents absent a similar move by gold or any other market. Interestingly, several of these 50 cent selloffs occurred in the after hours Globex session where trading is already somewhat thin, which of course made the trick easier to accomplish. I was personally trading during several of these selling episodes and very carefully observed in real time exactly what was happening on both the Globex and CBOT (mini-silver).

 

Yes, I know, this sounds a lot like those conspiracy theories about a cartel whose job is to keep the gold and silver price suppressed no matter what. Well, I've already pointed out that COMEX gold has seen substantial contract liquidation, which is consistent with a capitulation by speculators just like every other time gold has taken a big dive. No mystery there. And even if there were a cartel, we must still put most of the blame on the hot money A-holes for making every decline so dramatic. At the same time, we must also credit them for making every advance so dramatic.

 

In any case, what I'm about to point out about silver is that a relatively small player, perhaps a very wealthy individual, a descent-size hedge fund or the like -- and not necessarily a cartel with unlimited resources -- could have played a big hand in the recent blood-letting. I'm not saying any individual or group was responsible for the decline itself since silver and gold had clear reasons to do that, many of which I've already discussed (including the key failure of September silver to surmount $17.985 or to hold $16.035). It's just that the severity of silver's recent fall defies conventional explanation.

 

One of the things I found interesting during the current episode is that my own stop loss orders never suffered much slippage. Since a true stop loss is a market order once the contract has traded through a given stop price, these orders can sometimes be filled many cents below the stop, increasing the amount of loss or reducing the booked profit. This is called slippage (the term is also used to describe trading losses incurred when positions are rolled forward to future periods). Yet almost all of my orders in the past few days were filled within a cent of the stop price. Even in the overnight sessions. Normally you don't see these "quality" fills just above and below obvious areas of support like the round numbers, moving averages, etc. Especially in a very fast moving market.

 

It's as if someone was literally shaking positions loose and then snapping them right up. Time and time again. Now, there are other possible explanations for what I personally witnessed, but the theory I've come up with has the advantage of being both plausible and intriguing. To wit, someone may have been looking to accumulate a rather large position in silver at a decent price. Clearly it would have to be someone with deep pockets who didn't care about the mounting losses on the many positions already acquired while the plumbing operation continued. In the end, this trader or traders may have accumulated as few as several thousand contracts or perhaps more than 20,000. The upper figure doesn't come cheap--I calculate the cost including margin might be as high as $500 million. Still, that amount is entirely within the reach of many individuals and funds. It also tends to demonstrate the desire to have the position in place quickly but to hold it for some time.

 

The crazy thing is that the lower end of my theoretical haul--just a few thousand contracts--could possible account for a dollar or perhaps even two dollars of silver's decline.

 

Why didn't this happen in the gold market? Because it is too big for something like this. A trader would have to commit ten times as much capital or more and still could not move the gold price by a similar amount. Besides, this trader wanted silver, not gold. What intrigues me is that I may have stumbled across the first sign that a 21st century version of the Hunt Brothers might be active in the silver market right now, quietly accumulating positions. If so, this is no mere Hunt wannabe judging by the sophistication of the first confirmed operation.

 

At this point, I imagine many of you are shaking your heads, disappointed to find out that I have a soft side for conspiracy theories after all. Well, the truth is that I am actually a big conspiracy theory fanatic. Always have been. But that doesn't make me any less skeptical than you. In fact, my disappointment in finding out that just about every conspiracy theory that I've ever investigated is a load of crap makes me particularly pragmatic and circumspect. At the same time, my fascination does mean that I would absolutely love to be the one to uncover a real conspiracy, especially if it involved something else that fascinates me, namely silver. All I'm trying to say is that you should take these comments with unusually large grains of salt.

 

If my speculation is true -- and again I'd like to emphasize that it is just speculation -- then does this constitute illegal market manipulation of the silver market? Not necessarily. There is nothing inherently illegal about a trader placing orders in a tactical manner that takes advantage of known strategies employed by other traders. This type of thing happens in the stock market all the time. The problem here is that a lot of the just-concluded "tactical trading" in silver appears to have taken place when the market was fairly illiquid. Just how illiquid? Well, there are certain times in the after hours session when I could discern (using market depth, trade volume, order size, etc.) that I was just one of a few live traders making live trades. Especially in CBOT mini-silver where I test and refine ideas before trying them out on the big contracts.

 

Let me now repeat again that the "tactical trading" I observed is unlikely, in my opinion, to have had anything to do with the concentrated commercial traders who are net short. After all, they did not cover in silver as they did in gold. Also, they don't need an illiquid market to move prices, they can already move prices with no trouble in the regular, liquid session. At the same time, I cannot rule out their complicity. To the extent some of their positions are not hedging physical metal, they may have a motive. A while back I pointed out that the U.S. Mint has a hedging program that their counterparty most likely would use to gain a commercial designation for their COMEX trading. To my knowledge, this is the only publicly disclosed instance where we can clearly see the connection, but there are likely other instances that have not been disclosed because the transactions are not material or they involve private parties. We'll have a better picture when this week's COT report is released Friday afternoon. If that shows the commercial shorts decreased their short commitment by an unusual amount in terms of both net positions and concentration, that would tend to argue for their participation in the massacre.

 

Even then, I can't recall an episode before where so much of the damage was done in the after hours session instead of the main COMEX pit session. Especially since selling in spot markets (some of which were open when the selling episodes took place) has by itself never before been vigorous enough to account for such large price drops. This should be even more true now that we can see what the world's biggest confirmed owner of silver is doing day to day. If SLV was not a major source of selling, it is hard to believe somebody else was.

 

For now, my only conclusion of merit is to put an asterisk beside my recent comment that Globex (and CBOT) after hours trading was a blessing to the small silver and gold trader. Unfortunately, we may have just witnessed the flip side of that coin, a curse. Who put that curse on silver and why remains to be seen, but at least now we have a new idea.

 

AUGUST 12 2008 12:25AM - I'm getting lots of questions asking if I can see how far down the bottom might be.  The answer is no. That said, I am going to point out something that may turn out to be rather important in defining the action over the next few days. Last September, open interest in COMEX gold started to rise strongly from its typical 300,000 - 400,000 or so level (futures only) to over 550,000 contracts by November 2007. Open interest peaked at almost 600,000 in January 2008 and has been declining since. That decline has accelerated in recent days, and counting today's action, open interest could perhaps stand under 350,000 contracts again. In other words, the entire speculative element that was driven by the emergence of the credit crisis last August may have now been worked completely out of the gold market. If true, we may be just about at the point where we can start thinking about fundamentals again and perhaps even expect some positive action from bargain hunters. Consequently, au/ag prices may very well start to stabilize during the remainder of the week. Perhaps a final rinse might be required. And while I can't calculate the precise distance, I am starting to see the bottom. I might, of course, be totally wrong -- I could just be seeing a mirage or the top of a cloud.

 

Nah . . . it sure looks a lot like the ground to me.

 

Here now is some reader mail along with my ruthless but caring response.

 

"No. I am not throwing in the towel. I can't I have so much invested!

 

I am in shock. Nothing makes any sense. Does this mean we are now in a bear market for precious metals?

 

How can the dollar be rallying when we still have massive CDO and SIV problems, as well as a huge national debt plus inflation.

 

I am sick to my stomach.

 

If it ever rallies again at what price should we sell our silver?"

 

ME: You're sick because you "have so much invested"! It's a natural feeling, I assure you. The only cure is battle-hardened thick skin or getting yourself less invested.

Yes, this current episode is extraordinary but not unique. It is important to keep in mind that gold and silver tend to be more volatile from day to day in both their bull and bear markets than stocks. Still, even the Nasdaq, in its epic rise from 1995 to 2000, saw its share of sickening drops. Nothing like this of course but comparable.

It requires special fortitude, immense patience and deep conviction to ride out the waves without having your gold and silver shaken loose. And that is precisely what happens in these swoons--gold and silver being shaken from the weak grips of the amateurs into the open arms of the pros.

Is this now a bear market in gold and silver? The Aden sisters say it will be if gold crosses below such and such moving average. Well, I think it just might cross below their sacred moving average. Don't worry, it doesn't make them right about a bear market. Some other guru will always come along and give you a different threshold for a bear market. Don't listen to any of them. Instead, think for yourself and ask some questions. What has fundamentally changed? The Eurozone might slow down? We already knew that. The dollar could rally for some time? We knew that too. Oil may retreat from its ridiculous $150 level? Not news to you or me.

What price should you sell your silver? It depends on what your goals are. In my case, I bought a specific quantity of physical silver that I think will be able to pay off my mortgage before the bull market is over. I will sell that silver without a second thought as soon as that price is reached. I have other silver I plan to hold until death and pass down to my grandkids. Some silver I will sell the next time we rise 30% above the 200 day moving average. There might be other reasons to sell silver. Selling because you are afraid or sick is not a reason; it is the realization of a poor buy decision.

I'm sorry if the above seems overly harsh or too frank but there isn't much room for sentimentality or mincing words in this type of situation. This is a brutal market that preys on the weak. Only the strong survive, and they do
so by holding on for dear life.

 

AUGUST 11 2008 5:40PM - Ouch, if these prices get any better the pain is going to kill us! I wish I could see the bottom from here but once silver broke $16.035 it was falling on momentum, panic and fear. Neither technical mumbo jumbo nor anything you might find on a chart mean anything in these circumstances. The only thing that matters is silver is still falling and continues to be a better and better buy every day. The drop today happened on the back of gold finally breaking down below $850 which immediately ran literally thousands of stop loss orders culminating in a very fast decline of $30+. Silver got no credit for having already fallen much further than gold and instead got creamed again.

 

Nothing matters here to those selling gold and silver, not even what looks to be the start of a major confrontation (involving only words and stares, we hope) between Russia and the U.S. and its allies. And despite what many PM "experts" will tell you, the selling isn't being done by central banks or some cartel but rather by speculators who liked, but now apparently hate, gold and silver. Not for their inherent and monetary properties but what they can do for this quarter's bottom line. I say good riddance to these jerks. And please don't come back.

 

So, what to do? If you are fully loaded, nothing. If you are leveraged, hopefully you haven't been wiped out (some traders definitely have been). If you have money to buy gold and silver, then buy. Just please don't tell me you are throwing in the towel, it will just make me sad and prompt me to give you a stern lecture.

 

AUGUST 10 2008 7:10PM - Geopolitical risk looks to be building back into the crude oil and PM markets this Sunday evening (Monday already in the Far East) as Russia and Georgia hurtle toward each other in a dangerous escalation of their "Summer Olympics" conflict over two small corners of The Caucasus. Whether this becomes all out war or just another flare up that has yet again claimed the lives of many innocents on both sides, the situation looks to have serious short and long term implications for regional security and the relationship between the great powers. So far as of 6:45 PM PDT on Sunday night, oil is up a buck, gold is up 5 bucks and silver is up a dime. In other words, the early risers don't think much will go wrong here. But, what "could" go wrong?

 

On Christmas Eve, 1979, the Soviet Union invaded Afghanistan. Gold was trading around $460 that week and silver was rising strongly through $23. Exactly four weeks later the prices of silver and gold had doubled in a classic blow-off peak. And even though gold and silver began a bear market decline the very next day that wouldn't end for more than 20 years, gold didn't trade below its Christmas 1979 price until March 1981. Silver, ever the volatile one, did decline below its Christmas 1979 price by March 1980 but it briefly surpassed that level again for a day in September 1980 before finally giving up the ghost.

 

Now mind you, Afghanistan was no close ally of the U.S.. Neither did it seek NATO membership nor had it been promised future entry into that less-and-less exclusive club like Georgia has been.

 

Our pragmatic side says the odds favor a de-escalation of hostilities between Georgia and Russia in the days ahead, perhaps followed by a Chechnya-style low intensity conflict or a UN-observed peace deal. Our wild, reckless side says these hostilities might be the prelude to WWIII, reminiscent of another WW started because of entangling alliances that dragged nation states into centuries-old backwoods disagreements.

 

Be that as it may, this event has demonstrated very clearly that we should hold some gold and silver not only because of what will happen at some point in the indeterminate future, but what could happen over a single weekend, even during the Summer Olympics. Or, of course, the Christmas holidays.

 

AUGUST 10 2008 4:20PM - Phew, I've finally been able to catch up with almost all of the e-mails from the past few days and it looks like there will be 12 free subscriptions at this point. There's still a few hours left so perhaps there might even be more. The "winners" will be hearing from me early in the week.

 

A bit now on what the service is probably going to include once it is fully implemented. If you don't care, there is no need to read the rest of this posting.

 

Please realize not all of the below features will be functional on Day 1 of the launch since that would delay things at least another year! The basic foundations, however, of the service--exclusive commentaries about the au/ag market, the resource stock functionality and the basis early warning system--will be ready to launch soon.

 

Of course, the central foundation of this thing will be the "babbling and mumbling" from yours truly, as well as other contributors I deem worthy. Some of this will be exclusive (meaning it won't appear on SILVERAXIS or elsewhere), some will appear here on a delayed basis and some will appear here pretty much at the same time. The new service will be less specific about silver as compared to SILVERAXIS mainly because it will include expanded commentary from people who are experts in gold, commodities, exploration stocks, money, or what have you. There will be more overall content of course and it will be updated more frequently while SILVERAXIS will maintain at least the current level of upkeep (which is admittedly pathetic at times). This will ensure fairness to both (a) those loyal readers who cannot afford or don't want to pay for the privilege of listening to (yet another bunch of) blowhards or windbags and (b) those who recognize value when they see it and are in a position to take advantage of it.

 

Now for the key planned features:

 

- The commentaries in the paid service will sometimes take different forms to foster interaction with the reader. Some examples under consideration include conference format (real time), blog format (where members can post their own comments and replies), teaching modules (with lesson plans and problems to solve), etc. Members will also be able to sign up for an e-mail version of our exclusive commentaries and perhaps even a printed version if there is sufficient demand.

 

- There will be emphasis as part of this service on explaining concepts such as the basis, options, ETFs, etc. and how to apply them. In addition, when I talk about a particular option or trading strategy on SILVERAXIS, the paid service will include greater detail including actual trading symbols, timing, success/failure of my own personal trades, and follow ups.

 

- I will provide my proprietary basis calculations and update them frequently. The service will include an early-warning feature that indicates the possible approach of Professor Antal Fekete's "Last Contango". There will also be detailed trading ideas using the basis, including methods for "arbitraging" between gold and silver. If and when we can generate sufficient membership fees, we should be able to acquire data in real time and generate even more powerful basis trading and early warning tools.

 

- All Founding Members will have unlimited (within reason) chance to ask questions, share ideas and otherwise communicate with me and my partners. This is the main reason for restricting the number of Founding Members. Relevant and important excerpts will be taken from these Founding Member communications and shared with all members (while maintaining anonymity of course). Members who are not Founding Members will have the ability to ask and have their questions and comments answered in an open format but it will not always be possible to reply to these in as much detail or as timely as Founding Members. In fact, Founding Members will hopefully answer many of these questions themselves and we might only have to add that: yes, we agree with the answer provided by so-and-so Founding Member. Don't worry, this is not something that we expect Founding Members to do, but rather something we think a few will very much want to do. Unfortunately, the potential time commitment related to this portion of the new service means that I personally will need to prioritize my communications and thus I may not have as much time as I've had in the past to respond to e-mail from SILVERAXIS readers. I will still try to do so, but it will likely be more sporadic than it has been in the past.

 

- The service will cover the "best" and most "interesting" silver, gold and metal mining and exploration companies. We will comment on each of these companies, provide links and hints that will help members conduct investor due diligence, cover what newsletter writers and brokers have to say, and discuss critical news and developments as they arise. We will not make official buy and sell recommendations per se, but it will be easy to figure out where our preferences lie. We will also disclose whether or not we have a position in a particular stock. Another planned feature is to provide in-depth buy and sell ideas for a very small universe of highly prospective stocks, which we would follow very diligently using special reports. This feature would have very restricted first-come, first-served distribution and be available at an additional cost to regular members but would be free to some Founding Members based on total distribution. Since resource stocks might be the only thing about our service that really interest some members, we plan to make sure these features alone justify the price of admission.

 

- We plan to conduct anonymous user surveys, encourage members to provide country, region and industry "location reports", and provide other opportunities for member input that will help all of us gain a better understanding of the global silver, gold and metal markets. This type of leveraging for mutual benefit of a motivated (i.e., paying), non-agendized precious metal investment community has never been attempted and it's about time.

 

- The "user group" we plan to found will at all times respect (and in fact encourage) anonymity. For example, Founding Members will be identifiable only as "FM1", "FM2", etc. Nicknames can be used by those who prefer a bit of familiarity especially those who plan to contribute frequently (or, having been in jail, would prefer not to be known simply by a number). We feel the most important characteristic of this community will be to keep an open yet skeptical mind and to be always eager to learn or teach something new or from a different perspective. Of course, no member will be required to do anything or share anything. Indeed, the emphasis will be on quality, not quantity, and thus we might actually discourage too much participation.

 

- Founding Members will lock in a low (relative to later members) introductory rate that is good for life. "Life" means as long as the Founding Member is a subscriber and the service is in existence. And Founding Members willing to spread the word about our service will be able to get a refund of even this low subscription fee. Exactly how low will it be? I don't have the exact figure just yet, but it will definitely be less than $100 per year if subscribing under an annual auto-renewal plan. Some of you are probably saying, "Tom, you're crazy to start out this low with all of these planned features!" That's probably true. I've even had credible people in the PM industry tell me that my SILVERAXIS comments alone are worth $100-200 per year. But, I'm no salesman and would absolutely cringe if it turns out the service is not worth what you pay for it. In fact, if you ever feel that way, please just let me know and I will simply refund your subscription. Other than that, we set the Founding Member introductory rate so low as a Thank You for trusting us with your hard-earned money and of course also for reading our "babbling and mumbling" all this time.

 

Well, that's most of it but I'm sure there is something else that I've forgotten. It may seem like a lot but the truth is that our ability to get all of these features off the ground will depend in part on the amount of participation and encouragement we receive as well as being able to find the help to make it happen. However far we go, one thing I personally guarantee is that subscribers will get their money's worth.

 

AUGUST 8 2008 10:25AM - The word is out there that central banks are intervening in the currency markets in support of the dollar. James Turk, in his latest dispatch, points out that foreign holdings of Treasury and agency securities in the custody of the Federal Reserve have been climbing at an accelerated pace in the past 3 weeks. He says this is direct evidence of manipulation in favor of the dollar. Oh, were it that simple! I've reviewed the weekly changes of securities held in the Fed's custody and there doesn't appear to be anything particularly unusual in the offing. Absent statistical modeling that includes correlation analysis, there is not much substance behind these claims. A few billion or even tens of billions is not going to make a squat of difference in the currency markets and certainly cannot explain the large decline in the Euro and spirited rally in the dollar. Instead, what can explain it is a shift in sentiment against the perverted thinking that the Eurozone was going to be immune from a global slowdown. I mean, come on, what was the ECB thinking by raising rates in July? What we are seeing now is simply the unwinding of unrealistic expectations.

 

Yet again, silver has been one of the biggest victims of this latest reversal of market wrong-headedness despite the fact that speculative elements in other markets, including gold and copper, are much larger. To wit, gold has now just returned to its bottom of early May (around $850 spot) whereas silver has collapsed almost a full dollar below its own (around $16). But don't despair too much, dear reader, for this is precisely what makes silver such a great opportunity. I'm convinced you will feel much better in a few months if you go out and buy some bullion today.

 

With the silver price almost $2 below its 200 day moving average, which is similar to mid-August 2007 but otherwise has no precedent during the current bull market, the idea that there is a wholesale "shortage" of silver bullion in London or anywhere else can now be examined in the full light of day and properly assigned the probability that it deserves: zero. Yet apparently the detractors are not satisfied with libeling Barclays and its silver ETF, SLV. They now make the claim that Central Fund of Canada is experiencing delays in receiving the silver that it already shows as held in portfolio. This is truly sad.

 

But let us not be sad ourselves. Instead we should relish the thought that the recent decline in the price of silver will allow a new wave of investors to join us in enjoying the white monetary metal for fun and profit. With that said, I am officially flipping the "Alert Flag" for the speculative term to Green, which represents the first change since last October when I turned it from Green to Yellow. There is the possibility of further downside but this is not about picking exact bottoms, it is about risk and reward. I think it is fitting that this change (reversal) to Green gets made right about the same price level as the previous change to Yellow. Back then, who would have believed that we would be at the same place 10 months later?

 

AUGUST 7 2008 11:25PM - It's pretty impressive, and indicative of just how good a floor $16.035 was, that silver so far has managed to hold that level despite the dollar soaring to 75 on the index as the Euro plunged through 1.5300 on its way to 1.5193, its lowest print since early March. At the moment September COMEX silver can be had for $16.05. Alas, the wicked winds continue to gather strength and may very well turn out to be even stronger than what the virtual brick wall of $16.035 can withstand.

 

Now keep in mind, all this is happening as Freddie Mac and Fannie Mae head toward nationalization in the months ahead. Plus, the Federal Reserve's balance sheet continues to deteriorate at a seemingly unstoppable pace with the latest count showing that a total of $366 billion of Federal Reserve notes (the funny money featuring the portraits of dead Presidents) is no longer backed by U.S. Treasury securities or gold but rather by private sector credit. That is 46%, which is precisely 46% too high. What I'm trying to tell you is that if you're heavy into fiat and financial assets but light into monetary assets (silver and gold), you'd be crazy not to trade in some of the former for the latter before the week is out. Au/ag prices may still get "better" or they may not, and silver could even go to $10, but it ain't going to zero. And that means a lot in these uncertain times.

 

Bottom line, if you ask me what one source you should consult on a regular basis to keep your faith in the eventual triumph of innocent gold and silver over the evil financial schemes of men, it would be the Federal Reserve Statistical Release H.4.1. I'm honored to have received such positive response to a paid subscription service, but in truth you don't need anything else than that report, and the best part is that it's free.

 

What isn't free or even cheap is the premiums on bullion products as Gene Arensberg points out, but the stuff being hocked on www.tulving.com and a few other online destinations don't seem that particularly bad. A premium of $1.75 over spot on silver Eagles is about the same as it's been the past couple of years. On the other hand, both the JM/Engelhard 100 oz. bars and 1 oz. generic rounds are about two bits higher than they have been offered prior to this year. Meanwhile, junk bags of 90% U.S. silver coins are selling at spot and so they remain the outstanding bargains of the PM universe.

 

AUGUST 7 2008 11:20AM - Well, we have our $16.035! September COMEX silver bounced from that exact level at 10:43AM. The question now is, will that hold? I'm long futures at this point with a stop just below $16. The opportunity was just too perfect to pass up even if it turns into a losing trade.

 

AUGUST 7 2008 10:40AM - Au/ag still seeking bottoms as the Euro has just about reached 1.53 while the dollar approaches congestion near 75 on the dollar index. Silver is within cents of my $16.035 "God forbid" technical target. Some of my call option trades in COMEX silver triggered this morning as well as in GLD (the Sept. 95 call option bid 0.60). This remains a risky trade but profits in the PM market rarely fall out of trees. One thing to really watch now is the Euro. A decline below 1.5280 might mean the next stop is 1.5000 and unless au/ag decouple from the dollar, the monetary metals would be set to go lower still.

 

There continue to be some encouraging signs that an au/ag bottom might be near, namely the crosswinds that have utterly confused the market about the present state of the U.S. economy. The slew of reports out this morning is illustrative:

 

*Wal-Mart July Sales Miss Estimates

*People Seeking Jobless Benefits Hit 6-year High

*June Pending Home Sales Up Unexpectedly

*Retailers Report Mixed Sales Results in July

*AIG's Posts Huge 2Q Loss, Shares Plunge

 

These headlines are contrary to the idea that the business cycle in America has turned the corner. It's only because the Eurozone doesn't seem to be faring much better that the dollar has been rallying. That's a paper-thin excuse, however, and will easily blow over at the next strong gust. The key for gold and silver is whether or not a slowdown in Europe will create a banking and financial crisis there which drives people to the shelter of the monetary metals. So far the evidence is inconclusive.

 

Alright, enough suspense, I am officially announcing another free membership contest for the imminent subscription service. I use the term "imminent" lightly because we are not going to make the mistake of committing to another launch date until we are absolutely certain everything will be ready. We have made a personal commitment, however, to do our darned best to get it going as soon as possible. And as you can imagine, we have also made a considerable financial commitment setting things up. In any case, to be fairer to all of my North American and international readers, this won't be a fast-fingered deal where the first X responses win.

 

Instead, all e-mail sent to tom@silveraxis.com with "FREE SUBSCRIPTION" in the subject line between now and midnight PDT this Sunday, August 10th, is eligible. The "winners" shall be picked at random with the number of "prizes" based on the overall response rate (but will be no less than 10 even if just 10 of you respond). Also, even if you don't win, a response will place you on the special list of "Founding Members" who will be entitled to preferential rates, free goodies and whatever else we can come up with to entice you to hand over a bit of your hard-earned cash to hear us blabber and mumble. And please don't worry about any indiscretion on our part. We, like you, really hate spam and would never dream of giving your e-mail or personal details to anybody else.

 

A note of caution to those of you who like to procrastinate like us: We are planning to strictly limit the number of Founding Members to just a few hundred and hope to fill the remaining open spots pretty quickly. Even if at this point you would never consider paying for anything we might peddle based on the stuff spewed forth on SILVERAXIS, it might not be a bad idea to "volunteer" for Founding Member status just in case we actually come up with something valuable that blows the field away (which is exactly our plan and partially explains the launch delay).

 

By the way, the "we" does mean there will be more to this than just my own conceited commentary. For now, my partners shall remain incognito but they will be revealed in due time. Also, I will finally be putting a personal bio and resume up on SILVERAXIS that will reveal a lot more about me and probably help explain how and where I get some of my crazy ideas.

 

In closing, I would like to apologize to the several of you who sent an e-mail last November in response to a similar pitch but never received as much as a confirmation from me. Yes, I still have all of your e-mails and I plan to reply to each of them as part of this new-and-improved effort. And yes, all of you are already on the super-duper Founding Member List. Have no fear, I am much better prepared this go and have set aside the proper time to make sure I do this right. Just please remember to put "FREE SUBSCRIPTION" in the subject line or header of the e-mail to make it a bit easier.

 

AUGUST 6 2008 8:20AM - Even though the dollar is climbing, au/ag has caught an updraft as a result of strong physical buying out of Asia and London as evidenced by the big shrinkage in basis. This morning, Freddie Mac reported bigger than expected losses and that also stoked the fire. Unfortunately, the dollar looks to break above 74.50 (per the September dollar index futures) and if it does, there is clear sailing up to at least 75. At the same time, the Euro appears destined for 1.530 before taking a break from its decline. As such, we may very possibly see new lows in au/ag this week. I'm out of my futures positions with small gains and for now will be strictly using call option strategies like the ones discussed yesterday to fish the coming bottom.

 

AUGUST 5 2008 4:05PM - Just following up on my corn and copper put option trades with some updates for those who are interested. I have now taken partial profits on corn but due to some clumsy trading my total gain per position was a measly 28 cents--$1,400. That may seem pretty good, but I should point out that I pretty much picked the top and held the position during a $2 fall in corn prices. Thus, if using futures contracts the profit would have been around $10,000 per position. And had I not messed with it, the option alone should have generated a profit of 65 cents or $3,250. I know, shoulda, woulda, coulda . . . but mind you, that's on a put option that cost $275.

 

Alas, all my bids for 2009 corn put options have gone begging as the bottom pretty much dropped out of corn prices literally a few hours after I put in my orders in the middle of July. It is in these far-dated corn put options where the real money is likely to be made, but now even the $4.50 puts are too expensive given the balance of risk and reward. On the other hand, the September '08 call options have become ridiculously cheap, even considering they expire in less than 3 weeks. Assuming corn can hold $5.00, the $5.50 call option for 12 cents ($600) would seem like a steal. It should double on even a minor technical bounce from the current $5.25 corn price. Perhaps such a bounce will also provide another opportunity to buy some long-dated put options? We'll see.

 

I've had better luck with copper although I'm not quite satisfied with the size of my position there either. I was perhaps a bit patient with my bids and only got filled on about half my orders before the copper price started to fall. That's probably fine considering just how contrarian and peculiar this trade really is, making discipline even more important than usual. I note that copper continues to hold up relatively well and is practically the only metal that has been consistently in backwardation. Of course, the possibility of a reversal in the sentiment that has made copper's anti-gravity tricks possible is precisely what makes the trade so powerful.

 

At this point, some of you might be wondering why I seem to be obsessed with copper and corn on a website "dedicated to investment opportunities in silver". Well, recall that I previously mentioned that corn and copper are bellwethers for the commodity sector and that silver and gold prices are vulnerable in the short term to a severe correction in commodities. Taking advantage of such short term vulnerabilities represents one of the best opportunities to make profits in gold and silver. It then stands to reason I should actually be trading commodities to get first hand exposure and a better feel for these markets, no? Especially since commodities are in a historic, once-in-an-eon place from both a fundamental and technical perspective. I only wish I could have as good a trade in silver or gold to discuss right now as the $2.50 copper put options. No worries, I'm sure at some point I will.

 

AUGUST 5 2008 1:40PM - In the last few hours the contango has all but disappeared from the silver price (contango is the premium in COMEX futures price over the spot price) and has shrunk substantially in the gold price. This can mean several things but most likely signals physical buyers stepping in to hunt for bargains. This could provide some price support but the question is, for how long?

 

The dollar is poised to cross the 74 level on the index but appears to have some areas of resistance all the way up to 76. Meanwhile, the Euro has strong support at 1.530 (currently at 1.546). Crude oil could fall to the $110 area but put option valuations indicate that it would face stiff buying demand below that level.

 

All in all, we are probably very close here to a temporary bottom in au/ag timewise. I wouldn't be very surprised to see silver take a final dive down to $16.035 before heading back north, especially since the market seems to be a slave to technicals. Unfortunately, it is not possible to determine with much certainty whether $16.035 (or whatever the low print is during the next several days) turns out to be the final, final bottom. From a trading perspective, however, we have already reached an extremely good fishing spot and as I said yesterday, it may still get "better" (i.e., worse for the silver price).

 

In fact, the low in silver may very well be put in between here (around $16.45 in September COMEX silver) and $16.035. I am in the process of testing this thesis by going long the futures but I've also identified a couple of option trades that could do pretty well. The first is the COMEX silver September 18 call option. I'm putting in a standing bid at 8 cents ($400) and looking to sell on a bounce around 20 cents ($1000). The 8 cent bid would probably get filled if silver were to continue its decline toward $16 in the next few days. This option expires in 3 weeks so assuming it gets filled, it will either work out immediately or go bust. Another option, with more time, is the COMEX gold October 950 call option. My standing bid will be at $600 (with a $1500 exit target) which should hit if gold declines to $850-860.

 

If you like stock options, the equivalent trade in GLD would be the September 95 calls with a bid of 0.60, target 1.50. A good strategy might be to buy in sets of 3, selling one at the initial target, one at double the target (3.00) and holding the last one 'til kingdom come. I hope those poor souls who bought all those September 100 calls for 2.00 and above aren't hurting too badly--they can now be had for 0.35 and while a long shot, that's probably not a terrible bet at this point.

 

AUGUST 4 2008 11:45PM - The silver price fell so quickly through 3 of the 4 targets I provided Friday that there wasn't much of a chance to try going long at those levels. Technically speaking, this type of action is discouraging. Both au/ag prices are now back at the 200 day moving averages and that is normally an excellent buy point. Yet it looks like the buying could get even "better" shortly. In silver, only $16.035 lies below but this target is valid only for a couple weeks or so. If prices head to that level quickly, we can expect some sort of bounce there, or perhaps even a final bottom. By contrast, if prices hold their current level, rise or grind slowly down, my crystal ball is too foggy to provide any useful fortune telling.

 

I've just reviewed a fairly compelling technical analysis, however, that presents the case for gold bottoming in the $729 range and starting a new rally from there. Although not addressed in this research, the equivalent silver price would be a tad under $15. The good news is these numbers are significantly higher than my worst case bull market correction to $500 gold and $10 silver. The bad news is $729 and $15 are quite a ways down. The other good news is even if these levels were to be reached, the chart action would probably look like a steep "V" and the massacre may be over before you and I knew it. Do I think au/ag are going down that far? No. But I will sleep at night if they do.

 

Okay, let's put aside the above speculation and talk about the real deal. If you have not yet, but would like to, establish a long term position in au/ag and have some patience, it is never a bad idea to acquire the monetary metals at or below the 200 day moving average. Thus, it would be completely foolish to advise against buying now. Always, of course, buy au/ag with money you don't need (anytime soon) to pay living or retirement expenses, much less the kids' college tuition. Expecting a gain (or even just to hold value) from au/ag over a short time frame such as a few months is asking for trouble. On the other hand, if you were to put together a plan to carefully start accumulating au/ag right now at or below their 200 day moving averages with the aim to complete your purchases by late September, I believe you would be very happy with the results in a year or two. Same goes for silver stocks, especially the ones I've recently mentioned. I note that U.S. bullion dealers seem to have okay inventory of silver coins and bars at the moment with somewhat high, but still reasonable, premiums. Given that generic 1 ounce silver rounds can fetch upwards of $1 premium over the spot price, I would suggest you concentrate silver purchases on Silver Eagles and 90% pre-1964 junk bags.

 

AUGUST 1 2008 2:10PM - Yesterday we got the 2nd quarter GDP report that came in just shy of expectations but revised the 4th quarter 2007 down to -0.2% vs. the previously reported 0.6% growth. Big deal. Yet this was enough to send the dollar reeling and silver immediately took the opportunity to dash past the $17.655 level after a night of struggling to surmount it. Alas, $17.985 held its ground, the dollar soon started to recover and we are left at the end of the week pretty much where we started it.

 

The technical picture may seem muddled, but buried deep in the muck I've found four silver prices where we might expect a significant bounce or even the start of the next rally. If the first one fails, I expect silver to fall to the next one. If that fails, the target becomes the one below, and so on. If I get the chance, I will be literally fishing these spots for silver with very, very tight spots. They are: $17.425, $17.090, $16.990 and (God forbid) $16.035. All basis September COMEX.

 

Let's talk silver explorers and miners for a bit to close out this typically uneventful summer week. After trading as low as 28 cents last week, U.S. Silver finally caught a break as it announced late last week what could be the start of a major expansion plan on the East side of their Silver Valley property where the idled Caladay shaft burrows 5,000+ feet into the earth. Then this week, more hints of a turnaround were revealed with news that silver production has reached its highest level since Coeur d'Alene Mines sold the property to U.S. Silver in mid-2006. This one-two punch propelled the shares to 40 cents yesterday for a rise of more than 40% in just over a week.

 

I didn't personally take advantage of this latest dip to lower my cost basis because I was busy buying another PM stock on fire sale, Exeter Resources. After weeks of bravely holding out, Exeter finally succumbed to the junior malaise in July as it dropped 50% on the back of scarcity in news flow. The slide was finally stopped when the company reported 3.55 meters of 471.9 grams/tonne (13.68 oz./ton) gold at Cerro Moro in Argentina. Silver grades have not been reported yet as they likely exceeded the 10,000 grams/tonne (300 oz./ton) limit for conventional fire assay. This drill hole is 400 meters on strike from the bonanza grades reported in mid-2007 and firmly places Cerro Moro as one of the more exciting gold-silver discoveries in the past few years. Nowhere near Aurelian's Fruta del Norte, of course, but 99% of explorers would kill to get these assays. It's hard to be absolutely convinced of anything in the current environment, but I feel very strongly that Exeter has the right goods to double, triple, quadruple and more from current levels even if au/ag go nowhere. It is one of a select few stocks I plan to hold through thick and thin (caveat: very bad developments can always change the best plans). I wouldn't be ashamed to recommend it to widows and orphans. Of course I own a boatload.

 

Another one that falls into the category of "PM stocks for widows and orphans" is the recently unbeloved Impact Silver. Impact is about the only junior (or major for that matter) miner that has operated at a profit since they have gone into production. The stock is a victim of lemming behavior that apparently resulted from a famous newsletter indiscriminately dropping Impact from its recommended portfolio. Their loss is your gain. For pennies on the dollar, you can have a profitable 1+ million ounce (soon) silver producer with management so keen they can probably make money mining silver even if its price dropped to a penny per ounce. The company is cashed up but still smart enough to sell non-core assets in this market (see here). That is the kind of position most other juniors would kill to be in (are you seeing a theme developing?)

 

I'll close with a roundup of what many would consider a mundane grouping of silver producers but one I think will be hard to beat. On a risk-reward basis I'll wager these gems against any other 5 you might wish to put up: Pan American, First Majestic, Hecla, Silvercorp, Endeavour Silver. I admit it, my mouth waters thinking about the kind of surefire profits this "ultimate silver stock portfolio" should generate. For the casual silver investor who is not interested in the 500% up, 90% down roller coaster ride that most silver stocks can take you on, plunking down a few grand on each of the above is the way to go. Do this and you will save yourself untold aggravation; spend the extra time with family and friends. Save the subscription fee of high-priced "newsletter research"; spend the extra money on a few more shares.

 

Next week, I hope to run the second official contest for free subscriptions to the non-existent subscription service that I will probably never launch, so keep your eyes peeled. On the other hand, I may be too busy working on an important project (I do need to pay the bills you know) to post here at all, so please forgive me in advance should I leave you for a few days without something useful (or useless), amusing (or unintentionally funny), and thought-provoking (or mind-numbingly stupid). Your potential response to the supposed contest will go a long way to tell me just how much punishment you are willing to take and could thus weigh so heavily on my conscience that I will have no option but to finally stop talking about it and do something already.

 

JULY 30 2008 10:15PM - Some of you are asking, "technical, shmechnical, how does this guy get precise targets like $17.655 and $17.985?" Actually, it's quite easy although I don't believe you can find this kind of thing anywhere else on the Internet (for free at least). The closest I've seen is Jim Sinclair and his www.JSMineset.com which is a great source of information and I encourage all of you to read it for the big picture, technical analysis of gold and PM stocks and key fundamentals. I don't take everything Mr. Sinclair says as gospel but 95% of his stuff is pure gold, which is about 94.9% more than everybody else. Below you will find the chart that reveals where I got these precise numbers. Unfortunately, I'm not a multi-millionaire bigshot like Mr. Sinclair so things like this will more often show up in the subscription service I plan to launch in the year 2100.

 

[Click for Full Size Image]

 

 

JULY 30 2008 3:05PM - Very encouraging bounce by silver and gold today after flirting with the 200DMAs earlier this morning as predicted a couple of days ago. Silver in particular is in the midst of a powerful move up, buoyed by a surprise rise in oil prices and some of the commodities including corn. Unfortunately, my trading has really sucked in the past few days and I've been unable to create a profitable advantage out of several good setups (including corn, where I clearly saw--and stated for the record--that a bounce was coming yet I still made a mess of my potential trading profits by tinkering too much instead of letting things ride). The worst example was today when one of my sell orders to close in Sept. COMEX silver actually represented the last down tick before the tempestuous metal went on a furious 60 cent tear (costing me a potential $3K in gains). I noticed only later that my stop loss had been placed just a couple of points ABOVE the 200DMA--about as dumb as you can get!

 

Despite the great action from silver today, the white monetary metal is not out of the woods until it clears exactly $17.655 basis the Sept. COMEX contract. If it doesn't, the pattern of lower highs and lower lows--which started on July 15 from a high of $19.55--will remain intact and we should expect another downdraft that may eventually take silver below today's low of $16.845 basis the Sept. contract. If $17.655 is cleared, the next obstacle is $17.985. Should that level be cleared as well, there would exist a very good possibility that a solid bottom was formed earlier today. In other words, unless and until these recovery levels are achieved, there is no big reason to get very excited despite the appearances otherwise. Indeed, the dollar looks like it has more room to rally before making its own peak. Conversely, the Euro appears vulnerable down to 1.53 (currently just shy of 1.56). At the moment (3:05PM PDT), silver looks to have just set a lower high and so there is a good chance that it will now retrace most of its earlier gains.

 

Regardless of the technical chart action, there are some fundamental reasons to be positive on silver, including the fact that the iShares silver ETF, SLV, has just passed 200 million ounces with a sizeable addition of almost 5 million ounces yesterday. The total verifiable silver inventory tracked on my site is now just a smidgeon shy of 425 million ounces. SLV and its peers seem to add silver in a down market, up market, sideways market, and every other type of market. With buying like this, I think there is an outside shot that the total silver stockpiles could surpass 500 million ounces by the end of this year.

 

That kind of investment demand will create compelling fundamental support for higher silver prices in the short to medium term, although it also creates a dangerous situation should market sentiment make a complete U-turn. I would define a U-turn as a major change whether economic or otherwise that could create persistent selling pressure among silver investors for several months. We really haven't had one of these during the current bull market in au/ag--every correction and consolidation period so far has resulted from prices going too far and too fast.

 

A severe correction in the commodity sector could possibly create a U-turn in au/ag sentiment, but that is not a certainly. In fact, there are circumstances where au/ag might actually rally should commodities crash. On the other hand, I don't see any plausible reason for au/ag sentiment to make a negative shift if the commodity sector remains strong. In any case, sentiment can make several U-turns during the remainder of this bull market and yet it should have absolutely no bearing on the long term buy-and-hold strategy most of us are employing for our core metal holdings.

 

From a traditional investment standpoint, however, the narrow circumstances that could lead to a severe decline in au/ag markets is actually a very, very good thing that doesn't get as much press as it should. There are literally dozens of reasons why stocks in general might crash from here, or bonds, or real estate or just about everything else. In other words, an investment opportunity is not only defined by the potential for big gains but the possibility of big (or bigger) losses. Realizing and periodically reminding ourselves of this will not only create a powerful attitude adjustment but also focus our senses on the very specific circumstances that deserve the worry. Yes, I'm trying to get there myself. And yes, this is a corollary to the pragmatic diatribe from a couple of days ago. Pulling it all together then, the 'ideal' silver investor will have patience, confidence and focus. Come to think of it, that pretty much describes the 'ideal' anything.

 

JULY 28 2008 7:05PM - I've gotten some flack recently for being bearish on silver. I'm not sure how that impression was formed, but it could have resulted from my pragmatic commentary that weighs the risks and rewards as well as the ups and downs of PM investing. There will be some more pragmatism (bearishness?) to follow in a bit, but first I'd like to defend myself by explaining again what the Alert Flags at the top of the home page mean. As you can see, I have "Buy" for three time horizons--Short Term, Medium Term and Long Term--which means that I personally (as in, with my own money) believe an investment in silver made today has a very good chance of paying off if held for these time periods. The "Caution" for the Speculative Term of 3 months or less means that there is little certainty (in my opinion) that silver will make money next week, next month or next quarter. Basically, I'm neutral on the immediate prospects for silver but bullish on anything over 3 months. I've maintained this general sentiment toward silver since last October (prior to that, every timeframe was a "Buy"). I blew it and should have turned the Speculative Term from "Caution" to "Buy" last December but didn't since these "Alert Flags" reflect my own investment position and I missed the December low myself.

 

I believe my commentaries in general have supported these "Alert Flag" sentiments so I'm not sure it would be fair to label me bearish although this may be a term of relativity in comparison to the permanent cheerleaders who proliferate on the web.

 

Now for the pragmatism. Stock market pain, geopolitical worries and firmer oil prices lent a helping hand to au/ag today but these things tend to be fleeting supporters nowadays. I don't believe the monetary metals have completed all required work to the downside but the final bottom is probably not very far off. The 200 day moving averages continue to rise, with gold's now at $885 and silver's at $16.70 (on a cash basis). In the case of silver, assuming the price continues to meander in the $16.50 - $18.50 range, the 200DMA could rise to almost $18 in the weeks ahead before finally flattening out and then turning up once again when the next rally begins. I would note that silver has rallied anywhere from 30-50% above the 200DMA at each of its peaks, so that would place the next one at $23.40 - $27.00 (from $18). Of course, the 200DMA will resume its rise during a rally so these numbers are probably low.

 

My favored scenario for now is that au/ag will trade below their 200DMAs at some point in the next few weeks but pricewise they will most likely stay above $16.50 and $850. Obviously that would be a very attractive buying opportunity . . . unless au/ag are headed for a major crash, which seems nearly impossible given all of the crises out there.

 

Of course, failure to heed the 'nearly impossible' has sunk quite a few ships, lost numerous wars and decimated both the complex and simple plans of mice and men, so it would be foolish not to consider the worst case scenario: a recession-fueled collapse in the commodities as speculators and 'sector investors' flee with tails between their legs, accompanied by a strong rally in the dollar (to 80 and above on the Dollar Index). Absent some compelling reason to buy au/ag (one that appeals to an ever growing population base), they could fall quite far in a scenario where both speculators and current 'believers' panic and exit COMEX, ETF and other positions en masse. There is really no way to determine what the lows might be in such a dire situation although $500 gold and $10 silver seem nearly impossible. Oops . . . there's that term again! Interestingly, these round number levels represent roughly a 60% drop from au/ag's absolute peak, leaving bull market to-date gains of about 100%. The 60%/100% formula appears to be quite a common theme in metals, with nickel, lead and zinc having already completed that painful journey. I expect copper to join them soon, even if there is no wholesale collapse in the commodity sector. Gold and silver are different, and that is why a wholesale commodity sector collapse is probably required before they would be at risk of succumbing to their own 60%/100% correction.

 

One might dismiss the above as blathering by a Chicken Little or Silver Bear, but I'd answer such a protest by pointing out that $17 silver and $900 gold are increasingly seen as 'ordinary' and 'natural' by market participants in the same sense that $400 gold and $600 gold were viewed as such. Yet the current $900 gold price has brought major changes in the structure of the gold market: among them, the virtual disappearance of cultural demand in India and the completion of dehedging programs by major gold producers. These were major, if not 'the' major, drivers for the gold market in years past but now represent little more than dried up sources of demand. So far, these drivers have been more than supplanted by other sources such as ETFs and possibly central bank (Russia, etc.) buying. But there are qualitative differences--for example, demand in India tended to increase as gold prices fell whereas ETF demand falls with falling gold prices--that few seem to acknowledge much less understand. The result is the possibility of big surprises that can shake the faith of market participants and create 'nearly impossible' outcomes.

 

I've explained here a few days ago how I have personally decided to 'soothe the pragmatism' from which I suffer (buying put options in COMEX copper and CBOT corn) although there are certainly other methods available. If you don't have the means to protect your portfolio to similar effect and would be bankrupted (or lose the kids' college money) if silver goes to $10 or gold to $500, then you might consider taking a closer look at your PM exposure to see if it might be excessive. This, of course, is not an issue for most of you who hold au/ag for the long term as crisis insurance, a value play or wealth protection.

 

Now for the flip side of pragmatism. We could see a situation where flight to safety creates huge flows of investment into both the dollar (Treasuries) and au/ag. That would result in the fabled decoupling of the dollar and the monetary metals, and in my mind it's not a question of "if" it will happen during this bull market but "when". As the credit crisis gets worse and the global economy weakens in the months ahead, the "when" could very well turn out to be "very soon". The reason behind the decoupling would be exceedingly simple: economic crisis in the countries whose currencies are currently strong against the dollar (Euro, Pound, Yen, Yuan, etc.). Already we are seeing the cracks in the currencies of many developing nations--it's only a matter of time before the major currencies feel the pressure too. Longer term, the dollar is still toast in the sense that it will very likely trade at 50 or lower on the Dollar Index (as I mentioned recently in reference to the Freddie/Fannie nationalization), but I don't believe that phase will start until the overseas economies slow down, stabilize and start to turn back up (possibly in 2010 or 2011). What I'm trying to say is that au/ag could actually go up--or at least not go down by very much--as the dollar rallies and then absolutely catch fire as the dollar makes its final descent. Whether that descent will end in doom for the world's reserve currency or merely a severe mauling is irrelevant because gold and silver will probably make incredible bull market highs either way, representing a great opportunity to switch into other assets that will be extremely undervalued at that point (I still plan to be around then and hope you will too). In the final analysis, this is why 'investing' in silver and gold is a good idea if you want to build wealth (not only protect it) in spite of the 'pragmatic' risks.

 

For sanity's sake, however, you need to be prepared to wait a few years for vindication, but be ready for it today. Love it or hate it, coming to terms with the capricious nature of au/ag investing will definitely help you sleep at night. More importantly, it will help you avoid becoming another bitter, obsessed, conspiracy-minded windbag.

 

Signed,

 

Pragmatic Windbag

 

JULY 24 2008 11:05PM - Au/ag were slapped silly today by a mild rise in the dollar and pretty much any other reason you or I could think of. In the end, however, the monetary metals recovered as the stock markets drove over the edge of another cliff and Iran said "nah" to the international nuke inspectors. Au/ag prices are currently in no-man's land with the technicals saying we haven't reached a final bottom but geopolitics and market sentiment beg to differ. If I had to guess, I'd say prices will go up first, then down, then up, then down. Up first because the Euro has just broken above some technical peaks and so for now the direction in au/ag are also up. Of course, that's useless information unless we know by how much.

 

For the first time in a while, we saw something encouraging in the PM shares today as Kinross agreed to buy Aurelian in a C$1.2 billion all-stock deal. I'm a bit surprised by this given that Aurelian's world-class Fruta del Norte gold deposit is still an inferred resource, and it's in Ecuador. The same Ecuador that a couple of months ago suspended all exploration activities in the country while the government legislates a new mining law. Nobody knows exactly what the law will look like in the end, what the tax rates will be, or what types of restrictions will be placed on mining activity. Yet Kinross decided to say, "to heck with all the typical senior gold company caution." I saw bully for them, and hopefully this also means bully for the better PM juniors.

 

JULY 23 2008 5:30PM - My mouth is agape reading the mortgage rescue bill that is about to be voted into law by Congress as I realize that the U.S. mortgage industry has just been effectively nationalized. At the same time, the national debt ceiling is being raised by 'only' $800 billion to a mind-boggling $10.8 trillion. My suspicion is they will need much more before it's over. Against this backdrop, gold and silver are being pushed around as if financial Armageddon didn't just knock on the door. The Euro may be overvalued and the Eurozone might be having their own problems, but what just happened here with the rescue of Freddie Mac and Fannie Mae is virtually guaranteed to send the U.S. dollar to new lows perhaps as far as 50 or below on the dollar index. This piece of legislation is the new elephant in the room and will likely be the major driver for gold and silver prices in the medium term.

 

JULY 23 2008 12:30PM - I've been watching market depth during the current au/ag fallout and buyers are AWAL. They appear to have been scared away as gold dropped below $950 yesterday and couldn't seem to climb back above that level by this morning. Fed by a rally in the dollar and a decline in commodities and crude oil, we saw the typical but disappointing 'waterfall' action continue throughout the trading day and into the afterhours. There isn't much in the way of downside support until $16.50 silver and $850 gold but I expect prices to bounce somewhere north of those numbers before finally bottoming somewhere around there in the next couple of weeks. As such, I continue to probe for a good place to get long. Too bad silver couldn't make use of its relative advantages compared to gold as I've discussed in the past few days. Maybe someday there will be enough strong-handed investment demand to take advantage of such opportunities. Perhaps by then there will be a 'wholesale shortage' -- in London and other places -- of silver bullion as well. But clearly not yet.

 

A brief note on the "Commentary" section of the home page. I'm slowly going through all of the recent articles that I've flagged over the past few weeks and will be adding them as I run across those I find relevant to silver and PMs. I'm putting the most-recently added articles at the top and that's why the dates are all jumbled up. I would urge my readers to look over this section from time to time to make sure they haven't missed the best articles on the PM market that the web has to offer (according to me of course).

 

JULY 22 2008 4:55PM - Central Fund of Canada has just added over 3 million ounces of silver to its holdings and the London ETF, PHAG, finally added almost a million ounces after months of acting comatose. Meanwhile, the Swiss ETF ZKB keeps plugging along with an addition of about 0.5 million ounces last week. I expect the iShares ETF, SLV, to make a big showing in the days ahead as well. Perhaps it will be substantial enough to put the question of a silver shortage in London to rest. I note that the SLV's 10-for-1 share split (and hopefully improved NAV premium/discount reporting) goes into effect tomorrow. In any case, the silver stockpiles that I track on the home page of this website show a total accumulation of 415 million ounces of silver as of today. This is a strong testament to the substantial investment demand that is out there, which is no doubt a multiple of the visible stockpile.

 

A reader has made a valuable suggestion with respect to these silver inventories. He pointed out that perhaps some of you might be aware of other publicly-available information on silver holdings by investment funds or entities that I have not included in the 'Silver Alerts' table. He gave the example of a certain mutual fund, although that fund appears to hold its silver at a COMEX warehouse (and therefore including these holdings would be double-counting). If you do know of any verifiable sources, please let me know especially if the amount is over 1 million ounces. For now, I am already planning to add the mintage figures of the silver Eagles produced by the U.S. Mint since it is highly likely that 99% or more of these coins are still in the possession of investors and collectors. And while it may be true that some of these will never be sold near melt value due to numismatic considerations, it is equally possible that silver will one day reach such a high price that the numismatic value all but disappears.

 

Before you say 'no way', let me point out that the supply of Morgan silver dollars took a huge hit in 1979-1980 as a result of the millions of these collectible coins that were melted down. Morgan dollars basically traded in 1980 as bullion except for a few rare exceptions, and I expect the silver Eagles will do the same at some point--probably even low mintage years like 1996. In fact, one possible sign of a top in the silver market might be when even the more collectible silver Eagles trade at melt value (1996 and proofs included). Obviously, we are not there right now but it should be instructive for you to learn that the numismatic premium has already disappeared for most silver Eagle dates including the once "rare" 1986 and 1990. Indeed, back in 2003 you could have bought the 1986 silver Eagle for around $16 per coin at its cheapest (with silver trading around $5-6 per ounce). Today, you can have it for $22-23 on ebay with the dreadful result being that silver has appreciated in melt value by 300% while the 1986 silver Eagle has only gone up by 50%. The 1996 silver Eagle has done a bit better by doubling in price. The valuable lesson, often taught but rarely demonstrated like I've just done, is that you shouldn't pay much more than melt value for silver acquired for investment purposes.

 

Enough about silver, let's talk gold for a minute. I don't usually discuss gold inventories because the declared stockpiles of gold are so large (if you believe government figures about how much they hold), but an interesting thing just happened today at the COMEX warehouses that does warrant some attention. For the first time since early 2007 (and who knows how far back before that), the amount of COMEX warehouse gold has exceeded 8 million ounces today. We do have deliveries under the August contract coming up in a couple of weeks and a huge open interest in COMEX gold futures, so the increase itself is not very unusual. Still, the size of the addition and the overall COMEX holdings do jump out. To me, this speaks of a possible distribution phase with selling pressure appearing in August, which I believe supports my theorizing a couple days ago about the huge open interest in Sept. 100 GLD call options. Basically, I view these as troubling developments that may be setting gold up for a substantial fall regardless of fundamentals or technicals. Of course, if we get something like Fannie Mae and Freddie Mac being nationalized or Iran being attacked by Israel, all bets are off. Short of some massive systemic shock, however, gold may have some work to do in overcoming these headwinds starting early August and lasting perhaps a couple of months. Unless silver gains too much sympathy for falling commodities, we could even see it outperform gold on a price decline for the first time in history.

 

Flipping back to SLV, I'm surprised to see Howard Ruff, veteran investment advisor, buying the theory hook, line and sinker that SLV is 'naked short'. He is recommending that all of his flock get out of SLV and GLD gradually over time, presumably because he believes these ETFs are running the risk of default. I hope this type of incorrect-though-influential thinking does not continue to catch on because should SLV or GLD lose popularity, I can guarantee you that au/ag prices will get punished really hard. Fortunately, most of the SLV and GLD shareholders are unlikely to be swayed by the errant logic of 'naked shorting'. As I've said many times before, there are plenty of reasons not to invest in gold or silver ETFs, but the idea that they don't hold the bullion they claim to hold or that shares are being sold 'naked short' in huge numbers, is 100% wrong.

 

Unfortunately, the backlash against short selling is increasing with the ridiculous, selective 'defense' by the SEC last week of the U.S. financial industry's giants. Thanks to this encouragement, my mailbox is now overflowing with messages from 'anti-shorting' crusaders. Meanwhile, Ted Butler continues to waste valuable space, this time arguing that all shorting of stocks should stop. If he would just get off the dead-end road, there is no telling how much value his relentless efforts could provide to silver investors.

 

Here is the thing. The short selling issue is irrelevant for 99% of stocks, including the vast majority of juniors trading in Canada. It has been a factor with respect to a few companies that are the legitimate victims of boiling room operations, although most deserved having their prices pushed lower (because they were outright frauds or pump-and-dump operations). Indeed, I'm aware of several PM stocks right now that short sellers would absolutely love yet I see no evidence their shares are being shorted to any great extent. I do see one problem with short selling, and that is when it comes to large restricted share issuances and convertible debentures that can be repriced--so called 'death spiral financings'. Some participants in a financing may simply be going for arbitrage profits and as a result they may short sell (in a few cases even 'naked' short sell) in the open market against their long position obtained in the financing. These are case-by-case issues that the SEC and Canadian regulators should deal with--as they have in the past--using enforcement actions available under existing securities laws.

 

The ultimate proof that short selling, whether 'naked' or otherwise, is nowhere near as widespread as alleged is the fact that it is rarely profitable on a portfolio basis for even the smartest hedge funds. Most industry players realized a long time ago that betting on falling stock prices is done best, if ever, using put options, written call options, single-stock futures, or sector plays. Perhaps the 'anti-shorting' crusaders, if not the SEC too, will realize this eventually.

 

JULY 22 2008 10:25AM - That attempt at $1,000 by gold didn't last very long as it got cut a bit short by the commodities getting hammered today. Nonetheless it provided a clear opportunity for taking profits. As we speak, gold is struggling to stay above its support level and silver is grappling with the round number trading at $18. I'm currently bottom-fishing with very tight stops.

 

Looks like my corn option trade was late. In the past couple of days, corn has sunk below $6 with not much in the way of support all the way down to $4. I wish I had added more $6 puts or had additional time to buy some of the other options I mentioned last week, but at this point they've gotten way too expensive given the risk-reward spread. I still think there will be a big bounce in the days ahead and I'm actually using some of my profits on the $6 puts to buy some calls. I will then hopefully use the profits on the calls to buy more puts for the next downleg.

 

As for copper, it continues to provide an excellent opportunity to risk a tiny amount to make a huge payday in case the red metal finally succumbs to a correction in commodities. Copper may look very strong now with unassailable fundamentals, but if the facade cracks, we could see a bunch of limit-down days that quickly take a dollar or two off the price. It's easy to be put off by the tiny volumes in copper options, but if you put in a reasonable bid, you will get filled most of the time. This doesn't mean you can get an order for 100 options filled, so this trade is purely for smaller accounts and not hedge funds, which is just fine by me. I offer up the December 2008 COMEX copper $2.50 put option, which can be had for $200 and under, against any other speculative trade for 2008 (disclosure: I own quite a few and plan to add some more, rolling out to 2009 put options if December approaches expiration without much underlying movement). In fact, I think this trade is so good that I wouldn't feel bad charging $1,000 to reveal it--if I already had a subscription service. Perhaps this will make me hurry up and get it started, plus if it turns out as well as I think it could, some people might actually take me up on the next offer.

 

JULY 20 2008 10:35PM - If you think silver has succumbed to gravity, I say not so fast. As long as gold is able to hang around the $950 level, things are okay. So far gold is holding but who knows what the next hour holds.

 

Here is one worrying sign. More than one reader has pointed out to me that open interest in the Sept. 100 GLD (the big Gold ETF) call options has grown to a huge size. This appears to be a rather large bet that gold will go over $1,000 by September considering that options on GLD were introduced only one month ago. 165,000 option contracts represent more than 1.5 million ounces of gold, which is more than 5% of the GLD outstanding shares. By comparison, the nearest option month for COMEX gold is October, and there are about 7,000 of the $1000 strike call options outstanding, for a total of 700,000 ounces. This is less than 2% of the outstanding COMEX futures. Also, 1.5 million ounces is about half of what GLD has added in the past couple of months. Moreover, the premium on the Sept. GLD call options is significantly lower than the premium on the Oct. COMEX gold call options, which expire at about the same time. That is not the case for the put options, where the premium on GLD is much higher. Thus, it appears that the large volume of these Sept. 100 GLD call options may have resulted not from huge demand but rather huge supply. In effect, the GLD Sept. 100 call options are being offered at a price that is too sweet to pass up.

 

Now, who would offer these GLD call options so cheap? Well, I don't think it takes a rocket scientist to draw the conclusion that these people are one and the same who acquired some of the GLD shares that resulted in the ETF adding 3 million ounces to the gold Trust in the past few weeks. In other words, somebody bought a bunch of GLD shares and then wrote call options against them. The GLD purchase appears to have been done mostly under 90 and therefore the call option strike price plus premium represents an income of more than 10% if the calls expire in the money and are exercised. Otherwise, the option writers get to keep the premium which lowers their cost basis in the GLD shares.

 

If you've followed Professor Fekete's writings, you should recognize at this point that we may have the confirmed arrival of "bulls in bears' skin" (BIBS for short) in GLD just one month after options were introduced. What these BIBS seem to be doing can be boiled down to the following. They buy a bunch of GLD shares, driving up demand and causing more gold to be delivered to the gold Trust, which in turn causes gold prices to rise. As a result of rising gold prices, there is growing speculative interest in GLD and the BIBS sell call options in huge numbers (the BIBS are probably bullion banks and Authorized Participants, and many of the buyers are no doubt their own clients). Money that might have otherwise gone into GLD itself has instead gone into GLD call options, and because the BIBS have now lifted their own buying, the net result is a possible decline in GLD (and gold) demand. This, in turn, could very well ensure that GLD does not rise above 100, allowing the BIBS to keep the option premium. If GLD does rise above 100 by option expiration, the BIBS aren't concerned because they're still up more than 10% in a couple of months and they get to repeat the process again. This is what the Professor means by 'earning an income' on gold, although this version appears both more brazen and accessible to the average investor than do most of the other methods. The telltale sign that this was overdone the first time around is the premium on the GLD call option being lower than the premium on the COMEX gold call option, not just in the Sept. 100 calls but across the board in calls.

 

We should know if I'm wrong that the BIBS are involved here because assuming GLD does close above 100 at option expiration, the resulting demand for GLD shares should drive a lot of new gold into the Trust, perhaps over 1 million ounces. I'm guessing that won't happen because those 1 million ounces have already been added before the fact.

 

The above theory also explains something that is a bit of a mystery with respect to SLV, the iShares silver ETF. Some silver analysts have had free reign in speculating that perhaps the lack of silver additions to SLV in contrast to the big additions of gold to GLD is the result of 'naked' short selling of SLV shares by the Authorized Participants. To my mind, that type of thinking is simply not very logical in light of the possible effect of the new GLD option trading that has created the very large open interest and low call premiums in the GLD Sept. 100 calls.

 

So what's this all mean? Well, it's possible that some of gold's (and thus silver's) strength in the past month has been the result of the accumulation of gold by BIBS for their new "line of business" (selling GLD call options) and not fundamental or technical reasons. With this gold buying removed from the equation going forward, we may see the price of gold (more so than silver) drop for unexplainable reasons. I see two takeaways. One, we can't be too confident about gold holding $950 in the days and weeks ahead. Two, silver may very well turn out to be the better bet for the next little while even if prices drop. In other words, silver typically falls faster and more than gold but it might not be the case this time around.

 

Even though gold may fail to hold $950 in the near future, I'm personally betting that in fact it will first make another run at $1,000. The way I see it is that crude oil may try another stab at $150, sparking new but temporary momentum in the commodities and au/ag. I'm inclined to start taking some trading profits if that happens, although I will be looking to jump back in if some fundamental or technical reasons warrant doing so. Along the way, I would also be looking to increase my copper and corn put option holdings.

 

Time to move on. Last week I discussed that the SEC's emergency order against 'naked' short selling in certain financial stocks is really nothing more than a protection racket resulting in less liquidity and a worse-off market. Well, here comes confirmation via TradeStation and other brokers, many of whom are now refusing to allow 'retail' short sales of any kind (even if the shares are located and borrowed before the short sale). The TradeStation notice sums it up nastily:

 

Due to the industry impact of the recent SEC emergency order on short selling, TradeStation Securities will not be able to facilitate retail short sales that are cleared through TradeStation Securities in the following securities beginning 12:00:01 a.m. on Monday, July 21, 2008, and ending 11:59:59 p.m. on Tuesday, July 29, 2008.

 

It then goes on to list the companies (Bank of America, Morgan Stanley, Goldman Sachs, Citigroup, Freddie Mac, Fannie Mae, etc., etc.) that have been operated in such a way that they are both the most critical to the U.S. and world economy and at the same time the most vulnerable to unsubstantiated rumors. Simply amazing!

 

JULY 17 2008 9:15PM - The support levels mentioned yesterday are being tested as I write this and so far au/ag are holding up. Crude oil got pummeled again today and many recent superstar commodities such as corn are also on the ropes. The commodity indexes are either sitting right at trendline (Continuous CRB) or have already broken down (GSCI). If this is the start of a long-needed correction, it presents some temporary problems for the monetary metals. Fortunately, they are in remarkably good shape to deal with any fallout. But just in case, I'm going to protect my substantial long exposure with a slightly different strategy than I've discussed before. This strategy is consistent with my recent rantings about a possible correction in commodities. In short, I am buying put options in corn and copper, two commodities that are bellwethers in many ways. Both have made some of the most spectacular moves out of all the exchange-traded commodities during this bull market and both continue to be supported by a very bullish consensus. That makes their put options relatively cheap and also means that a shift in sentiment could cause their prices to fall . . . by a lot (fundamentals be damned).

 

Copper in particular has some very attractive put options all along the option chain (Sept @ $3.00 - $3.30, Dec @ $2.80 - $2.50, Mar 2009 @ $2.50, etc.) I especially like the Dec $2.50 put currently trading under $200 because it offers extreme leverage should copper fall by a similar amount from its peak (60%) as have lead, zinc and nickel. At $2.00 copper, each option would be worth $12,500. At what I think might be the eventual low of $1.60, each option would be worth over $20,000 for a legendary 100-to-1 gain. The likelihood of this happening by late November (when the December put options expire) isn't very good, however, even if commodity prices crash and burn, so my strategy involves buying some $2.50 put options into Mar 2009. If copper doesn't end up crashing by the time these put options expire, that probably means gold and silver will be much higher and the losses on these options will have served their purpose as portfolio insurance. In a best case scenario (for this strategy), copper crashes while gold and silver go up (and I can probably retire).

 

Corn is a bit tougher in that it has already come down by almost 20% from its peak, but there are still some attractive put options out there. The $5.50 put option, for example, seems to be a pretty good bet from Dec 2008 all the way out to May 2009. On a move down in corn prices to $4.00, which is not at all implausible, these puts would be worth around $7,500 each. The $4.50 puts are cheaper but not a bad way to gamble on lower prices; I'd consider buying them all the way out to Dec 2009. Also, I already own some $6.00 puts acquired while corn was still near its peak, and should there be the inevitable bounce in the weeks ahead, that would be where I might look to add more positions.

 

Let me emphasize here that the above put options are all high risk contrarian plays that should involve only risk capital. In my own case, I am essentially using them to hedge my long exposure in gold and silver against a precipitous decline in commodity prices. If some of these put options should expire worthless, I would look to replace them with further out options until I see evidence that a global economic slowdown similar to what occurred between 1974-76 will not now do the same thing, or worse, to the price of copper and corn that it did back then.

 

JULY 16 2008 4:05PM - Gold and silver broke out from the upper end of their trading ranges late last week and it was off to the races. The reason was that the financial system took several body blows. First, there was the emergence of new concerns about Freddie Mac and Fannie Mae, which led the FED to extend to them the same borrowing terms available to banks and Wall Street securities firms. This will no doubt result in another round of severe deterioration of the Fed's balance sheet. These mortgage-lending heavyweights will also continue to make news in the months ahead as loan defaults continue to eat away at their capital, and this will provide strong moral support for gold and silver along the way.

 

Then there was the failure of IndyMac Bank, the third (measured by FDIC-insured deposits) or second (savings and loan) largest in U.S. history. This past Monday, depositors actually lined up at the doors of bank branches hoping to withdraw funds in a scene reminiscent of the Great Depression (or more recently, the Northern Rock failure in the U.K.) It is interesting to note that the failure of IndyMac was actually the result of accelerating deposit withdrawals in the past few weeks as realization of the bank's troubles spread. Thus, we now have the first confirmed case of a bank run in the current credit crisis, replete with customers saying they are seriously considering stuffing their money under a mattress or burying it in the back yard. It's only a matter of time before some of these people discover gold and silver.

 

As if all this wasn't enough, the SEC just issued an emergency order that allegedly seeks to protect investors, but is nothing more than yet another sign that the banking industry is in grave danger. The SEC order requires that shares of certain stocks comprising many of the world's 'money center' banks and credit-issuing entities (Freddie Mac and Fannie Mae included) must be borrowed before they can be shorted. This eliminates the possibility of 'naked' short selling whether it is done manipulatively or by market makers who are conducting legitimate operations that have been encouraged by market regulators for decades. Unfortunately, increased price volatility could be an unintended consequence of this SEC intervention given that it now discourages market making activity. So, why issue the order? Apparently the SEC fears that false rumors may be responsible for damaging the credibility of major financial institutions that rely on the trust of counterparties. The SEC even trots out Bear Stearns as an example, insinuating that its failure was the direct result of false rumors about its dire financial position. Whether true or not, we should not lose sight of the fact that the companies listed in the emergency order probably represent (1) institutions deemed 'too big to fail' and (2) institutions that can presumably fail based on some unsubstantiated rumors about their financial condition. It's a sad but insightful fact that our biggest, supposedly safest, and most critical institutions have been structured in such an irresponsible manner that they need SEC protection against rumor mongering to keep them safe from ruin.

 

The above three events are currently serving as major drivers for au/ag and they go a long way to explaining last week's breakout from the trading range established in March. Had oil not weakened yesterday and the dollar correspondingly not found its legs, we could have easily witnessed gold climbing back above $1000 and silver over $20 today. That would have left both au/ag in a position to quickly achieve new highs before momentum started to dry up. So, what's next? I wouldn't be surprised to see the former resistance at $18.50 silver and $950 gold get tested a few times as support. If these levels hold relatively firm, the upward trajectory could continue with renewed vigor. Failure, on the other hand, would somewhat invalidate the breakout and suggest that we are still in a bottom-forming process that may involve further visits to the respective 200 day moving averages (now at $16.50 for silver and almost $880 for gold, and still rising fast). In any case, the renewed distress in the banking and credit sectors should serve to support au/ag prices even if oil and the commodity sector experience a major correction as I discussed in past commentaries. Thus, we may be one step closer to the perfect setup wherein au/ag become the biggest beneficiaries of anti-dollar, anti-stock and anti-bond money flows. In such an environment, we can expect the true gold and silver producers and explorers to eventually shine as investors start to view their relative risk in a better light thanks to the great demand for what these companies (hope to) produce.

 

Now for a quick update on the basis and some other fundamentals. The basis in gold and silver actually remains in relative neutral territory on this latest move. There is absolutely no indication of a move toward backwardation and thus we must assume that monetary demand is still far off. In addition, both the gold and silver basis are nearly identical according to several measures that I calculate, providing no indication of investment preference (instead suggesting a 50-50 split). If I had to generalize, I'd say the basis is telling us (1) there is approximate balance between upside potential and downside risk in au/ag, (2) current price action is mostly technical and (3) physical supply for the most part is keeping up with fundamental demand. Number three, of course, argues against a shortage of silver in London or elsewhere (I note that even silver Eagles are back in stock at most bullion dealers0.

 

Moving on, let's take a look at the silver ETFs. The iShares SLV has finally added 3 million ounces in the past few days to reach the 197 million ounce level it had achieved a month ago today. By my reckoning, it took the Authorized Participants (the brokers who can exchange physical silver for ETF shares) quite a while to absorb sufficient excess demand to warrant these additions. Some of you may be wondering about where all that SLV trading volume has gone. My answer is that trading volume figures in SLV are deceptive in that much of it in the recent past has occurred right around par to the iShares' NAV. This means that the Authorized Participants who normally bridge the gap between the price of SLV and the cash price of silver have not had a lot of work to do. Possible reasons for this include (1) the increased liquidity of SLV as the number of shares outstanding continues to increase and (2) greater competition from market participants acting as secondary market makers whenever a premium or discount to NAV appears. These secondary market makers probably include brokers as well as do-it-yourself traders who view the risk of a persistent premium or discount as remote. In effect, these traders are anticipating the corrective action of the Authorized Participants, which makes such action unnecessary. I would note that the recent proposal by Barclays to split the silver iShares 10-for-1 should increase liquidity even further as well as encourage smaller investors who are put off by the 'high' price of an individual share. The net result will probably be even greater pricing efficiency.

 

There is another possible reason for this split, although it is pure speculation on my part. By splitting the shares 10-for-1, each iShare will be priced roughly the same as one ounce of silver. This will permit a more straightforward and timely calculation of differences between the price of SLV and the cash price of silver (premium or discount to NAV). As it stands now, individual investors and even small firms are at a significant disadvantage in making this calculation compared to large trading desks. By contrast, GLD publishes NAV premium and discount indicators on its website with a very reasonable 5-10 second delay (see "Current Indicative Intraday Value of GLD" here). Meanwhile, the SLV website publishes a NAV figure using the daily London silver fixing, which occurs sometime after 12 noon London time. As such, we have a once-a-day "indicative value" for SLV but we don't even know the exact time that such value was calculated (the silver fixing can occur right at 12 noon or several minutes -- sometimes even hours -- afterwards, depending on how long it takes to balance buy and sell orders). Furthermore, the explanation of 'timing discrepancies" in the NAV calculation as provided by Barclays is not helpful whatsoever because it makes several inaccurate or confusing statements. I recently asked Barclays to look into this, and it is plausible that their review resulted in a decision to revamp their entire approach to calculating and reporting NAV, and part of that decision may have been to split the shares. Again, this is just speculation on my part but I hope Barclays does improve the timeliness and relevance of its NAV calculations as part of this share split.

 

Here is my explanation of the current NAV calculation that I provided to Barclays and what I believe may have prompted them to consider the change. If you can tell the difference between what I'm saying below and what is stated on the Barclays website, you are probably among a select few who truly understand the workings of the silver ETF:

 

The NAV calculation is made by the iShares Silver Trust accountants at the end of each trading session using the London morning price of silver. The London silver price is fixed shortly after 12 noon GMT but usually before the iShares open for trading on the AMEX.

 

The Market Price of the iShares is calculated as of the close of trading at 4pm EST

 

Premium/Discount is the difference between NAV and Market Price and may reflect a timing discrepancy, a pricing difference, or a combination of the two.

 

A timing discrepancy may result from silver price movements after the London morning fixing used to calculate NAV. While the iShares are open for trading on the AMEX, silver also trades in London on the afternoon spot market, in New York on the COMEX futures exchange, and in various electronic exchanges. A change in the price of silver traded in these markets may affect the trading price of the iShares. This would result in a Premium/Discount to NAV representing a timing discrepancy.

 

By contrast, a pricing difference may result from a change in the price of silver traded in London during the afternoon session, or on a futures exchange, that is not reflected, or only partially so, in the price of the iShares. A pricing difference represents an arbitrage opportunity for Authorized Participants who will sell the overpriced item (iShares or silver), use the proceeds to buy the underpriced item, and pocket the difference as profit. iShares traders will sometimes anticipate arbitrage chasing by the Authorized Participants, reducing the profit opportunity and making action by the Authorized Participants unnecessary.

 

It may not be possible to determine the precise composition of timing differences and pricing discrepancies in the Premium/Discount and consequently it should neither be relied upon as an indicator of the iShares' effectiveness in tracking the price of silver from day to day nor of an imminent change in the silver held by the iShares Silver Trust resulting from Authorized Participants taking advantage of arbitrage opportunities. The average or mean of Premium/Discount to NAV over time, however, may be a good indicator of price-tracking effectiveness or imminent change in silver holdings.

 

**********************

 

Of course, in my own work I try to use "the average or mean of Premium/Discount to NAV over time" as an indicator of balance between ETF share supply and demand and the resulting overflow effect on the physical silver market as metal is delivered to, or withdrawn from, the iShares silver Trust. I also use a proprietary intraday tracking mechanism that allows investors to determine at a glance if SLV (or GLD) is trading at a discount or premium to NAV. I plan to discuss both these methods in the subscription service that will be launched this century or next.

 

Slogging on to take a peek at the other silver ETFs, we find that the Swiss ZKB is still busy adding silver and has now exceeded 22 million ounces while the London version (PHAG) seems to be struggling to overcome the decidedly unrounded 11 million ounce threshold. Who knows, maybe somebody is 'naked' short selling PHAG as well as SLV?

 

In total, the confirmed stockpiles of silver now amount to over 410 million ounces, which is about what the best analysis said 3 years ago was out there to be had in aggregate. The fact that such a quantity of silver could be assembled at prices almost exclusively south of $20 can mean only one of two things: (1) the alleged effort to suppress silver prices has been a tremendous success to date, but will fail any day now, OR (2) there is some multiple of this 410 million ounces still hiding out there, to be accumulated at some higher silver price. The choice between these two possibilities has some subjective elements that only time can resolve, and I'm willing to be patient seeing that both scenarios favor higher silver prices. Hey, I'd love to be wrong that #2 is right if it means $100 silver!

 

In closing, I will just briefly discuss the very disappointing July silver deliveries at COMEX, which are running about 4 million ounces behind the pace of last year. There wasn't that much excitement in the silver market in July 2007, and certainly there was little talk of possible shortages. Some analysts attribute this year's lower rate of silver deliveries to a concerted attempt by the exchange to discourage speculators from taking delivery, but even if that were true, it would not explain why commercial users faced with shortages in London are not drawing down the COMEX facilities. In the next few days, we should know how much warehouse silver is actually being withdrawn by commercial users. If it is not a substantial amount, we can put another nail (for now) in the silver shortage coffin. If and when a true shortage does arrive, I have no doubt it will be discernable in the COMEX figures (not to mention the basis).

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