Today In Silver

Because some emails are not getting through to paid Founding Members, I am going to repost them here starting with the preceding one. If you are a paid Founding Member, I will be personally e-mailing you shortly the password to get into this and future Metal Augmentor posts.

The password you used to register as a member of this todayinsilver blog will not work. Neither will any other password you may have received. If you are a GSUL attendee, your password for basis posts will work for the basis posts but you will need another password for the Founding Member posts. Also, please do not ask me for special password requests, the Wordpress blog system cannot accomodate it. Sorry for the convoluted approach, it is not by design but rather it reflects the limitations of the system we have to work with temporarily. Once the Metal Augmentor website is fully up and running, everything will be simple and straightforward.

The problem of not getting the Metal Augmentor email appears to be that a certain percentage of Founding Members have spam or email filters that are blocking the emails. If any of you can fix this on your own by unblocking email from the Metal Augmentor email address (info@metalaugmentor.com), please do so. Also, if you are able to check your spam folder, you should find the emails there.

Posts about the basis will continue to be accessible to GSUL attendees only and so please do not email me for a password to such posts unless you have paid to attend Canberra in November.

silverax Windbag Wisdom

silverax Founding Members

First, the comments section of the blog was shut down due to excessive spam but now it is open again, so please comment away as before. I am trying to keep from having to use a more restrictive approach such as requiring users to register with a valid e-mail address before posting comments, but it looks like I may have to go that route soon.

Second, we have now sent out our second communication to Founding Members of The Metal Augmentor service. An e-mail was initially sent on October 9 to update the Mining Equities Report with current share prices and we have also added over a dozen new companies to the list. Another e-mail was sent earlier this morning to describe our current Silver Option Strategies. So, if you’ve registered and paid as a Founding Member and haven’t received any e-mails about The Metal Augmentor, it is possible that you may have provided a bad e-mail address or otherwise your hosting server or spam filter is blocking e-mail messages received from our mailing account (we are currently using a service called Constant Contact). In either case, should you wish to receive our e-mails but you are not receiving them, please let us know at info@metalaugmentor.com. I’ll conclude by noting that we are still building the website for The Metal Augmentor, so not receiving our e-mails in the meantime means that you are missing out on some of the free benefits of being a Founding Member.

silverax Windbag Wisdom

Yesterday’s stock market relief rally, one of the biggest in history, seemed to indicate that some confidence is coming back to Wall Street and that the fear trade in gold may be over for a while. If the latest high wire acts do provide some stability to the financial markets and the banking system, even if temporary, the theme in gold may have to flip from flight-to-safety to inflation-hedge, or rather hyperinflation-hedge. Depending on the length of the transition or switch period, gold and silver may remain range bound for a while with silver between $10 and $14 and gold between $800 and $925. It is important to watch for breaks above and below these levels as they could indicate further movement in that direction. In particular, should gold break below $800 at the same time that silver breaks $10, it is possible that gold is headed back down to the $730 area to test the September low and that could possibly take silver down to the mid-$8s. I don’t view this as a likely scenario but the possibility is there. A report that further explores the technical situation in silver from a modified Elliott Wave perspective will be made available to Founding Members soon.

I am still testing and refining the silver option strategy I mentioned last Friday and hope to have it ready for Founding Members of www.metalaugmentor.com shortly. I’ve attempted to run a test order on a portion of the strategy but unfortunately the option market is a bit thin right now so it will probably be necessary to adjust the order to get a fill. In any case, I’m not going to goof around with it any longer at this point so I will e-mail a discussion of the strategy to Founding Members shortly.

Getting back to the latest Fed and Treasury plans, apparently the first $250 billion of the $700 billion bailout will be used to partially nationalize U.S. banks by acquiring preferred shares in the 9 (so far) largest financial institutions. See http://www.federalreserve.gov/newsevents/press/monetary/20081014b.htm. The plan apparently would involve auctioning Treasury securities and using the proceeds to buy the preferred shares, which is not itself inflationary. As I mentioned in the past, temporary bank nationalization was the most popular recommendation by literally hundreds of U.S. economists to the Fed, Treasury, Congress and everybody else who would listen. Well, these Keynesian socialists have now apparently gained favor. And even though the initial purchase of bank stock will not itself be inflationary (assuming the funds are raised through Treasury auction), there is a good chance that the injected liquidity will become ingrained and entrenched over time, making it impossible to withdraw the funds if and when the inflationary pressure from the cumulative bailouts starts to expand out of control.

The decision to partially nationalize U.S. banks follows the path adopted by several governments on Monday including the U.K. and member countries of the European Union as part of a $2.3 trillion bailout package. Only a few years ago it was a big deal when a bailout was measured in the single digit billions. How far we have come! And yet gullible pundits and reporters are saying these efforts will not be inflationary because they are temporary and the liquidity will be withdrawn as soon as it is no longer needed by financial institutions. Yeah right! History shows that governments only undo largess under two circumstances: (1) the temporary measure words immediately and there is intense political pressure to unwind the meddling or (2) the temporary measure becomes semi-permanent but can be withdrawn many years or decades later when inflation has made it cheap to do so.

Also, we have a bit more information now on the commercial paper program that the Fed plans to launch in the next two weeks, which does have the capability to immediately inflate the money supply. See http://www.federalreserve.gov/newsevents/press/monetary/20081014a.htm. The required margin or discount on commercial paper held by the Fed is small and therefore if the Fed was going to monetize a particular class of credits, this would be it. Thus, I am presuming in advance that the initial funding for this program will not come from the Treasury Supplementary Financing Program (which has provided almost $460 billion to the Fed as of last week) but rather from newly printed money via helicopter drop.

silverax Windbag Wisdom

Many of you know the song from R.E.M. that starts out:

That’s great, it starts with an earthquake, birds and snakes, an aeroplane,
Lenny Bruce is not afraid
Eye of a hurricane, listen to yourself churn - world
Serves its own needs, don’t misserve your own needs. Feed
It off an aux speak, grunt, no, strength,turn, ladder
Start to clatter with fear fight down height. Wire
In a fire, representing seven games, in a government
For hire and a combat site. Left of west and coming in
A hurry with the furies breathing down your neck. Team
By team reporters baffled, trumped, tethered cropped
Look at that low playing! Fine, then. Uh oh,
Overflow, population, common food, but it’ll do. Save
Yourself, serve yourself. World serves its own needs,
Listen to your heart bleed dummy with the rapture and
The revered and the right, right. You vitriolic,
Patriotic, slam, fight, bright light, feeling pretty
Psyched

It’s the end of the world as we know it
It’s the end of the world as we know it
It’s the end of the world as we know it and I feel fine

I find a lot of parallels between this song and what is happening with the world today. And despite the wild ride, if you own physical gold and silver in your own secure possession as I and others have been advocating for years, you too can sing the part that goes “and I feel fine” with not one bit of sarcasm.

Look, we shouldn’t be very surprised by silver and gold getting crushed on a Friday beginning at the usual hour and continuing into the electronic session. It sure had the feel of another (last?) operation by the Hung Brothers. I hope they are almost done trying to wrestle away as much monetary metal from the unwashed masses as possible.

Silver dropping to or below $10, as I’ve mentioned a few times, could indeed be the final capitulation. In particular, the $9.60 level held in December COMEX silver (except for an instant plunge lower). As you may recall, the $9.60 level represents the June 2006 low and it is a fairly clean line in the sand. Should this level fail by a significant margin, it could very well mean that the worst-case “depressionary” scenario will soon be upon us. On the other hand, gold is trading at $850, more than a hundred dollars above its own September low, so let’s not be so hasty writing this bull market’s obituary. Silver could come back in a big hurry to declare that rumors of its death were exaggerated.

In spite of the seemingly imminent financial Armageddon, the basis is telling us that the Last Contango is not yet upon us. We are not in backwardation by any conventional measure. Does this mean the basis doesn’t actually work? No, it means we are not actually at the edge of financial Armageddon despite the appearances.

The basis aside, the gold-silver ratio has reached an extreme level not seen for many years. For a brief moment today, the ratio reached 87, and it settled not far from there at 83. I realize this is extremely painful for silver investors especially those who switched out of gold at some point in the past couple of years. No need to worry, however, if your holding period is long enough. This move will reverse as the bull market resumes. My estimate of the gold-silver ratio at the next rally top (sorry I can’t tell you when that will take place) is 35. Even if won’t quite go that low, it doesn’t take a brain surgeon to figure out that the current gold-silver ratio offers an excellent opportunity to move some gold into silver assuming your PM holdings are allocated more than 50% to gold. Back to the basis, it also is telling you that the allocation should be toward silver for now. I’ll have a special post soon for GSUL Canberra attendees that will explain this in more detail.

Speaking of the GSUL Canberra session to be held November 11-15 (see www.feketeaustralia.com but contact me at tom@silveraxis.com to sign up), I am still short the minimum number of attendees. Please consider signing up even if you cannot make it in person as I will be providing an exclusive video and/or audio feed over the Internet as well as the opportunity to ask questions by e-mail. This so called “remote attendee” option will also include a DVD set that will be made available at production cost. The price will be much higher for non-attendees so don’t think you will be able to save money by waiting.

I could probably spend the next 100 hours writing about all the stuff that has happened in the past few days. Unfortunately, I don’t have 100 hours so here is a bullet point list instead that touches on a few of the topics:

• It is now clear to all but the most obtuse of market observers that the current crisis will have to be hyperinflated away or else we are all going back to the Stone Age. My guess is that $10 trillion or more of direct liquidity injections will be required worldwide, and that might only be the start. None of that “sterilized” Fed credit, either. No, I’m talking about bona fide helicopter drops. Fleets of helicopters, in fact. Speaking of which, I’ll be updating the Fed’s bankruptcy and helicopter status if I get a chance during the next few days but for now I’ll just say that the Monetary Base and Reserve Balances did increase as I expected. In the past week, new liquidity injections came mostly to a halt even as the Treasury provided another $100 billion more financing to the bankrupt Fed.
• Italian Premier Silvio Berlusconi is speculating that a meeting of global leaders will be needed to arrive at a global solution to the present problems, perhaps a sort of Bretton Woods II. He also claims there should be a market holiday, which is not something that anybody would serious consider in my opinion.
• There are all sorts of rumors about bank holidays and freezes, that people should stock up on guns, gas and food, etc. Do what you must, but it is highly unlikely it will come to that in the near future.
• The panic has not yet hit the banking system. There is no run on the banks. Thus, there is no need to close the banks. How do I know this? The banks, at least as of this Wednesday October 8, were holding a large amount of excess cash and had drawn down only very little of the newly-created $180 billion of Reserve Balances. The self-fulfilling prophesy of Jim Sinclair and others urging people to withdraw their money has not yet trickled down to the masses, or perhaps the masses have been reassured by the new FDIC limits and the new-found eagerness of the federal government to nationalize every morsel of the financial system as it fails.
• The commodities are getting extremely oversold even considering that depression might be around the corner. The CRB broke 400 (top of my target), oil went under $80 (top of my target), copper almost hit $2 (again, top of my target). The first day things don’t look as urgent and fatal as they did every day this week, there is going to be a massive relief rally (or dead cat bounce). Even though I expect copper to go lower (perhaps to $1.60 or less), it is very possible that it could first rally all the way back to $3. In anticipation of this possibility, instead of selling a portion of my deep in-the-money copper put options outright, I’ve gone long futures against them. This acts to offset the position and lock in gains although it also eliminates the remaining time value. What you gain in return is the ability to make money coming and going. I’ll explain more to subscribers of The Metal Augmentor (www.metalaugmentor.com). For example, the December $2.50 copper put still had a remaining time value of $1,750 at the close of today out of an overall premium totaling more than $10,000. That “by the way” represents a gain of 50-to-1 or 5000% per option contract on the initial $200 purchase price (more than 20000% annualized and ignoring commissions). And yes, my target is still 100-to-1 on these options.
• I don’t mean to brag but I told you before that such gains were possible on the right option plays and now I’ve shown you. I will have more 50-to-1 or better speculative plays to discuss in the future but only as part of The Metal Augmentor service. In fact, the only reason I even discussed the copper play is to get some of you to believe that applying a bit of intelligence and common sense to the markets can sometimes generate huge returns.
• Speaking of the new service, there is a bit of good news and a bit of bad news to report. The bad news is that we are still a few weeks away from officially launching a fully functioning website. The good news is that we are going to start e-mailing commentaries immediately, including one this weekend. Here’s a hint. It will include a strategy to make 50-to-1 on your money from an extremely speculative, but surprisingly safe, strategy involving call options on silver. To get this report, however, you will need to sign up before it is e-mailed out because we will not be repeating the communication. I will, however, make a special exception for those who sign up by midnight next Tuesday. Just go to www.metalaugmentor.com/subscriptions.com, carefully read our shtick and then click on the link to purchase our inaugural Mining Equities Report. Don’t worry if you don’t give a hoot about mining equities or our reports about them; The Metal Augmentor will include much more than just analysis of stocks. On the other hand, if you are even mildly interested in mining stocks, you should know that we have already e-mailed to our subscribers an updated version of the report (you will be purchasing and downloading this latest version) that now includes an expanded list of 50 companies trading at or below their cash value. In fact, many of these companies are actually trading at less than their cash in the bank.
• If you are sick of hearing about the copper put options or The Metal Augmentor, too bad! I won’t necessarily stoop to used care salesman tactics but I probably won’t stop until I’ve badgered every one of you into subscribing!

silverax Windbag Wisdom