SILVERAXIS - TODAY IN SILVER

I could be wrong but I am getting the sense from the latest Federal Reserve statistical releases that we are now seeing some unsticking in the financial system. It is subtle and too early to represent a trend but it is the first sign in several months. Combined with a decline in the silver basis in the past few days to match the decline in the gold basis over the past two months, we could be on the edge of a monetary slippery slope that takes everyone by surprise (think opposite of deflation, even if just in the short term). Indeed, the basis in silver fell almost to zero earlier this week and remains on the verge of backwardation. Is this just anticipation of the G-20 “Global Meltdown” Summit to take place this weekend or something else?  There’s a bit less than 72 hours to contemplate the possibilities. Personally speaking, I’ll be doing more than just contemplating — I’ll be looking at some December 2008 COMEX call options in silver and gold.

First, apologies for not posting the past couple of weeks, it will pick up shortly. Second, I really appreciate all the comments (okay, not the silly ones that bemoan my absence) and hope that you will keep it up. I would particularly appreciate seeing some of the “regulars” linking to and discussing the major stories of the day as I know these discussions you’ve been having in the comment section are being read and enjoyed by a lot of people.

As far as the silver and gold market, what can I say? Another week and more of the same. The monetary base continues to explode and silver and gold continue to struggle near their lows.

Despite the obituaries that have been written about silver lately, the white monetary metal is alive and well, as am I. The rumors were well founded, however, considering my temporary disappearance and silver’s plunge to a low of $8.40 basis the December 2008 COMEX futures earlier in the week. The swoon in silver occurred as gold carried out a somewhat unconvincing recovery from its own low of $681.00 on Friday the 24th. Currently, gold remains below the important $730 range and needs to move up quickly or else gravity will drag it and silver back down again.

I must say that it was somewhat liberating to not post any comments or answer emails for a few days but now I’m back on the job. I was prepared to write had something extraordinary taken place but the past week didn’t offer much in the way of critical material with perhaps the only exception being that the Federal Reserve has once again proven me correct: the new Commercial Paper Funding Facility (CPFF) is turning out to be the primary mechanism of Bernanke’s helicopter operation as the latest Factors Affecting Reserve Balances H.4.1 Report shows. According to this report, Reserve Balances of banks grew a mind-boggling $200 billion in the latest week to $425 billion as the Federal Reserve acquired $145 billion of commercial paper. If this increase is not somehow neutralized by the Fed during the coming weeks, it will show up in the Monetary Base.

I believe the critical point for gold and silver will come if and when the banks begin to lend against these massive new reserves. Assuming I’m right about the consequences, we could see an initial move by gold to the $1,000 level and silver to $16 or so in the matter of a few days as the insiders position themselves. Alternatively, as long as the deflation theme continues to threaten the world order with the prospects of imminent financial collapse, gold and silver will remain depressed.

It would be a very bad thing if gold and silver should take out the lows of the last 2 weeks as that points to a near-term economic collapse of epic proportions. The best analogy I can think of is an empty bottle being held under water–the longer and deeper it is held, the more explosive the eventual rise, but if the bottle is pushed too deep, the extreme water pressure will cause the bottle to burst.