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DECEMBER 29 2006 5:30PM PDT - Not much new today. COMEX open interest has dropped by a few thousand contracts once again without apparent rhyme or reason. One thing we do know is that those short of silver on the COMEX have been buying of late (if you don't understand this, please be sure to read to the end of today's commentary). And as I've mentioned in the past few days, the 9 million ounces of new silver in the ETF could also have been shorts buying silver. Indeed, maybe the recent positive bias in silver and gold prices might be explained by short covering. Or maybe not.

Shorts tend to cover around price bottoms except during a "short squeeze" but the latter would imply wildly rising prices and falling open interest whereas currently prices are subdued. Even without a short squeeze, current conditions are certainly favorable for a rally. The key to timing is determining when speculative interest is beginning an upswing. There are still few signs of that among the indicators that I follow but things can change in an instant.

Please keep in mind that my short term speculation that the situation with the silver ETF could soon lead to major price action is just that, speculation. It is based on a single factor -- the massive recent addition to the ETF's silver holdings combined with the nearby ceiling.

In the world of silver stocks, Impact, Arian, Silvercrest and Oremex were big movers today. Arian rose on management outlook although the stock has been a veritable yo-yo of late -- rising and dropping 10% on alternate days -- the trading of which somebody sharp could probably make a living off. In the case of SilverCrest and Oremex, it appears to be a normal reaction to recent selloffs. I'm assuming Impact has just received newsletter or advisor coverage or else some exciting news is on tap. In either case, Impact has room to run and I wouldn't be surprised by further strength after more than a month of being glued to C$1.60.

One other interesting development today. It was announced that Royal Gold has acquired a 2% NSR on the Penasquito project being developed by Goldcorp. Penasquito was basically Western Silver, which was bought out by Glamis Gold and in turn by Goldcorp. Penasquito is expected to produce over 20 million ounces of silver and 300,000 ounces of gold per year starting in 2008. But here is the interesting part. Silver Wheaton has the right of first refusal to buy silver production from Penasquito, which Royal Gold's NSR deal has somehow usurped. How can this be? I haven't done the math, but the 2% NSR for $100 million seems to be a pretty rich valuation and perhaps Silver Wheaton was unable so far to negotiate a fair price. Meanwhile, Royal Gold appears to be looking for "company defining" deals. And unlike many of their recent transactions, this Penasquito NSR does not appear to be capped, resulting in added upside leverage to Royal Gold's royalty portfolio. As for Silver Wheaton, I wouldn't say that the chances for a Penasquito deal have been eliminated by the Royal Gold transaction, but it certainly has become more complicated. Perhaps Silver Wheaton should be commended for its financial discipline in not blindly buying silver production at any cost, especially since Goldcorp is a related party. Such is the forte of companies which go on to greatness in the minds of many investors. Silver Standard comes to mind. In any case, the Penasquito NSR transaction seems to mark the triumphant return of the traditional royalty model to challenge Silver Wheaton's new-fangled approach.

Finally, I'm going to close this year with a hopefully timely discussion of the meaning of open interest as it relates to the futures markets. Those intimately familiar with futures and who therefore can easily explain why a drop in open interest is almost always the result of short covering can probably skip the remainder of this discussion. In upcoming installments, I will try to demonstrate how to properly use open interest and its breakdown, the Commitments of Traders (COT) Report, as an analysis tool in the silver market. I will also show how it is frequently misused to support various opinions and prognostications about silver.

First, a definition of open interest. Open interest is the sum at a particular point in time of all outstanding futures contracts (consisting of pairs of long and short positions) for every delivery month in a particular futures market such as COMEX silver. The term contract also encompasses options on futures as I describe below.

But first, it is important to realize when discussing open interest that futures are not the same as stocks or other financial instruments where (with the infrequent exception of naked shorting) the units of investment are limited by virtue of ownership. What I mean by this is that a share of stock represents ownership in a company, a bond represents ownership of debt, etc. such that the investors or traders cannot themselves change the number of underlying ownership units.

A futures contract, on the other hand, does not represent ownership of anything. Instead, futures simply represent the exchange-guaranteed right to demand future delivery of a specific commodity or instrument at a set price and date, or in the case of cash-settled futures, they represent the exchange-guaranteed right to receive the cash gains or losses of the price movement in an underlying commodity or instrument. By exchange-guaranteed, I mean that the ultimate exercise of the right depends on the exchange itself whether it is the COMEX, CBOT, CME, etc.

More on exchange guarantees later, but for now it should suffice that delivery is never the ultimate purpose of futures but rather one aspect of a much larger set of rules protecting market participants. This fact may be explicitly understood by just a few people but in practice it is assumed by the vast majority of exchange participants who conduct their trading activities accordingly. Those who try to force changes in the arrangement based on a particular interpretation of law are doing so purely out of self-interest and not for the general welfare of the futures markets. Sounds like a familiar theme found in many conspiracy theories, doesn't it?

In fact, exchanges were never meant to be a primary means to take delivery of physical underlying commodities and no futures exchange has ever guaranteed that physical delivery will always be available under all conditions. Instead, the exchanges have discouraged the use of futures contracts as the primary means to buy or sell physical commodities. Their facilities were not designed for this purpose and they are not the most efficient means to do so. The physical delivery process was meant to comply with regulations existing at the time, to instill confidence in a new unproven financial concept, and to encourage commercial hedging by tying contracts to a physical delivery mechanism.

Regardless, what is important here is that futures are derivatives of ownership in commodities and other financial instruments. They are neither actual claims on commodities nor absolute guarantees of delivery. Some people are confused by this. Others get mad when they try to use futures for a purpose for which they were never intended. The rational simply see the futures exchanges as regulated counterparty markets.

In fact, the entire over-the-counter derivatives market is just a larger, unregulated, private version of the futures exchanges. The main difference is that regulated futures are exchange-guaranteed whereas OTC derivatives have no counterparty guarantees. Thus, futures have very little counterparty risk whereas OTC derivatives have significant risk.

To contain this counterparty risk and therefore minimize OTC derivative premiums, several international banks act as de facto counterparty guarantors in the OTC markets similar to the guarantor role of the futures exchanges. This is one of the main reasons why OTC positions are concentrated in the likes of JPMorgan Chase, Citibank and a few others. It is still open to debate whether such concentration of derivatives exposure in a few players actually reduces systemic risk. The fact is, however, that the present arrangement has been able to absorb shocks like the bankruptcy of Enron and several hedge funds which were all major players in the derivatives markets. But I am getting far off the subject.

The main point to keep in mind is that derivatives are unique in the financial markets in that they are a zero sum game; one's profits are always equal to another's losses. From this observation flows several key distinctions between futures and derivatives and other financial markets. Some are obvious and others not so obvious, but failure to understand any one of them will usually result in falling prey to misconceptions which are likely to lead our analysis astray.

Let me provide an example using open interest, which is the whole point of this discussion. It may seem counterintuitive, but the act of buying futures or selling previously bought futures will have no determinable impact on open interest. Why? The simple fact is that buying a futures contract does not necessarily initiate a new futures contract. It all depends on the seller. It is the seller who determines whether the contract you are buying is an existing contract (which is the same situation as when it comes time for you to sell the contract you are now buying) or a "new" contract.

By new contract, of course, I mean a contract which the seller does not actually hold. When a seller shorts a futures contract, he or she is in effect creating a new contract out of thin air. Meanwhile, the buyer doesn't know the difference. In reality, this is a simplification of what actually happens at the back office of the futures exchange because the settlement process typically credits and debits contracts in a fungible manner much like how a bank records activity in a checking account. Account balance and open interest are figured by adding together the pluses and minuses. But these details are not relevant in understanding the big picture.

What matters is that every increase in open interest is always the result of a new short contract and every decrease the result of covering a short contract. Shorts can sell contracts they do not have to buyers and thus they create new supply, or they can buy contracts to cover their short position and thus remove supply. In contrast, longs cannot change the total quantity or supply of futures contracts -- as represented by open interest -- with their buying or selling. They may change open interest if the shorts "accommodate" them by selling short a contract. Otherwise, the long will buy from another long without changing open interest. Consistent, aggressive buying between longs without accommodation by shorts typically results in a fast rise in price. This may seem like a good thing at first except that very few longs are actually able to acquire futures on the cheap before prices rise very far. Thus, the action of shorts in selling to the longs is truly an accommodation -- more longs are able to acquire the futures at a desired price then would be the case otherwise. What makes futures and other derivatives unique is that such accomodation is impossible with financial instruments based on ownership.

This is all very interesting, but there is more. It is important to realize that it is the longs who actually initiate every trade in futures. Why is this? No sale occurs without a corresponding buy, that's why. A short always needs a long to complete a transaction. On the other hand, a long does not need a short since he or she can just buy from another long as I've described above.

What we really have in the futures market is a delicate balance of power. The shorts control the supply of futures but they need the cooperation of longs. Meanwhile the longs can theoretically buy and sell between themselves, making the very existence of shorts temporarily irrelevant, but in reality the longs can never truly know from whom -- a short or another long -- they are buying at any point in time.

Before you think that one side or the other has an unfair advantage in this relationship, remember that it is just the natural way the future markets work. Besides, the shorts actually have an arguably tougher time since their risk is unlimited (prices can rise to infinity) in contrast to the longs whose risk is limited (prices can only drop to zero). This is one of the reasons I personally almost never take a short position other than with a put option where my risk is limited to the option premium.

As I hinted above, the definition of contract in the futures market may include or exclude options on futures. Options are simply the right to buy or sell a futures contract at a particular price before expiration of the option. Options are bought and sold at a premium which represents both the actual and the potential profit in the underlying futures contract. Think about actual profit, which is called intrinsic value, as the right to pay less than the cost of a futures contract, sort of like a grocery coupon with a cash value equal to how much you save when buying a product. Think about potential profit, which is called time value, as the right to delay your purchase until (and if) the price of the futures contract changes so that you can pay less than its cost.

In reality, most options are actually purchased "out of the money", meaning that they don't have actual profits or intrinsic value, and the option buyer is simply hoping for future price changes to move the option "in the money". Using the grocery coupon example, It might be useful to think about an option on futures as a coupon with a fixed product price. For example, let's consider a coupon which allows the shopper to purchase a box of cereal for $3.00. If cereal today costs $2.50, the coupon has no intrinsic or real value. But if that box of cereal was $1.50 two weeks ago and $2.00 last week, the possibility that cereal prices may climb above $3.00 a box sometime soon means that the $3.00 coupon might in fact represent a future savings. And the more time to the expiration of that coupon, the more likely that cereal prices could climb above $3.00, and therefore the higher the "time" value of that coupon. Buying such a coupon for a few cents today may result in many cents or even several dollars of future savings if prices move enough in the right direction. This is precisely the same thing that option buyers hope will happen.

Okay, let's get back to open interest. In effect, options are precursors to futures contracts even though they rarely get exercised into futures. Similarly, futures rarely get held for delivery of the underlying commodity or financial instrument. There are times when it is valid to lump options with futures and times when it isn't valid to do so. Furthermore, there is often confusion about exactly what a particular open interest figure represents because the inclusion or exclusion of options isn't always identified. I typically include options when I use the term open interest without saying so and therefore I am also guilty of the prevailing confusing practice.

In conclusion, I've tried above to lay the foundation for my upcoming comments about the very important implications of the basic operation of the futures markets, open interest and Commitments of Traders Report for the analysis of COMEX silver. Many commentators who study this market have failed to keep these basic relationships in mind. Although I didn't point out specific examples of this yet, the above discussion makes several of the mistakes self-evident. Hopefully as more and more silver investors become aware of the improbable and faulty conclusions these basic mistakes have engendered, the quality of the true investment case for silver will become more and more apparent.

In the meantime, have a very Happy New Year and let's hope for silver to be triumphant in 2007!

DECEMBER 28 2006 1:00PM PDT - Subdued, positively biased action continues in gold and silver today. Sabina, Arian, Aurcana and Excellon are among the biggest movers with no news out so far in a week many investors and traders take off traditionally. I will keep today's commentary short but I did want to point out an alternate viewpoint to the BRIC (Brazil, Russia, India and China) consensus with respect to their ongoing and future influence on commodities - Will India Consume Commodities?

Lastly, my supposed schooling on monetary theory and related matters by Mr. Gnazzo has now invaded the far reaches of the Internet as it greets me everywhere I look. Other than the fact that Mr. Gnazzo tries to make me look like an idiot, which in due time necessitates a defense and counterattack, I am actually quite thankful for the publicity. Frankly, I wouldn't mind being known as the anti-conspiracy theory crusader in the PM circles although I really don't have the time or taste for it. Here is the thing about fighting conspiracy theories. Those who have become indoctrinated by them -- and are most in need of opening their eyes -- you will never convince otherwise. So why bother? There is no direct financial gain from doing it. But perhaps challenging it and offering alternate viewpoints may lead to the PM sector gaining respect as an investment asset class so that more people will become involved from every walk of life -- before the predicted manic blowoff stage. Some of these people might look for ideas and advice other than from those who currently dominate the Internet discourse - the Gnazzos, Sinclairs, Turks, Murphys, Embrys and their comrades in arms. I guess I could see how a challenge to this status quo could get Mr. Gnazzo and other conspiracy theory purveyors working themselves up in a tizzy.

So let me simplify all of this in a way that they cannot. The reason I would even consider a crusade is because I want more people like me to benefit from the investment opportunities presented by silver. Their success is my success. This is no big secret -- look at my mission statement below in the section "Dear Silver Investor".  In the alternative, I could be quite happy -- if not as successful -- trading against the conspiracy consensus should it endure.

DECEMBER 27 2006 1:15PM PDT - With oil down, industrial metals and the dollar waffling, gold and silver took advantage of their internal momentum and continued higher today. Not much new to report today fundamentally speaking as the silver ETF's travels continue to be ignored on a wide scale. I am maintaining a very short term speculative position in the electronic GLOBEX silver contract, having decided not to switch to the COMEX contract even though my protective puts are COMEX puts. It looks like this week will conclude with an upward bias for gold and silver prices and the beginning of the New Year should be interesting.

Not much to report on the silver stock front and this situation is likely to hold until next week. Quite a few silver stocks continue to be in a buying zone should the silver rally recommence next spring. One thing to watch out for is not to put all your eggs in one basket especially with any particular emerging junior producer. Some of these junior producers will have startup and production ramping issues, which are unavoidable even with the best laid plans, so to be overweighed in any one or two could be a risky proposition. Most operational problems which could pop up are likely to be temporary but it doesn't take much to make a particular stock a laggard in a hot market. The more aggressive the production goals of a company, the higher the risk especially with projects that lack a significant resource estimate. Again, this is only something you should think about -- without getting carried away -- in advance of a spring rally and then only in terms of making sure you are properly diversified in your silver stock portfolio. I am by no means suggesting you should avoid the emerging silver producers as a group since they should significantly outperform the average silver stock in the next 6 months.

Now to a topic near and dear to my heart (not!), the conspiracy theory debate. On December 19, I wrote a screed about the abundance of conspiracy theories which are "infecting" a perfectly healthy and normal bull market in gold and silver. I did this not because I had or have an agenda to disprove conspiracy theories, for which I neither have the time nor do I think there is a good reason to do so, but rather to persuade investors to ignore punditry, dogma and sensationalistic publications of personal credo and instead think for themselves. The argument is that a thinking investor who is able to put together the pieces of the market puzzle by him/herself will be able to take advantage of whatever opportunities are available at any point in time vs. waiting (and meanwhile being wrong) until a particular consensus theory seems to have been proven right -- solely by the passage of time. Well, I received a few e-mails from annoyed silver bugs who thought I was too harsh on the conspiracy movement when I used such inflammatory words as "nonsense", "weird", "lazy" and "cult-like". In response, I did not apologize but rather took the e-mailers to task by expanding on my argument to the point of causing mental fatigue, exhaustion and acquiescence. I refrained from debating the merits of a particular conspiracy theory since my very point was that there is no way to win against well-constructed circular logic. Instead, all I need to make the very argument irrelevant is demonstrate the circularity and speciousness in a brutal and honest manner, something that is exceedingly simple to do.

Well, lo and behold, one Douglas Gnazzo of Honest Money fame has taken me behind the shed for a public execution with his Szabo on Conspiracy Theory: A Rejoinder. I suppose this is revenge for an earlier sneak attack I had made against his Gold Reserve Audit 2005 piece with my timely reply. I should point out that I have nothing against Mr. Gnazzo who seems to be a perfectly nice gentleman, has apparently studied a lot of monetary history and economics and is quite well read. I also have nothing against honest money or any constitutional interpretation holding that only gold and silver coin are legal tender. Then again, I see little benefit to railing against modern economics or monetary gymnastics in an investor forum. Identifying possible outcomes and discussing the appropriate investment strategies, yes. Charades, lawsuits, slander, fabrications, sensationalism, self-promotion, pseudo-patriotism, moral relativism, no.

Here is the deal. I will not debate the detailed merits of any particular conspiracy theory since my December 19 commentary -- despite, in spite and because of Mr. Gnazzo's protests -- has proven the slippery slopes of that approach. My point was to prove that regardless of the logic of an argument against conspiracy theories, a seemingly logical response can always be made, to which one could counter-reply logically and get yet another logical response. Once the logic is exhausted on both sides, the burden of proof will have been reduced to truism or dogma, bringing the whole argument full circle, only to be repeated again. And again and again if one enjoys mental masochism. This situation exists because the two sides are essentially debating secret motivations, intentions and plans -- to wit, conspiracies -- which by definition are not personally known, or provable beyond a reasonable doubt, by either side. Yet it is the logic of the conspiracy theory itself which eventually becomes corrupted by the contradictory, nonsensical, self-serving and sometimes downright silly statements out of the other corner of the theorist's mouth. This is true whether the argument is at the philosophical level which is how I tried to demonstrate it or in respect of a particular piece of fact, evidence or information that is in contention.

I give credit to Mr. Gnazzo for his clever attempt to dissemble my point by disassembling my words but all he has done in fact is to prove the very thing that I have contended. For those who can't see this, I will try to post a more detailed reply in the next few days. And God I hope this doesn't turn into a conspiracy theory debate!

DECEMBER 26 2006 3:45PM PDT - With the dollar up and oil down, gold and silver nevertheless gained ground today apparently based on geopolitical concerns.

The silver ETF's addition of 9 million ounces late last week finally got some coverage from Gene Arensberg at Resource Investor in his weekly Got Gold Report. He says the addition to the silver ETF represents positive money flow and strong retail investor demand but I don't necessarily agree with that statement at this point. See, the silver ETF traded under 350,000 shares on December 21 and 22 and under 250,000 shares today. That is under 950,000 shares for three days and therefore less than 9 million ounces of silver. We must, however, also remember that most of the daily trading is back and forth and not the purchase of newly issued ETF shares from the dealers. In fact, normally it might take several weeks if not months to work off that many new ETF shares. So, why did the dealers acquire 9 million ounces worth of ETF shares if there wasn't immediate demand for them? That is where the real mystery lies and it is the key to understanding what this massive addition means. In my personal opinion, these shares were either used to liquidate existing short positions or acquired for the portfolio of a dealer or its client. This of course is pure speculation but if true, it could mean that the funds are positioning themselves for another run at silver.

With the latest COT report showing a decline of around 6,000 COMEX silver contracts, basis and futures spreads acting within a normal range, silver lease rates low with little variation, it appears all quiet on the silver front. But we shouldn't be lulled by these things into believing that a few indicators and measures are capable of predicting the dynamics of a market such as silver in which numerous forces operate behind the scenes. Instead, we should always look for the footsteps of these hidden forces which can become visible at times. Is the 9 million ounces of silver added to an ETF with only 9 million ounces of headroom such a footstep? Only time will tell.

In the meantime, I continue to look for other footsteps although more carefully after the Cannington mine debacle. There is one interesting thing about the Cannington mine, however, that perhaps still bears keeping in mind: its production of silver (and lead) has been apparently declining in the past year. Okay, so it's just one mine. But then we look at something like Mexico's silver production sharply lower in October and maybe it isn't an isolated incident. With silver production lower - although perhaps more of a temporary phenomenon and not a confirmed long-term trend - at both the world's largest silver mine and the world's largest silver producing country, we might want to be paying closer attention to possible disruptions to silver supply.

Two more topics for today. First, finally I've been able to track down some information on U.S. Silver and its acquisition of the Coeur complex in the Silver Valley, Idaho from Coeur d'Alene Mines in June 2006. Apparently, U.S. Silver has agreed to merge with a Canadian trading shell (Chrysalis Capital III Corporation) to monetize its equity presumably so that U.S. Silver investors can sell their shares down the line. Too bad U.S. Silver was unable to keep itself in the U.S. like McEwen's U.S. Gold. Oh well, Chrysalis (the quote is CYX-P.V on Yahoo!) or whatever it is renamed looks to be the next silver stock. Unfortunately, I don't have enough information to determine whether the recent trading at C$0.68 is a good price or not, although the merger with U.S. Silver looks to create around 150 million outstanding shares so without more information my present guess would be "no". I do, however, like companies with their asset base in the U.S. because a US dollar collapse against other currencies would be leveraged by operations on U.S. soil as opposed to foreign operations which would have little to show. More on this concept later as it requires a bit of explaining. But for now I plan to keep my eye on this U.S. Silver/Chrysalis development. Even though neither company seems to have a website or widely distributed news release, I was able to find this courtesy www.silverminers.com:

CHRYSALIS CAPITAL III CORPORATION PROVIDES FURTHER DETAILS ON THE ACQUISITION OF U.S. SILVER CORPORATION AND COMPLETION OF U.S.$6.9 MILLION PRIVATE PLACEMENT BY U.S. SILVER CORPORATION.

Second, I wanted to mention something here that I originally wrote on another venue because I think it is important information. It is about China, silver, the silver ETF and shorting silver.

China Short Silver?

Before I get to China, let me talk about a group of confirmed silver shorts. Rumors have started flying recently that the silver ETF has become a primary tool in the arsenal of silver shorters. These rumors are actually quite familiar to me since I am one of the people spreading them! I could spend days (and I have, believe me) talking about the silver ETF but after all the ugly and boring details it would simply come down to this. The silver ETF may be an in-demand product for retail and institutional silver investors but it is much more of a trading tool for the dealer pack. I don't see this as a nefarious thing but rather something to be aware of and to understand before concluding that the ETF is the greatest thing since sliced bread or a valid substitute for physical silver. The biggest mistake of all is to assume that the ETFs are a 100% positive influence on prices. In fact, there is a dark side to an ETF, which is that a dealer long position is almost always covered by a short. This should not be surprising to those who understand how the markets work.

Now let's get to China, which is much more difficult to establish as a silver shorting enterprise despite speculation by Ted Butler, me or anybody else. I personally believe China is short silver by virtue of having borrowed it on international markets. There is no factual data to support this, only indirect indications. But even if correct, we don't know how much silver is left in Chinese government and industry stockpiles and so whether the silver borrowing is backed up or will have to be repaid through future purchases of silver on the international market.

The Chinese apparently don't rely on bullion banks to intermediate many of their transactions so they could be truly net short the metal if the stockpiles aren't there. That would be incredibly bullish for future silver prices but would also be a rather unusual situation (being naked short silver). I know many so-called silver experts believe naked shorting is a huge problem in the silver market, but I'm not one of them. Instead, I believe the huge problem is a growing global position size amid a shrinking available supply of physical silver. To fully appreciate my position, please allow me to digress a bit.

Cartels, cabals, the ETF and China aside, being short in silver as in many other commodities is mostly a function of fiddling with or hedging forward production. For example, a typical transaction might involve a silver user or cooperative securing forward supply 6 months or a year out (this used to be 3 to 4 years) with smelters or directly with mining companies. Doing this would usually involve a significant premium (along the lines of contango in futures) but bullion banks will offer to cut this premium if you let them counterparty the transaction, so why not? This is where the arbitrage and derivative games start as the bullion banks will actually take the client's forward purchase as their own, creating a synthetic long position which is then hedged by an offsetting short position. In turn, the counterparty taking the short position -- who is now long silver -- might hedge all or part of that long position with a further short. And on and on.

If you understand this, you will see that essentially what happens is that one long position (the mine's or smelter's forward product) has created possibly several multiples of additional long and short positions. To the extent some short positions end up with a speculator as the counterparty, the chain is finally broken because the ultimate long position is not hedged. When the speculation involves the COMEX, TOCOM, etc., it becomes visible to the public. But much like the tip of an iceberg, most of the real mass is hidden below surface as a sort of derivatives pyramid which could represent an order of magnitude in open positions compared to the initiating transaction (the forward purchase) and the final speculative position. One of the problems with looking at just COMEX is we don't know what percentage of the total speculative pie it represents. The only true solution to this -- something unlikely to ever happen -- is to require full public disclosure of all OTC derivative contracts and whether or not each exchange position is hedged or unhedged.

The concern is not the naked shorting but rather that the numerous counterparties create a sort of "house of cards". So far, contractions and expansions (think accordion) in the chain of long-short positions have been handled without a problem but it is a quite delicate balance and has a significant risk of collapse especially with tightening silver supply where the margin of error keeps getting smaller and smaller.

The above is why I always say that Ted Butler is essentially right in his conclusion but far off on his mechanics. His short squeeze of naked shorts is the functional equivalent of a derivative collapse due to cascading counterparty failures to settle the end transaction with real silver (remember that it all started with a silver user purchasing forward production to secure future silver supply).

Back to the Chinese, I don't think there is a chain of long-short positions there. I also don't think they are so stupid as to be naked short in a big way, which leads me to conclude they have physical silver to back their borrowings. So why borrow then? Perhaps it helps to view China as a centrally planned system that has succeeded in convincing the rest of the world that various components of their economic machine represent distinct and separate counterparties. What I am saying is why use up the silver stockpile when you can create an entity to borrow which in the normal course of capitalistic business might fail to perform (i.e., go bankrupt) ? That way, you get to have your cake and eat it too!

Centrally planned capitalism may turn out to be the perfect manipulation tool right up until a systemic shock renders it useless. This is the real essence of the Chinese "miracle", once again something that has been missed by 99.999% of the so-called experts. Just look at the Japanese. 40 years of incredible -- and centrally orchestrated -- post-war industrialization and modernization followed by almost 20 years on a "treadmill" economy. Yes, China may have a lot of years left in its miracle if Japan is a guide. But when the fat lady stops singing, there could be a prolonged period of adjustment precisely because centrally planned capitalism is unable to admit its manipulating ways or cope with its mistakes. The U.S. itself is not immune from the risk of central planning (thanks to the Fed) as the exploding deficits in the public and private sectors can attest. Yet our adjustment is likely to be more painful, sharp, severe and consequently over much more quickly.

DECEMBER 23 2006 10:00AM PDT - Correction, Retraction, I was wrong! Cannington Mine did in fact reopen two days after shutting down so it is not really the explosive news story I gave the impression of it being. Everything else I said, however, shouldn't really change at this point, but who knows for sure.

So what happened? It appears Yahoo! Asia, which was the original source of the story, put out a false update on December 19 that claimed the mine was still closed, where in fact it had been reopened two days earlier. The correction appeared on December 21, two days after the false story and four days after the mine reopening. I suppose the lesson here is that news is only as good as the outfit reporting it and confirmation is important before making a significant financial or other commitment. This is something we all know but it helps to be reminded periodically.

And why exactly did I not pick up on the December 21 correction when I did a news search on December 22? The only thing I can think of is that I might have used a search term based on a preconceived notion of reality: "Cannington Mine closure" or "Cannington Mine shutdown". Since the correction was in fact related to the reopening of Cannington, my particular search terms could have influenced the search results. Perhaps this is even a more important lesson than the one above because the tendency for preconceived, prejudicial ideas to skew our view of reality is not something we all know and understand. Take for example my recent rants on the prevalence of conspiracy theories concerning the PM sector. In many of the conspiracies, it is a suspicion arising from an ingrained belief system which leads to a preconceived, prejudicial and selective search for the "truth". Not surprisingly, this often leads to insular, partial, biased and plain wrong conclusions which nonetheless seem to have an absoluteness to them thanks to the fact that the results were exactly what was expected. In these types of circumstances, it doesn't take much evidence or proof to convince ourselves of being right. Even trying to be careful does not guarantee avoidance of the perception trap since it is an integral part of how our minds understand the world around us. All we can do is be vigilant, open minded, self critical and willing to admit when we are wrong.

With that, once again have a Happy Holidays and hopefully I won't have to make another correction before next week!

DECEMBER 22 2006 2:00PM PDT - I did buy some CME GLOBEX silver futures this morning after the COMEX closed early. I haven't traded this product in a while and was pleasantly surprised at the speed of the fill. It's not a perfect offset to put options on the COMEX but it will have to do for now. Plus it is so darned easy to trade with it being open 23 hours a day and with instant fills right at the ask. I don't follow the depth and liquidity of this market but I might just have to consider moving some of my afterhours and electronic trading to this platform from CBOT. I'll let you know if I come up with anything useful but in the meantime I would appreciate hearing from you about any experiences, good or bad, trading silver either on the CBOT or GLOBEX.

Okay, here is what I have to say so far about the silver ETF today given the surprise 9 million ounce addition yesterday that was first reported here this morning. 121 million ounces is 9 million ounces short of the ETF's limit and there is no indication when the additional 150 million ounces will be available via the registration of 15 million more ETF shares. Since there are just 9 million ounces left to be issued, that means one more day like this and the ETF will enter into a very interesting and perhaps unique situation for the silver market. I don't just yet know the entire implication and it all depends on the underlying physical demand, but if I had to guess, there are probably some rather sophisticated individuals and organizations who are watching and they could easily irritate the situation with some concerted action.

How? Well, remember that the market makers have an incentive to arbitrage the ETF price to match the physical price of silver. But if they can't create new ETF shares because the share limit has been reached and if they also don't hold enough ETF shares in inventory -- which is possible given the current modest open interest on the COMEX remembering my earlier discussion about the market makers using the COMEX to hedge their ETF position -- the market makers' only arbitrage choice in the case buying enthusiasm gets out of hand would be to sell short the ETF shares. Interestingly, this creates physical demand because the market makers have to either go long COMEX contracts or physical silver in order to create the hedging offset. In turn, this could add to the ETF buying enthusiasm and create a vicious circle or vortex where ETF demand spurs physical demand and vice versa. All as a result of market makers shorting ETF shares because they have no alternative. This is completely unlike the situation where there are ETF shares available to issue because buying physical silver, creating new ETF shares and selling them to shareholders is a LAGGING process. On the other hand, shorting ETF shares could become a LEADING process as I just described. In addition, the short position will have to be eventually unwound, creating demand for ETF shares at a time in the rally cycle where normally there might be excess supply. Given all of this, it probably doesn't take too wise a trader to figure out how to take advantage of this to drive silver prices higher. Hedge funds live for this sort of situation. Keep in mind they lost the battle to squeeze silver supply this past May but I don't think they have given up on the war.

The alternative is a vast decline in ETF liquidity as bid and ask spreads grow too wide and market makers are unable or unwilling to do anything about it.

Or, maybe nothing at all with happen and this is all just a statistical anomaly.

Personally, I give odds to the first scenario and that is why I jumped into a risk free long futures position this morning. Then again, I don't have the conviction of taking an outright leveraged position on such idle speculation.

On the other hand, the fact that nobody so far today seems to have reported on these developments in the silver ETF is telling of the degree of timeliness and the level of understanding that so-called experts possess in this arena. Certainly if somebody was paying me for my advice about silver, I would feel an obligation to immediately point out what is happening here even if I couldn't construct a trading or investment strategy around it.

This is now the second complete miss this week by the silver community, both with the potential to be extremely bullish. The first, which I mentioned one week ago is the indefinite closure of BHP's Cannington mine due to a fatality and safety concerns, something that presumably should matter in the scheme of things since Cannington is the single largest producer of silver, although declining of late, at roughly 7.5% of the world's annual mine supply. This is the reason I originally included BHP as a "silver" stock even though it isn't really and why I even specifically mentioned the importance of having an inclusive methodology when discussing silver stocks (see Stocks).

Well, I scoured the 'net for the latest on Cannington and this is the most recent piece I was able to come up with: BHP's Cannington mine idle as worker death probe. It is from Tuesday but let me quote from it a bit:

"...mine remained shut indefinitely pending the outcome of company and police investigations, four days after a worker was killed.."

"...too early since the closure of the world's biggest single source of silver to determine if shipments of metal to customers would be deferred or the more serious declaration of force majeure would be declared."

"...too early to say how long the mine will stay shut because the investigations are now underway..."

Now, BHP may not be a silver stock but you can't tell me this situation isn't relevant to silver investors. Combine it with the latest mega-increase in ETF holdings of silver and it could even be considered a likely source for trading advice. Hello advice givers, anybody out there?

Personally, if I had a super short term alert flag (less than 1 month) for extreme speculators and experienced traders, it would be a firm shade of green at the moment. As it is, only experience and better judgment is keeping me from changing my short term alert flag to green. Things can change quickly.

Oh well, maybe everybody is off to holiday. Which reminds me, have a merry, happy one regardless of the tradition you follow!

DECEMBER 22 2006 10:00AM PDT - I got a late start this morning so imagine my surprise to see gold up a little but silver up strong with the dollar in midst of a substantial rally. Two seconds later I noticed that the silver ETF has just added 9 million ounces of silver. Not since its third day of trading, May 2, 2006 has the ETF added this much silver in one day, so this is a very interesting development. I have not had a chance to check any news or other indicators as I instinctively went to my futures account to establish a couple of long futures positions against in-the-money puts, which is my favorite (safe but not always very profitable) way to create a leveraged speculation in short-term silver price movements. Unfortunately, the COMEX is on holiday hours and closed early so if I am really serious about this I will have to use an electronic exchange. I will continue this discussion later.

DECEMBER 21 2006 1:30PM PDT - Metals weaker once more today with copper leading the charge having fallen below several support levels. And even though the metal declines have not been that bad, gold and silver stocks are not liking what they are seeing. That is, with a few exceptions like Impact which seems to be glued to C$1.60 and MAG Silver which is on a tear, now over C$6.50.

On the other hand, stocks like Mines Management don't look like such a hot area play at the moment, with falling copper prices and significant environmental concerns continuing to surface. In fact, there are rumors that Revett Minerals (in which Silver Wheaton recently took a stake) and Mines Management have recently become embroiled once more in an intriguing game of cat and mouse. The issues are whether there is space from an environmental perspective for 2 massive mines within a small area of pristine natural habitat, concerns about drainage of lake water into one or both mines, and just exactly who is ahead in the permitting process. An overtone to all of this is the apparent repeated past efforts by each company to explore a merger. Frankly at this point, only ego should be standing in the way since, logically speaking, pretty much any other alternative would be inferior. I currently own Mines Management.

An interesting blog appeared today in which the author explores the use of gold in coinage during the Roman Empire and concludes that in fact gold was not considered money but rather silver and bronze were. The implication is that gold is only money in the minds of men and there is nothing inherent about it that makes it the perfect medium of exchange, especially in today's world. I think this is a good one-sided argument but it fails to consider a number of factors, perhaps the most important of which is that gold is still considered as the de facto currency of last resort by the majority in the world's monetary authorities. So while it is true that gold (or for that matter silver) will never be used as pocket change to pay for milk or gas, the utility of gold (and silver) as monetary tools and exchange regulators is certainly bound to increase in the future.

At a minimum, gold and silver will likely be used in the future as a bridge between failing currencies and their replacement monetary schemes, unless of course the monetary metals become the world's reserve currency in place of the US dollar. In this regard, there is only one reason they should do so -- gold and silver are the only transportable form of wealth that citizens have consistently trusted throughout history, especially during social and financial crises. Even the blogger admits this while failing to see the implications in pointing out that Caesar bought the protection of his mercenaries with gold. Indeed, during times of war or cross-border strife, only one medium of exchange is respected by all combatants and readily accepted by third parties as payment for war materials -- the monetary metals, gold and silver.

So in fact there is no reason to expect gold and silver to function in the future as money during prolonged periods of peace AND public confidence in government. But if there is war (whether the weapons are guns and bombs or merely financial) and public confidence falters at the same time, having 10% of your net worth in physical gold and silver in your own possession is the best -- and possibly the only available -- insurance. Ideally that gold and silver should be hidden, confidential and spread between a few secure locations. Now I will be the first to admit that the probability of this insurance paying off (hopefully) is remote during any one lifetime, but I guarantee that it will pay off for someone at some point in the future. Therefore, it is very important to instill the discipline of "10% gold and silver" in the minds of family and friends if you wish to leave behind a lasting financial legacy.

DECEMBER 20 2006 10:30AM PDT - Dollar firming at the moment with gold and silver off slightly. Not much new to report. MAG Silver is on a tear as it continues to have success hitting veins at depth and strike. Along with Esperanza and Silvercorp, this is a solid group of silver stocks to watch for fantastic drill results. You are paying up for them but quality comes at a price these days. I wouldn't overindulge but these companies certainly deserve a look. Esperanza is back in a buy range with no recent news at San Luis. Things can change quickly. I currently own all three.

Today I would like to discuss some common misconceptions about the silver ETF. Often it is mentioned that Barclays added silver to the ETF, but we should remember that Barclays is only the sponsor. The actual selling of physical silver would be done by the dealers after they redeem baskets of ETF shares (50,000 shares or roughly 500,000 ounces at a time) acquired from retail investors. But the fact is, we cannot determine whether trading on a particular day represents retail investors selling to, or buying from, the dealers or whether the volume represents trading between retail investors. And even if shares are sold to the dealers, the dealers will not automatically redeem those shares for silver. In fact, on a net basis dealers have rarely decided as a group to redeem their ETF shares for physical silver. We know this because the silver ETF's holdings rarely decrease and that includes the past few days.

Now here is the interesting part. Suppose that in fact retail investors sold to the dealers. In that case, the dealers may -- instead of redeeming ETF shares for physical metal and selling the silver into the market -- decide to hedge their acquired long ETF positions by means of paper only. They could do this a number of ways, perhaps the simplist being a commercial short position in silver futures on the COMEX. This may, in fact, have a very similar effect to selling the physical silver backing the ETF shares. The same concept obviously works with the gold ETF (GLD) as well as several other ETF products. I even personally confirmed this by speaking directly to some of the trading firms doing it.

I don't know why, but it seems very difficult for many so-called experts to grasp the simple concept of dealers holding ETF share positions acquired for arbitrage against paper short positions on the COMEX and elsewhere. Every PM site and just about every newsletter continues to publish supposed expert analysis in which it is shown that the gold and silver ETFs rarely reduce their official holdings. As if that should come as a surprise once you truly understand an ETF's mechanics! Worse, almost everyone makes the mistake of assuming that ETF holdings remain steady during falling metal prices because ETF investors are a new breed of long-term super investors who cannot be easily shaken from their positions.

To repeat, dealers probably accumulate large ETF share positions during metal price declines which they are loath to redeem for physical metal because of the cost, time delays and effort involved. Instead, the dealers do what they always do best: hedge and arbitrage using paper. It is way more efficient and profitable for them to do so. Understand the implications of this and you will be ahead of 99.999% of your peers in this investment arena. More on this later including possible ways for retail investors to take advantage of the ETF and the dealer arbitrage.

DECEMBER 19 2006 1:00PM PDT - Our obligatory PM bounce continued today as expected with the dollar heading south. This is actually curious given the huge increase in PPI for November (2%) at least appears inflationary. Then again, September and October showed a combined decrease of 2.9% so at this point the PPI is still in the hole by 0.9% on a running three month average.

Silver did bounce off $12.30 cash basis again this morning but it's probably not the double low to confirm that a bottom is in. Meanwhile, many silver stocks are having a great day today as people are apparently buying "the dip that never was".

Today I would like to talk a little about being a contrarian and conspiracy theories. Unfortunately, the widespread indoctrination of conspiracy theory as a way to understand the gold and silver markets has led to a lot of lazy, muddled analysis. Every correction brings out commentary from all corners along the lines of "the cartel is at it again" or "central bank manipulation is back". I'm not sure the people who peddle this nonsense are aware of the fact that these conspiracy theories are creating a dangerous "groupthink" where alternate viewpoints become more and more ignored while the general public is kept at a distance by this weird, cult-like behavior.

But there is a useful angle to the conspiracy theories abounding in the PM sector. The key to this is that ongoing manipulations of the gold and silver price are supposedly so obvious as to be egregious and sickening. Now consider that being a gold and silver bug these days is still to be a contrarian. Couldn't then the manipulation theories be seen as a consensus of the contrarians, or a contrarian consensus? Yet to make real profits in the markets, don't we need to trade against the consensus? But wait a second, isn't the opposite of the contrarian consensus -- contrarian to the contrarian if you will -- really just the same as the general market consensus, i.e. gold and silver are horrible investments? Confused yet about where I'm going with this?

Well, you shouldn't be. What I am saying is that these are really three different things -- the general market consensus, the contrarian consensus and what I'll call the independent contrarian (some refer to it as a "true" contrarian). Out of these three, the only one which can beat the markets in the long term is the independent contrarian. That means not being married to any particular idea, being open-minded and flexible, avoiding obvious or irrelevant truths, thinking for yourself, etc.

Look at it this way. The general consensus is a big crowd. By definition, not everyone can be a standout winner in a big crowd. In contrast, the contrarian consensus starts out as a small crowd so everyone can be a big winner for a while. But sooner or later a successful contrarian consensus, by definition, becomes a bigger and bigger crowd until perhaps it becomes the general consensus. At that point the former general consensus becomes the contrarian consensus. But that doesn't mean the former contrarian consensus has switched beliefs. They have just become part of the general consensus by popularity. Meantime, the new contrarian consensus is actually made up of the old general consensus which has also not changed its mind.

In fact, only the independent contrarian, not married to any particular beliefs, has the ability to straddle both sides. Thus, only the independent contrarian has a chance at making money in the markets all the time. This is the reason why conspiracy theories in gold and silver are the independent contrarian's true friend. And while I do bitch and moan about the nonsense all the time, in secret I am very thankful.

We must study conspiracy theories in order to better understand them and therefore to recognize the extent to which they betray the contrarian consensus. For example, many penny stocks with low credibility and poor business models are defended by small but vocal "contrarian shareholders" who believe that naked shorting is responsible for their company's terrible stock performance. In effect, the prevalence of naked shorting has become a contrarian consensus, including for several gold and silver stocks. If only the naked shorts can be exposed or squeezed, the stock would be trading much higher. Now, an independent contrarian would actually study and confirm the practice of naked shorting and find that in fact it is very limited especially at penny stock levels where the downside profit potential is tiny while the upside loss is unlimited. The independent contrarian would also discover that the "facts" confirming naked shorting -- the persistent failures to deliver at the DTC -- are usually the result of the company's own stock issuance practices, the less orderly transaction processing in the OTC market or even that the delivery failure might have been initiated by certain persons wishing to "prove" that the stock is being naked shorted. As a result of this type of understanding, the independent contrarian would always avoid such a contrarian consensus while the general consensus could be seduced over time. 

It could take a similar type of process to understand many of the gold and silver conspiracy theories circling around the Internet.

One unifying feature of most conspiracy theories is the tendency to focus on a few unsupported observations while ignoring the mountains of actual facts. The reasoning goes like this. The facts were created as part of the conspiracy itself so we can't rely on any of them. Instead, we must look for subtle clues in the conspiracy leaders' behavior and statements, or we must uncover seeming anomalies in selective evidence, because those things are much more likely to contain the complete, absolute truth. In reality, the independent contrarian has a huge leg up by being unafraid of facts and therefore he or she has a virtual monopoly on the real truth.

Conspiracy theorists almost always think that they are selflessly supporting a noble cause in exposing the supposed fraud, while everyone involved in the establishment is painted as a crooked liar, hell bent on keeping the big secret. And conspiracy theorists typically never limit their suspicion to just one situation but rather they have a conspiracy-based explanation for virtually everything in life. Often this world view which holds that humans are primarily crooks and liars comes about as a result of repeatedly witnessing real crookedness on a personal, every day scale. As a result, we find that many of the conspiracy nuts are older gentlemen (and sometimes ladies) with a lot of life experience and distrust for the system. The young and impressionable are also prone to conspiracy theories because of precisely the opposite: lack of life experience. Once again, the independent contrarian is at an advantage here because he or she is not prejudiced by personal experiences or lack thereof.

In any case, the list of conspiracy theories involving gold and silver is almost endless. The granddaddy of them all is that a few rich old money families (Rothschilds, etc.) are secretly building an ever growing hoarde of private gold as a way to eventually take over the world, if they haven't already done so without our knowledge. The most pervasive one is that central banks are actively manipulating the gold price in an effort to maintain confidence in their fiat currencies. Apparently the bullion banks and many other institutions (e.g., Silver Users Association, COMEX, etc.) are also involved in this dastardly effort to destroy the free market and screw the private gold or silver investor.

The bullion banks must be shorting huge amounts of gold and silver on a naked basis and they cannot possibly have the metal to deliver. Masquerading as commercials, they are also shorting on the COMEX and are able to cap every rally mounted by the longs. If it weren't for these illegal efforts to depress gold and silver prices, both metals would be much higher today.

Then there is the plunge protection team ("PPT"), a secretive cabal of government and finance, which comes to the rescue of Wall Street whenever the spectre of 1987 repeating appears. Not content with saving the fat cats at the investment banks, the PPT is also involved in raiding gold periodically. And let's not forget all the politicized bureaucracies like the Fed, Treasury Department, OMB, etc. which always aim to please the incumbent party by fraudulently manipulating economic data starting with the lowliest clerk up to the cabinet secretary. A recent example is the Fed's decision to discontinue M3 since it shows rampant, out of control growth in the money supply, something that is very embarrassing to the Fed, and especially new governor Bernanke, whose stated goal as Chairman is disciplined control of inflation.

Now, I should point out that arguing against these conspiracy theories is pointless. For example, assume that I were to point out the logical inconsistency that central banks -- whose very survival depends on fiat currency -- are allegedly owned and controlled by the same old money which is supposed to be hoarding gold in order to take over the world. Well, I'd probably be told that this makes sense because the central banks are really just trying to fool people into holding fiat currencies while the banks help the old money acquire all the real money -- gold -- at artificially depressed prices. At least that argument is logical, but it isn't one that remains uncorrupted for long. Sooner or later, the theories would be back to something like the central banks being nothing more than an unconstitutional inflation tax on the working stiffs of the world. This despite the fact that it is actually those who seek income -- the wealthy and lenders (banks) -- who stand to lose most from the decreasing purchasing power of fiat money while borrowers, the working classes and others with little to lose are consequently likely to gain (wages always rise during "real" inflations).

Once again, a logical answer to this can be supplied via the supposed fact that the wealthy and banks not only control money supply but most of the productive capital (farms, factories, natural resources, etc.) as well and therefore they would receive the disproportionate share of the increase in money supply such that inflation would actually increase their wealth on a relative basis. To which I would reply by first asking that if inflation is good for central banks and the wealthy, why would they not want to encourage it, and second, if the wealthy by definition already own the productive capital, why do they need conspiracies to increase their wealth? The answer to the first part would, of course, be that too much inflation will destroy the fiat currency and the wealthy don't want that because they like the status quo. The answer to the second part is simple, that wealth begets greed.

This is just the tip of the iceberg of understanding gold and silver conspiracy theories and I urge you to study them without trying to change the beliefs of others. After all, by forming a consensus within the contrarian PM sector, a good conspiracy theory is the independent contrarian's best friend.

Some of the more colorful independent contrarians within the PM sector and general investment sector include Adam Hamilton of Zeal LLC, Ken Fisher the institutional fund manager, Bob Moriarty of 321gold and Steven Jon Kaplan the self-proclaimed True Contrarian. Study their style and even borrow some of their ideas but don't take all of their investment advice. After all, an independent contrarian does all his or her own thinking while looking for the unique, overlooked or misunderstood by the consensus -- even the contrarian consensus.

DECEMBER 18 2006 7:00PM PDT - Well, I almost cut off the tip of my thumb earlier today in a Christmas tree mishap so my typing is really slow. But what a day in the markets, huh? We could have seen a low around $12.30 silver and $612 gold cash basis in the morning that may last a few days or even mark the bottom of this interim correction. On the other hand, this correction was pretty quick so far and seasonally the timing is a bit off. If so, we might rally a bit from here before revisiting the lows in a double bottom. In any case, it sort of depends on the dollar right now, which has fallen unusually far without retracement.

Let's take a look at the fundamental factors for a moment as there is some new data out today. First, COMEX open interest was up for the first time in several weeks, although only a measly 3,000 contracts or so. Most of this was an increase in commercial shorts and large speculative longs which is not at all surprising nor conspiratorial. This is not the same COMEX of only a few months ago. I sense subdued behavior on both the short and long sides given that $15 silver is "been there, done that". As a result, there could be a bit of a catch-22 building here with speculators looking to enter in force after a breakout to new highs and physical buyers looking to speculators to lead the way.

Which way will this go? Well, physical buying does seem to be picking up a little with recent additions to the silver ETF and the increase in COMEX warehouse stocks primarily in the eligible category.

For those who don't know, "eligible" silver at the COMEX warehouses is silver in storage which meets the specifications of a COMEX silver bar (1,000 ounces give or take from a specified fabricator) but which does not have a COMEX warehouse receipt issued against it and therefore has not been "registered" with the COMEX but is "eligible" as such. Typically, silver will be registered in anticipation of becoming part of a possible or actual physical delivery under a futures contract but the point many people miss is that once silver has become registered as a result of contract delivery it will remain in that category until withdrawn from the depository. Therefore, if you or I take physical delivery of a COMEX silver contract and leave the silver at the warehouse as Ted Butler and others have suggested in the past, that silver will in fact be in the registered category. So the mistake people make is thinking that registered silver is all dealer inventory when in fact we just don't know who owns that silver. Meanwhile, a portion of eligible silver is undoubtedly dealer inventory taking advantage of cheaper storage costs in pool accounts as compared to the higher cost of storage as a COMEX warehouse receipt. I plan on writing a full commentary on this later but for now suffice it to say that an increase in eligible silver at COMEX warehouses is a possible sign that dealers are accumulating silver in advance of expected delivery. What I am trying to say is that it matters little what the relative proportion of eligible to registered silver is in the COMEX warehouses. Instead, the important thing is the changes in these categories over time especially if these changes can be correlated to some other factor.

Alright, enough about COMEX warehouse stocks and let's now look at LBMA clearing volume, which increased in November to a little over 100 million ounces per day. This is still about half what it was earlier this year and represents a tepid pace of silver trading in the over-the-counter markets. Although a lagging indicator, LBMA clearing volume provides a broad directional cue to silver prices, something I've been meaning to demonstrate on a chart but have not had a chance to finish. In any case, current LBMA clearing volumes correspond more to the silver market in late 2004 which led to a dud of a spring rally in 2005 as opposed to late 2005 which resulted in the $15 high in silver earlier this year. Unless the ETFs have fundamentally changed bullion trading in London, which I doubt, we should keep our eyes on this LBMA clearing volume to get a sense as to whether we are headed for a spring pop or a spring dud.

Last on the fundamentals is the futures basis and spread, which both have shown surprisingly tight cohesion during the recent run up and now the correction. By cohesion, I mean that the basis and spread have fluctuated very little and have remained within a historic average range. I suppose this should not be entirely unexpected given the timid silver lease rates, which by the way have not been kept current once again.

Put it all together and you get a silver market that is currently unable to get much excitement from higher or lower prices. Gold looks to be about the same. I don't know what is going to break the doldrums -- perhaps the dollar going below 80 basis the dollar index -- but we should hope to see some early signs by listening to what the market is telling us, not what we want to hear.

Finally, I wanted to revisit a few silver stocks to see how they are faring during this correction. On one extreme, we find the Impact shareholder who might be wondering, "what correction?" That stock is still at rally highs and seems to like it there. Meanwhile, poor Mines Management was dropping while silver was rallying and now that silver has dropped, that stock has stopped its free fall. Those are two very different companies which apparently aren't concerned with short-term gyrations in silver prices. And there are plenty of others which are hanging tough, making it awfully hard to so far buy this dip. In fact, it's downright difficult to find relative bargains at the moment. Maybe Great Panther, Palmarejo, Silvercorp, Endeavour, Esperanza and a few others but the pickins' sure is tough! At this rate the silver ETF could become the most undervalued stock of them all!

DECEMBER 15 2006 11:00AM PDT - Didn't have a chance to mention this earlier, but Silver Wheaton has just acquired a 19.9% fully diluted interest in Sabina Silver by way of private placement. This is after acquiring 19.9% of Bear Creek and 19.9% of Revett Minerals earlier. Why 19.9%? Because 20% is a threshold for reporting and accounting for the investment under equity accounting which would force Silver Wheaton to record its minority portion of these company's earnings and losses on its own books, a definite no-no.

So why is Silver Wheaton doing this? Privately I've discussed it with a few people, but today it has become obvious for everyone. According to the Sabina press release, "Silver Wheaton will acquire a right of first refusal over any silver stream sale by Sabina from its existing projects." Yikes! I didn't see this in the Bear Creek and Revett press releases, but it should now be obvious what Silver Wheaton is trying to do. Unable to find companies willing to sell by-product silver at a discount for upfront cash from existing mines, SLW is now going after pre-production companies in the hopes of having negotiating leverage for future silver by-product. I hope Sabina, Bear Creek and Revett are smart enough to avoid Silver Wheaton's sweet tasting poison but my guess is that at least one if not more of them, and perhaps others in the future, will fall for the trance-inducing business model that SIlver Wheaton has pioneered. I have written about this business model in the past (Silver Wheaton and Coeur d'Alene Mines) in terms of just how revolutionary it would be for the silver market if carried out successfully. Therefore, I don't fault Silver Wheaton for continuing to evolve it as Silver Wheaton's success and the success of silver -- the physical metal -- have forever been inextricably tied together.

This is also a heads up that Bear Creek, Revett (which I've had my eyes on for a while but have not purchased yet) and Sabina may no longer be silver companies but will rather become base metal companies in the future. If so, too bad for them and hurray for Silver Wheaton.

In closing, I do have a hunch that after all this time, finally the brilliance of the Silver Wheaton business model is starting to dawn on some mining companies. In fact, based on some rumors that I have heard, there could be some announcements coming out in the very near future. I wish I could tell you more about the hunch or how to trade it but I personally have been avoiding doing so for ethical reasons and would urge others to do the same.

I have not yet mentioned the most important implication of all of this. What is happening here is literally busting the seams of the metal markets and mining industry yet nobody is talking about it. Heck, even traditional royalty plays like NSR's are being described and positioned as the purchase of metal production. Just look at the way Battle Mountain Gold yesterday described its purchase of an additional NSR on Minefinders' Dolores project: "Battle Mountain will receive approximately 5,623 ounces gold and 82,000 ounces silver in 2008". The difference from past practice is subtle but crucial. Before Silver Wheaton, this type of deal would probably have been expressed as so much expected cash flow based on a given metal price. Today, the cash flow calculation is left up to the reader who has to come up with his or her future estimate of the metal price instead of the company providing its own estimate. And this is exactly what makes Silver Wheaton such a compelling investment for those who think metal prices are headed higher.

The crux, what makes all this revolutionary, is this:

Companies can't estimate a high future metal price but investors certainly can and usually do! A corporate structure that takes advantage of this simply fact stands to vastly improve market performance compared to peers. Silver Wheaton, which is mostly owned by sophisticated investors, has so far proven this and there will be others. Our job is to find them and be early.

I truly believe this idea is worth a lot of money, and yet, here I am giving it away for free! I'm a fool and you're lucky if you listen and understand.

DECEMBER 15 2006 10:45AM PDT - For now, the "gold is decoupling from the dollar" theory appears dead. Also, the GATA theories on gold manipulation are getting old although they are starting to get more bening in an effort to appeal to more than the fringe element. Chris Powell of GATA has just published a piece describing a large coin dealer, Blanchard & Co., asking the IMF to require central banks to report their gold lending. Great idea, way to go, but probably would have more weight to it if it didn't seem so self-serving (a gold dealer asking for something that could presumably ignite gold prices, also to prove its own conspiracy theories: what nerve!). In any case, perhaps we shall one day see some level headedness from both central banks and their detractors and maybe that will be the day when gold lending will start being publicly reported.

DECEMBER 15 2006 10:15AM PDT - Tame inflation and high industrial production in November supported the dollar today. Silver and gold simply couldn't take it anymore and they both plunged characteristically as fear instantly replaced greed. Today's drop has silver and gold in an area of technical damage and it will be instructive to see what happens next. Late session plunges in both metals are worrisome for the short term but patience should reward in the coming weeks. The predictable buying opportunity for which powder has hopefully been kept dry is coming. Personally I am also near a level of taking profits on the protective put positions which are now well in the money and could provide an excellent security blanket for the long futures I plan to deploy shortly to take advantage of a rebound.

Two important pieces of news in silver today. First, the silver ETF has just added another 1.5 million ounces in a show of remarkable resilience at higher metal prices given the obvious risk of a short-term plunge. Second, BHP's Cannington mine in Australia, the single largest source of silver in previous years, has suffered an unfortunate fatality which will close the mine indefinitely. Now, indefinite might mean a few days, a week or a month. Probably not a year but startup could be slow and reaching pre-accident production levels might take a while. Already Cannington has suffered drops in silver production in the last few quarters and this will likely accelerate the trend. It doesn't take much to get the ball rolling and the funds love trying to leverage supply disruptions, even if minor, into higher metal prices. They do so at the margin by tightening local supply (in this case the Pacific Rim) which causes regional players to panic buy in global markets to secure supply. What this might mean for silver in the days ahead is unknown, but one thing for certain is that the shutdown of the world's largest silver mine is not bearish for silver prices.

DECEMBER 14 2006 11:30AM PDT - Gyration continues in gold, silver, dollar, etc. with the dollar possibly trying to retrace back to around 85 on the dollar index. Silver showing great strength which could of course reverse in a hurry as silver was around $12.50 when the dollar first broke below 85. I would continue to recommend keeping some cash in the event we experience a shakeout before the current rally cycle is over.

Not a lot of news in the fundamental indicators although it looks like the LBMA has stopped reporting lease rates again today.

Several interesting articles and news out today. First, two not directly related to silver but still important. The U.S. Mint has announced a temporary 120 day rule that bans the melting or export of pennies and nickels since the metal content is now higher than the face value. This happened to silver in the 1960's but I don't see the same thing happening with nickel and zinc as what happened with silver - hoarding by the general public. Hoarding by private funds, yes. After 120 days during which the public is asked to comment, the rule could become permanent. Still, out of all the base metals perhaps nickel and zinc have the best fundamentals and the longest tail as far as new production coming on line so pennies and nickels may be worth more as scrap than coin for quite a while (if not forever). The ban on melting is therefore probably just a stopgap measure.

An interesting article by Gary North titled Misunderstanding Gold makes the point that gold will perform well on higher inflation expectations and not necessarily on a declining dollar. To the extent these inflation expectations are muted due to a recession or otherwise, he states the gold price is at risk. He makes some valid points and certainly this is something to consider but I think gold acts on a number of fundamental levels and so Mr. North's focus on a single factor is unlikely to represent a complete picture.

The silver articles out today include an interesting analysis of Fibonacci cycles applied to silver with the conclusion that silver is at least somewhat in synch with these cycles although the recent lengthy bear market causes interference. The point is that Fibonacci cycles should become more important as the bull market moves forward. The cycles point to silver reaching about $15 next spring before consolidating over the summer in preparation for a run at $17 to $18 next fall and winter. I personally think Fibonacci cycles are only partially useful but I can't fault the predictive results for 2007 although it remains to be seen what a U.S. recession or global slowdown will do to metal prices.

Also, Clive Maund has an update out which basically shows silver is in a strong uptrend channel. The upper channel is currently around $15 and this should represent strong resistance. On the other hand, a break below the lower channel currently at around $13.75 could mean a significant drop and a great buying opportunity. I've followed Clive Maund for a long time and he tends to be about 50% right with his analysis. This one, however, appears to be quite compelling and I tend to agree with it. As I've stated before, there may be a good opportunity to buy weakness in the near future before an eventual move higher in early 2007.

Finally, Smartstox has posted an interview with David Morgan at the SF show in which Mr. Morgan predicts $18 silver by April 2007. This is probably not a bad call and I believe Mr. Morgan also believes we will see a period of weakness before departing on a rally to that peak.

In silver stock news, Avino was halted pending news, Silver Dragon filed an amended 8-K describing a deal from March 2006 which apparently caused some people to bid up the stock for no reason (unless of course there is some real news out there and it has been leaked), Impact has added concessions to its joint venture with Yale Resources, Sabina reported some high grade narrow intercepts of silver and gold at its Del Norte project at Eskay Creek, and O.T. Mining appears to have come up goose eggs once again on its 2006 exploration program at their Ruby property.

DECEMBER 13 2006 11:00AM PDT - Strong retail sales report for November placed support under a sinking dollar which initially pressured gold and silver. However, the precious metals bounced back on "buy the dip" purchases as gold dropped near $620 cash basis. It also helped that crude inventories showed a surprising drop for a third week in a row, with energy prices rallying as a result. This back and forth churn, as I pointed out a few days ago, was to be expected as the dollar may need to retrace a bit as well as mixed economic data continues to rattle the markets until a clear direction emerges (recession or "goldilocks" soft landing).

What does surprise a little is the strength that silver has shown, not wanting to head too far south of $14. This is quite bullish and may point to a strong rally peak in the spring which should easily take out $15. Perhaps we might see a shakeout before then -- with a possible spike low to near the $12 level -- but COMEX open interest is nowhere near the highs and my guess is that speculative COMEX longs are prepared to hold on.

With respect to lease rates, finally the LBMA published updated figures today after a week and sure enough the lease rates have jumped substantially higher during this week-long "dark" period. At the same time, the rates have simply regained the level of early November so this isn't something to get too worked up about. Yet the rise in lease rates may point to a gradual retightening in physical supply, even if just minor at this point, and as such is a bullish signal in general.

The rise in lease rates has also worked its way into tighter futures spreads with even the basis showing a marked decline. However, the basis and spread aren't very useful over extremely short periods of time and they need to continue on a declining trend to indicate that stronger physical demand has appeared in the market.

I would like to point out several opportunities here should silver prices continue to rally into the spring. First, Great Panther is approaching a very nice buy level thanks to profit taking from the summer's financing and the exercise of in-the-money warrants. While the weakness could continue a little while longer, this pause is probably a pretty good opportunity to start accumulating a position for those who are underweight in this highly prospective silver stock.

Another stock which looks ripe for picking is Endeavour thanks to the recent dampening of expectations. Production was slowed down over the summer by rain, normal delays and the decision to change from contract miners to the company's own mining personnel. As with Great Panther, it might take a few days for shareholders to take some profits but we are probably at a pretty good nibbling level for those not owning enough of this stock.

Another one worth a look is Palmarejo. Recent investor excitement pushed the stock to near 52 week highs around $10 Canadian but it has now backed off to a little over $8.00 Canadian.

On a different note, it appears that Mines Management has decided to underperform in sympathy with other geo-politically and enviromentally sensitive silver stocks (Apogee, Apex Silver, etc.) and is now approaching its 52 week low on investor worries about what the new Democrat-led Congress might do to the U.S. mining industry. However, I continue to like the stock as a long-term play on leveraging in-situ metal value on American soil. Despite the risks of environmental politics, U.S based deposits should conceivably be much more valuable than their foreign counterparts as measured by dollar value as long as you believe the U.S. dollar will substantially depreciate against other currencies in the future.

Speaking of U.S. based projects, it looks like a company by the name of Strategic Nevada Resources (SNS on the Vancouver exchange) was the sole bidder at auction for the historic Crescent mine in the famed Silver Valley of Idaho. I spoke to quite a few companies and mining people about this property and even considered putting together an investor syndicate to acquire it. But the price, $650,000 cash, was just too high given that this mine is flooded, In fact, as I understand it, the Bunker Hill mine next door drains into the Crescent mine. So there is no short-term exploration play here as Strategic Nevada Resources likely knows very well but ithe situation bears watching if for no other reason than entertainment.

While we are at it, I wanted to mention a couple more companies with U.S. based silver projects. First up is Silver Quest, which belongs on the Overlooked List and I also plan to write a commentary about this company. It has a project in Nevada called Corcoran Canyon and hopefully will be acquiring additional silver projects in Nevada or the U.S.. The compelling thing about this stock is the low market cap around US$10 million. They also hold several other silver projects in Mexico and Canada. More on this later but I would take a look at establishing a starter position around current prices under $0.60 Canadian. Next up is Fury Explorations with their Taylor project, also in Nevada. This is an open pit, low-grade silver deposit similar to Oremex's Tejamen. It may not be as large but Taylor has existing infrastructure and could be placed in production in short order. You should look at both stocks although you might want to consider relative value.

When speaking of companies with U.S. based silver deposits. invariable the topic of Sterling Mining, O.T. Mining, Clifton Mining and Coeur d'Alene Mines will come up. I could probably fill several tomes with opinions about these companies but suffice it to say that for one reason or another I don't view the risk-reward of share ownership as favorable at this time. In each case, corporate philosophy, management structure and other issues cloud the type of risk assessment that is necessary prior to deployment of significant amounts of speculative capital. This can be seen in the lack of coverage of these companies by knowledgable and respected analysts and newsletter writers. None of this is to say that one should not buy these stock or that they won't succeed in their endeavors resulting in much higher share prices. It's just that I am unable to answer fundamental questions about these companies to my own satisfaction. Perhaps this is an opportunity for those who CAN get their heads around these companies to figure things out but I personally have been unable to do so despite many hours of effort.

Finally, I would like to point out that Arian Silver announced today that it has acquired an option on what looks to be a prospective silver project in Zacatecas state called San Jose. It's about time they put the connections and capital to use. As far as share structure and stock price though, the path looks similar to Fortuna Silver so one might look at both that company and Arian as longer term silver plays. It is interesting to note that both these companies are after silver deposits which can be bulk mined, which is a pretty smart strategy if you ask me. I think there is still time to board these trains and I see no reason to be in a huge hurry at present.

[I own shares of Great Panther, Endeavour, Palmarejo, Mines Management and Oremex. I may buy some Silver Quest soon.]

DECEMBER 12 2006 12:30PM PDT - Please see the Stocks page for a listing of different categories of silver stocks. It is a work in progress but does now include a summary of silver stocks I've discussed in the past which I have aggregated into various "portfolios". Also, I am in the process of finalizing the general categorizations of silver stocks to better focus research efforts so please keep checking this page in the weeks ahead.

DECEMBER 12 2006 10:30AM PDT - More whiffle-whaffle in the silver and gold markets today. This time the likely culprit is the unexpected decrease in the trade defitcit due singularly to lower oil prices. We are now approacing critical short-term support around $620 in cash gold although silver is still way above its short-term support levels. Recall that $620 gold corresponded to roughly the 85 level on the dollar index so perhaps gold might be telling us that the dollar will try to regain that level in the days ahead. As a result, I would remain vigilant with respect to short-term silver prices -- although this is something only speculators and traders should worry about. On the other hand, gold could experience a strong bounce from here or down around $620 and take silver along for the ride.

The fundamental silver indicators continue to be flatlining and lease rates have still not been updated by the LBMA. Unless things change, expect there to be an eventual hard dive in silver and gold once everyone has spent their "buy the dip" money. In general, you should probably have positioned yourself and be ready for any incipient rally in precious metal stocks and only should be "buying the dips" selectively when the market is giving you deals on individual equities too good to pass up. For example, purely as a long-term play, I could not pass up collecting a few shares of Mines Management on today's weakness which had the shares down below $5.30, which is only 10% above the 52 week low.

DECEMBER 11 2006 12:00PM PDT - Churn today continues to provide ample opportunities to shuffle portfolios and nibble at prospective silver stocks. I should point out that silver lease rates have not been updated by the LBMA since Dec. 5 so we don't really know what is going on in that market although I don't suspect any major developments.

The second installment of Don Hansen's "value strategy", this one featuring Great Panther, has just been posted here. The stock is well above its summer low although recent profit taking from the financing done over the summer has created a good entry point at current levels around $2.40 Canadian (US$2.10). Once the selling pressure subsides, this stock is likely to regain its momentum upon a resumption of the metal rally. Stocks like this are really great to own because they are easy to trade while also being solid long-term plays. Don's other 3 "value strategy" stocks are the same way as are some other emerging producers such as Silvercorp.

DECEMBER 8 2006 3:00PM PDT - The dollar was up on supposed good news in the November jobs report and that made gold and silver drop today. I mentioned a few days ago that the dollar was due for some support and that would mean weaker metal prices directly ahead, but silver has held up extremely well, closing today at $13.75 which is barely off the $14 high reached at the top of the current rally. What's more, the silver ETF has added another million ounces and the COMEX warehouse holdings are also up -- in fact, they each now have slightly over 110 million ounces of silver. Meanwhile, COMEX open interest is stagnant with virtually no change since last week, lease rates continue to be moribund and the futures basis/spread are acting normal. Add it all up and what this basically tells me is that speculation has reached a stable level and therefore higher silver prices are probably here to stay. We should not expect silver to trade below $10 an ounce in the foreseeable future. This may not seem like a very bullish statement to the average silver investor,  but for silver miners, it is an awesome development (if true). While I would continue to be cautious here, establishing new silver investments at this point whether in bullion, silver stocks or whatever, would be prudent if done in moderation.

Alas, I was unable to establish a significant position in Oremex this week, an undervalued potential ten bagger stock I discussed last Friday. Both Oremex and Silvercorp. the other undervalued potential ten bagger I've discussed so far, ended the week on a tear despite today's weaker silver price. Silvercorp, after much speculation, is being added to the S&P Small Cap index in Canada on December 18, which has spurred some buying on good volume and I think this stock has great momentum and potential. It may trade below current levels on a pullback but establishing an opening position here would probably be okay. I would probably be more aggressive in picking up Oremex since it wouldn't take much promotion to move this stock substantially higher from its base around 60 cents Canadian (it closed today up 7 cents at 68 cents Canadian).

Lastly, I have an in my hand an updated "Value Strategy" by Don Hansen which discusses Great Panther and I will post it over the weekend. Coincidentally, Great Panther is seeing a bit of a pullback as the past summer's financing has come free trading but this profit-taking should be over within a week or two. At that point, Great Panther will probably regain its upward momentum just in time for possibly the next leg up in this rally.

Have a great weekend and go buy some physical silver while you're at it!

DECEMBER 7 2006 1:00PM PDT - I have a problem with those who are looking for a manic level of investor participation in gold and silver stocks to mark the top of the precious metals bull market. They claim that public participation is currently nonexistent but will one day become just like during the height of the Internet bubble. They point to 1979-80 as an example to back up their claims. Yet these prognosticators fail to acknowledge that a large percentage of the public entering the precious metal trade at that time were actually sellers of physical gold and silver. What about the huge runup in gold and silver stocks back then? Well, that runup actually didn't reach epic proportions until well after silver and gold put in their high in early 1980. Back then, there were much fewer silver and gold stocks to choose from and the general public was largely absent from the stock markets. Joe Q. Public didn't have a trading account. It was near the end of the bear market in stocks.

So who drove the silver and gold stocks to manic levels in the early 1980's? Speculators, wealthy individuals, gold bugs and silver bugs, that's who. Not Sally Housewife or Ned Whitecollar Worker.

As for the Internet bubble, that was made possible by an advancement in technology which almost everybody could see and appreciate (just log on to the Internet) combined with a once in a lifetime bull market in equities and the advent of online trading.

Today, we are likely no longer in a bull market for general equities and online trading is widespread. Gold and silver, although you could buy bullion and appreciate its beauty, is not in any way comparable to the novelty that the Internet represented back in the 90's. The Internet led people to dream and think big. It was a time of extreme optimism. In contrast, gold and silver do best during times of pessimism. People don't look at gold and silver and imagine a better world. They will buy gold and silver if they have to but they won't necessarily be excited about it the same way they were about buying Yahoo!, CGMI, Cisco and other Internet darlings. Heck, many of the "buyers in force" (more than a couple of hundred shares here and there) worked in the hi-tech industry themselves and had cash to invest as a result of stock options! The same thing is happening today with many resource investors being employed in, or retired from, the resource sector.

Don't get me wrong, I believe greater public participation in gold and silver are inevitable. I just don't believe it is appropriate to draw conclusions based on a selective recollection of what happened in the late 70's and early 80's or the once-in-a-lifetime stock market boom of the late 1990's.

I've written about this before -- Is the Spotlight Shining On Silver, Gold and Commodities Yet? -- when gold first crossed $700 and silver was flirting with $15 earlier this year. At the time, mainstream headlines were reporting on gold and silver daily. Jim Cramer, one of the most wildly followed gurus on Wall Street, had already been recommending resource stocks including gold and silver stocks for almost a year. Also, many mainstream investor publications such as CBS MarketWatch and Forbes had hired resource analysts and reporters to follow the market. Some mainstream magazine covers had even featured oil, natural gas, copper, gold or silver.

Yet some precious metal gurus keep telling their disciples that it will only be time to sell when Newsweek has a gold mine CEO on the cover. Others confidently state the bull market will be over when most investors can rattle off the names of at least a few gold and silver stocks. Man, wouldn't such arbitrary measures be the nicest and easiest trading signals ever devised? As such, they are likely to be wrong.

The fact is, this bull market in precious metals could be over well before the general public pays attention. On the other hand, the public could become very involved while the bull market roars for many more years. It all depends on what else is going on. For example, genetic research could result in a major breakthrough for treating disease. Under those circumstances, what happens with gold and silver would likely be irrelevant to most people and investors.

Today, we just don't know when and what is going to bring the bull market in precious metals to an end. The only thing we can say with a fair degree of certainty is that there will come an ultimate price, excluding the effect of inflation, at which there will be more sellers than buyers. The fact that most active investors and some portion of the general public is aware of, but apathetic to, this bull market is interesting but irrelevant unless these people become buyers in force. Yet higher prices will not generally change the apathy, nor will they guarantee buying by those inflicted with indifference. Those of us who are not demagogues should simply ignore the segment of the public (i.e., most people) that will never understand what gold and silver really represent until they are forced to us it as money. By then, there will be no investment opportunity left in precious metals.

Instead, we should look at a segment of the population that has money, capability and greed factor. These people are not the general public but they pretty much represent the substantial portion of active investing and wealth held by the public. I am not talking about Wall Street but rather a representative group of investors who believe themselves to be so sophisticated and smart that they spend time trying to prove it to their peers. One gathering spot for these investors is Motley Fool.

Specifically, I suggest a new "Fool Index of Interest" in silver stocks. You see, Motley Fool has a feature that allows registered users to rate stocks as either "outperform" or "underperform" the S&P500. It is called The Motley Fool Caps and allegedly helps investors beat the market. I am not really interested in whether this is true or what the Fools actually have to say about various companies including silver stocks. What I am interested in is the number of rated silver stocks (6) compared to all rated stocks (2889) as well as the number of ratings for the most rated stock (Microsoft - 3337) compared to the most rated silver stock (Silver Wheaton - 164). I propose tracking these ratios over time as a way to gauge relative interest in silver stocks by the most active segment of investors, those who actually have time and motivation to goof around on a site like Motley Fool. These are the potential buyers in force who could move the silver and gold market, who are likely to become manic, who could be responsible for an unsustainable rise (especially the stocks) leading to a bubble, and ahead of who the rest of us should stay one step ahead. Basically, these Fools are pretty much the same as the rest of us who consider our investment abilities to extend beyond those of the general public, except most of the Fools apparently don't yet "get it".

Frankly, I was actually surprised that there were as many as 6 silver stocks rated out of almost 3000 stocks in all industries and sectors of the stock market. Perhaps it should not come as a surprise when we actually look at these 6 silver stocks:  Silver Wheaton, Silver Standard, Pan American, Apex Silver, Hecla and Coeur. Note that Motley Fool only includes stocks with U.S. listings. The 164 ratings on Silver Wheaton (157 "outperform" and 7 "underperform") was also more ratings than I had expected. In fact, Silver Wheaton is currently the 293rd most rated stock. Considering that silver stocks are such a small sector, this actually isn't that bad. The interest in silver stocks at Motley Fool seems quite consistent with most other sectors. It isn't very high but it also isn't very low. It seems to be healthy but not dangerous, a good sign for the future viability of its bull market. This compared to Microsoft, Cisco, etc. which despite being more than 5 years into a bear market still demonstrate an obsessive level of investor interest.

In any case, I will start tracking this "Fool Index of Interest" once a week to see where it goes. It will actually have 3 indicators:

(1) rated silver stocks to total rated stocks (currently 6/2889 = 0.2%)

(2) most rated silver stock to most rated stock (currently 164/3337 = 4.9%)

(3) rank of most rated silver stock (currently 293rd)

Out of these, I believe (2) might be the most useful as it could demonstrate a change in interest level in silver stocks as compared to other market segments.

Perhaps this exercise does nothing more than help dispell a common myth among precious metal investors that somehow silver and gold exist in a world of their own as opposed to competing with other investment options. Motley Fool is a very clear reminder that other investment options exist and it could also turn out to be a good indicator of changing investor interest. But even if a silver (or gold) stock someday became the most rated stock on Motley Fool, nobody should be foolish enough to claim that marks the top of the bull market in precious metals. There are too many other factors to consider.

By the way, the top rated gold company is Goldcorp with 300 ratings, making it the 145th most rated stock with 283 "outperforms" and 17 "underperforms". I will also be tracking the top rated gold stock.

DECEMBER 7 2006 10:30AM PDT - A strong buy-the-dip rally left gold slightly up for the day after cash gold touched $625 per ounce -- but meanwhile silver was up a powerful 30 cents (!!) having touched $13.50 at the low. Looks like silver has taken back the leadership position.

There is a strong tendency to buy weakness this time of year not to mention that most of the precious metal gurus have instructed their flocks to buy weakness. The buy weakness mantra currently even extends into the cultural purchases in India where many people have been delaying wedding purchases of gold and are now looking for any deal they can get. This is all fine and well and is quite bullish in the short term, but it does not constitute the underpinning for a healthy, longer term rise in the price of silver and gold. For that, I believe at least some of the fundamental indicators that I track should be turning positive.

I still believe we could see some metal weakness in the immediate future while the dollar consolidates its recent losses. If the U.S. is in fact experiencing a major economic slowdown, we should see this manifested in retail sales over the holidays. This is likely to give direction to the dollar and precious metals right after Christmas but until then we could be in a holding pattern.

At the same time, starting now to position one's silver portfolio for a blowoff rally next Spring is probably not a bad idea. Silver stocks likely to do the best during a major rally are those which are currently near or at 52 week highs or have made substantial moves off their summer lows. These stocks have significant momentum behind them and would probably catch the majority of hot money flowing into the market. Realize, however, that some of these companies may have an overhang of recent share offerings which have or will come free trading. For example, First Majestic just completed a financing and Great Panther is currently working through a share issuance from this summer. With that in mind, my top silver stocks which have momentum potential are Endeavour, Energold, Esperanza, First Majestic, Genco, Hecla, Impact, MAG, Pan American, Silver Standard and Silvercorp. I will concentrate the deployment of dry powder into these stocks in the near term. If there are other silver stocks you are considering for a near-term trade, please take a look at the one year chart to get a sense of the price behavior and don't forget to check trading volume figures. I would appreciate hearing from you in case I missed something.

DECEMBER 6 2006 11:30AM PDT - Significant drops in gold and silver today as the dollar firmed on better-than-expected economic news in the U.S. service sector. The reasoning is that perhaps the Fed will not need to lower interest rates very soon. Despite the drop in metal prices, many silver and gold stocks are holding up fairly well. Perhaps there won't be much of a buying opportunity in the next few days and weeks but I am nevertheless using the opportunity to shift some holdings around.

Unfortunately, I was only able to get a few fills on the COMEX put orders I mentioned on Monday but I did exit all long futures positions that I had established in the past 6 weeks. These were starting to worry me because the current silver and gold picture isn't as certain as it was back then. I plan to switch back to a positive bias quickly though as I will be looking to replace the futures with calls in the coming days and I also plan to go long futures against any puts that are in the money.

My fundamental indicators continue to stink and with the dollar possibly looking to bump against the ceiling basis 85 on the dollar index, a short period of gold and silver weakness could lie ahead. Hopefully physical buying comes in at some point which could conceivably be detected by the market indicators that I track, but who knows for sure?

DECEMBER 5 2006 12:00PM PDT - Gold and silver off slightly with virtually no change in the dollar on what may be the beginning of a bout of profit taking. If the dollar has found temporary support, the precious metals could weaken here somewhat although I will not go out on the limb to make more precise predictions. What I am prepared to say is that none of my indicators except the silver ETF (and that only mildly) point to fundamental support for sustained higher prices so the risk of normal speculative ebbs and flows is unmitigated. I began taking some profits off the table today (only a portion of the gains since the summer lows) while also positioning for some short term trades.

I mentioned Silvercorp yesterday so I would like to officially add it to the overlooked silver stock list. Not only that, after thinking about this company and its Ying project for a long time, I have also added it to the Ten Bagger list. I know it may be controversial but hear me out.

Overlooked / Ten Bagger: Silvercorp Metals - Silvercorp is advancing the monster Ying project in Henan province, China. It has other properties in China and is looking for more property acquisitions but it is only Ying that matters. A portion of Ying was placed into production earlier this year at zero net cost because tunnel development ore and exploration ore was so rich that it not only paid for exploration but mine startup. There may have been cases like this before in the history of mining, but they have literally only scratched the surface at Ying. The deposit is base metal rich but who cares with silver values so high that the cutoff grade is 40 ounces per ton? They have already blocked out 100 million ounces of pure silver with another 100 million ounce silver equivalent of zinc and lead and this is on just a portion of 13 of the over 40 veins that have been discovered so far. When zinc and lead are used as by-product credits, the cost per ounce to mine the silver is on the order of negative $5. In this type of instance, I'd rather have the base metal than not! Silvercorp with 50 million shares out is currently a US$750 million market cap, which is apparently quite high and even "overvalued" in some people's minds. But, what should 100 million ounces of high-grade, pure silver at a negative mining cost be worth? With silver at $14, I'd say not much shy of US$1 billion. If we account for country and ownership risk and apply a 25% discount, we'd be right at Silvercorp's current market cap. [Technically, Silvercorp owns 77.5% of Ying with Chinese ownership of the other 22.5%, so a discount of 25% might be a little small but it should work for our high level purposes here.] And this assigns no expansion or exploration potential to the 50 square kilometer Ying property. That is why I consider this an overlooked silver stock. As I stated earlier, resource drilling has been performed on only a portion of the known mineralization and it is a no brainer that the resources will be doubled in short order. Beyond that, the veins appear to show good vertical continuity with pockets and shoots of high grade ore present at depth which is exactly what one would expect in a mesothermal system. And while the district scale prevalence of these systems has not been demonstrated, the localized vein structures point to a system more highly mineralized than the Sunshine Mine in the Silver Valley of Idaho, which has seen historical silver production of over 350 million ounces at an average grade of 20+ ounces per ton. And that famous mine still probably hosts 200 million ounces. So in my mind, the 40+ veins uncovered to date should eventually host at least 500 million ounces of silver in high-grade ore. Further, given the local geology and historical mining activity in other parts of Ying, it is not difficult to imagine that there may be other deposits of similar size. Now let me explain what I think it will take for Silvercorp to be a Ten Bagger. It's actually quite simple. 100 million ounces of pure silver = $750 million market cap so 1 billion ounces of silver = $7.5 billion market cap. Actually, there are a few complications to this such as the fact that Ying is subject to a "30 year business license" which is different from Western-style mineral rights but should Silvercorp be able to negotiate longer terms or alternatively expand production to mine at a rate of 1 billion ounces of silver over the 30 years, this issue would be largely solved. But management may decide to a buyout before they get there. Did I forget to mention that this mine will also be a cash cow and could throw off earnings in the range of $100 million to $200 million or more per year depending on metal prices? And that management has already indicated that it plans to pay out a large portion of earnings as dividends? If there was one silver company which could eventually pay annual dividends almost the size as the current share price, this might be it. Okay, so silver would probably have to be above $50 an ounce on a sustained basis, but who else currently has this deposit size and grade? [I currently have a small position in Silvercorp and may add to holdings in the future].

DECEMBER 4 2006 12:00PM PDT - Gold and the dollar were about even for the day while silver was up a bit more, continuing the leadership position assumed last Friday. Other than the silver ETF, which did add to its holdings last week, the fundamental indicators that I track continue to look dreadful for silver with the last Commitment of Traders (COT) report showing a decline of almost 20,000 contracts in open interest from last week. Since options on the December silver contract had just expired as of the Nov. 28 COT report date (the December contract month is the most popular for options), a drop or slowdown in the open interest is not all that surprising, but a decrease of 20,000 contracts at the same time that silver climbed almost a $1 in price is somewhat disconcerting. In addition, the open interest in futures only has also dropped from the previous week. A number of conclusion can be drawn here running the gamut of bearishness and bullishness, and everything in between.

For example, it would be extremely bullish for someone who believes that a few concentrated short sellers control the silver market by selling into price rallies, which eventually cap the advance. The drop in open interest during a price rise could be seen by such people as possible exhaustion in short selling, pointing to an imminent short squeeze and much higher prices directly ahead. This type of thinking is centered in the Ted Butler camp of silver analysis. While I disagree with Mr. Butler's analysis of the futures exchanges and manipulation theories about the silver market, I think he has a laser-lock on the investment opportunity in silver like few others when he discusses physical silver as the best way to go. His recent commentary, What Happens at $100 Silver, is a great illustration of this. I wholeheartedly endorse the physical ownership of silver and would urge new investors to look there first before even thinking about mining stocks, ETFs or the like. The disastrous quality of "advice" about silver investing that the general public must contend with is constantly being demonstrated by junk like this. Mr. Butler should consider cutting back on the conspiracy angle so that his otherwise sage advice can compete in the mainstream with bull crap that currently holds sway.

A bearish argument, on the other hand, concerning declining open interest during a price rise is the traditional divergence setup under which a trend reversal is expected when volume does not confirm price. This technical model focuses on a single market psychology -- decreasing buying at a higher price typically reaches a tipping point where the trend will reverse just as the buying reaches exhaustion.

So which is it? Do the latest COT figures indicate an exhaustion by (short) sellers or buyers? Well, as they say, it takes two to tango, so it could be a combination of the two. At the same time, it is hard to tango, so maybe there is simply a speculative disinterest accumulating on the COMEX.

In any case, the latest COT report does not give me a great degree of confidence in the near-term price of silver. When combined with the other factors which I track, we are left with a silver market driven purely by a weaker dollar and marginal buying interest in the silver ETF. I believe speculative risk has increased to an unacceptable level and I have closed most of my open futures positions, rolling some contracts into call options just in case we have a price spike ahead. At the same time, I am leaving in place and even looking to add to the put (short) wing of these previous butterfly spreads (using only a portion of realized profits from the long wing).

I am also contemplating taking about 50% of the profits since the summer lows out of select silver stocks as a way of raising a little dry powder while maintaining a substantial exposure to further price gains.

Unfortunately I am running out of time today but I did want to discuss one stock for the overlooked list which would not traditionally appear to belong there until you hear my argument in the coming days. For now, I will just mention the stock and provide a very brief comment. This next addition to the overlooked list is none other than Silvercorp, a company approaching a market cap of $1 billion but which has likely discovered an incredible world-class deposit named Ying. Buying this stock at the present moment may not be the best timing but it could satisfy both trading and long-term investing criteria in the near term. Hope I'll have time to discuss it more before the window of opportunity passes.

DECEMBER 1 2006 11:00AM PDT - The dollar was down today but gold could not hold it together, leaving silver to do its own bidding. Under the circumstances, silver did just fine closing up a few cents for the day. The silver ETF also added 2 million ounces yesterday, not a big number but it does indicate the uptake is still there at $14. This is an encouraging sign. The other factors I track, however, are showing no letup from their hibernation.

Today, I want to add to the overlooked list and inaugurate my first ten bagger silver stock:

Overlooked / Ten Bagger: Oremex Resources - The flagship project is the Tejamen silver-gold project in Durango state, Mexico. On part of this project, two mantos have been drilled like swiss cheese to establish a 50 million ounce inferred resource which has an NPV of US$100 million at $12 silver according to a preliminary independent assessment. The NPV rises to US$150 million at $15 silver. The deposit is open in several directions and the metal values are predominantly silver with a small gold credit, similar to Coeur's Rochester Mine in Nevada. This is just one portion of the property and Oremex has at least one other highly prospective property in Mexico. Not bad for a stock with US$20 million market cap. This company has been slow to move in the past and management turnover was an issue but perhaps the turnaround is just ahead. As with many Mexican mining projects, surface rights could be an issue here but not a show stopper. The major plus going for the company is that Oremex has little coverage by analysts and newsletter pundits. A sustained rise above $15 silver along with meaningful progress toward development of Tejamen should mean an implied value for Oremex around US$200 million, meaning that it has Ten Bagger potential from current levels using reasonable assumptions. [I do not currently own the stock but will likely start buying it, subject to market conditions, sometime next week]

NOVEMBER 30 2006 9:30AM PDT - Big jump in silver and gold this morning with the dollar swooning below 83 on the dollar index. Silver is definitely outperforming here being only about $1 away from the high reached last spring while gold is still $80 or so below the spring peak. So much for a rest in the market! Fortunately, quite a few of the best silver stocks have not made big jumps today and at $14 silver many are great buys. A few like Endeavour, First Majestic and Palmarejo are even down for the day at this moment.

I don't know what it is going to take to get my fundamental indicators turned positive but for now they continue to be in a coma. And as long as they fail to confirm the technical picture, I will remain cautious. For me, that means continuing to keep some dry powder and biasing my silver stock portfolio toward medium and long term plays.

NOVEMBER 29 2006 12:00PM PDT - Not much to report in the way of the silver and gold markets today although the dollar did bounce off 83 rather strongly but that was mostly because GDP for Q3 was higher than expected. The fundamental factors that I track continue to be dead in the water and the complacency is actually becoming a little worrisome. Partly for this reason, I have reduced the aggressiveness of my portfolio using today's relatively tranquil market as an opportunity to sell my poorest performing and riskiest holdings. Many of the stocks I sold are highly speculative or have failed to move recently even after positive news out of the company. I will use the funds that I raised today to buy some of the better performing equities on dips (if any) in the coming days.

In Daily Silver Stock News, Mines Management announced progress on permitting and Energold Drilling released very positive earnings which highlighted the undervalued status of the company. I'd watch these two as they seem to have very limited downside yet could also make substantial moves higher. Both are well off their 52 week highs despite being in much better shape today then when those highs were made. In the case of Mines Management, one wild card is the copper component of the Montanore deposit which could weigh on the share price. But even if we forget about all the copper, this company has room to the upside based solely on the silver reserves.

Apogee finally released some drill results which investors seem to appreciate. Yes, Apogee is an undervalued company but with all that base metal and Bolivia, I'm not sure where it is going. If you own it and believe in its long-term viability, you should probably also look at Apex Silver, Gabriel Resources and Crystallex. Perhaps some or all of these plays will work out and return handsome gains but in my personal opinion there are too many other opportunities out there to worry about yet one more risk on top of all of the other risks inherent in exploration and mining. This type of stock is mostly a gamble on a political outcome, not much different from betting on the outcome of an election. That is not the reason I invest in silver and other resource stocks and I would urge other investors to look over their portfolios and use this resting point in the market to replace any stocks which are undervalued simply because of political or environmental risks with stocks which are undervalued because they are not being looked at from the proper investment perspective. I've mentioned many silver stocks here in the past few weeks that likely fall in the latter category and will continue to do so in the coming days.

I'll close with an observation about the SF Hard Asset show which wrapped up this past Monday. Despite a lot of high expectations and near record registrations, the show was a total dud in my mind. I don't know if it was the rainy weather or what, but the speaking hall was rarely half full and the "suits" (industry delegates) on the convention floor outnumbered the "sweaters" (investors, mostly retired men) by a factor of 3 to 1. The show had more the feel of an industry convention than an investor conference. Now some people might point out this is a great indication that participation by the public is still completely absent from the resource markets and thus the bull is nowhere near its end. That argument has been repeated so often now that it is considered a given, yet I always worry about such dogmatic consensus views. In fact, many bull markets have ended in the past and will end in the future without the classical mania and bubble. What if the next bubble is not in commodities but rather in genetic medicine, alternate fuels, nanotechnology or any of a number of other promising "intellectual asset classes" instead of hard assets? Don't get me wrong, I don't think that the commodity boom is over or that the precious metals are anywhere near finished. I just don't believe that very simple observations about human nature are reliable and accurate.

NOVEMBER 28 2006 4:30PM PDT - Many silver and gold stocks were weak today despite the dollar weakness and volatile move up and down in the metals. On the COMEX, December options expired yesterday but many contracts were still being rolled today and some will probably be rolled tomorrow. Some of the sharp up and down moves are no doubt the result of this. We shall see how things develop after Wednesday. Quiet on the silver news front today.

I talked to a few exhibitors at the SF Hard Asset show on Sunday and yesterday and came away with some observations that I will share in the coming days and weeks. I spoke mostly with silver company CEOs, presidents and IR people but also talked to a few others as well. The one non-silver discussion I had which made me want to buy some stock was with Greg Johnson of NovaGold. I originally spoke with Greg back in 2003 right before NovaGold listed on the AMEX and I immediately bought some shares. Although I have since reduced my position, I have owned some stock the whole time and may add to my position again very soon. You really can't go wrong with NovaGold at these levels. Two world-class gold projects and then some, a bid by Barrick which puts a floor price under the shares and the likely addition of significant more resources to the 40 million ounce resource base. And that is 40 million ounces of gold, not silver, for a company with a market cap around US$1.5 billion. With Barrick hanging around, the story may not resolve to the upside immediately but this is probably as good a gold stock as there is over the medium term (which I define as 6-18 months).

Now to some silver companies. Silver Eagle Mines is an interesting district play in the Mexican silver belt with its Miguel Auza property in northern Zacatecas state (see map). The reason I find it interesting is that the mineral rights are substantial at 41,500 hectares (160 sq. miles) and the historic mining area is on the electrical grid and close to highways, smelters, etc. In fact, the old mine is literally located under the town of Miguel Auza. There is a NI43-101 compliant indicated resource of 3.2 million ounce silver eq. and inferred resource of 9.4 million ounce silver eq. based on a 10,000 meter drill program completed in 2005 on one of the main veins. That is a lot of drilling but it appears to have been done meticulously and the quality of information appears to be high. I have the sense that management is serious about the business of mining and is not planning to rush into production and prior to conducting further drilling, exploration and mine development. This company will probably not see production in the near future but hopefully it will expand its resource base consistently in the near future. This is no Impact, First Majestic, Endeavour, Great Panther, Aurcana, etc. at this point but it could be down the line. I personally added a small position to increase the number of Mexican silver projects to which I have exposure in my silver portfolio.

Palmarejo Silver and Gold is developing a world-class silver and gold project in Chihuahua not far from Gammon Lake's Ocampo project, which is already on the way to becoming a world-class producer. In fact, Bolnisi Gold, the Australian mining outfit, abandoned Ocampo in favor of the Palmarejo project and formed Palmarejo Silver and Gold as a way to gain exposure to the Canadian stock markets (Bolnisi currently owns around 75% of Palmarejo Silver and Gold). Both Gammon Lake and Palmarejo are solid plays in the silver stock arena and I like them especially over some of the other larger cap players because the coproduct is gold and not base metals. Although by no means substantially undervalued, both companies should have leverage to rising silver and gold prices. At the same time, the risk is lower than with many other silver stocks (even many solid junior producers) because both Ocampo and Palmarejo have already been established as world-class deposits. I own small but core positions in both companies and would consider adding to positions on a significant pullback.

Silver Quest Resources will be added to my overlooked silver stock list in the next few days. For now, it should be sufficient to state that it has a market cap of under US$10 million and at least four interesting projects, two of which are currently being drilled. One, the 3Ts project in British Columbia is quite prospective and was previously controlled by 3 majors before being consolidated by Silver Quest. The other, the Corcoran Canyon Project in Nevada, has just returned respectable drill intercepts from the very first drill hole in a modest three hole drill program. But perhaps the most positive thing about this company is the management, all of whom are serious exploration and mining people. Another positive is the tight share structure, with under 20 million shares outstanding and less than 25 million on a fully diluted basis. These guys have not succumbed to the dilution game and they are hopefully intent on staying clear of it. This is a pure exploration play and there are no plans by the company itself to mine or put any of these projects into production. But for US$10 million, you are probably getting more than your money's worth. I don't currently own any shares but would consider adding as a medium term play especially if Silver Quest lags other silver stocks.

Stay tuned for more. In the meantime, buy some physical silver and gold if it does not constitute at least 10% of your net worth.

NOVEMBER 28 2006 10:00AM PDT - The dollar slightly down today but gold and silver took a big swoon just a few minutes ago and have since recovered and looking to go higher for the day. Very positive technical action but the fundamentals still aren't there. The silver ETF did not add to holdings after the 1.5 million ounce addition early last week, the COMEX open interest actually fell by a few contracts, COMEX warehouse stocks are holding steady, silver lease rates are comatose and the basis and futures spread appear healthy. Any one of these indicators can be wrong but all of them together are saying that physical supplies are okay given the level of demand. So for now, I continue to believe that we may see a gold and silver spike very soon to reflect a weakening dollar but that such spike would be shortlived and difficult to trade.

Update on the SF Hard Asset conference to follow.

NOVEMBER 27 2006 10:30AM PDT - The dollar seems to have stabilized for the moment at about the 83.5 level but it doesn't appear that gold and silver are finished with their reactionary moves. December options expiration today might mean that the move in gold and silver has been somewhat restrained and the upside move could accelerate in the coming days. It should be interesting to see what these moves have done for COMEX open interest, ETF holdings and the like. Due to the Thanksgiving holidays, however, these figures have not been released to the public as of this moment but they should be soon.

Silver Wheaton's announcement last Friday that it acquired almost 20% of Revett Minerals continues to be the most significant news and one might look at Mines Management as a potential beneficiary of this development. Mines Management has failed to move on this news and the stock was actually down earlier today. This might be an opportunity depending on how you define that term. It certainly is one in my mind.

On a separate note, U.S. stocks are getting hammered today with the impetus apparently being Wal-Mart's less than stellar retail sales for Thanksgiving. Most silver and gold stocks are up today but should this turn into something ugly for the general markets, panic selling could also temporarily infect the PM equities. If so, it might be a rare buying opportunity but one should remain cautious in this market. For example, one could arbitrage trade the silver and gold ETFs (which should continue to track gold and silver prices) while waiting for PM equities to correct even as PM prices continue to stay strong. More on this later but I need to get over to the SF Hard Asset conference right now.

NOVEMBER 24 2006 9:30AM PDT - The dollar has broken down in a big way today and consequently gold and silver are up, way up. My strategy has consisted of waiting for fundamentals to confirm the move in gold and silver but it doesn't look like the markets are going to wait around. This appears to be a purely technical move driven by dollar weakness. No other fundamentals appear necessary at this time. Hopefully most silver investors have been adding to their various investment and speculative positions along the way. As I mentioned several weeks ago, we could be setting up for a big spike in gold and silver which may be rather shortlived but could reach a spectacular level--possibly over $700 in gold and over $18 in silver.

In silver stock news, there's been nothing exciting over the past couple of days other than the announcement by Silver Wheaton that it has acquired almost 20% of Revett Minerals by way of a private placement. The funding will be used by Revett to advance the Rock Creek deposit. Revett was up around 20% this morning on the news. I discussed Revett and Mines Management a few weeks ago and mentioned the possibility of buyouts and recommended that these two stocks by acquired as a "unit". What I failed to mention is that they should be acquired on a dollar-weighted equivalent basis, meaning that if Revett is at $1.50 and Mines Management at $6, the "unit" would consist of 4 shares of Revett and 1 share of Mines Management. Well, Mines Management did not move up today on the Revett news as the market has yet to figure out that these two companies are twins and what is good for one is good for the other. As a result, there is a nice opportunity for serious silver investors to build a moderate position in these two companies as a "unit" for a long-term hold of over 18 months. A good place to start would be the Mines Management leg of the unit considering this stock's failure to move up on the Revett news.

Another stock I'll highlight in closing is Esperanza Silver. This stock keeps moving up and continues to be the top-performing silver stock over the past 30 days according to www.silverstrategies.com. A very nice feature article discussing Esperanza and Silver Standard is Don Hansen's Silver Mining Shares - Investing vs. Speculating. Here is another place where I'd consider building a "unit" consisting of both Esperanza and Silver Standard as a way to play San Luis. A moderately aggressive portfolio which includes speculation might have the unit consisting of 5 shares of Esperanza to 1 share of Silver Standard. Other portfolios could have a different mix based on each particular investor's risk tolerance. But regardless of the ratio, an investment portfolio with both Esperanza and Silver Standard is likely to have a better risk-reward profile than a portfolio with just one of these stocks. A final point, I would not buy Silver Standard or Esperanza aggressively at these levels but would rather establish an initial position to be added to on pullbacks or rest periods. Definitely don't chase these stocks, that is a sure way to consistently buy at interim tops.

Have a great weekend and be smart: go out and buy some silver you can touch.

NOVEMBER 22 2006 12:20PM PDT - The dollar finished the session under 85 on the index while gold and silver were likely restrained by the steep fall of sibling precious metal platinum, which saw rumors of a possible ETF fading. We have the possible setup here of a significant rally over the next few weeks to be confirmed by the dollar's continuing weakness and the return of fundamental demand. Even if fundamental demand does not return in force, I'd be willing to give gold and silver the benefit of the doubt in the very short term especially if trading volumes increase substantially. Here, I would look at the ETF volumes, COMEX open interest, slight bump in lease rates, London bullion market statistics, etc. for any inkling that interest is mounting. No signs yet. Should prices rise here, it would primarily be a technical phenomenon and would need to be confirmed by fundamental indicators in order to result in a sustained rally.

It is interesting to note that 3 of the 4 silver stocks which are seeing 10% plus gains today--Aurcana, Arian Silver and Energold--are on the initial installment of my "overlooked" list from two days ago (see Archives). At the present, they do not seem so overlooked but let's see what happens in the coming days and weeks. I hope to have new additions to the list in the next few days.

NOVEMBER 22 2006 9:40AM PDT - The dollar has made a rather substantial move below 85 on the USD index and while gold and silver rallied at the same time, they are now actually down for the day at the moment in likely sympathy with oil and commodities. Also, a large increase in commercial short positions cannot be ruled out. Regardless, the dollar's break below 85, should it last, could provide a substantial opportunity for at least some short term gains as a weak dollar refuels the gold and silver rockets for a possibly launch to bull market highs. December is still the active contract for both COMEX gold and silver but the switch to the next contract is under way. This could agitate conditions. Here is a dollar chart:

This could be a false breakdown and we have to give the situation some room to resolve either way. Should the breakdown continue, however, and fundamental indicators also start pointing toward a period of precious metals strenght, I would consider turning my short-term flag green which would essentially indicate that, in my opinion, conditions are ideal for short-term leveraged and speculative trades. I am not seeing fundamental signs yet, stay tuned. Dollar Breakdown to Ignite Gold Market is an interesting article discussing the same thing.

NOVEMBER 21 2006 12:20PM PDT - Silver and gold were up strong today without a lot of assistance from the dollar, which continues to meander above the critical 85 level. Oil, base metals and platinum were helpful, however, with platinum making the largest gain in a massive speculative peak before closing lower for the day on speculation that a platinum ETF is about to be launched. Silver at $13.00 may start to also attract new speculative interest so post-Thanksgiving trading and the roll of December COMEX contracts into February for gold and March for silver in the next few days could result in some surprises. The basis did turn negative today but this appears to be a function of the end-of-day pricing and should correct tomorrow; it is not an indication of a pending supply squeeze.

It is mostly quiet on the news front. Energold and Aurcana are among the leading gainers for the day on the back of recent Internet write-ups previously mentioned here. Revett and Mines Management are also seeing joint buying interest. I pointed out several weeks ago how these two stocks should be bought together as a "unit". I will continue with the overlooked silver stock list as time permits and I am also working on several other ways to look at an investment in silver stocks.

Finally, I would like to briefly discuss an analysis titled Silver Hedge of the Decade? published today by a mysterious writer who calls himself Silverfox. In it, Silverfox points out a possible "hedge" play in which an investor would buy 1 share of Aquiline and 1 share of IMA as a "unit" in anticipation of the appeals court decision over Navidad. While I usually like this type of play, I'm not sure it is appropriate under the current circumstances. Prior to the original court ruling over Navidad, it would have been very profitable to "hedge" the decision by holding a proportional share of Aquiline vs. IMA (a ratio of 4:1 would have made sense based on the probability of the outcome). There was clearly going to be movement in the two stocks based on that decision and it was also discernable what the decision was going to be. If the decision did end up going against Aquiline, its stock would not have dropped by much since very little of a favorable decision was priced into the shares. On the other hand, IMA had a near-certain victory priced into its own shares. The arbitrage opportunity was clear and easy to exploit. But this time around, the appeal is likely to be in favor of Aquiline, which already has victory priced into the shares. Meanwhile, IMA is trading at book value. So the current situation is not very attractive compared to the opportunity that was available priot to the original decision. I also believe that uncertainty and delays arising from the appeals process may weigh on Aquiline's share price and that was one of the reasons I did not include it on my list of largest potential gainers that I introduced on November 3, 2006. So far, I've been wrong as Aquiline has gone from CAD$5 to over CAD$7 in the past two weeks. But for now, I'll stick to my guns.

NOVEMBER 20 2006 7:30PM PDT - I've just put together an overlooked list of silver stocks that serious silver investors should consider. Some of these I've talked about before, others are trading at a steep discount to peers and still others are at 52 week lows (sometimes for good reason, so look before you leap). I will list these stocks in the coming days a few here and a few there along with my observations. I will go through the list mostly in an alphabetical fashion but I may jump around as warranted by emerging opportunities, company news or other events. Here are three companies in the first installment.

Overlooked: Arian Silver - Jason Homell has apparently added this stock to his promotion list so it should see some interest from a wider audience of silver investors. I looked at this company prior to its debut on the AIM in London and a couple of months before its listing in Vancouver. Since then, the stock has lost the initial euphoria accompanying many new issues and the price has drifted down to a level where only a significant rate of dilution would punish it much lower. Management has a hard-nosed, no BS approach that will require quite a bit of capital to fund but unless the company gets the share price up by making some major progress on an existing property or acquires something that excites the market, there could indeed be substantial dilution ahead. In fact, the company has just announced a financing for 14 million shares plus 14 million warrants, which will likely weigh on the price for a while. On the other hand, the company is getting its hands dirty in exploration, advancing tunnels and digging new ramps into old workings and known vein structures at several projects concurrently in order to conduct direct sampling and get close to the ore bodies. Drilling is presumably next, but I like the proactive approach they are taking as a preparatory step. The key here will be a race for time and money as exploration dollars spent without exciting news releases will result in a high rate of share dilution and a moribund stock price. Disclosure: I do not own shares of Arian Silver at the present time.

Overlooked: Aurcana - Subject of a very bullish write-up today in Resource Investor by David J. DesLauriers: Last Chance to Board Mexican Silver Producer Geared for Lift-Off. This is the latest in a series of bullish write-ups by Mr. DesLauriers. Aurcana is one of several emerging silver producers which have strong immediate production goals but the market is unable to determine the long-term quality of resources or the viability of operations at historic (e.g. $7.00) silver prices. The company has not provided independent verification of the factors management appears to view very positively. A bet on Aurcana therefore is a bet on management's prescience. Still, simply the start of production and the very real potential for significant expansion of resources could result in the type of stock performance Mr. DesLauriers envisions. Just beware of what I call the "Northgate syndrome" -- the rational fear of investors that current mining is depleting resources faster than new production can be brought on line. Many of the emerging producers in Mexico, not just Aurcana, could be infected with this syndrome. These "Sierra Madre juniors" are turning the conventional mining wisdom of "drill-feasibility study-build mine" on its head by using the more direct approach of "buy old mine-put it into production ASAP". The results of this experiment remain to be witnessed but I don't think it would be controversial to say that some will likely succeed while others will fail. Disclosure: I do not own shares of Aurcana at the present time.

Overlooked: Energold - Doug Beiers tells the story of this company very well in his A Tale of 2 Profitable Micro-Caps. For some reason, hardrock drilling companies have received little respect from resource investors in the current metals boom and as a result they are trading at low valuations as a group. If all Energold had was its drilling business, it would probably be appropriately priced by the market vis-a-vis its peers. But this company also owns over 6 million shares of Impact Silver (ergo the reason I include it as a "silver stock") and several prospective exploration projects in the Dominican Republic, not to mention having a very strong balance sheet which could be used for share buybacks or accretive acquisitions. The downside is management's conservative style, typical of many drilling outfits, which results in a drowned out voice in the universe of overpromoted and superhyped junior explorers. If management can become more vocal in singing the company's praises and a few newsletter writers become convinced of Energold's story, there is a significant potential for price appreciation from the rush of new investors. Failing that, management may wish to consider a share buyback, distribute the Impact stock to shareholders and/or spin off its exploration properties as a way of unlocking value. In any case, shareholders aren't likely to lose even if management decided to do nothing. Disclosure: I own under 5,000 shares of Energold at the present time.

NOVEMBER 20 2006 12:00PM PDT - More minor gyrations today in what is otherwise expected to be a quiet period of trading. Energies and the dollar were muted to start out "Turkey week" amid more reports of a slowing housing sector. COMEX open interest is up about 5,000 contracts over last week. The silver ETF increased its holdings last week by 1.5 million ounces but failed to follow up with more today. COMEX warehouse stocks fell a bit on Friday and we will keep our eyes on daily movements as December delivery approaches. Finally, lease rates and the basis/spread are showing no signs of tightness with the spread actually approaching a quite significant contango. I believe this may indicate growing speculative positions in far-dated futures without corresponding physical demand in the near term.

On the silver stock front, Esperanza and Silver Standard announced further outstanding drill holes today at San Luis, including more than 5 ounces of gold and 100 ounces of silver over 9 feet. The market shrugged its shoulders, though, figuring the 50% move in the stock in the last few weeks was enough compensation for such tremendous drill intercepts. But if the Aurelian story is any indication, Esperanza may start to take off again after the initial wave of buying and trading have settled down and as drill results continue to define a possible world-class deposit. This story is covered in more depth by the commentary Silver Mining Shares - Investing vs. Speculating. The other story worth mentioning is the 5%/2 million share buyback announced by Minco Mining today. The reason for the buyback is the market's supposed failure to assign sufficient value to Minco Mining's projects and ownership stake in Minco Silver, a story we covered here about 2 weeks ago.

Be smart, go buy some silver you can touch!

NOVEMBER 17 2006 11:30AM PDT - Gold recovered its overnight losses but silver remained in the red today as crude oil prices fell amid reports of a softening economy including a larger-than-expected drop in new housing construction in October. Neither gold nor silver found solace in a sinking dollar, which once again is flirting with the 85 level.

For the first time in two weeks, the silver ETF has added to its holdings to the tune of 1.5 million ounces. Perhaps this is a sign that some fundamental physical demand is returning to silver. Yet I am not seeing this in any of the other indicators so perhaps it was just the ETF dealers adding to inventory after several weeks of modest drawdowns. The way this works is that the ETF dealers will deliver 1,000 ounce bars of silver to the ETF's London vaults in baskets of roughly 500,000 ounces for which they receive 50,000 ETF shares to trade or sell to ETF investors. It typically can take several days or even weeks to exhaust these dealer inventories or baskets through sales to retail investors. The sales are usually made when the price of an ETF share is higher (at a premium) to the spot price of the physical silver it represents, but not always. In any case, it will take consistent additions to the ETF holdings at this point to signal a new wave of investment demand.

In silver stock news today, Capstone announced a shareholder rights plan, Minco closed its $15 million Canadian public offering, Palmarejo updated drill results at a secondary exploration project and Aquiline announced progress in taking over operations at Navidad. Links to these news items are provided at Daily Silver Stock News.

The real blockbuster news involved Barrick, however, which issued a press release just a few minutes ago about NovaGold that can only be described as a sequence of low blows. I have placed this "news item" under the critical category even though neither Barrick nor NovaGold are silver companies--although I do consider Barrick to have a significant place in silver mining as a by-product producer and owner of Pascua-Lama in Chile, and therefore in my ranking system it is generically included as a silver company--and their disputes do not in any way relate to silver. Why I did this should hopefully become obvious as you read further.

I guess in the context of the epic struggle between Barrick and NovaGold, this development shouldn't come as too great a surprise. As an investor in resource stocks, however, the message that Barrick is conveying holds an important lesson. I believe this lesson is that the ultimate value of a resource company cannot be determined without understanding some of the nitty-gritty details which would bore most resource investors to death. Furthermore, what is not being said can often be as imporant, if not more so, than what is being said. Investors cannot count on management to assess and disclose for them every piece of relevant information even if management has the best of intentions. Barrick today is also validating in a very ugly way that the majority of mining analysis and so-called experts in the resource field simply do not dig deep enough or have the expertise to establish all of the necessary criteria to evaluate the empirical value and risk factors pertaining to mining companies. And if the experts are unable to do this, or if they are, they certainly are not willing to inform the public, how exactly is the average resource investor supposed to make the right investment decision? I don't have the answers but I'll try to monitor this situation to see how it develops. You can read more about Barrick's emerging problems here.

NOVEMBER 16 2006 10:30AM PDT - This yo-yo action is getting long in the tooth although I have yet to see signs that the markets are aware of what they are "supposed" to be doing right now. Crude oil is down, the dollar and stocks up, inflation has apparently been subdued and the U.S. economy is slowing, or for the wishful thinkers maybe it is entering a "goldilocks" phase. It's almost like the markets are perched on a balance beam in perfect equilibrium. Of course, the next slight gust of wind to come along will set the whole thing to teetering. But which way will all the pieces fall? I don't think anybody knows the answer with a high degree of certainty yet those who happen to be right will afterwards always insist they knew all along. I'm probably not the only one to find it interesting that none of these prescient gurus ever retire on the supposed killing they made in the market, never to be heard from again. Instead, they seem to become even more desperate for attention.

So, what to do, what to do? I say stay the course: keep some powder dry while creating or maintaining a nice portfolio of select silver and gold stocks. Learn to become less sensitive to daily market machinations and more aware of the general ebbs and flows. Think long term when you plan to invest in natural resources and short term when you plan to speculate. Don't let your speculations become investments by holding them too long as the market moves against you. Don't let your investments become speculations by trading them every time you can't control your fear or greed. Learn to keep your fear and greed in check. Never assume that you will do better than breakeven during any 18 months and be prepared for much worse.

Okay, back to silver. I would like to point out that the contango in silver futures has grown to a rather healthy number compared to earlier this year, indicating that speculation in the physical market is not sufficient to be causing a squeeze in supply. Although this may not seem like a positive situation to many silver investors, in fact it is a blessing in disguise because an orderly market is much more likely to maintain its trend. We are in a bull market for gold and silver and in order to stay that way, there needs to be a place for new market participants to put their money. The end of this market will not necessarily be heralded by manic public participation as so many "gurus" seem to presume but rather when gold and silver return to monetary status or absent that, they reach a high enough price that the balance shifts from hoarding to dishoarding. Whether or not the general public will be participant en masse at that point is irrelevant and beside the point. And what is the "high enough price"? I think you can get a pretty good sense by looking at the "guru" targets but just realize that even those prices are likely to be taken out on a spike (probably not tradable). So when will this all happen? It could be next year, next decade or twenty years from now. Just be prepared, is all.

NOVEMBER 15 2006 10:00AM PDT - We have seen both the dollar and crude oil rise today along with an interim report by GFMS that indicated gold fabrication demand fell during the 3rd quarter of 2006. Gold and silver continue in a "woopsie-doo" pattern and are awaiting direction from some external "macro" impetus. In silver company news so far today (see Daily Silver Stock News), both Scorpio and Bear Creek released encouraging drill results and their shares traded higher in an otherwise lackluster market. We previously featured these two companies among a list of 29 (see Archives) as likely candidates for a stream of news flow which could drive their share prices higher assuming the news is positive.

NOVEMBER 14 2006 10:00AM PDT - I don't think the markets really know what to make of today's economic numbers which show slumping retail sales and dropping inflation at the producer level. As a result, gold, silver and the dollar are meandering back and forth and this could continue the rest of this week. The silver ETF has been absolutely frozen at just under 105 million ounces of silver since October 26 while the 100 million ounce threshold was first breached on August 30. Silver lease rates have collapsed and are showing no signs of life during this rally and neither the futures basis nor futures spread point to any sense of urgency by market participants. Open interest on the COMEX increased by around 5,000 contracts between October 31 and November 7 and has probably grown further since then, but is not at an extreme reading. So all we can do is continue to wait and see. Little news from silver companies so far today (see Daily Silver Stock News); First Majestic did announce a CDN$14.4 million private placement.

NOVEMBER 13 2006 12:40PM PDT - Gold and silver were down today but started to recover into the close. This is not altogether surprising as the dollar has made a move back above 85 and crude oil prices were back under $60 per barrel. This week will see a string of reports on the state of the economy which could jostle the dollar, gold and silver back and forth. In company news, Great Panther is moving up to the Toronto exchange tomorrow, Silver Dragon has completed the acquisition of Sino Silver's assets in China and Metallica's El Morro joint venture project in Chile doubled measured and indicated resources. Links to these news items can be found in the revamped Daily Silver Stock News section.

NOVEMBER 10 2006 11:00PM PDT - Apparently part of the gold and silver move yesterday was due to mumbling out of China that once again they are looking to diversify out of the dollar. With the dollar down today, however, both gold and silver are also down (silver actually closed up due to a last minute rally). This points to another dynamic which may be in the works on top of the market's need to digest yesterday's explosive move. That dynamic likely involves oil and commodities which could move in opposite direction to the dollar during an economic slowdown.

In silver stock news, Minco Silver priced its public offering of 5 million shares today and due to the recent run up in prices, the offering price was significantly lower than the trading price. The result: Minco Silver was trading for $3.50 before trade was halted pending news. By the time trading resumed, ithe price had fallen to $2.90 as shareholders who were participating in the offer at $3.00 sold their shares in the market. The pricing was simply a function of the trailing average stock price; Minco Silver was actually trading under $3.00 prior to last week. This episode demonstrates a few valuable principals regarding entry points. First, unless the position is very small (1,000 shares or under), it is a good idea to accumulate or dollar cost average your purchases. Second, it is important to pay attention to offerings especially with Canadian stocks. Not only can the price be volatile during the offering period but also when the shares become free trading a few months later. I'm actually in the process of charting the various offerings for a select group of silver stocks in order to determine the extent to which these activities effect stock prices. In the meantime, I'll try to highlight any recent offerings when discussing particular silver stocks.

NOVEMBER 9 2006 10:40AM PDT - Okay, now I am getting a better picture, the dollar did appear to dip below the very important 85 level around the same time gold and silver had their vertical leap. In fact, there was no attempt at a bounce at 85 like the last four or fives times in recent days with the dollar action in the last few minutes actually looking quite frantic below 85 as if it were now a ceiling. But even with all of this going on, I was able to pick up this morning a few shares of my favorite silver, gold and other resource companies at around the same price, if not lower than, they have been trading for the last few weeks.

NOVEMBER 9 2006 8:40AM PDT - Rocket launch! Maybe a little too fast and too soon but I haven't seen an intraday chart like this in silver or gold for quite some time. The reasons being given this morning include the expectation that Democrats will be big spenders, leading to greater inflation, and the rising price of crude oil the last few days which has black gold once again trading above $60 per barrel. The dollar, though, is not cooperating and the narrowing trade deficit provides a strong counterpoint. So far the credit is going to lower energy prices during the third quarter, but the truth may be that the trade deficit is shrinking as the U.S. economy starts to slow down and fewer people are buying the frivolous junk overflowing the shelves at Wal-Mart.

NOVEMBER 8 2006 11:00AM PDT - It appears as if gold and silver may have lost a battle with the dollar today by dropping below respective support at $620 and $12.50. But have they lost the war? They are strong on technicals and seasonality but not very strong on fundamentals, so who the heck knows?

One fundamental factor that I believe could hold part of the answer is the Commitment of Traders on the COMEX. After a high of over 200,000 contracts of open interest in combined futures and options at the rally peak earlier this year, the total open interest today stands at around 150,000 contracts. I am currently analyzing the COT structures and will start incorporating them into my analysis going forward because I believe the COMEX may be trying to reassert itself as the driver of the silver market after the silver ETF stole the show for much of this year. Perhaps that is the meaning of the flatlining silver lease rates and normalization of the silver basis after a period of intense activity during most of 2006.

NOVEMBER 8 2006 10:00AM PDT - It was gold and silver's turn to bounce off support today, each engaged in a game of cat and mouse with the dollar. Gold so far seems to be holding $620 while silver is manning the fort at $12.50. Meanwhile, the dollar seems perfectly content floating just above 85.

NOVEMBER 7 2006 12:10PM PDT - The dollar once again bounces off the 85 support and gold and silver patiently wait for developments. Fundamental indicators continue on life support. Apogee announces that it cuts 42m (over 100 feet) of 405g/t (over 10 ounces) of silver but the market yawns since it is still Bolivia.

NOVEMBER 6 2006 3:20PM PDT - Gold and silver made marginal moves today with gold down a little and silver up a little as they wait for the dollar to make up its mind. We continue to be in a holding pattern on the launchpad. Other than their role as foil to the dollar, gold and silver don't currently have much in the way of fundamental rocket fuel, leaving it to the chart patterns, technicals and seasonality to rule the day. I personally don't feel very comfortable in such situations as anything can and does happen. Thus, until we get some clear signals, I continue to remain vigilant.

Last Friday, I prepared a list of silver stocks which I believe have the greatest potential for price appreciation in the coming months should they make newsworthy progress whether it be discovery, drilling, mine development or expansion of operations. These companies have major programs underway and they also have fewer distractions and less baggage as compared to the other silver stocks which did not make the list.

I recognized at the time I prepared the list that there were most likely some deserving companies which were left off while others included on the list may face "disruptions" such as private placement shares coming free to trade, so I plan to review and update this list frequently to keep it as prospective as possible. With that said, my first update to the list is to add Minco Silver Corporation and Minco Mining & Metals Corporation. These companies are related entities operating in China with Minco Mining owning 56% of Minco Silver. Minco Silver is currently half-way through a drilling program at the Fuwan silver project which already has an inferred resource of 100 million plus ounces of silver. But the interesting thing is that Minco Mining's market cap is almost entirely represented by its stake in Minco Silver, giving virtually no credit to Minco Mining's significant exploration upside. This situation first presented itself earlier this year and was pointed out by Sean Rakhimov of www.silverstrategies.com and others. Investors initially jumped on this arbitrage opportunity but recently we are seeing it again.

David Bond of www.silverminers.com has his own take on Minco Silver, which I have also linked under the heading "Silver Company Analysis from Others". In fact, it was reading Mr. Bond's article which made me re-evaluate my thinking on Minco Silver.

Although I personally don't currently own shares of Minco Mining or Minco Silver, I am considering a small position in each just in case the truth turns out to bear even a mild resemblance to the story. Should I take the plunge, I would probably buy the two Minco's as a "unit" representing 2 shares of Minco Mining for every 1 share of Minco Silver. That way, I would have some direct exposure to Minco Silver and I would also be taking advantage of the potential leverage found in Minco Mining.

Perhaps the two Minco's ain't no Silvercorp, but then again Minco Mining already has a U.S. listing on the AMEX. With respect to the "China factor", each investor should carefully consider his or her investment timeframe as part of the decision to invest or not invest. In my own case, I feel relatively comfortable with a medium term investment in China (up to 18 months) as I expect any geopolitical risk over that time horizon to be relatively minor.

NOVEMBER 3 2006 12:55PM PDT - Rising payrolls gave hope to the dollar today that the economy is okay and the Fed will not have to start lowering interest rates soon. Gold and silver swooned on the news but recovered almost immediately, ending the day with gold sporting a small gain and silver down just fractionally. These are very bullish indicators but we probably won't see silver or gold take off until the dollar resumes its downtrend, unless some as yet hidden crisis is about to unfold. The consensus of the experts, pundits and gurus right now seems to be that we are at the beginning of the next wave up in things gold and silver, to culminate sometime next spring. This has indeed been a familiar pattern in the current bull market (fall rally lasting into spring) but I get the nagging feeling that trading patterns aren't supposed to be this easy to recognize. In fact, every fundamental indicator that I follow is pretty much dead at the moment, meaning that the market is probably trading on mostly technical factors, quite possibly relying on nothing more than a self-fulfilling prophecy that the market must go higher. While this type of situation can sometimes lead to the greatest gains, it also deserves caution because it can turn on a dime as market sentiment can go into reverse at any moment.

My investment strategy continues to be maintaining a moderately bullish stance while keeping some powder dry. I am carefully adding to my equity positions, especially those companies which are in active news release mode as they announce results of drilling, mine development or resource/production expansion. Of course, the news might not always be good, but when it is, such a company's stock stands the best chance of making the largest gains in the current market environment. The following is an extensive list of companies which might fit this bill and therefore deserve a look (I hold many of these in my own portfolio):

Bear Creek Mining - drilling at Santa Ana, Peru

Aurcana - production at La Negra, Mexico

Endeavour Silver - production at Guanacevi, Mexico

Esperanza - drilling at San Luis, Peru

Excellon - expansion at Platosa, Mexico

First Majestic - expansion at La Parrilla, Mexico

Fortuna - production at Caylloma, Peru

Fury - drilling at Taylor, Nevada

Genco - expansion at La Guitarra, Mexico

Great Panther - expansion at Guanajuato, Mexico

Impact - expansion at Zacualpan, Mexico

Kimber - advancing Monterde, Mexico to production

MAG - drilling w/ Penoles at Juanicipio, Mexico

Minera Andes - advancing San Jose, Argentina for possible production in 2007

Minefinders - advancing Dolores, Mexico for possible production in 2007

Metalline - feasibiity study for Sierra Mojada, Mexico

Metallica - progress on surface right issues at Cerro San Pedro, Mexico

Orko - drilling at La Preciosa, Mexico

Palmarejo - mine development at Palmarejo, Mexico

Scorpio - drilling at Nuestra Senora, Mexico

Silvercorp - expanding production at Ying, China

Silver Dragon - drilling at Erbahuo, China and Cerro las Minitas, Mexico

Silver Standard - putting Pirquitas, Argentina into production and Esperanza JV partner at San Luis

Silver Quest - drilling at Corcoran Canyon, Nevada

Silver Wheaton - right of first refusal on silver production from Penasquito

Southern Silver - drilling at Sorpresa-Magistral, Mexico

UC Resources - drilling at Copalquin, Mexico

The above list is not a recommendation but simply a selection of companies involved in silver exploration or production which are in an active phase that could generate a stream of positive news in the coming months. Some companies did not make this list for one good reason or another, but if you believe I've made a glaring omission, by all means please e-mail me.

NOVEMBER 2 2006 9:45AM PDT - With the dollar barely holding up amid reports indicating a U.S. economic slowdown AND rising inflation pressures, gold and silver are up strong today. It looks like I didn't consider the scenario of gold and silver closing above resistance with the dollar index holding 85, but if that happens, we might be in a wait and see mode. I still give 50/50 odds of a major sharp rally should cash gold close above $620 and silver above $12.50. None of this should concern long term silver investors since silver and many silver stocks continue to trade at attractive levels well off their highs with significant upside opportunity in the coming years.

I'd like to continue my discussion of Esperanza Silver today by mentioning that its exciting San Luis project in Peru is likely to be diluted by Silver Standard, the joint venture partner, to a 20% interest if Silver Standard funds the project through production. In such a case, Esperanza would not have to worry about financing or share dilution but it also means that the "blue sky" upside of this project to Esperanza is about 1/5th what it would be as a wholly-owned project. On the other hand, Silver Standard may be content with its current 55% interest in the property in which case Esperanza would be responsible for 45% of development costs to retain its 45% interest. In any case, with drilling just commencing, any further bonanza-grade drill results should add to Esperanza's share price. This may be no Aurelian, a company which came out of nowhere to reporting drill results on 100% owned property which in all probability contains a multi-million ounce gold deposit, but the San Luis property probably still holds some positive surprises for Esperanza shareholders in the coming months.

I've been asked which other silver stocks appear to have prospects which could hold similar positive surprises for shareholders in the near term. And as I scanned the universe of silver stocks, most of them listed here, I couldn't help but think that many, if not most, of these stocks have significant discovery and expansion potential. To go down the list alphabetically, a sample of names would include Aurcana, Canasil, Excellon, Impact, MAG, Minera Andes, Orko, Silvercorp, Tumi and many others. These stocks represent the gamut of risk and upside potential but you really can't go wrong owning a basket of them unless this bull market is on its last legs, something that is highly unlikely.

One final item for now, the silver basis and futures spread remain in a relatively normal range unlike what we were seeing at the same silver price earlier this year, indicating that near-term physical demand continues to be met with adequate supply for the moment. How much longer that lasts is anybody's guess but any major change in lease rates, the basis or futures spread would be a good indication that supplies are once again tightening to critical levels.

NOVEMBER 1 2006 11:00AM PDT - Precious metals up strong, dollar up, oil down, copper down, stocks down. The PM rally either fails somewhere around this level because the dollar index has in fact bottomed at 85, or the dollar index dives below 85 and silver/gold are at "even odds" to be off on a short rocket ride as I mentioned in my October 31 commentary. The dollar has now touched 85 twice and each time bounced off it like it was a scalding pot handle, but not a very big bounce.

Esperanza, mentioned here yesterday for its discovery of bonanza grades in Peru at its San Luis joint venture with Silver Standard, is getting a lot of attention this morning including a rare e-mail alert from David Morgan of Silver-Investor. Regardless, significant volume is failing to move the stock by much this morning. The San Luis project, should it prove feasible (by no means 100% certain even with the amazing drill results), is likely many years away from production, so I think there will be good opportunities to buy in the near future. On the other hand, this is still just a US$100 million market cap for a company which may have discovered a world-class deposit. To see what can happen in these types of situations, one need only look at a 1 year chart like that of Aurelian (ARU.V):

Notice the original excitement took the stock "only" from 50 cents Canadian to $3.00 Canadian. This happened literally in one day. There was no way to trade that move. From there, however, plenty of opportunity remained for any late arrivals to enjoy the ride which still continues to this day making this stock one of the few "10 baggers" of 2006. Aurelian's fully diluted market cap, by that way, is currently over US$1 billion, not bad for a company which was valued under US$15 million earlier this year (that actually makes it close to a "100 bagger"!). I am in no way suggesting that Esperanza will enjoy this level of success or that it will follow a similar path. Nor am I making a recommendation to buy shares of Aurelian or Esperanza. I am only saying that you probably haven't missed the boat on Esperanza; establishing a position in phases whether you call it averaging in or whatever always makes sense and that is also the case here should you decide to invest.

I guess there are a couple more things that I should mention. First, I personally own under 5,000 shares of Esperanza (darn it!) but will likely be adding to that position. Second, I am in the process of creating a list of "10 bagger" silver stocks to represent the most speculative and prospective silver stocks, and given the above discussion it should be easy to conclude whether or not Esperanza is likely to be on that list. Third (okay, that's more than a couple), a good place to start your research into Esperanza is an article posted in September to Resource Investor, to which I have also provided a link under the category "Silver Company Analysis from Others".

OCTOBER 31 2006 2:00PM PDT - Both gold and silver sit just under major resistance, which if broken, can in all likelihood result in an acceleration upwards, especially if the U.S. dollar index fails to hold the critical 85 level. I don't like exact figures for this type of thing although masters like Jim Sinclair (www.jsmineset.com) and Rick Ackerman (www.rickackerman.com) have had great success with them. Sinclair says the magic number for gold is a close over $612 but I think a close over $620 would be an even stronger indication of an imminent launch. For silver, it would for certainly ride the coat-tails of gold but a close over $13.00 would indicate that its own turbo boosters have been ignited. I have been slowly accumulating silver stock positions in the past few weeks and have noticed a number of them breaking out of their chart patterns. Some quite violently such as Esperanza Silver, which closed up $0.70 today (33.3%) at $2.80 for a new 52 week high after reporting truly bonanza grades (best hole: 1.42 oz/ton gold and 34.4 oz/ton silver over 20 feet) at its San Luis joint venture project with Silver Standard in Peru. See news release here.

Other big winners on the day included Revett Minerals (discussed in my most recent post) and Metalline Mining. Beyond today's price action, breakouts are visible on the charts of most silver stocks. I still believe now is a great time to start or continue to buy quality development or production oriented silver companies in moderation. Many of them are still well off their old highs, including Impact, Endeavour, Excellon, Minera Andes, MAG, Capstone, etc.  (all of which I own). I hope they don't take off too fast if this indeed is the next runup before I can deploy a little bit more trading capital.

On the fundamental side of silver, all of the indicators are still DOA, the lease rate, COMEX and ETF holdings and basis and futures spreads. COMEX open interest is relatively low but still shows speculative excess. No question it can go much, much higher as most of the momentum money is still waiting on the sidelines.

If I had to guess what is going to happen here, I'd place even odds on a "mini-spike" that very quickly takes gold over $700 and silver to perhaps $18 before those gains are largely given back, all prior to year-end. The reason this could happen is that technical factors are strenthening amid what might be rapidly improving, but shortlived, fundamentals (demand for physical metal). I have decided to play this theory on a small scale by placing butterfly spreads (long call and put combinations) at various strike prices along with covered futures with net long exposure. As usual, I'm finding it much easier to do this in gold than silver. In any case, this is just a pure speculative play to keep me focused on the markets during a period which is likely to be critical for gold and silver.

On a related note, I continue to whole-heartedly agree with Paul van Eeden about the risk to base metal prices from what appears to be an imminent slowdown in the U.S., and perhaps world, economy. His post can be found here. I believe the dollar may drop first and gold and silver will rally before the base metal malaise drags them both back down to earth. This sort of dovetails with my above theory but the timing is different as I would expect the drop in base metals to commence in earnest at least a few months, if not a year, from now.

In closing, I would like to explain the lack of updated articles and commentaries on this site. It isn't for lack of trying, there just doesn't seem to be that much quality, original and well-reasoned discussion out there recently. Most of the basic, no-brainer points have already been said, usually better, and I refuse to dilute the message with volume. To see what I mean by original, please read The Myth of the Gold Supply Deficit by Robert Blumen. Sure, I can probably make a case against most of his points, but what a fresh, well-reasoned viewpoint! Thank you so much Mr. Blumen for breathing a little bit of new life into the rotting corpse of PM commentary! Please keep it up!

OCTOBER 26 2006 10:00AM PDT - We might be in the midst of either a technical rally or a new building phase in silver and gold. The technical rally -- we could also call it a dead cat bounce but that would presume we know silver prices are headed down next and we don't claim to be so smart -- would be confirmed if the silver advance was abruptly halted around the $12.50-$13.00 range and gold stopped dead in its tracks below $620 or so. We could then expect to either see very choppy consolidation action or a resumption of weakness eventually plumbing this year's lows. On the other hand, if these price hurdles are breached convincingly, odds are we could be heading for new highs and very fast. In any case, the potential for explosive action is there as a lot of speculative money is still sitting on the sidelines but a lot also remains precariously committed to the trade..

In my own silver portfolio, I am managing the uncertainty and risks by staying with quality mining and exploration stocks and taking it easy on leveraged or highly speculative positions. My gut tells me that we are still not out of the woods and a tremendous buying opportunity lies ahead somewhere. I am continuing to stay with companies focused on silver and gold, in that order. I am avoiding base metals except in a few compelling cases. True, so far I have been dead wrong on the base metal complex as lead, zinc and nickel are attempting or making new highs. Yet base metal companies have not performed nearly as well and that makes be thing that investors fears a "Sword of Damocles", as I've heard it described by at least one metal analyst, hangs over base metal prices.

Overall, my flag system still remains yellow indicating caution over the short and medium term as I believe the next 18 months is probably going to be a rough ride for PM investors. Profitable maybe, but not the easy profits to which many silver and gold bulls have grown accustomed.

Instead of my usual pontification about silver lease rates, ETF meanderings and the like, today I'd like to highlight a potential opportunity that bears watching in a couple of related silver exploration companies. These are longer term plays with the possibility of rekindled investor interest regardless of what metal prices do. Unless, of course, the metals fall out of bed in which case a lot of people will be returning to their day jobs. I don't have positions currently in either company but recent developments are tempting me to at least nibble. I'll start by pointing out that there are very few easy-to-exploit ore deposits left in the U.S. or Canada.  These are arguable the two most politically stable if not always the most environmentally friendly countries in the world and one day in the future there could actually be strategic importance in having producing silver mines in the U.S. or countries friendly to the American way of life. So I always have liked mines that are located in areas controlled by the "good guys" (for a moment let's ignore the argument that the current U.S. administration is causing a lot of people to doubt that America belongs in that category). In any case, I've had my eyes on a number of U.S. and Canada based projects for several years for this very reason.

Those who think I am going to discuss the greatest silver camp in North America, the Silver Valley of north Idaho, you are wrong although I will get to that fascinating topic at some point in the future.

No, I am talking about a little known area of mineral riches in Montana just a few miles to the east of the Silver Valley. There in the Cabinet Mountains and the surrounding wilderness, Revett Minerals (RVM on Toronto exchange) and Mines Management (MGN on AMEX) are in a dead heat to develop virtually identical deposits of copper and silver known as Rock Creek and Montanore, respectively. Each deposit is estimated to contain over 200 million ounces of silver and 2 billion tons of copper in similar low grade ore bodies but which are amenable to mechanized, highly efficient room and pillar mining.

What did you ask, isn't copper a base metal? Well, at current metal values, silver is 40% of the ore value and that's not too shabby. And I did say that I was thinking about nibbling not making these the anchors of my portfolio.

So let's get back to Rock Creek and Montanore. Each is in the late stages of environmental review and permitting. Each has recently breathed a sigh of relief as unreasonable legal challenges by environmentalists are likely winding down. Each will be conducting final evaluation work during 2007 to support final feasibility studies and mine plans. Each is capable, if everything goes right, of being silver producers in less than 5 years with Mines Management perhaps having the upper hand. Each could produce over 5 million ounces of silver and 50 million pounds of copper per annum over a 20+ year mine life. And yes, each is pretty much a one-trick pony. Revett does currently operate the Troy Mine a few miles away but it has just a few years of mine life remaining. Mines Management has no other projects in the pipeline. Each trades at a fraction of its peers likely due to a "one-trick pony" discount.

Now, let me point out that there are a number of positives and negatives for these two companies and much more detail which complicates matters (for example, Revett owns around 75% of Rock Creek). This is not a buy recommendation and each person should understand the risks involved with investments in mining companies in general, especially those in a pre-feasibility stage. These projects and companies also carry specific risks that investors should heed. Finally, share purchases in these companies should be considered highly speculative and suitable only for investors with adequate discretionary funds and a long investment horizon.

Having said that, there are few silver investment opportunities involving almost 500 million ounces of in-ground silver with a combined market cap around $150 million. By comparisons, the best known silver company, Silver Standard (SSRI on Nasdaq) has over 1 billion ounces of reserves and resources and about a $1.5 billion market cap. True, much of Silver Standard's silver is measured and indicated which is a more reliable figure than the inferred resources of Rock Creek and Montanore. But we should also point out that Silver Standard only has three projects which are very large but only one, Pitarrilla, is of the same scale as either Rock Creek or Montanore. In fact, Rock Creek and Montanore are among the world's 10 largest well understood silver deposits which have not been developed. Furthermore, Revett Minerals and Mines Management are focused -- by definition, since they are one-trick ponies after all -- on mine development and have discernable, if not still lengthy, paths toward being silver producers.  Finally it bears repeating that they are not in the Arctic circle, next to a Superfund site or in Bolivia, either. They are in a place where U.S. or Canadian investors could take the kids on their next vacation. No passports required.

I'll share further thoughts on these companies as I look into them more carefully but in the meantime, if any of my readers have important points that should be considered, please drop me a line at tom@silveraxis.com.

OCTOBER 9 2006 11:30AM PDT - I apologize for not updating the website for over 2 months. A number of projects rained down on my head all at once and instead of devoting less time to silver analysis then it deserved, I made a decision to take a break from it. In the meantime, the silver market has had nothing and everything happen to it. First, virtually nothing has changed with the price of silver, spending most of the time in the $11-13 range with only a few exciting days of price action. COMEX warehouse stocks, after provocatively dipping below 100 million ounces, climbed back above that number but not by much. Silver lease rates have continued their steady decline to pre-ETF levels and for all intents and purposes they have essentially flatlined. ETF holdings have slowly marched upwards over 100 million ounces with only slight periodic declines. Perhaps most interestingly, the silver basis has returned to normal levels, even to a sizable contango, which it has been building up over the past two months while lease rates have been declining. There are important points to be made with respect to each of these events, or rather non-events, and I will strive to cover them in the days and weeks ahead. For now, it is enough to say that all of this data is pointing away from an imminent silver shortage or showdown and toward historical norms in the market behavior of silver. So while nothing has really changed, everything could be different going forward.

In fact, I believe we are at a major crossroads, one that I have hinted at in previous commentaries and published pieces. To summarize, the commodities bull is either going to gain steam from this point forward or it is going to suffer a major drubbing under the weight of the massive and unprecedented (for the commodities sector at least) level of speculation that has taken place over the past couple of years. Please don't get me wrong. Fundamentally speaking, the commodities cycle does not appear to be at its end, unless of course the housing sector pops in a spectacular fashion taking down the worldwide economy with it. What I am saying is that we may be due for at least a deceleration if not temporary reversal of several key factors supportive of higher commodity prices. This makes the current level of speculation in the commodity markets akin to a house of cards. There are plenty of reasons why commodities might resume their upward march instead of collapsing or even just taking a prolonged breather, but my analysis of the risk-reward ratio indicates that extreme caution is warranted right now.

There is another reason why everything may have changed in the silver market during my absence. Barclays recently filed a registration statement with the SEC to register an additional 15,222,727 iShares for trading. This would add to the 13 million shares already registered, providing the ETF with the total capacity to suck up over 280 million ounces of silver from the marketplace. Since I was a primary voice in the trepidation that surrounded Barclays' original registration for 130 million ounces, you'd perhaps expect the same "sky is falling" commentary from me again. Well, you'd be wrong. While the silver ETF did originally make some fundamental waves in the silver market, it has not precipitated a crisis (one, frankly, which I had expected) while gobbling up over 100 million ounces of silver. True, we did have the revelation that Mr. Buffett has sold his silver and that might have provided a significant portion of the silver acquired by the ETF. Yet, that is pure speculation and does not explain the phenomenon of declining silver lease rates, which peaked around the launch of the ETF and have been steadily declining ever since.

A plausible explanation for that decline and the ETF's slight impact might be that more silver is available than many of us might suspect. I suppose it should not be an unforgivable mistake to underestimate the silver stockpiles and overestimate the shortage given the constant drumming from virtually all silver experts, most notably Ted Butler but even the CPM Group and GFMS, each of which have issued data suggesting available silver stockpiles to be no more than several hundred million ounces at best. In stark contrast, Barclays seems to be confident that it alone can lock away almost 300 million ounces of silver in its vaults. And for that to be true, there must be a multiple of that much silver available to investors, unless we are to believe that this one ETF will be the primary investment conduit for silver going forward.

I have a lot more to say about this topic in the near future but for now I will close by stating the silver market is showing itself to be very different from what we have been told by the experts. And what this means is "watch out". The experts are probably wrong. The fabled silver shortage may still be far off. Silver investors may yet suffer a few rounds of pain before the arrival of salvation, which I define as silver surmounting $50 per ounce.

I need to spend some time thinking about all of these developments, especially as they relate to my general outlook as illustrated by my alert flag system. I wouldn't rule out a change in colors.

On a final note, I wanted to mention where I currently stand with respect to mining stocks. I believe we are in the midst of a correction which may have further to go. Only quality junior producers or near producers of gold and silver along with a few aggressive majors should be bought at this point. I have pared my portfolio of virtually all companies with heavy exposure to base metals and have slowly been deploying capital at opportune points into the aforementioned stocks, especially those trading at a discount. There is absolutely no reason to be afraid of being heavily in cash at the moment nor making moderate purchases of quality mining stocks as long as your investment horizon is long term. Everything else right now is a crapshoot.

AUGUST 1 2006 10:40AM PDT - I did not post in the past week due to dull market comditions and prior commitments. The last couple of days, however, have been witness to some interesting developments in the silver market. First, the COMEX warehouse stocks dropped under 100 million ounces for the first time in a long while at the same time that the silver ETF came out of its 2 week slumber and added 1 million ounces to increase its holdings to almost 92.5 million ounces. In the meantime, silver lease rates have been decimated, returning to pre-ETF levels with 1, 2 and 3 month rates approaching zero. What this means in my opinion is that somehow or someway a significant amount of silver has made its way to the leasing market where demand for leasing is presently very low. Based on these developments, I don't think there is an impending silver shortage and those speculative longs who are holding positions with the expectation that such a shortage will squeeze prices higher in the next few weeks or months may soon start to figure this out. So although from a technical perspective the silver chart looks poised for a major rally, the fundamentals at the same time appear to be weakening. Add in the possible global slowdown and its impact on base metals and silver prices continue to be vulnerable in the short to mid term. I was tempted to turn my short term flag green yesterday purely on the basis of technical and seasonal factors, but under the circumstances I will maintain caution and continue to deploy new capital only opportunistically and sparingly.

Those investors who are underexposed to silver and gold should consider to add to their positions in a measured manner at these levels while perhaps holding back a significant quantity of dry powder. Once again I advise underweighting base metals and focusing instead on those silver companies with significant gold credits. Paul van Eeden provides several good reasons for doing so in his latest piece.

JULY 21 2006 11:30AM PDT - Despite continuing Middle East tensions and a puttering rally in the dollar, gold and silver exhibited sickly behavior on all but one day this week. Fed chairman Bernanke did spook gold along the way by suggesting rising prices might be self-moderating on inflation and that we are already starting to witness this. I'm not sure I follow his logic although I agree that a global economic slowdown would reduce fundamental demand for some commodities. But what effect that will have on inflation is not clear to me.

Silver inventories have remained constant during the last two weeks with the ETF holding nearly 91.5 million ounces and the COMEX around 102 million ounces. These numbers hardly shifted as silver first got lit on fire and then fell back spectacularly during the period. It sure looks to me like investors are satiated at this point and have simply run out of buying steam. Also, the trading pattern of the silver ETF is becoming clear with the ETF dealers issuing themselves new ETF shares (by depositing silver bullion with the ETF) ahead of expected price moves and volume spikes. Then they try to sell those shares to the public during the expected rally. However, it doesn't look like this has worked out for the dealers and during the last two silver rallies they seemed to have lost quite a bit of money as they got left holding the bag. It makes me wonder how long the dealers will continue pursuing this approach. But while they do, we should see stable to upward silver inventories at the  ETF.

Now let's talk about silver lease rates. They have absolutely collapsed in the past couple of days after the sharp upward reversal of a similar collapse over a week ago. These lease rates are now the most bunched together and on average the lowest for all of 2006. Some people have commented to me that the spike in lease rates last week was a sign of silver manipulation as the shorters borrowed silver and sold it into the incipient rally, thereby capping it. However, this makes no sense to me. Silver is still above $10 so it doesn't seem to me like the work of the conspirators is done, if in fact there are conspirators. So why are lease rates so low at this point? Shouldn't the shorters still be trying to pound silver under $10? Instead, here is what I think really happened, although I'm just speculating like everybody else. Last week's rise in gold and silver were related to the Middle East crisis which prompted panic buying. This carried over to leasing as many buyers attempted to secure physical metal on a short term basis. Meanwhile, crises in the Middle East have stayed acute for only a few days or weeks in the recent past so this was not an unreasonable approach. However, the reversal of this panic sentiment took hold of the market almost immediately (much sooner than anticipated), causing a deluge of selling and unwinding of trades. I don't believe this is yet over and we may well see some aftershocks in the silver market.

When we put it all together, what we get is a silver market aimlessly afloat at sea and highly vulnerable to the next storm. Investment demand is keeping the boat afloat and will eventually previal in seeing silver triumphantly sail into port, but in the meantime there are nasty weather conditions to be endured. These include the technical damage which must still be repaired via passage of time and a potentially weakening global economy, Crises without clear, long-lasting implications are merely mirages of land and will have only a temporary impact and a diminishing one at that. I continue to see caution for silver ahead but see nothing wrong with moderate and opportunistic buying of both bullion and select silver stocks, especially those that also have a lot of gold. In fact, this is a great time to dollar cost average for those investors not yet comfortably invested in silver and gold.

On a separate note, Arian Silver is supposed to start trading today in Vancouver. What I said about the company previously appears to still be true and with the current pattern of silver prices this company could perhaps be in a position to acquire some attractive silver assets in Mexico without paying a king's ransom. I am personally focusing on producers or near-producers for deploying additional investment capital but will keep my eye on Arian in the days ahead.

Finally, IMA Exploration has been beaten to a pulp and it could become an interesting buying opportunity at near these prices, at least on a cash breakup value if nothing else. What would help is if management came out and assured shareholders that it will not waste the $15 million of cash currently in the till on a long-shot appeal to reverse the court decision to award Navidad to Aquiline. A million or two, fine, but after that management must let it go. Better yet, try to work out a deal beneficial to both parties. One almost feels like telling these two companies the same thing one would say to children fighting over a toy: "Share!" If I see a chance of any sharing develop, there could be an incredible buying opportunity in both these stocks. Otherwise, both Acquiline and IMA will have to come down in price some more before either one becomes an investment worth considering.

JULY 17 2006 10:00AM PDT - The dollar is up strong today and has knocked a bit of wind out of silver and gold's latest rally. We should see extreme volatility in the days ahead. But at some point, the Mideast crisis (Iraq, Iran, Palestinians, Hezbollah, etc., etc.) will become a normal state of affairs and may not provide a solid footing for panic buying of gold. Then other fundamentals will take over which are not terribly supportive of a strong advance by the precious metals at the moment. The primary factors which may pressure silver and gold prices are a potential global economic slowdown and the technical damage which only time can repair.

Here is the real news of the day. Over the weekend, the Navidad base metal and silver project in Argentina has been awarded by the Canadian courts to Aquiline with IMA Exploration on the losing end. This was good enough to more than double Aquiline's share price on the open while IMA got flushed down the toilet for an 80% loss. Yikes!!! I wish that I were further along with my published silver stock analysis because I had a strong inkling that things may come down exactly in this manner. IMA shareholders should have owned at least one Aquiline share for each IMA share they owned as an insurance policy. On the other hand, Aquiline shareholders should have held one IMA share for each four Aquiline shares they held. In any case, this matter is nowhere near resolution as IMA will now go through a lengthy period of appeal which will keep Navidad in limbo for years. I doubt Aquiline or IMA will be so stupid as to spend a bunch more money on this project until ownership is final. In retrospect, IMA management was extremely irresponsible for not loading the company up with other projects so that in the likely event of the loss of Navidad they would have other projects to immediately fall back upon. This was a horrible management blunder and the main reason not to own IMA in a sensible silver portfolio. At present, I would own neither Aquiline nor IMA until the picture becomes a little bit more clear. However, if IMA is in fact able to walk and chew gum at the same time (fight to appeal the Navidad decision while developing other projects), it could become a tempting turn around play at the current price (60 cents Canadian) or lower. And let's not forget that there is still another path to resolution: IMA and Aquiline splitting ownership (otherwise, Acquiline has to come up with more than $15 million Canadian to repay IMA for development costs while a shroud of uncertainty continues to hang over the project). In fact, IMA has $15 million Canadian in the bank so at 60 cents Canadian it is currently trading at cash breakup value. Therefore, if the share price were to seek much lower levels, IMA would actually become a value play and something I would consider buying.

JULY 13 2006 10:15AM PDT - Mideast tensions are rocketing gold and oil higher and silver is following. Lease rates have gone through a dipsy-do in a perfectly timed confirmation of what I have said in my most recent commentary. The rates first fell out of bed late last week as mounting physical pressures were temporarily eased but since then the rising geopolitical tensions have once again supported physical buying. The movement in lease rates over the past week seems to have largely reflected the transfer of metal ownership in London. In the meantime, the silver ETF is at almost 91.5 million ounces and comfortably over the $1 billion net asset value mark. On the other hand, mining shares and especially the juniors are seriously lagging this latest move in gold and silver, which can partially be explained by the weakness of the general stock market. Yet there does appear to be more to it. My own guess is that the latest Mideast crisis is not going to be as serious as it now seems and given the softening economic picture, we are in for a period of rocky ground for commodities in general which will also infect the precious metals.

I am on the verge of returning my short term flag to red and have increasingly taken steps to protect my investment portfolio from a severe stock market decline which would likely take most silver and other resource stocks on an unpleasant ride even if just temporarily. I continue to maintain that the key metal with which to supplement your silver investment portfolio is gold and not base metals and therefore should I decide to lighten up on stocks the first to go will probably be those with the least exposure to gold.

On a separate note, Arian Silver has not yet started trading in Canada which is probably a good thing considering that it may not do very well in the current environment. With the exception of a few advanced speculative plays, I am largely sticking with the well-known names with strong following that are producing or near production.

Finally, I am revamping the basis analysis including creating current and long term charts and have therefore temporarily discontinued updating the basis and futures spread data series. I hope to have something up in the next few days.

JULY 7 2006 11:00AM PDT - The dollar was flat to up the last few days while gold and silver continued to rally so perhaps it should come as no surprise that on a down day for the dollar both gold and silver should also decline. The real news is the continued growth in holdings for the silver ETF, now up to almost 88 million ounces which at some point yesterday put the trust's net asset value above the $1 billion mark. If you will remember, Dave Morgan a couple of months back pointed out that JPMorgan Chase is only responsible for storing $1 billion of silver at its London warehouse, leaving open the question of what happens if/when the ETF's silver exceeds that valuation. Let's see if we find out during the current run in silver prices although I suspect this angle will turn out to be a non-event simply because additional custodians are likely to be appointed.

From our lease rate chart above, we can see that rates have turned north again although the general trend seems to be more along the lines of a tightening of rates between lease terms at a historically high band. In fact, silver lease rates are starting to resemble those of platinum, a metal with a tight market in which lease rates reflect a low level of liquidity. Since interest in silver is definitely not on a decline, we are tempted to conclude that the silver market is becoming ever tighter. Actually, the offtake by the ETF and its frontrunners makes this a foregone and uncontroversial conclusion. If investor interest can be maintained, the long term result of this tightening is inevitably higher prices, but that is a big "IF". Besides that, there are several potential events on the horizon which might temporarily disrupt the bull market in precious metals. Therefore, my mental flags out to 18 months remain cautious (yellow) and I continue to maintain a good store of dry powder for opportunistic buying. Once again, I will also reiterate that any buying that I am currently doing is focused on the silver-gold side instead of base metals, which I believe have gotten way, way ahead of themselves due in part to speculative fervor.

One last note, for those following the fate of Arian Silver, the first and so far only silver company which I have provided public commentary about, I have been informed that it will begin trading on Toronto sometime next week under the symbel "AGQ".

JULY 3 2006 12:05PM PDT - Happy 4th of July! Despite an early market close today, silver and gold carried over their euphoria from last week even while the dollar's fall has stabilized. From a technical standpoint, the precious metals are showing good strength but I'm wondering why some of the market indicators that I follow don't seem to be confirming a strong push. For example, lease rates and COMEX warehouse stocks have absolutely flatlined in the last 2 weeks and while the ETF has been adding silver robustly, it too seems to have topped out in the last 3 days (at 83 million ounces). The silver basis is in a dead period so we look to the gold basis, which seems to be behaving rather normally. One way to interpret this situation is that there is not a lot of fundamental backing to this move and so it may not be of a lasting nature. I continue to maintain that for a strong, long-term advance to assert itself from these levels, there need to be more supportive macroeconomic, geopolitical and/or currency-based events that simply have not materialized (although they are certainly on the horizon). The one thing that does make me wonder though is the market's ability to discount the future and I certainly wouldn't rule out a resumption of silver and gold's magnificant advance to new highs from right here. But I don't think this is a low risk, high reward type of scenario so I continue to waive short-term and medium-term yellow flags while being both well invested in the precious metals and holding a significant amount of cash. Once again I find myself in agreement with Paul van Eeden in his latest essay.

JUNE 29 2006 1:50PM PDT - The Fed hiked rates 25 bp as expected but the dollar went crazy and dropped out of bed anyway. Gold and silver sniffed early in the day what was about to happen and rallied accordingly. But the fireworks really started after the NY close in the Asian markets at the moment the Fed announcement came out. While this could just be a knee jerk reaction, I'm not going to discount the robust nature of this rally which has fundamental support from ETF buying. The silver ETF is now up to almost 83 million ounces which is 10 million ounces more than its previous top. We seem to be heading for another attempt at the $1 billion NAV. Will that be followed by the maxing out of the ETF at 130 million ounces? Don't know, but my guess is that we are still in murky waters and the markets may need a bit of time to better judge whether we are headed for a period of inflation and overheating or a bust. We are still at good price levels in bullion and some silver stocks to be buying on a moderate basis.

JUNE 27 2006 1:50PM PDT - What we have here is classic give and take or what some people call chopping action. If I had to guess, we are seeing some evaporation of speculative enthusiasm although certainly the global politicial backdrop is supportive of metal prices especially the latest defiant statements from the "mullahcrats" in Iran. We remain in cautious territory with perhaps some short term market direction becoming clear by Thursday when the Fed announces its latest interest rate move. Sleep well by making sure your portfolio isn't overly exposed to a short term vicious shakeout while still being sufficiently locked and loaded to enjoy a possible spike to new highs in gold and silver.

JUNE 26 2006 11:30AM PDT - We had a sizeable addition to the ETF's silver holdings on Friday and now it owns almost 78.5 million ounces of silver, comfortably above the prior high of 73 million ounces. At the same time, COMEX warehouse stocks have started to fall again and are flirting with the 100 million ounce level. To those who think COMEX silver is being withdrawn and delivered to the ETF, I don't see evidence of that yet because for that to be practical, the ETF would have to obtain a storage facility in New York. Currently I believe the ETF silver is all held at JPMorgan Chase's vaults in London so taking delivery on the COMEX and shipping the silver to London doesn't make a lot of sense unless the LBMA is all out of silver, which would probably be news to the London silver traders. So what is more likely to be going on is some value buying along with another speculative run by the funds for the highs in silver. Yet the basis and lease rates seem to be saying that there isn't tremendous buying or selling pressure right here. For this reason combined with an uncertain economic outlook, I think the speculative effort is too early and will run into some problems before eventually being successful in taking out the $15 double top that silver carved out over the last few months. So I remain in cautious mode over the short to medium term but definitely looking for bargains and great values. I am also willing to concede that the bottom in gold and silver might be in and all we might get now is some sideways consolidation. Either way, this is not a bad spot for some moderate buying.

JUNE 22 2006 11:45AM PDT - The dollar was very strong today but gold and silver hardly seemed to care. Lease rates are up slightly, the basis is again turning a bit negative and the ETF and COMEX warehouse holdings have stabilized. We might be entering summer doldrums for a couple of weeks here or setting up for something. In any case, here is an opportunity to carefully look at the metals and stocks and selectively add to the portfolio. It always amazes me that there are good bullion deals available all the time regardless of what metal prices are doing. That is, if you know where to look. For example, one bullion dealer currently has great deals on Canadian Silver Maple Leafs while another one has got an incredible opportunity in the new 24K (.9999 fine gold) Buffalo 1 oz. bullion coins just released by the U.S. Mint. These would be my favorite two bullion purchases at the moment. Just send me an e-mail and I would be happy to fill you in on the details. In the stocks, many of the silver focused juniors producing in Mexico look like great deals - among these are Excellon, Impact, Great Panther, First Majestic and some others. I own all of these and plan to add to them should we see further weakness. So what are you waiting for, this is a good point to add moderately to your portfolio in both the metal and mining stocks while holding back a good quantity of dry powder. And don't forget Pan American, Silver Wheaton, Goldcorp, Agnico-Eagle (thanks Dave Bond for pointing this one out, it is after all on my silver stock page), etc.

JUNE 20 2006 2:30PM PDT - I think we are witnessing more stabilization and renewed buying interest in the spot market, throught the ETF (which is now at 71.5 million ounces of silver after sliding to 67 million ounces) and also the mining shares. I'm still not convinced we have hit bottom as the interest is quite weak but as I've stated in the last few days, this is probably a pretty good buying opportunity and a good place to deploy some capital while keeping a moderate amount of dry powder just in case the shakeout is not yet over. As I've also stated before, I am favoring gold-silver over anything with base metal and although my focus here is silver, I must say that gold currently has a better risk-reward profile. When buying physical metal, I'd presently be inclined to put the same amount of money into gold as silver, if not more. When it comes to silver stocks, I'd want to weigh my portfolio toward companies with significant gold projects or at least gold credits. I am focusing on emerging or near-term producers with low cash mining costs who will have cash flow to finance their business if the capital markets turn uncooperative.

JUNE 16 2006 12:20AM PDT - Have we hit the bottom or is this just a counter move to a longer bottoming process? Don't know and actually don't care, I have both an adequate exposure to the upside and enough dry powder to take advantage of further declines. The recent article by Paul van Eeden on Kitco, The Better Sleeping Principle, summed up this type of situation rather nicely. In any case, lease rates have jumped in the last couple of days at the same time silver turned up and the ETF finally started to add some ounces to its holdings. Due to the large down and up moves in the past several days, the basis and futures spread are not reliable indicators but in general they seem to also be pointing to a possibly echo repeat of the manic speculation the funds put on earlier this year. This time, however, I don't think the wind is at their backs and we will have to carefully look at how these factors play out in the days ahead to get a clue where the market is going next. For now it's a toss up and I remain cautious in both the short and medium term while continuing to accumulate undervalued investments (mostly silver junior stocks with some production and large, highly prospective land holdings) that have strong prospects over the long term.

JUNE 14 2006 11:10AM PDT - First time that I am making a second update in one day, but there is something I forgot to mention before. I believe the next phase of silver's bull market will be led by gold, not commodities, due to a possible global economic softening. Thus my position is that having higher exposure to gold than base metals is the way to go, especially when evaluating the list of "silver companies" on my stocks page. Many of these have quite a bit of base metals, mostly zinc and lead but sometimes also copper. Meanwhile, many others have a lot of gold in addition to silver. Therefore, other than a few special cases (Minera Andes, Revett), the stocks I am looking to load up on for a short to medium term holding period are the ones with mostly gold and silver and not a lot of exposure to base metals. I believe the base metal stocks will take a while to bottom over the next few months and perhaps even a year or two.

JUN 14 2006 10:22AM PDT - I am archiving older commentaries for posterity and for future reference. The last several days have basically bore out what I've said during the past 2 months, which is that the funds have made silver, gold and commodities a very dangerous playground. However, we are now near the 200 day moving average for silver and many resource investments while many of the stocks and even the HUI have actually gone below it. So even though I believe this correction could last a while longer and full recovery may not come for a while, I AM CHANGING THE SHORT TERM ALERT FLAG FROM RED TO YELLOW. HOWEVER, FOR NOW I AM LEAVING THE MEDIUM TERM FLAG YELLOW ALSO. This means I have turned from negative to neutral on the prospects for silver investments in the next 6 months and may even take moderate long trading positions looking to exit within 6-18 months (I was already neutral on the 6-18 month timeframe).

What I am saying is that we are due for a bounce in silver (possibly not a large one) so I may create some portfolio exposure to this possibility with tight stop losses. I am not selling here and in fact have not sold in the past 30 days.

It should be noted that we remain in cautious territory with possible downside exposure in silver to the mid 8's.

The indicators are starting to all say the same thing -- silver is entering a period of lower speculative excess and exhaustion. Lease rate have now settled down to pre-ETF levels and the ETF itself has stalled, remaining 6 million ounces short of the all time high holdings of 73 million ounces. And just as I suspected, the ETF has been trading at all sorts of premiums and discounts to the spot price of silver in a much larger range than gold. Meanwhile, the basis has largely turned back to contango (although it did exhibit a 5 cent backwardation yesterday, which I attribute to the large drop) and even futures spreads out 4 years have turned contango from deep backwardation. Finally, COMEX warehouse stocks got a boost of over 5 million ounces yesterday after hitting a low of under 104 million ounces.

If you have dry powder, you should definitely start looking at some of the silver stocks which are now more than 50% off their highs and some have even entered an undervalued level assuming you believe this bull market is still intact. These tend to be the silver juniors and in my opinion include such names as Minera Andes, Impact, Endeavour Silver, Revett, Great Panther and others. In fact, even some of the more established plays, although still overvalued by traditional measures, are becoming ripe pickings. Here, Pan American, Gammon Lake and Silver Wheaton jump to mind, each of which has a potential to return 100% or more returns in the next two years or so with less risk than the juniors.  Yes, I own most of these. Shortly I hope to put out a more authoritative analysis of silver stocks.

In the June 12, 2006 commentary, I went more into the action and consequences of the funds and silver lease rates so you should check the archives if you have not read up on these important silver market factors.

JUN 12 2006 3:00PM PDT - Network problems hopefully resolved . . . We seem to be on our way to the 200 day moving averages but I don't know if prices will just keep falling or at some point start to move sideways and wait for the moving averages to rise up to them. In either case, we remain in cautious territory. Many indicators continue to be contradictory -- for example, lease rate have now settled down to pre-ETF levels and the ETF itself has stalled at this level, 6 million ounces short of the all time high holdings of 73 million ounces. Meanwhile, the basis has turned back to contango and even futures spreads out 4 years have turned contango from deep backwardation. What this means to me is that things are settling down and will soon be returning to normal, meaning a stage of rebuilding in the bull market. COMEX warehouse stocks do continue to fall so there is still some speculative buying of the good delivery bar form of silver that the ETF requires, but otherwise it appears things are calming down as prices melt.

I am looking for the point at which my short term flag will turn yellow, at which time I will probably also change my medium term flag to green. Meanwhile, I have increasingly deployed my own capital into the longer-term spectrum of silver investments which I intend to hold at least 18 months. There are now starting to be some very compelling opportunities amongst the silver stocks and for the first time in a long time, I have even purchased some of the more main stream silver stocks such as Pan American, Silver Wheaton, Gammon Lakes, etc. In the juniors, I have my eyes on Minera Andes, Impact, MAG, Endeavour, Revett, Great Panther and a slew of others, most of which are more than 50% off their peaks and closer to their 52 week lows than highs. If you believe the bull market is intact, it would be hard to go wrong buying at these levels a nice diversified mix of silver producers, late stagers, explorers and even pure speculations.

It appears the funds have lost Round 1 of the Squeeze Game and they will need to regroup for a while. The late arrivals have lost a bunch of money and learned the lesson that commodity investing is not a momentum game. The funds are still in control and their big footsteps in and out of silver (not to mention copper, gold, oil, etc.) will probably control prices for a while longer until volatility starts to evaporate and they become bored. Ideally that will be the best time to be an aggressive buyer and that is when I plan to turn my short term flag to green.

But just because the funds lost Round 1, it doesn't mean they have given up. Some will continue to take silver deliveries as they wait for the swingers to join the party once again at some point in the future. Yes, they have failed to squeeze the silver market just as the ETF came on board.

A little more for those interested in what silver lease rates have had to say in the last 2 months. On March 21, 2006 (the day the rule change to list the silver ETF was announced), a rising gap developed between short term and long term lease rates indicating a speculative play was being put on. Basically, speculative buying of physical silver and short-term lending of that silver to get some sort of return seems to have resulted in the diverging lease rates. As of April 24, 2006 when the silver ETF made its final step toward launch, we started to see lease rates dropping across the board as players began to make longer term commitments to the market. They were willing to lease their silver (to generate income) over longer terms of up to 1 year. However, on April 28, 2006, the day the ETF launched, rates across the entire spectrum lept higher and rose for a few weeks. Across the board rises in lease rates in my opinion could indicate a tightening of silver supply to be confirmed should rates continue higher or stay at relatively high levels. In general, the action in lease rates over the past two months is telling me that speculators are making increasing commitments to the long side of the market through phyiscal buying. Some of this physical silver may end up in the ETF but the mechanism is not clear to me. For example, if funds are converting physical silver to paper ETF shares, it could cause some interesting moves in silver (up and down). On May 24, 2006, exactly one month after leaping higher, lease rates started to drop at the same time the ETF silver holdings started to top out. At the time, I stated this condition might indicate silver finally coming out of secret stockpiles and therefore the funds strategy of squeezing the market could be delayed at least for a while. It seems I might have been right as the funds simply ran out of "heart" or capital to commit to the move as additional silver kept showing up on the markets.

Basically, the funds bet that there was only 100 million or so ounces of silver readily and easily available. They were wrong. So Round 1 is over. Now they need to sharpen their pencils, come up with a new number and wait for the right time to launch their next attack.

We are in for some exciting times directly ahead!