• The primary theme and most important is to "Expect the Unexpected" in the silver market in 2002 extending into 2003.
• The second theme is to provide information about silver investment vehicles.
• The third theme is to provide reference material and web sites where additional information on the silver market is available.

Successful investing has been defined as: "the placing of money whereby at the end of a period of time, you have that money plus more."

This definition was in the era of low inflation. This is not always going to be the case during the next decade.

I have redefined successful investing as: "the placing of capital with a known purchasing power in a liquid market. At the end of a period of time, you have more purchasing power and the capital is in a liquid form"

Purchasing power accounts for inflation (depreciation of fiat money), deflation (appreciation of fiat money), exchange rate changes, taxation, regulations & banking rules, and liquidity ..

A liquid form of capital is defined as that which can easily and quickly (within hours) be used to purchase nearly all goods and services desired by capital possessor.

Risk, Relevancy, and Reward should be a part of every investor strategy. Very few investments go as planned!

Risk reflects both the risks of the investment to providing a desired return and the tolerance for loss by the investor.

The investors tolerance for loss is typically defined into the three categories of "gambler", "speculator", and "investor." Gamblers take risks which result in net losses in the short term periods of time. Speculators tend to make money for short periods of time. Investors make money over the long haul. Which are you?

Investment risk involve many things including the probability of unknown and/or unexpected events.

In my opinion, every person regardless of risk tolerance should have a written detailed plan before investing in anything. The best way to increase wealth is to first study and determine useful knowledge of the market of interest, supply & demand projections, the managers, participants/ & stakeholders, popular beliefs & opinions, realistic economic outlooks, accounting facts (beware of pro-forma accounting), and governmental/banking/financial institution current or future impacts.

I have written two possibly useful articles related to silver that can be found on the following websites

Other risks are defined within the following web site & article

The relevancy of any investment including silver takes into consideration many factors. Such factors might include concerns and issues of:

               Taxation        morality & religious beliefs        ownership        Other personal needs

               privacy             personal objectives             trust             advantages/disadvantages
 
               time factors      expected/perceived changes       security concerns      competition

               recent history          technology changes         govt. intervention          inheritances

If privacy is a concern, you will lose privacy with stock purchases and most investments vehicles. Silver privacy can be retained if purchased in transaction amounts less of than $10,000 paid in cash and physical possession taken.

Stocks in some companies could be nationalized by governments with stockholders left with little or nothing.

Reward is the objective of any investment strategy/philosophy. In my opinion every investment strategy must include 'a time or objectives' of when to sell. Silver is not a buy and hold investment of decades. Silver may not be a good upside investment if the silver prices are 8 or more times than a silver price within the previous year. Every investor should look for downturns in silver prices and have a plan on how to deal with them. Some downturns occur due to an apparent seasonality phenomena that occurs in most, but in not all years. A 28 year silver seasonality chart can be found at www.gold-eagle.com/charts/gegsr.html

In my opinion, one thing lacking in most investment plans is when to sell the investment. Conditions of when to fold (admit losing position), and when to hold (not to exit too soon) , and when to exit should be defined in writing before the investment is made. In my opinion, one should actively reconsider their silver position should any of the following sell indicators occur.

Prices of metals and stocks tend to decline much faster than the price rise time. Selling is difficult after the peak has been reached in a bubble and the sharp decline (in days and hours) has begun. The prudent investor for safety concerns avoids trying to guess the peak exactly and sells prior to the peak.

One indicator may be the DJIA/(Silver Price) ratio. (DJIA = Dow Jones Industrial Average) The 1980 silver bubble led to a single inter day low ratio of 800/52 = 16. A ratio of 50 is more plausible for the next silver Bubble. This would put a silver price peak near 10,000/50 = $200/oz, if the DJIA does not fall farther in 2002. In my opinion, a silver price of $75 is more believable and that is not likely to happen until 2003 or 2004.

Another indicator may be gold/silver price ratio which in December 2001 is about 280/4.20 = 66. at the peak of the Silver bubble in 1980, the ratio was as low as about 16. The January 2002 gold price projects silver at most 280/16 = $17.50/oz. . However, a December 2002, Gold price rise to $500/oz would project a silver high at $500/16 = $31.25/oz. A gold/silver ratio chart may be seen at: http://www.gold-eagle.com/charts/gegsr.html

Palladium, a platinum group metal increased by a factor of 10+ times in the decade of 1990 ($80/oz) to 2000 ($800/oz.). A factor of 10 times in the silver market would put silver at ($4.20)(10) = $42/oz.

When a stock price in metals goes up by a factor of eight or more within a year, it is probably time to sell or at least keep a close eye on it. If "stock put" options are available, they could be purchased to protect from a sharp stock price decline. Stop loss orders could be placed on the stock.

Investing in the commodity silver can be achieved by the following vehicles.

• Financial derivatives including "Futures contracts" "Options in Silver" and "Silver leasing"
• Physical possession of "junk silver coins", "collectable silver artifacts", "silver bars"
• Mining stocks
• Numismatics (collectable rare coins)
• Silver smuggling from India and other dangerous illegal activities
• Mining for silver yourself

1. Financial Silver Derivatives fall into three categories. They are options, futures, and silver leasing.

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WARNING: should silver prices rise above $40/oz,
derivatives are likely to be defaulted upon and/or the
rules of trading changed against you
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When the 1980 silver bubble occurred, Trading rules were changed. They included 100% margin for buyers. No new contracts could be purchased. Options were not traded at that time on an exchange that I am aware of, and silver leasing derivatives was not a common practice. What would happen to options and derivatives in another silver bubble is anybody's guess. It would not be surprising for exchanges to seek government intervention into the market and the intervention granted.

Government intervention activities could include confiscation of your investment, your life made miserable, and . . . . One should follow closely the events unfolding in Argentina as to what might happen to silver investments in the country you live in. In my opinion, the government will not actively seek out and seize silver in personal physical possession. It is unclear what will happen to silver holdings in foreign countries or exchanges in other countries where silver is traded.

All SILVER INVESTMENT VEHICLE SALES/PURCHASES MAY NOT BE FINAL ! !

Option Contracts

A SILVER OPTION is a contract with three key ingredients. The first ingredient is a time limit for which the contract is only valid. This valid period is usually 30 days, 60 days, or 90 days from date of purchase. The second ingredient is the amount of silver involved which is usally 5,000 oz of silver which meets quality standards of a futures exchange. The third ingredient is the striking price at which the silver is to be sold.

Options come in two flavors.

The call option is purchased by someone who thinks the price of silver will go above the striking price in the time period the option is valid. The call option buyer has the right to purchase the silver for the striking price during the contract valid period.

The call option seller has physical silver, does not expect the price of silver to rise above the striking price and expects to earn extra money that he would not otherwise receive from it. A seller of an option who does not have physical silver is said to be selling a "Naked option".

The put option is purchase by someone who thinks the price of silver will go below the striking price in the time period the option is valid. The put option buyer has the right to sell silver at the striking price of the option contract during that time which the put option contract is valid. The put option seller is someone with deep pockets (money to pay for the silver) who believes silver price will not decline to the striking price, but wants to use the option as a hedge and earn extra money.

Options are traded on the COMEX [From Barron's Nov. 26th,2001]
49,401 call options of 5,000 oz. = 247 million oz = $1,101million dollars @ $4.10/oz.
8,978 put options of 5,000 oz = 45 million oz = $ 184 million dollars @$4.10/oz.

Option Risks: Probably 90 to 95% of all options are never exercised and purchasers rarely make money from them. The purchaser loses all the premium or price for which they paid for an unexercised option.

Should silver prices go above $15/oz. look for default by sellers of naked options as well as option exchanges changing the rules against you. In my opinion, if silver prices go above $40/oz, look for government intervention via executive orders which will not favor the buyer. If you sell an option you could be in deep economic ruin very quickly.

Option Advantages: Buyers can have control of a large amount of silver for a small amount of money for a brief period of time. A typical silver call option for 90 days out in December 2001 that has a striking price 20 cents above the spot market price has a premium price of about 20/cents/oz [($0.2) (5,000 oz)= $1,000 which represents about (5,000 oz)($4.10) = $20,500. The other advantage is that option buyer limitshis loss to the price of the option.

Silver Options are traded on the New York Mercantile Exchange, COMEX division. [COMEX] and the Amsterdam Exchange [AEX]

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The price is 4 cents/oz of silver for a 5,000 oz. contract = $200 plus a commission fee In December 2001. The option is worthless if the price currently $4.30 in December 2001 remains below $8.50. Should the silver price go to $15.00 before the expiry date, then the option would yield: ($15.00 - $8.50) (5,000 oz) = $32,500.
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Futures Contracts

A SILVER FUTURE CONTRACT is a contract for a fixed amount of silver (5,000 oz on the COMEX) of defined quality to be delivered on a certain date which may be the following month or up to typically three years at a specific price.

The number of future contracts on the Comex exchange (called open interest) was 75,468contracts [Barrons, Nov. 26th. about 70,000 contracts. This represents notational control of silver equal to

(75,468 contracts)(5,000 oz/contract) = 377.34 million oz. of silver.

The futures contract seller is typically a mining company who wants to hedge their production to a known selling price for the purpose of raising money to keep in operation despite a possible declining silver price. Holders of silver sometime sell futures contracts as a means of earning money during times of perceived upcoming lower silver prices. The contract seller must show ability (or financial capability) of providing the silver when the contract becomes due throughout the life of the contract.

The silver contract purchaser is some one who has a use for the silver. They are hedging to protect themselves from unexpected higher prices in the future. Investors/speculators/gamblers purchase futures contracts in the believe the silver prices will be much higher than they are at the time of purchase. The purchaser must provide a minimum margin requirement at all times (currently about 10% of the contract price) at time of purchase and provide all additional margin moneys when required by the exchange. The additional margin money is required when the spot price of silver declines below the futures contract purchase price.

Futures Contract risks: The buyer must either take deliver on the contract expiry date or sell it to someone else before then via the exchange.

You had better have deep pockets to provide for margin calls. Extra margin money can be used in daily deposits to earn extra money with the brokerage until or if a margin call is made.

The exchanges can change the rules as it did during the 1980 silver bubble. The exchange may prohibit new contracts from being purchased even with 100% margin. Margins were raised to 100% of existing future contracts to flush out speculators. This is unlikely to happen unless silver goes from the current $4.10/oz to above $20/oz in 2002. It was this method that supposedly cost the Hunt's over 2 billion dollars because they could not borrow enough money from the banks to cover the raised margins.

Futures Contract Advantages: This allows a leveraged control of upwards of 10 times the amount of silver over buying physical silver. The exchanges are usually a very liquid market in which one can sell their contracts easily. and quickly with low brokerage fees.

Silver Futures Contracts are sold on the following exchanges

New York Commodity Exchange (5,000 oz contract) [COMEX]
Chicago Board of Trade (1,000 oz. contracts) [CBOT]
Tokyo Commodity Exchange [TOCOM]
London Metal Exchange [LME]

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A SPECULATOR using Future Contracts

The speculator buys a futures contract for delivery in a year or more. The speculator puts up twice the minimal margin (about 10% of the contract). A margin of about 3, 000 is required for a 5,000 oz. contract priced at about $4.50/oz. ($22,500) . Of course a speculator must have a commodity trading account.

An INVESTOR using Futures Contracts & Put Options.

The investor trades buys a future contract for delivery in a year or so with a stop loss order. To protect against silver price decline, the investor buys a "put silver option" to protect against losses and profit on a short term whip saw price decline.

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Silver Leasing and Silver leasing paper

Silver leasing by banks is an method by which banks holding silver assets in bank vaults (a non performing asset) into a performing asset. The banks lease the silver out to a customer with the agreement that the customer returns the same amount of silver of same quality with payment of a nominal interest rate of 2% of the value of the silver. The bank would still carry the silver as an asset on its accounting books.

In practice, the customer sells the silver (which tended to drive the price down) and was consumed in fabrication demand. The bank customer would hedge the silver against a price increase using options or futures contracts. The bank customer would then use the money from the silver sale proceeds for ventures with higher rates of returns. Since, silver prices declined, customers and banks were willing to renew the loans.

Due to vanishing silver supplies, bank customers are finding it increasingly difficult to return the silver to the banks and close out the loans. This causes silver leasing interest rates to skyrocket at times.

Silver leasing paper is not traded on any market exchange that I am currently aware of. Therefore, silver leasing paper is not liquid. [difficulties in ability to buy or sell quickly.] Direct contact with a commercial bank such as JP Morgan/Chase might provide additional information as to investing in silver leasing paper.

Physical possession is the holding of silver in one's personal possession

Physical possession requires hiding the silver to avoid theft or confiscation. One of the best hiding methods to avoid loss is to keep a low profile and not advertise or allowing others to know you have something of value and/or where it is stored. Physical storage requires some creative storage methods. Remember that silver is a metal and detectable with metal detectors.

One should never store physical silver in bank boxes for long periods of time or during economic instability. Items from bank boxes have been known to disappear even when in the bank vaults. Items found in bank boxes are subject to government confiscation and must be included in estates which may be taxable.

A silver purchaser of physical silver should never leave purchased silver items in storage with a silver seller. Storage costs can be excessively high. Silver sellers have been known to quickly close their business and leave the purchaser without his/her silver.

There is the possibility that the government could confiscate silver in what ever form under any number of laws such as:

• Requiring silver to be turned into the government as happened to Gold during the 1930's
• Alleging that silver is related to illegal drugs or terrorism. It is up to you to prove otherwise which is very difficult. If you do prove yourself innocent, you have to pay your own legal fees as well as forfeit 10% of the silver to the government.
• Declare a national emergency/crisis/war and the silver is needed for some war effort.
• Claim IRS taxes (even if false) are due and seize it on that basis.

Fortunately, government will not go after small amounts as it is too costly to do and at silver prices less than $20 it would be political suicide from a public backlash about government credibility.

Physical silver possession falls into three areas. They are:

• Junk silver coins are defined as coins which contain silver and are sold near the bullion value of the silver within them. They are damaged coins or have no particular neumistic value. These coins are useful in worst case economic situations where barter is necessary for trading and fiat money is not accepted at full faith and credit.



• Collectable silver artifacts/jewelry/mementos/sterling ware. Nearly all of these artifacts were purchased for five or more times the actual silver bullion content in them. Many artifacts are 1 oz bars with designs on them and said to be collectable by the private mints making them. Sterling silver artifacts often have useful purposes and a few may have more value as antiques than for the silver within them. Plated silver artifacts rarely have much value other than as memorabilia. Buyers of memorabilia are elusive to find. Silver jewelry when sold back to jewelers almost always fetches less than was paid for it.



• Silver bars of 1000 oz size with a purity standard (assayed) are bought and sold on the futures exchanges and probably can be bought from mining companies. Smaller bars of 1, 10, and 100 oz sizes are available through most coin stores. Recent reports indicate the smaller bars are getting difficult to come by.

Numismatics silver coins requires expertise in numismatics to be a successful investment. Novices to this market are often sold coins with exceptionally high mark ups and have been known to sell fakes. Be sure to get a second opinion and check with coin magazines as to current coin values. The seller's integrity is crucial before one considering a high dollar purchase.

Mining stocks: There are few mining stocks which are primarily affected by silver prices alone. Most mining stocks with silver production is where silver is a byproduct of something else the company mines such as lead, silver, zinc, and/or gold.

The mining stocks whose stock prices are significantly affected by silver prices currently are in two camps. One camp has hedged their production of future silver for a fixed price over the next two or more years. Their profits of hedged production are unlikely to rise dramatically because profits will not rise. The other camp does not hedge the production and whose profits will reflect the silver price increases.

The Silver Index Seven is comprised of the following seven companies and found at http://www.gold-eagle.com/silver_section.html . This chart is updated weekly.

There are other companies with the name of silver (not all are in the silver business) by clicking under 'silver" at http://www.gold-eagle.com/silver_section.html - and then at page bottom clicking on "companies"

Other silver related stocks one might consider are:

When speculators enter the silver market, the tend to purchase stocks in companies that are traded on an exchange versus over the counter stocks. This is due to stock brokers like easy trades to do and promote them easier. More material is available about the companies. Stocks trading on NASDAQ pink sheets is more time consuming.

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An INVESTOR purchasing stocks in silver mining companies

The investor purchases only mining stocks with the following characteristics.

1. Actively traded on an exchange.
2. Actually produce silver from mining activities.
3. Have unhedged positions in silver and gold mining production.
4. Has a recent financial statement and has read it.

The investor avoids mining stocks with the following characteristics.

1. Those companies that only explore for mineral deposits.
2. stocks of companies in bankruptcy.
3. stocks in companies with major lawsuits pending against them.

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Actual mining for silver yourself s an investment vehicle beyond the scope of this essay.

Silver smuggling is illegal and is dangerous. There are estimates of one to six billion ounces of silver in private hands within India in the form of eating/cooking utensils. Exporting this silver is extremely difficult. However, smuggling of silver from India to Arab countries does take place when the price of silver rises above $10. Most people do not not recommended that one become involved in this type of activity.

Other References:

[1] U.S. Government site with statistics on silver including sales in 2000.

[2] Straight Talk on Silver, by Keith M. Barron, Ph.D. kmbarron@compuserve.com
     www.gold-eagle.com/editorials_01/barron120601.html {part 2}
     www.gold-eagle.com/editorials_01/barron120101.html {part 1}

[3] Golden Bull or Yellow Bear. by Vaughn (Includes some good investment philosophy)
     www.gold-eagle.com/editorials_01/vaughn111201.html

This essay is provided for information purposes only. Nothing herein is to be construed as a recommendation to buy or sell any particular security or financial instrument. Nothing herein is to be construed as a recommendation to engage in any particular investment strategy or trading strategy. The information within is not intended as a recommendation to buy or sell anything.

This is my summary of recent gold forum postings of www.gold-eagle.com, material from library sources, Internet sites, and my own opinion. The accuracy of all numbers have not been verified.

I appreciate all E-mails, questions, comments, and flames on this essay. My E-mail address is wallybently@aol.com