Q: Given RR's bullish sentiment towards silver; where is the demand for silver coming from? It certainly is not coming from the photograph industry.
A: Structural deficits have existed in silver for 14 years. There is very little above ground silver left and RR was correct in saying we are going to run out of silver.
Silver will explode in price as a result of the deficits, especially when investor demand takes off and exacerbates the already precarious supply/demand situation.
Q: Being an industrial metal, what industry is consuming it?
A: Silver is in almost everything. Look around your house, the inside of your telephone, your refrigerator, your microwave and on and on. This is a link to Jim Puplava's fantastic article on silver, a must read and would be an excellent source of info for you:
http://www.financialsense.com/stormwatch/oldupdates/2003/0702.htm
Q: Eric...I wonder if you have an opinion re the huge number of Silver calls outstanding for the month of December?....you have stated that you believe a "Silver crisis" will be here shortly....are you able to publicly state your "timing" reasons....either way I indeed appreciate your comments.....and would say "thanks tons" but even my sense of humor balks at doing so!!..??
A: Ronald, a significant event happened earlier this year in the silver market, Barrick (ABX) announced they were getting rid of their "hedge" book in silver.
ABX was net short the silver market to the tune of 42 million ounces. They announced they were going to accomplish this by "delivering" into the market 13 million ounces and by purchasing the other 29 million ounces in the futures market.
Almost immediately after this announcement call options in two months at the end of the year were purchased for a total of roughly 30 million ounces.
I believe that ABX did this because they wanted "insurance" in case the price of silver exploded. If silver exploded they were limited to losses of $6.00 and $7.00 strike prices which is the price at which the call options were purchased.
You may ask, well what accounts for the other millions and millions of ounces? Good question.
The answer in my opinion is other producers with hedges immediately said to themselves, we need to get out of our hedges if ABX is exiting and followed a similar "call option" strategy in order to give them the necessary time at the end of the year to clear out their hedges.
By the way, ABX paid approximately 1.2 million dollars for the 29 million ounce hedge protection. Not a bad price to pay to allow them to get out relatively unscathed.
Q: Thanks Eric for the detailed explanation....what continues to puzzle me is who and why would any one sell them that many calls...unless they in some fashion were protected from a huge potential loss from a sharply rising Silver price???....I'm sure you know better then I the nature of floor brokers and market makers....but this does not seem like the kind of risk they would normally take.....naked short thousands of calls at $6 and $7 dollars???.....it does seem to me knowing the reasoning of the other side of these calls would be knowledge worth having....I like others are aware of Buffets Silver holdings....he's the only one I'm aware of that could accommodate these purchases without serious losses....
A: It is a very dangerous game for whoever is selling those calls. If silver remains muted until December they are ok and pocket the 4 million bucks or so of profit. If silver takes off and breaks out above $6.00 and eventually $7.00 an incredible explosion in the price of silver could occur as the parties who sold those options scramble frantically to get "long" to offset all of
those "calls" in order to protect (hedge) themselves.
My thoughts are that the market would become very disorderly as buyers would continually "lock limit" up silver during many trading sessions with the trapped call sellers panicking as they will in fact be trapped.
That is not a prediction, just one possible outcome for folks to consider.
Having said that, I think all parties involved would feel just fine if silver traded in a very muted price range until December. It would allow hedgers to cover their shorts at a cheap price and call sellers to simply take the money to the bank.
Ah, "the best laid plans of mice and men" (smile).
Q: Eric, I have difficulty believing someone or some entity would take the huge risk involved in selling that many calls without being hedged in some manner....$4 million is a goodly amount of premium to pocket however $7 Silver and they are out $25 million....$8 Silver they are out $75 million.....do you think the sellers of those calls are naked call sellers???....if so, as you say this will be a sight to behold if they are forced to cover.....
A: I do not believe they are hedged, in fact I believe just the opposite, and they are as naked on those positions as the naked short sellers who cap the price of silver - what a game (manipulation).
Their losses grow incredibly large if in fact silver does take out $7.00 and you are right when you say, "if so, as you say this will be a sight to behold if they are forced to cover."
I would just like to caution everyone on the BB to the possibility that as Albert said we could get a low for gold (I would like to add silver to that as well) in August.
If this is the case, I believe that may very well be the last chance to buy cheap silver. I think buyers here are smart regardless because as Ted Butler says, "dimes to the downside, dollars to the upside."
Investors in silver require only one thing to make significant gains on their investment - PATIENCE!
Having said that, silver could obviously simply take off and that would be it for the shorts, but like Albert and David Morgan, I am looking for possibly one more final pullback in August.
Q: If silver is going to go through the roof, would investing in the Central Fund of Canada Ltd. (CEF) be a good way to ride the wave up. To Eric. Thanks
A: Had to call Ted Butler with this one. The fund (CEF) is composed of half silver and half gold, so it is ok for that reason.
They are about to have a pure gold play on the NYSE where each share is 1/10 ounce of physical gold.
Hopefully shortly after the gold ETF starts trading they will introduce a pure silver ETF, which Ted says would potentially be incredibly successful as the price of silver takes off.
Q: A breakout to the upside this month as seen on the weekly chart would call for a sell off back to test the break out area in August as you suggest....that would be a normal expectation....however if the price of Silver has been artificially held back the correction may be very mild....reason being ...."Don't mess with Mother Nature"...and those that do are usually taught a painful lesson...for the rest of us true believers "She" demands patience from us before our reward.
A: Ronald, you are right again and that is why RR is correctly recommending that people take a position in physical silver/silver stocks right now!
Yes, we may get the August pullback, but then again as you suggest silver may simply fly!
Q: Eric...I have posted this before but perhaps this is a good time to repost....if Silver's price had followed the percentage rise of the cycle 30 years ago ....price this July early August would be $9.30 an oz......February of 2004 price would be $18.75 per oz.....you have taught us well that the fundamentals are much more potent this time around.....
A: As Russell says, "Silver may be the cheapest thing around."
Q: What are the thoughts on natural gas prices---looks to me they are going to not go down much. Even Greenie seems concerned over the price of the stuff ---thanks
A: We are experiencing a natural gas crisis.
"We've talked for years about the coming natural gas shortage," Bob Simpson, chairman of XTO Energy of Fort Worth, a big natural gas producer, said recently. "Well, it's here."
Federal Reserve Chairman Alan Greenspan warned the House Committee on Energy and Commerce that the natural gas shortage poses a threat to key U.S. industries.
There is a coming silver crisis because of the price suppression on the COMEX. Silver is needed to produce a tremendous amount of industrial necessities and to build out the infrastructure of booming countries such as China and India.
When the silver crisis comes we will be having this exact same conversation; however the difference is that the lag time on new mining projects for silver is about 5 to 7 years. If it is rushed possibly 36 months - Talk about a coming crisis!
Q: Eric....on the weekly chart beginning July 15th 2002.....Silver has formed a huge 5 wave triangle that appears to be complete.....it is acting as though it wants to break lose and run...it's chomping at the bit and having difficulty selling off....it will be very interesting to see if it can be held back here.....I know I am not the only one who sees this triangle and knows what it portends.....surely there are those with mucho money who are now picking up their bullish interest.....anyone who can read and interpret a chart knows the potential when the 5 wave triangle is complete....I have not seen many triangles that take this long to complete...some but not many.....the longer it takes the bigger the ensuing move, usually.....if the manipulators, whoever they are can bust this they are really very powerful....they would then be making the market do whatever they want it to.....if they are that powerful then they can make and break a primary trend at will....I seriously doubt that they can...the primary trend is made by the MAN upstairs expressing his will thru us mortals....his messenger is MOTHER NATURE and we know this for a
fact..."DON'T MESS WITH MOTHER NATURE"!!!
A: Ronald, on the phone right now with David Morgan over at silver-investor.com (interviewed each week by Jim Puplava).
Let me quote him directly, "I've always stated that the market is bigger than any manipulator and eventually the market will break to the upside."
"Currently I'm concerned that this might be the top for 4 reasons:"
1. COT (commitment of traders) the funds are being managed again here and I think it will work again, but at some point it will fail."
2. Sentiment is too bullish (not the consensus numbers) but rather my own proprietary study."
3. Seasonality, normally get a spike high in July and a low in August, will it take place again this year?"
4. Gold - non-confirmation. We cannot rule out that gold's performance is indicating the typical summer lows just ahead."
David said it is very tricky here because of the four factors listed above. He believes that we will see a temporary low and if he is right about an August low that could be the end of the price suppression.
Of course he is extraordinarily bullish long-term on silver!
David and he just wanted to add one final thought, "I agree with Richard Russell that you should buy as much (precious metals) as you can buy and still sleep at night. All of my subscribers hopefully have their core position intact and should only trade 20 to 25% of their positions."
Neither Richard Russell nor David are saying put 100% of your money in PM's, I believe RR only recommends 10% currently and David recommends 10 to 20%. With the current environment David is recommending a more aggressive 20%.
Q: As you know, bull markets do everything possible to keep you off the bulls back, even if you are a bull - he will throw such violent corrections at you that make you want to get off - the downward corrections in a bull market are usually more intense and severe then most of the upward action, which is slower and more gradual.
A: So true and equally tough to accomplish is timing when to sell and exit the market. It will be extremely difficult in my opinion.
Q: I did buy some silver from Certified Mint. Bill Haynes guided me to purchase 100-ounce bars. It sure is a lot easier to carry a few 100-ounce bars to the bank than one 1000-ounce bar! Will have to rent a larger safety deposit box, silver is much more bulky than gold. Am still not sure how silver fits in if the more and more likely deflationary scenario unfolds. Bill Haynes feels that inflation/deflation silver goes up as commodity or store of value. Any-way very much appreciate the advice-- thanks
A: In my opinion there will be deflation in the form of falling real estate/equity prices, however there will at the same time be inflation in the form of higher prices for imported goods as the dollar continues what will be a multi-year slide.
Silver could very well be the # 1 investment once again by the end of this decade just like it was by 1980.
One comment, for folks who are concerned about weight, the fact that RR mentioned that 1,000 ounce bars weigh about 80 pounds, another option is to purchase 10 - 100 ounce bars for every 1,000 ounces you wish to purchase.
Two advantages to doing this, first is that the average weight would be about 7 pounds for each bar. Second is the fact that you can buy so much closer to the spot price than you can buy purchasing Silver American Eagles.
Let me give you an example. Let us use a closing price on silver of $4.79.
To purchase Silver American Eagles you would have to pay roughly $6.20/one ounce coin, which translates into about a 30% premium over the current spot price.
To purchase 100 ounce bars, you would pay 32 cents over spot price of $4.79 or roughly $5.11/ounce, or about 6.7% over spot price, significantly smaller premium over Silver American Eagles.
A $10,000.00 purchase would net the following total of silver using the above prices for Silver American Eagles and the 100 ounce bars:
Silver American Eagles = 1,612 ounces
100 ounce silver bars = 1,957 ounces
The purchaser would end up owning 21.5% more silver by purchasing the 100 ounce silver bars over the coins.
Regardless of which option buyers choose I believe that they will have unbelievable profits before this silver bull market ends (smile).
One Final Point
Remember when you purchase physical silver always pay in full and take delivery, NEVER USE LEVERAGE !
Eric King
July 12, 2003
Courtesy of
www.silver-investor.com