The Moment of Truth

July 5, 1998

Many years ago, a friend and client with whom I've unfortunately lost contact, would recount his experiences growing up behind the Iron Curtain in Romania. One curious aspect of his recollections were about the many stores and shops that had beautiful and bountiful window displays, but upon entering these establishments, there was little or no merchandise to be found inside. To actually purchase and remove merchandise from the window was difficult and certainly expensive. It was throughout the then Communist world, intended to create the illusion of plenty. My friend, Izzy, related this memory to me to make the point about silver and the COMEX silver stocks. He claimed that when the ongoing deficit in silver finally necessitated the withdrawal of the COMEX stocks, the end of the great silver price manipulation and the illusion of abundant silver supplies was at hand. When they had to take the silver stocks from the COMEX store window, he must have said a thousand times in his Romanian accent, we would be at the "moment of true".

Izzy wasn't particularly book smart, but he possessed a worldly intelligence that can only come from the experiences and travails of surviving and prospering against abnormal odds. He is also the only one I have ever known (or heard or read about) that bought silver under $4.50 in the late seventies and sold out completely over $45 in early 1980. I had no idea at the time just what a remarkable accomplishment that was. Just to put it in perspective, I doubt seriously that there has ever been anyone else that has captured a ten-bagger (on a cash, not margin or option, basis) in a commodity in modern history, since there have been so few ten fold movements in any commodity in a tradable time frame, to say nothing of the skill or luck that would be necessary to capture same. I think of this feat often, as well as my immigrant friend's words, as I contemplate the current developments in silver.

If the total world stockpile of silver inventory is the set, COMEX silver stocks are the only sub set that is visible. (For this equation, I am excluding the soon to be extinguished U.S. Government inventory). It is precisely because of this visibility that this would be the last sub set of inventory depleted, if there were, in fact, a downward price manipulation. COMEX silver stocks have declined from over 280 million ounces a few years ago, and from over 200 million ounces a little more than a year ago to under 90 million ounces presently, a low water mark of some significance, since the real deficit is still running 150-200 million ounces a year. Are we witnessing the final, permanent withdrawal of the COMEX "store window" stocks, that Izzy prophesied about, or is this a fake-out? Certainly the price of silver says this is not the real thing, in unambiguous terms. After all, if we're standing at the threshold of an all out scramble for the last of the silver stockpiles, you would think we would see some indication in the price. Yet, we see none. In my mind, this is due to the double barrel manipulation of fraudulent leasing and the epic paper short position in silver. (Please see my previous articles for a detailed explanation, this piece is about the silver stocks). But the very essence of a manipulation is that once it is ended, as the silver con most assuredly will be some day, its end will be shocking and violent. Presently, there are some tell tale signs that we may be closer to that day in silver.

Those signs center around Warren Buffett, the world's most successful investor, and Eastman Kodak, the world's largest industrial consumer of silver. It's no secret that Mr. Buffett bought 130 million ounces of silver in the past year, since it was purchased by his publicly traded company, Berkshire Hathaway. It also no secret that most of that silver was moved from the COMEX stockpile to London. This is the first sign that the COMEX is the supplier of last resort, because if Mr. Buffett could have purchased the entire amount and not have to draw from the COMEX, he would have. I say this because all the threats of investigations and phony lawsuits focused primarily on the COMEX silver stock withdrawals. Only a fool would not have side stepped that aggravation if possible, and as you know, Mr. Buffett is no fool. The point is, the COMEX stocks appear to have been needed to complete the transaction. The fact that COMEX silver stocks reached the current low level several months ago at the time of the completion of the Buffett purchase and have stayed at that level since then, confirms the relationship between COMEX stocks and his purchase. In the interim, the deficit in silver has been satisfied by lease supplies brought to market by the spike in lease rates earlier in the year.

But the lease supplies may not be able to sustain the market much longer, or so it would appear that that is what Eastman Kodak thinks. When it comes to silver, it's best to observe what Kodak does, rather than says. On several occasions, over the years, senior officials have reiterated (verbally and in writing) to me that they don't hedge or use the COMEX as a direct source of supply, relying on dealers for material on an as needed basis. Obviously they have changed their mind, based upon recent public filings and market rumors. While it certainly is its prerogative, Kodak's about-face and sudden decision to hedge its silver exposure can only mean it now expects higher prices. Since this is a company that could not survive without a steady supply of silver, you can be sure its change of heart came after deep and careful investigation and research. The market rumors may mean something beyond that. In the first three days of delivery for the current July futures contract, Goldman Sachs has stopped (taken) delivery of 28 million ounces of silver (this is not the rumor part). This is fully one third of the total COMEX silver stock of 86 million ounces. Since there is a 7.5 million ounce limit on what an individual speculator can stop in any delivery month, the rumor that Goldman Sachs is acting on behalf of Kodak rings true, as commercial firms are exempt from the restriction, if they can demonstrate they use that much in the normal course of their operations. Besides, there aren't that many likely candidates - maybe Du Pont, maybe Fuji. Anyway, we should know who soon enough, as this would appear to be the stuff of public filings. While the who isn't that important, the why is. Assuming it's Kodak for the sake of argument, why would Kodak, who up until the last year or so, never even hedged, now demand physical delivery of a giant chunk of COMEX silver stocks? Remember, Kodak for the past fifty years has not, and will not ever, intentionally take any action that would appear bullish for the price of silver. Not in any circumstance. For them to hedge the price suddenly, and if the rumors are true, demand physical delivery for an unprecedented percentage of the only visible stockpile in the world is monumental. There truly is change afoot in the world of silver. I wonder what Izzy would say?

In fact, I think I know what he would say. He would probably say, "are they taking delivery of my silver?" You see, because of the hardships he experienced in growing up, he was more suspicious and leery than most people in a number of ways. For one, he distrusted margin and would only hold silver by paying in full for COMEX silver certificates by accepting (stopping) delivery on a futures purchase, and having the certificate shipped to him. I thought this was odd at first, but have come to accept it eventually as the most intelligent way of holding decent quantities of fully paid for silver (based on commission costs, storage costs, safety, liquidity, taxes, etc.). I'm convinced that he would never had set what I believe was a world record for his ten bagger, if he didn't do it on a cash basis. Aside from the price, Izzy's only concern was could someone steal his silver if he had the certificate. I also knew of other people who invested in silver in this logical manner (no margin calls, no mark to market).

The point of all this is to demonstrate that there are lots of individual investors that own silver certificates, and therefore, silver in the COMEX stockpile. While no one knows just how much, for the past ten years or so, up until the past year, I thought that investors held about 100 million ounces of the COMEX stocks. This was when the stockpile at the COMEX was over 150, 200 or 250 million ounces. Now that the total stocks are below 86 million ounces, it's obvious that investors can't own 100 million. And with Goldman Sachs taking delivery of 28 million ounces, it's now obvious that investors can't own more than 58 million ounces. But I will tell you this - they own some quantity above zero and below 58 million. And if the number is closer to 58 than 0, as I strongly suspect, there are no available stocks effectively left on the COMEX. The COMEX stockpile of silver can never go to zero on a statistical basis, while it can go to zero on an effective basis. This is because the investors who hold certificates have no motivation to withdraw the silver, only to sell it at a higher price. As long as the price is kept low, they'll leave the silver where it is, and wait for higher prices to sell. But it is a mistake of the highest order to think that this investor silver "parked" at the COMEX is available at anywhere near current prices. The same goes for Kodak, if they are the ones who have taken delivery through Goldman. Kodak will only move that silver out in the most extreme circumstances. If Kodak owns that 28 million ounces, they will never relinquish control of it at this stage of the soon to be recognized great silver shortage. While silver stocks at the COMEX will undoubtedly move up and down from current levels, the market will soon learn the difference between reported and available stocks, just like Warren Buffett and Eastman Kodak. As for Izzy, I don't know what he's up to, but I feel in my bones that he's going to hit another ten bagger.

Palladium, platinum and silver are the most common substitutes for gold that closely retain its desired properties.