Inflation Insurance

Comparing Gold and Silver Investments to the US dollar from 2000-2008.

US Dollar:

Gold:

THE INDISPENSABLE METAL

Uses include:
Batteries | Bearings | Brazing and Soldering | Catalysts | Coins | Electrical | Electronics | Electroplating | Photography | Medical Applications | Jewelry and Silverware | Mirrors and Coatings | Solar Energy | Water Purification

BESIDES PETROLEUM, SILVER IS USED IN MORE APPLICATIONS THAN ANY OTHER COMMODITY!

• Most Reflective of all Metals
• Greatest conductor of both Heat and Electricity
• Strongly Resists Corrosion and Oxidation
• Second most Malleable and Ductile Metal
• Recently Discovered to be a Very Effective Anti-Microbial/Bacterial

HIGHLIGHTS:

* The possibility of silver-based catalytic converters. In 2003 a bill was passed by the congress to study the use of silver in the automotive catalytic Research and testing is currently being carried out in a three-year government program.

* New Developments in Superconductors require silver tape. A new form of cabling has recently been developed which can carry more electrical current in much smaller spaces with far less resistance. This new technology (Nobel Prize awarded in 2003) should one day replace old power grids, especially in larger cities where space is at a premium and large electrical loads a necessity.

* Environmentally friendly replacement of lead based solders (Silver is unique in that it can join many different metals together at temperatures well below the metals melting point) The European Union law, which bans the use of lead based solders,comes into effect on July 1, 2006. Silver used as solder accounted for some 37.5 M ounces in 2004, and is likely to increase significantly in the coming year because of the EU’s decision.

THE INDUSTRIAL SCRIMMAGE FOR DWINDLING SUPPLIES

As a precursor to this brief article, many of you may already be familiar with the dramatic rise in palladium prices over a four year period beginning in 1997. By the year 2001, the metal had risen from just above $100/oz to a high of $1100/oz. This was a result of industrial users (e.g. Ford Motor Company) panicking about a lack of supply and consequently building the necessary inventories so that factories would not need to be shut down. Silver should experience a similar price rise due to future industrial desperation, only unlike palladium, which has since cooled off, the industrial scrimmage for silver will be only one of many unique forces acting on silver. This should then result in significantly higher (relative terms) and much longer sustained gains in silver.

BUT WHAT WOULD CAUSE SUCH DESPERATION?

The answer isn’t very hard to understand:
First of all, Silver, aside from petroleum, is used in more applications than any other commodity. However, unlike petroleum, the amount of silver used in its myriad of applications is but a tiny percentage of the item’s total cost. This means that silver is basically price-inelastic when it comes to industrial demand, meaning that end-users would not readily substitute other metals even in a dramatic price rise. Thus, a significant price rise would more than likely lead to the build-up of inventory than the elimination of silver due to substitution of some kind.*

Secondly, because of the now 25 year old (just-in-time) policy developed and popularized by the Japanese, all inventories of commodities have been reduced significantly. Overall, this has helped create a much more lean and efficient industrial machine, but such ‘leanness’ is very vulnerable in lieu of any transportation disruptions. Therefore, this fear of unavailability could easily lead to panic among industry giants causing them to stockpile bullion.

Having been in ‘deficit-mode’ for so long (between 15-60 years), a shortage at some moment in time is inevitable. The only way for these end-users to protect themselves will be to build up inventories by buying all available physical silver. It is only a matter of time folks, so I urge you to position yourself accordingly.

* Build up is the only feasible option for industry at the moment. Due to silver’s low price environment, there hasn’t been significant motivation to look for viable alternatives. Of all the metals, it is the best conductor of electricity, the most lustrous, strongly resistant to corrosion, not easily oxidized, and is quite soft and malleable. Though the advent of digital photography is an obvious exception to the rule of silver’s ‘monopoly’, its effect (or lack of) on the silver market shall be thoroughly analyzed in a future article.

A LITTLE SOMETHING CALLED ‘EPITHERMAL DEPOSITION’

Epithermal deposition is a geological term that accurately describes silver’s distribution within the earth. It means quite simply that the majority of silver is deposited near the surface of the earth’s crust, and that the further one digs the less silver he will find to extract. This necessitates that silver will become more and more expensive as time waxes on, as it will become more and more expensive to mine. Just as the price of oil has risen dramatically because of a lack of easily exploitable oil and fears of peak production, so too will silver one day rise in price accordingly, as it is also an integral yet finite resource of the world. For the many uses of silver see here.

Speaking of finite resources, it certainly wouldn’t hurt to get a feel for how much silver resources are left in the world (below ground). Using the data from the USGS (U.S Geological Survey), found here one discovers the following numbers:

Note: I believe that the actual amount of silver remaining below ground is much larger than those figures presented by the USGS below. The reason being that there are many unexplored areas in the world that are likely to house the next elephant supply of silver. The only problem is that the incentive to exploit these areas will require a much higher and sustained market price to justify the risks involved with production in these areas, as they are often located in places of environmental and political uncertainty. Also, many of these locations are remote, and the consequent problem of transporting to and accessing the refineries becomes another issue altogether.

COMMODITY:

Silver

Annual Production (in metric tons):	20.0K*
Reserves (m tons)	270.0K
Resources (m tons)	570.0K
Years of production that remain using reserves:	14 yrs
Years of production that remain using resources:	29 yrs

If the U.S Geological Data can be trusted, then silver is the rarest of all the metals left in the world, in relative terms, with a maximum of 29 years left of production using current resource numbers. Many argue that a dramatic increase in the price of silver will soon be leveled with the ramping up of production. There are several problems with this argument, especially in light of the above data.

• Silver Mines take years to move from the exploration stage to the production stage. Extensive drilling programs must be completed, along with feasibility studies, mining plans, geological surveys, and other necessary preparatory work, not to mention the construction of the mine itself.
• Silver is primarily a by-product metal, and therefore, even significantly higher prices of silver are not likely to be enough of a motivating force to move primary lead, zinc, or copper mines towards significantly higher production if the prices of those base metal do not rise in accordance.
• Since silver has been depressed in price for a long time, many more mining companies will choose to lock in at a price of say, $10/oz, by selling forward or hedging their future production of silver, sometimes several years in advance. If they turn out to misjudge the market, and silver rises to say, $50/oz, then the promises to deliver silver at $10/oz may never be met due to the bankruptcy of those same companies. If nothing else, they certainly will not be motivated to extract any more silver than they have to, since these miners know that they are being ‘ripped-off’.
• Since the world’s total silver resources amount to a mere 29 years worth of production demands, an increase in mining activity will only hasten the day of silver’s permanent depletion. This is perhaps the greatest irony of all. (Remember that this day of depletion is not likely to occur in the near future as new resources will be discovered and exploited as the price of silver moves ever higher)

If you ask a financial advisers about the merits of owning silver and gold, what do you think that they will tell you? Perhaps with the recent rise in price these commodities they would advise that you invest a small portion of your savings into them, but they will likely do so with reluctance and almost certainly without any real enthusiasm. You shouldn’t trust them, not because they are bad people, but because they don’t have a clue when it comes to bullish fundamentals behind silver, gold, and the many other metal commodities. This is the beauty of the thing, you have the potential to get in on the ground floor, and you don’t even have to pay for any ‘expert’ advice. Believe it or Not!

As an aside, silver just broke $8/oz today (11/16/05). This could be the start of something big. And although I normally advise people to avoid chart and graph analysis when it comes to silver, since it has proven its ability to defy them dramatically, a significant resistance level has been broken at around $7.80.

Regardless of whether silver trades at $9 or $12, it remains dirt cheap, but I do caution that the longer one waits, the less ‘dirty’ it will be. One day it should even come out looking like it ought to, the most lustrous of all metals. Won’t that be something!

DEBT, DERIVATIVES, AND DEBASEMENT!

Why does there seem to be no limit to government expenditure?
Why does it seem that there is no limit for government debt?
It’s simple folks! This great nation has long since left the straight and narrow, and has deceived its people and most of the world with it. After all, when was the last execution held for the fraud of debasing coins, defined as follows in Section 19 of the Coin Act of 1792:

Penalty of Death for de-basing the coins.
Section 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of the fine gold or fine silver therein contained, or shall be of less weight or value than the same out to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offenses, shall be deemed guilty of felony, and shall suffer death.(see: Coinage Act of 1792)

As far as I know this law remains legally binding to this very day. Americans need to wake up. We were using Silver (90%) coins as recently as 1964. There were obviously no executions in the years that followed, but just look what the result has been of this dollar fraud. Our founding fathers were not fools:

Government has been able to spend, spend, spend! They are no longer accountable to anyone. Today it is more or less up to foreigners to call America’s bluff as they hold over 40% of our national debt, mostly in the form of treasury bills (another worthless IOU).

The dollar fraud generates huge amounts of revenue, because of the interest that it generates when it is loaned out. This is undoubtedly the strongest motivating force for suppressing the price of silver and gold, since the manipulation works to keep men ignorant of the fundamental imbalances (and inevitable consequences) that are evidenced more and more every year by the government’s crimson red balance sheet. But all such doomsday references aside, many are waking up to the reality of the situation, as noted by the dramatic (in terms of recent history) appreciation in the price of all metals prices. Whereas the dollar has gripped the whole world like a vise creating debtors of nations, the release of the gold and silver markets will free those same nations of their chains and put an end to the fraudulent money-making machine by keeping men honest.

The broader result of the fraudulent dollar, has been a fraudulent everything. They call this the total World derivatives, which amount to an estimated $210 TRILLION dollars according to The Bank of International Settlements. This is an incredible amount, and as such it has created an environment wherein no one wants to be the first to rock the very unsteady boat.

A derivative, by definition, is supposed to be derived from something with intrinsic value, but there is nothing big enough left in all the world that adds up to $210 TRILLION. No equity remains to settle these bloated accounts. They amount to little more than failed bets. The world’s greatest financial players having doubled down again and again and again, and the result has been this $210,000,000,000,000 absurdity. This is much much bigger than Enron! Shouldn’t ordinary people be concerned?

To avoid whatever might result from the collapse of this house of cards is really quite simple: get rid of your dollar denominated savings, and invest in tangible wealth (land, antiques, jewelry, etc.). Even if this house of cards never collapses (which history proves otherwise again and again) you will still avoid the hidden tax of inflation, which has stripped away over 98% of the dollar’s value since 1900.

When it comes to converting one’s income into tangible wealth, Silver and Gold are the most liquid and convenient forms. They are traded worldwide, and are accepted by all. The cost to convert silver and gold into a ‘dollar denominated’ form for every day purchases is minimal and requires little effort. Though Gold may be more easily stored, Silver offers much greater potential (perhaps 60 times that of Gold) and at very minimal risk. Also, purchasing stock in companies focused on precious metals exploration and extraction can offer the most incredible leverage of all. Stocks are obviously a riskier venture, usually commanding much greater volatility, but I firmly believe than many companies remain incredibly cheap at today’s prices and will explode upwards in the near future. It is my job to find this companies, do my due diligence (DD) and rely the information to you. I’m just hoping that my readers will wisely position themselves accordingly.

A SILVER DIME WORTH A DAY’S WAGE?

It is Perhaps History that Shouts ‘Buy’ Louder than Anything Else

Let me explain:

• For thousands of years a silver coin (equivalent in weight to today’s dime) was worth a day’s wage. Whether the Greek drachma or the Roman denarius, this ‘dime’ payed the workman for a day’s worth of work. Even as little as one hundred years ago in the United States of America a silver dollar was all that was needed (see here for proof). Today, with silver at $7.65/oz, these same silver dimes can be purchased from a local coin dealer for around $.50 each! Using a $15/hour wage rate and multiplying it by an 8/hour workday yields a daily wage of $120. After dividing this modern wage by the historical standard, a $.50 silver dime, one discovers the amazing truth that silver is undervalued by a factor of at least 240! In fact, buying a bag of 90% silver dimes today for about $5,000, includes 10,000 of these dimes, which translates into 38 years of earned wages if one were to work 5 days/week! That same bag, if the historic norms were to return, would command a monetary value of 1.2M dollars. In 1980, this same bag of coins could buy a comfortable home for you and your family.
• About 500 years, from the mid 1400’s to the mid 1900’s, it took between 15-20 ounces of silver to buy one ounce of gold. This is referred to as the silver/gold ratio. As you might have guessed it, today (10/24/05) that ratio stands at a very lopsided 61/1 (silver/gold).

WHY SUCH AN IMBALANCE?

Simple. Today no nation today uses silver as money. Instead, everyone trusts in the myth that is fiat. This demand for real money began to slip as early as the late 19th century, and finally dropped off completely in the late 1960’s. But worldwide demand for silver is still out-pacing the supply by between 50-150 million ounces per year even without monetary demand!* The reason for this imbalance is the emergence of modern industry following WWII, and now even more so today in our electronic age. The world is consuming silver like never before.

Understanding this, one must then come to terms with the main difference between industrial and monetary demand. When used for industrial purposes, silver is consumed, never to return to the market again (barring, of course, an incredibly dramatic rise in price to justify the cost of recycling very minute bits of silver).
Though it is impossible to know the exact amount of above ground supply of silver left in the world when including such items as jewelry and silverware in the evaluation, it isn’t nearly as hard to happen upon the numbers for accessible silver (able to be used industrially at the current prices) left in the world. As of 2005, this number stands at less than 300 million ounces, which equates to a very insubstantial dollar amount of $2.3 billion. Two billion dollars, after all, is only about 2 days worth of the USA’s ongoing trade deficit.

When including the silverware, jewelry, and other miscellaneous items, a reasonable estimate would be between 15-20 billion ounces of silver left in the world (the vast majority of it in a form that cannot be used industrially barring a sharp rise in price). Keep in mind that this is all that is left of the estimated 40 billion ounces mined in the history of mankind? Amazingly, the missing 20-25 billion ounces was consumed by industry in less than one hundred years starting at the turn of the 20th century. But, nevertheless, some might wonder whether it is conceivable that this jewelry and silverware would come to market and stop silver from rising. Undoubtedly some would be sold if prices were to rise much higher, perhaps in the range of $40-50/oz. But even at these prices it isn’t likely that more than a few hundred million ounces would find its way back, since, among other reasons, silver held in these forms represents a peoples life savings in many parts of the world where it is unwise to save paper money. A rise in price might only serve to encourage saving in this manner, as it is likely that at the same time all paper currencies will perform quite poorly.

But let’s not worry about these ‘ifs’, suffice it to say that before much of this silver would ever come to market, silver would have already caught the attention of some major financial giants and mutual funds, not to mention ten’s of millions of American’s who would have hopefully by then woken up to the corrupt system of unjust weights and measures in the form of ‘broken promises (i.e, paper currency) under which they now live. Why not wait to argue about these fundamental shifts that occur in the silver market after the gain of some 700%.
Besides, even if a very large amount of this silver supply were to be sold onto the market in the event of a high and sustained silver price, it would still be financial ‘child’s play’ to the world’s 691 billionaires all wanting a piece of the action. After all, what’s another 10 billion dollars worth of silver introduced into the market, when the market commands an unreal potential investment pool of $764,628,208,195 US dollars and cents (total amount of all U.S. Paper currency & coin in circulation as of June, 2005 http://www.fms.treas. gov/bulletin/index.html ) With this in mind, it certainly isn’t hard to imagine where the investor demand will come from. Many millions of men and women will inevitable become magnetically attracted once again to the precious metals scene as all their previously ‘precious’ paper currencies continue inflate.

GOVERNMENT INVENTORY HAS RUN DRY!

In 1980, when the price of silver peaked at around $50/oz ($150/oz in today’s inflated money) there was a global above ground supply of over 2 billion ounces. Now, total world silver bullion inventory stands at a meager 350 million ounces (at the price of $10/oz.) according to GMF.

This situation is a result of a continual deficit in the silver market. Every year, more silver is consumed than is mined. This has gone on for at least the last 15 years, and there is even strong evidence to suggest deficit has gone on much longer than that (about 60 years, according to the well renowned silver analyst, Ted Butler). To fill this gap, there has existed only four options.

1. Recycling scrap silver – which is currently done, but is largely dependent upon supply, and is therefore unable to fill the gap completely.
2. Hedging – results when silver producing mines sell their silver forward (i.e. In advance).
3. Investor selling – a trend which has reversed itself from net selling to net buying in just these past few years.
4. Liquidation of Government Holdings – this has largely helped to fill the demand gap in the past, but government coffers are now nearly empty.

The US is a shining example when it comes to making use of option number three. As a nation, we have gone from holding the most silver in history, to owning virtually no silver reserves at all in a little over 60 years time. Even our emergency military supply has been drained, something that is desperately needed in times of war. In fact, the US government which was the largest seller of silver in the 20th century, has now a net become a buyer of the metal (beginning is 2002), purchasing around 10 million ounces a year in order to mint its popular 1 ounce Silver Eagles!

But the US isn’t alone, most of the World has followed its lead. Such a systematic selling of silver partially explains the long bear market, as it has effectively masked the tremendous deficits between supply and demand that occur year after year. But all this es well for the average Joe who is willing to give a little and invest in silver, since there is now no central power that maintains the ability to flood the market with physical silver in order to suppress a dramatic rise in price.

Plenty of Gold (in comparison) is left in the central banks of the world to sell, but such is not the case for silver. Never before has this situation existed! It is but another phenomenon in the growing epiphenomena of the silver market.

WHEN THE HOUSING BUBBLE DEFLATES THE SILVER PRICE WILL INFLATE

1. 70% of the silver mined every year is as a by-product mineral. Only about 30% of silver supply originates from primarily silver producers. The rest comes from the mining of Gold (12%), Copper (26%), and Zinc/Lead (32%).
2. Because of the excessive printing of money by the federal reserve, combined with the artificially low interest rates prescribed by good old Alan Greenspan, the Nasdaq bubble of the 1990’s has merely morphed into the housing bubble, albeit after a bit of a hiccup.
3. According to http://www.copper.org/education/c-facts/homepage.html : Building construction continued to be the largest end-use market for copper products, accounting for more than two-fifths, 46.3% (3,384 million pounds), of total U.S. consumption. This demand results mostly from the copper used in plumbing and wiring systems.
4. More than half of all zinc mined is used to galvanize steel. Here again, the end in mind is usually construction. http://www.mii.org/Minerals/photozinc.html
5. Though the majority of lead consumed annually is used to make batteries for trucks, cars, and other vehicles, etc… http://www.mii.org/Minerals/photolead.html some is used for construction purposes as well.

If housing prices collapse, what will happen to the demand for copper and zinc? The demand for both will go down considerably, especially copper, since almost half of its use is directly parallel to construction growth. Since primary copper mining alone accounts for 26% of all silver mined every year, there will be much less silver available for the market. And since this market already has enough trouble finding adequate supply, you can surely bet that the price of silver is headed up. In the future, it could very well revert back to the ways of old, when copper was the by-product of silver mining, and not the other way around.

* Note: I do not necessarily predict that copper,zinc, and/or lead prices will fall, but rather, I am simply presenting an if/then scenario which would likely cause imbalances within the market favorable towards silver’s performance.

THE LARGEST SHORT POSITION IN HISTORY AND THE COMING SHORT SQUEEZE

Just what is a short?

In essence, shorting is the opposite of holding a ‘long’ position on something. Thus, as a ’short’, one anticipates a certain stock or commodity to perform poorly. A more thorough definition for shorting reads as follows:
The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

This risky assumption can lead quickly to a ’short squeeze’ which happens when the following occurs:
The price of a share rises and investors who sold short rush to buy it to cover their short position and cut their losses. This, in turn, drives the stock price even higher, resulting in many more short sellers feeling compelled to cover their positions.

Short positions of this description (perhaps other types as well, such as the infamous ‘naked short’) have existed on New York’s Commodity Exchange, Inc. (COMEX) for the past 20 years. The extraordinary thing regarding the silver short position is that of all the other commodities listed on COMEX, only in the case of silver has there existed a short position larger than that of the total world production and known world inventories combined. I guess that means silver wins the ‘boobie’ prize?

But every coin has two opposing faces, because when shorting something, one runs the risk of having to buy their shares back with limitless losses, that is, when those on the ‘long’ side choose to take physical delivery of their silver. Thus, when the price of silver really starts to rise, the short players are going to be forced to cover¡ªthat is, buy back their shorted shares¡ªwhich will, in effect, turn this long bearish trend into a stampeding bull of colossal strength as more and more of the doomed shorts fold. They will try to buy back their physical silver, but being in such ’short’ supply, this will only serve to push the price higher and higher until one day it might finally reach its true free-market price. Upwards of $100 an ounce is not unreasonable, and I look forward to the day as I continue to put my money where my mouth is.

THOSE FOOLISH ‘PAPER LONGS’

Amazingly, Silver is so cheap, that many find it much too cumbersome to invest in. It really is quite a load for someone who wishes to take ownership of a million dollars worth of physical silver bullion. At $7.80/oz (10/25/05) that would amount to over 5 tons of silver! Thus, many investors want to invest in silver, but without the hassles of transportation and storage. One way for them to accomplish this is through the purchase of Silver Bank Certificates.

But there is one major problem with Silver Certificates, Real Silver Exists to back of these paper ‘con’-tracts.

Reasonable estimates have determined that about 1 billion ounces of silver exist in this paper form. Only about 500 million ounces (at most) of silver is know to exist in above ground refined form. This means that Silver Contracts alone represent an estimated 2 times the amount of silver actually in existence. Obviously, these silver contracts won’t be able to be redeemed for anywhere near their face value, if anything at all, when the price really explodes. Also bear in mind that one billion ounces of silver is only worth about $8 billion dollars, so the number of such certificates in existence is likely to be much higher, since over six-hundred billionaires are currently roaming the earth. With a combined net worth of several trillion dollars, you can bet at least of few of these men and women have a portion of their wealth invested in silver, following Warren Buffet’s lead.

Again, let me say that there is no real above ground silver to back up these contracts. Therefore, these certificates are just as bad as the fiat money they were traded for. How foolish, not only have these ‘paper longs’ traded one broken promise for another one which happens to be much more expensive, but they consequently have little hope of profiting from a rise in the price of silver as they had otherwise hoped. These longs will be unable to acquire the tangible wealth that they so diligently sought, because they failed to discern that their certificates were empty promises just the same.

Thus, those who issue the certificates are in effect selling ’short’ positions (shorting is discussed more here: Short Positions ). This is in addition to the already abundant futures and leasing short positions that at COMEX which may have helped to suppress the price.

If indeed there are a billion of these paper certificates in existence, then for every dollar increase in the price of silver, the issuers (not the holders) stand to lose one billion dollars. At present, silver is continuing its climb, and one day higher prices will force these ’short sellers’ to limit their losses by buying the physical silver bullion itself, just in case their client-el start to redeem. This, in turn, will create more panic in the ’short’ community, which will further simulate the precipitous rise in the price of silver. Do you understand how bullish this is?

This is the Anti-bubble of all time, like a black hole reversing itself, finally able to crossover onto the other side of the event horizon. And just as the light would break forth from that pit of darkness, so also will silver, once back in the hands of ordinary men, reveal the truth behind this present system of unjust fiat money. Free oneself from these chains now! Don’t wait until it’s too late.