Silver Investing - Risk And Reward by David Morgan

One of the questions I am asked most frequently is, “Where can I invest in precious metals to maximize returns?” The answer is not as straightforward as one might expect.

An area that comes to mind for many is the futures market, where the leverage is great and the rewards can be just as great. However, to be successful requires much more time, effort, and money than many a novice “futures trader” can handle. The amount of success in trading the futures is a very low percentage, something on the order of 2%–3%. It has been my experience having done both futures and stock trading that stock trading/investing is much better suited to most private investors and allows leverage that is similar to and sometimes exceeds that of the futures market.

The advantages are that your risk is better controlled most of the time. I want to be clear: both futures trading and stock investing/trading are risky endeavors, but investing as a whole has risk, as does life itself. The point is, given the risk/reward profiles of futures or stocks, my experience is that stocks are more appealing.

This is a time period when gold and silver have been moving in a large trading range and the underlying mining equities have been reacting in a sluggish manner. That is to state, the mining shares generally have not performed in a manner providing greater leverage than the metals themselves.

There is still plenty of time for an investment in precious metals, but a wise investor should choose carefully ahead of the herd. It is my considered opinion that the window of opportunity exists right now for those who are not in this market or for those who wish to have further exposure to the precious metals. This window of opportunity may not last to the end of this year. In fact, let me go on record and state that the next two to four months should provide one of the best and safest times to purchase quality mining companies. If you can purchase during general stock market weakness and when metals prices are down as well, you can be pretty well assured you are buying low, before the next leg up in this market.

The big money is made if you catch a major trend and stick with it long enough to make substantial gains. Our premise is that the era of paper assets peaked in the year 2000, and commodities were at the bottom. We also believed that the paper money time bomb was ticking and astute investors around the world would seek the safety and time-tested soundness of real money—gold and silver. These two precious metals represent the top tier of all commodities, because they are readily accepted around the world as a means of final payment. Additionally, in times of financial stress, the metals are a store of value.

Basically, you have been given a second chance to buy before the next major leg up in the precious metals cycle and it is my firm belief that this time it will be led by the mining equities, for a number of reasons. First, there are more equity investors in the U.S. and other countries than at any time in history. On top of that fact, many trade from electronic platforms and are only a mouse click away from buying or selling a stock. Secondly, people love to buy with the herd. Once gold clears the US$1000 level again and stays there, many investors will have the confidence to buy into the mining shares.

Most people are lazy to some degree and they will do whatever is easy and convenient, and that means, as stated above, when the precious metals bull begins to run again, people are far more apt to purchase mining stocks than to buy silver or gold coins.

Silver Stocks

At this point in the precious metals cycle, many investors who discover the silver market may think they have missed most of the move. In fact in some cases they are correct. Our financial reports focus on “Money, Metals, and Mining,” and quite frankly, I cannot give you the opportunities we saw and recommended in 2002-2006 . . . but the next leg up will be very worthwhile, especially in light of the fact that the investing public trusts almost nothing in terms of “investment” at this time.

Real estate investing is dead, stocks have rallied but for how long, the municipal bond market looks shaky, and even the sacred U.S. Bond has been shunned to a great extent by foreign trading partners.

The most important fact about investing in the precious metals, actually for almost all markets, is simply that the majority of the move comes in a very compressed timeframe. One way to think about it is that maybe 90 percent of the entire move comes in the last ten percent of the time. If this cycle for silver is going to last 15 years, then the majority of the move upward will come during the last year. I call this the “blow-off” phase, or the “greed-panic” phase. In my view, this will occur because everyone will be dumping the U.S. dollar for something/anything, and the most sought-after class is the precious metals.

Notice I did not state gold, but precious metals. Certainly gold will be sought, but silver and silver-related investments would be the star performer at the end of the cycle. There are two reasons for this. First, silver is more affordable than gold. Those investors flooding into this market during the panic phase will be looking for the best alternative to the U.S. dollar possible, and that will be silver because it costs less per ounce than gold. Secondly, most will do some cursory investigation and find that silver outperforms gold during inflationary times.

To validate my point, think back to the dot-com bubble. Every little company with an Internet address was moving up, and most had very little merit. This is typical of markets-- near the end the public rushes in and drives prices to unsustainable levels.

First it must be understood that the universe of true silver stocks is extremely small. My definition of a true silver stock is a company whose primary revenue stream is based on silver. This is an unusual creature because approximately 75 percent of all silver comes from the mining of other metals. Depending upon which study you examine, about 25 percent of silver mined is a result of copper mining, 33 percent is a result of lead/zinc mining, and even 14 percent of silver comes out of the ground as a result of gold mining.

The reason an investor wants a primary silver producer is the fact that the stock price will be leveraged to the price of silver. If an investor buys a stock that has its primary metal as copper yet still yields quite a bit of silver, the company is more apt to move on the price of copper not silver.

Additionally, most miners who are base-metal miners and have a great deal of silver in the mix really do not care about the silver price, and they sell it for "peanuts" to use the proceeds against their primary mining activity. You may find other information on a huge universe of silver stocks available, but take your time to study and educate yourself. Just because a company has silver in its name, or is exploring to find silver, that does not make it a silver company.

It is an honor to be.

Sincerely,

David Morgan

Mr. Morgan has followed the silver market for more than 30 years. He wrote the book, Get the Skinny on Silver Investing. Much of his Web site, Silver-Investor.com, is devoted to education about the precious metals; it is both a free site and does have a members-only section. To receive full access to The Morgan Report, click the hyperlink.

D_I_V_O_R_C_E by Theodore Butler

Old-time country music fans will recognize the title as one of the late Tammy Wynette’s greatest hits. Men and women are alike in uncountable ways, yet are also remarkably different. In every species, the female is from Venus, the male from Mars. Sometimes, even relationships that have endured for the longest time end in divorce.

Today, I write of the pending divorce I see in a relationship that the world has grown comfortable in observing for hundreds of years. As such, when it becomes obvious that the two will part ways, most will be shocked and in disbelief. Yet there will be no reconciliation and the split should prove permanent. The divorce I speak of is in the price relationship between gold and silver.

Gold will still be gold, of course, and will remain as it has been since the dawn of civilization, valued by the world’s inhabitants for its beauty and rarity. As will silver. Each will exist forever, as they have existed through the ages. Each will rise and fall in price based upon supply and demand and investment flows and the presence (or absence) of manipulation. Nothing can change that. What will change is the price relationship they have shared in everyone’s living memory. They are about to begin separate journeys.

In the coming price relationship dissolution, silver will be the cause of the break up. That’s because it is the price of silver, relative to gold, that is out of line. Just like a spouse long-abused in a one-sided relationship, silver will be the one to blossom once the marriage is terminated. Certainly, I am not suggesting that gold has abused silver, as inert materials can’t possible abuse anything. The abuse of the silver price has come from the long-running manipulation. It is the coming end of the silver manipulation that will set silver free to begin its own new price life.

One of the irreconcilable differences in the gold-silver price relationship is something quite visible. Yes, both have been manipulated in price by the concentrated short selling of the big bullion banks on the COMEX. But the amount of short selling in gold never exceeded the amount of real gold existing in the world that could conceivably cover the short position. For example, the current total commercial net short position in COMEX gold futures sits at 20.4 million ounces (as of July 21). The net short position of the 4 largest traders is 16.1 million ounces. That’s a lot in terms of dollars, almost $20 billion and $16 billion respectively, but not so much in terms of the amount of gold bullion in the world (2 billion ounces). The total net short position in COMEX gold futures represents just 1% of the gold bullion in existence.

Half of the gold bullion in the world is owned by government entities (remember, I speak of gold bullion only, not the total 5 billion ounces of gold said to exist in all forms). The US government, alone, is reported to own 260 million ounces of gold. If the big 4 gold shorts really got into trouble, just 6% of the US Government’s gold stash could conceivably be used to bail them out completely and make delivery, if necessary. Let me be very clear here - I’m not saying this will happen. I am saying it could happen. If the US, or any number of other world governments decided that a gold short covering price fire must be extinguished, they could put it out with physical material if they chose. Not would, necessarily, but could.

This is not the case in silver. The 4 largest traders are net short 235 million ounces on COMEX futures. While that’s not very large in dollars, at just over $3 billion, it is enormous in terms of the amount of silver bullion in existence. The big 4 in silver are short more than 23 times what the big 4 are short in gold, relative to above ground bullion inventories. But here’s the kicker - there is no possible way for any government entity to extinguish a silver short covering price fire by actual delivery of government owned silver. That potential price smothering material simply does not exist in government hands. The US Government, the world’s largest owner of gold reserves, and formerly the largest owner of silver reserves, now owns no silver. For those that are convinced that there is government involvement in the gold and silver price manipulations, this is a difference worth considering.

This is not the only difference that will lead to a gold/silver price break up. The reason we have such a mismatch in the relative size of the short positions compared to world inventories, lies in the very nature of what silver has evolved into over the past century. Silver became a vital industrial material and its formerly large inventories have been consumed to the point where there is less silver bullion in existence than there is gold bullion. That one in a million of the world’s citizens know this fact, promises to make the gold/silver price divorce, when it occurs, as sensational as the most notorious celebrity split. Only instead of reading of racy details in a trashy tabloid, the specifics will be carried in the financial press and in price reporting. The growing awareness of the particulars of the divorce will drive many to want to buy silver.

I have long anticipated this divorce, but now its timing seems at hand. This has been the recent theme of my articles, where I have evoked images of this could be the last time and game changers. As an analyst studying supply and demand fundamentals, timing is not normally the focus of my attention. If I am to be wrong, it will likely come on the timing side. That said, there are two features in the current environment that may bear on the timing of the coming gold/silver split. Whether this is the time should be revealed in these two factors.

One, the current relative structure in the gold and silver futures markets, as defined by the Commitment of Traders Report (COT), suggest the divorce may be near. In gold, the commercials are shorting heavily again, showing no fear in selling into the recent price rally. So far, the big shorts have not yet shown a similar willingness to short additional silver contracts. This holds the promise that they may not short on further price gains. Simply put, if the big silver shorts don’t sell additional contracts, the silver price will fly and the divorce papers will be filed. If they do sell, the price marriage will be held together temporarily.

The second factor involved is the course of the CFTC in dealing with the issue of position limits in silver. This is directly related to whether the big shorts sell additional silver contracts. If the Commission does the right thing (as I hope), and levels the playing field in silver, then the big shorts can’t sell more COMEX silver short. If that occurs, as it should, the gold/silver divorce will be final. If not, the bad marriage will linger.

Just like a marriage that never should have occurred, given the real facts, silver has no business being less than 2% of the price of gold. Whether it deserves to be equal to gold in price is debatable, but it certainly doesn’t make sense for gold to be 70, or 50, or even 20 times more than the price of silver. On any reasonable and objective measurement, from annual production to existing inventories, the gold/silver price relationship is lopsided. You may think my divorce analogy is a bit extreme, but the coming price out-performance of silver compared to gold will reward those who back the real winner. The current price relationship is on the rocks. Those that can switch gold holdings to silver should do so without delay.

THE DOW CHART- LONG TERM

Folks, let's not get carried away with the Dow breaking 9,000, because the long term chart suggests something much different. If your buying into the current propaganda, you will be left heartbroken and broke. Right now, your probably breathing a sigh of relief that your current 401K is resembling a 301K, but let me suggest you might be left with a 101K if the chart is any indication. After fielding a couple of questions on the long term possibilities on the DOW, I decided to run my long term chart for the answers. So wholla.....Here is what the chart is telling me. Let's look at the chart from 1981 to present. As you can see, the DOW generally trends upwards between the upper and lower resistance bands and trends between them from high to low. Now let's take a look at the first significant event on this chart which is the year 1987. As you can see, the DOW broke out of the upper resistance band in Jan 87. By Oct 87, it corrected all the way back down to the lower resistance band and luckily held at that point. That minor correction is known as the Stock Market crash of 1987. Technically speaking it was just a correction from the stupid over speculation that the market could operate out of the norm. Now having righted the market. The market continued it's trend until March of 1996. Uh oh. The retard speculators are back. Having sat on their hands for nearly 9 years. They were eager to pump up the market and use the great technology boom to do so. Like clock work, the market was pumped up over the upper resistance band until 11 Sep 2001. We all know what happened on that day, so I won't go into detail. Needless to say, the bubble was popped and eventually corrected below the long term resistance line. With that bubble popped and the market righted, we should of left it alone - but no so fast. How could we re-inflate the market back to the long term trend. Enter the Grand housing Boom bubble. McMansion's for everyone was the dream and the dream was realized with B.S. financing programs. No money down and cheap interest rates were the catch phrase of the day. Bad Credit or No credit! It didn't really matter. You were getting your McMasion. Now take a look at the chart. They couldn't even get the market back within the long term trend lines with the great housing boom. Sadly, it all blew up with most Americans caught with their pants down and the market corrected all the way down to around 6500ish. Does that number sound familiar? Look at the chart! 6500 is where the bubble started in 1996. They used two consecutive bubbles to keep it a float until it deflated back to where it started. 6500ISH! The two bubble are so obvious it probably makes you feel like a fool! Hind sight is not 20/20. If you would of followed the trend, you would of known what was coming. Speaking of what is coming? Does the Energy Bill (Cap and Trade) and the Health Reform Care Bill sound familiar? Why do you think they're pushing hard for this? Oh yes, you guessed it. They need to start the next bubble, so be prepared! O.K.....one last look at the chart. The market should attempt to test the 61.8% Fib level at 9500. If the 9500 number is not broken, look out below. (If 9500 is broken, it must hold for two consecutive days.) The Dow will correct back to 8,000 and if 8,000 doesn't hold look to 6,500. Now here's where it can get scary. If 6,500 is broken, 5,200 offers some some support along with 4,000. If a "Black Swan" events occurs, 1,600 is where it will settle. Be prepared!

International Forecaster July 2009 (#6) - Gold, Silver, Economy + More By: Bob Chapman

The following are some snippets from the most recent issue of the International Forecaster. For the full 24 page issue, please see subscription information below.

US MARKETS

...

The US Illuminists are gambling big. This is the most dangerous part of their strategy, namely, how to take down America and the dollar without destroying themselves in the process, both financially and politically. They are going to get smoked. Even now the stock, bond and commodities markets are spiraling out of their control, and their new outrageous salaries and bonuses are about to be debauched as they are left holding the bag with huge positions in dollar-denominated paper assets. They will try to dump this paper without sending gold and silver on a moon-shot, but they are doomed to failure. The amounts of paper assets and debt are simply too massive, and the commodities markets and other tangible assets are too small to absorb these gargantuan sums of money and credit without exploding to the upside. Just keep buying gold, silver and their related shares on the dips, and you just can't lose in the long term. The trend is your friend. Gold and silver are trending up, and stocks, bonds and derivatives are trending down - way down!!!

About two months ago our sources informed us that the US government had begun sending large amounts of cash to embassies throughout the world to be exchanged for local currency. We have had a number of reports that this in fact has been the case.

Having been involved in counterintelligence and for some 50 years in economics and finance, I believe this is a precursor to problems centered around the US dollar.

It was just a few months ago that the USDX was 89.5. The USDX is a dollar index, and is computed by using a trade-weighted geometric average of six currencies and their weights are: the euro 57.6%; the Japanese yen 13.6%; the British pound 11.9%; the Canadian dollar 9.1%; the Swedish Korona 4.2% and the Swiss franc 3.6%.

We recommended the sale of the dollar at 89.5. It recently closed at 79.5.

We believe that between now and the end of October that the USDX could fall to 71.18, its former low of 18-months ago. At that time a number of businesses outside the US were refusing to take US dollars and we believe that will happen again, and that is what the Treasury Department is anticipating and the reason for sending the cash to the embassies for conversion to local currencies.

We also believe these events could precipitate a short bank holiday in the US due to disruption of capital flows in and out of the US and concern if not panic in the US banking community. We also believe the government will use such events as a trial run for a future major banking shutdown. They will be interested in the public’s reaction as a precursor to what might happen in the future if there were a major banking shutdown.

Americans are well aware of the Madoff scandal, but procedures used in his conviction leave many unanswered questions.

Conspiracy charges were never brought against Mr. Madoff. We had information we published just prior to the story breaking of what Mr. Madoff had been doing. Our contacts not only gave us the story, but details of how the funds were transferred from NYC to Israel and other offshore locations, such as the Cayman Islands, Belize and Switzerland. There were many wire transfers and also the physical transfer of bearer bonds to these locations.

What was interesting was Mr. Madoff’s association with veteran officers in the US military. That leads us to intelligence sources that have told us that Mr. Madoff was operating his scheme with elements of the CIA, the Russian-Israeli mafia and the Mossad. This would explain Mr. Madoff’s closed trial.

A number of banks were used in the operation. The Israeli Discount Bank, Bank Leumi, Bank of New York, Chase and Citibank’s private banking facility.

There is no question funds were being used by government agencies just as were those of AIG.

For his efforts Mr. Madoff received 150 years in prison, a ludicrous sentence under the circumstances. The nature of his trial was unusual. No media coverage, no attempt to charge any co-conspirators and no effort that we are aware of to recover funds, except for a billion here and a billion there. You don’t run a scheme like this out of your back pocket. Many on Wall Street knew what was going on and scores of others were involved. In the case of following the money all the court has to do is check with the NY Federal Reserve and the Treasury Department, both of which have access to every money wire out of his company and the banks he used. That would be too easy or is the avenue deliberately not being pursued. Then there is the case of the SEC, which knew for years a scam was being perpetrated. They were served up proof positive of a scam and did nothing to stop it. That tells us higher up in government they were told hands off, look the other way. The whole episode stinks, just like BCCI, Iran-Contra and Nugan-Hand, all CIA scam operations.

Mr. Madoff was convicted on 11 criminal charges – none of which included conspiracy. In other words, who assisted you in your criminal acts? Strangely the court had no interest in uncovering who else was involved. Thus far only a few billion dollars have been recovered.

The only reason Mr. Madoff turned himself in and pleaded guilty to all 11 counts of criminal activity was to protect his co-conspirators by not having to testify and government willingly allowed that. Mr. Madoff kept insisting he acted alone. After 28 years on Wall Street we can hardly believe that. None of his family was charged, yet they had to know what was going on.

There are just too many unanswered questions that government and Wall Street have been all too willing to sweep under the rug.

THE GOLDMAN SCAM:

There is absolutely no question that Goldman Sachs is a criminal enterprise and that they have co-opted our government.

We believe that they have been involved in massive unlawful activity using a program that may have been given to them by the government. The program is a major front running device that capitalized in picking up trades by snipping them out in nanoseconds and opportuning the system with a program no one else has. The Street has been and is furious that the media, regulators and our duly elected are not even discussing what could be the second biggest scam and abuse of our times. The biggest is the suppression of gold and silver prices.

Worse yet, few people realize that exchanges actually pay firms to trade against order flow when they act as a “supplementary liquidity provider.” Exchanges pay firms ¼ of a penny if they provide liquidity when an order appears in the system. This is an extra incentive to front run order flows. Can you imagine that this is a policy of the NYSE, led by the pirates at Goldman Sachs?

During the past two weeks, since these revelations, we have heard nothing from the SEC and their course of action. If something is not done nobody in their right mind would want to trade on our markets again.

If there is, as we suspect there is wrongdoing, this scam is bigger than Madoff and Stanford combined. Due to the position that the NYSE allowed Goldman to be placed in, they have a virtual monopoly on the NYSE’s Supplemental Liquidity 2 Provider Program.

It is Nasdaq’s view; these irregularities reveal that the NYSE’s true motivation for these SLP operations is to discriminate among its members and to burden some member’s ability to compete with the NYSE. This is as sinister as it gets.

We spent 28 years on Wall Street and we know that when a firm has an 87.5% trading accuracy record, something unnatural is going on. That is Goldman Sachs followed by JPMorgan Chase and Citigroup.

It was only six months ago Goldman received $10 billion from the US Treasury and relied on government guarantees to issue debt. This, in part, was how such enormous profits were made, up 64% year-on-year. As well, the government, via the Fed, stepped in and had the taxpayers pay $13 billion of AIG debt to Goldman, their part of a $105.4 billion rescue. This program has allowed Goldman to make record profits in the middle of a depression, some $27 billion a year.

As usual the media refuses to dig in and get the story we and a few others have dug up. Nor, as expected, has the SEC done anything.

...

THE INTERNATIONAL FORECASTER

WEDNESDAY - JULY 22, 2009

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