'Accumulate as much silver as you can'

Last Updated : 09 May 2011 at 17:50 IST
http://www.commodityonline.com/news/Accumulate-as-much-silver-as-you-can-38824-3-1.html
By Tehmaas S. GorimaarTo simply follow the silver price without trying to understand the extreme stress in the global paper currency system today would be folly. 

Since August 15, 1971, when Nixon closed the gold window, the world has been floating on a sea of fiat currencies, supported only by its one reserve currency, the U.S. dollar, which is nothing more than an I.O.U.

During the days of the true gold standard, a country was required to disgorge its gold reserves if it ran consistent trade deficits. Of course, these days, in the absence of the gold standard, countries have been at liberty to print as much currency as they deem fit.

This has led to a scenario of competitive devaluations. We are now at a point where the smart money is losing its faith in this paper currency system, and is viewing it as a giant, Ponzi scheme, the likes of which the world has never witnessed before.

The U.S. dollar has abused its privileged status as the reserve currency via extremes in fiscal and monetary policy. We are now at a breaking point. Make no mistake about that. To protect itself, real wealth is starting to abandon the paper Ponzi system in earnest. Smart investors are accumulating real money, namely, gold and silver.

It may behoove us all to bear in mind the difference between money and currency. The Merriam-Webster Dictionary defines currency as something (as coins, treasury notes, and bank notes) that is in circulation as a medium of exchange. A medium of exchange, and nothing more.

No implication is made regarding its value. The same dictionary defines money as something generally accepted as a medium of exchange, a measure of value, or a means of payment. For something to be considered to be money, therefore, it must be perceived as a thing of value.

After an evolutionary process spanning centuries, during which time things such as grains, cattle and sea-shells had their brief day in the sun, only gold and silver emerged as things of true value that could be considered as money. In the context of the present silver situation, it is well known that both, gold and silver, are the only assets that have been in a raging bull market for a decade or so.

Some months ago, supplies of silver started to tighten, and silver went into backwardation. This means that prices for silver futures were lower than spot prices for the metal. This, in turn, means that people were not willing to accept future promises of silver delivery on futures exchanges.

They wanted their metal at the present. Something else happened, too. Some silver longs on the Comex started to ask for delivery of physical metal, rather than settle their contracts in cash, or roll them over into the next delivery month. The Comex was caught with its pants down. (At the time of this writing, the Comex had about 33 million ounces of silver to deliver against more than 600 million ounces worth of silver contracts.)

Even if a tiny fraction of the longs took delivery, the Comex would have been busted, and their paper fraud would have been exposed. In other words, the Comex has insufficient silver to deliver, by a wide margin. It must be remembered that many of the players on the Comex, such as hedge funds and other managed accounts, are only interested in paper profits. They are not interested in taking physical possession of the metal, which, in reality, is their folly.

Their only interest is in showing high profits to their clients, so they can earn 20% or so of the profits they generate. On the short side of the silver trade are bullion banks, who, in cohorts with the Federal Reserve, want to preserve what is left of the declining dollar. If gold and silver rise against the dollar very rapidly, there may be a cascading effect, and we may see a waterfall collapse in the dollar.

At the time of writing, the dollat index had fallen below 74, and the only level left to protect was the band between 71 and 72. Below that was an abyss.

Once the dollar got there, it could have gone down to 60, marking the beginnings of a complete collapse. The Comex, in order to protect its own clients, the bullion banks, and the dollar, decided to raise the margins on silver contracts an unprecedented five times in three weeks.

This was the degree of fear at the Comex – that the silver market could bring the Exchange down, along with its bullion banks. So they decided to cut the legs from under the hedge funds. Unable to come up with the extra margins, the hedge funds were forced to liquidate.

However, the supply-demand situation in silver has not changed, Supplies are still tight. But by increasing margins by frightening amounts, the Comex has revealed its hand. It has shown the world that they are mortally wounded, and that they are fighting back with everything they’ve got

Here is what I think will happen next. The hedge funds, as a group, will have learnt their lesson. They now know how to beat the Comex. They will now go and buy physical silver in the market, and abandon the Comex. The next time the bullion banks short silver, there will be none left to deliver. There is a short window you have in which to accumulate as much silver as you can. There may never be another opportunity like this one.

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