Silver has been performing very strongly over the past month, has broken through previous resistance and continues to move higher despite the large concentrated short position by commercial traders (JPM and HSBC) on the Comex. There are signs that an increasing number of hedge funds and individual investors are demanding delivery of physical silver as the dangers of unallocated paper promises become more widely understood. So far this month, 453 silver contracts have been delivered on the Comex or 2.3 million ounces. There is a similar story with the ETF SLV in which nearly 15 million ounces of silver have been withdrawn since late February.
These funds and investors seem to be following the lead of Greenlight Capital, which shifted their gold position from GLD to physical gold during July of 2009. Passport Capital has also signaled their intention to take physical delivery in its $1.2 billion Global Strategy hedge fund rather than owning the ETF GLD. When funds with this amount of capital begin to shift into a relatively small precious metals market that is overly leveraged by naked shorts, the potential for an explosive short squeeze increases significantly.
Given the massive leverage (as high as 100-1) used by the banks that are naked shorting silver with paper contracts on the Comex, speculation has increased that a group of wealthy investors, Asian traders or funds may look to exploit this long-running manipulation scheme. This would be accomplished by demanding a huge quantity of the physical metal be delivered all at once, thus forcing the naked shorts to scramble to come up with the metal that is known to be in short supply. The short squeeze would then send the silver price blasting dramatically higher. I won’t go off the deep end and give this outcome a high probability, but it is certainly higher than it was just a few months ago and prior to the widespread manipulation exposure given by CFTC whistleblower Andrew Maguire, GATA and most recently the New York Post.
All of this adds up to what could be a once-in-a-lifetime opportunity to generate massive returns in a short time period. If you are not already invested in silver, you just might miss the ride.
I believe it is a good idea to have physical silver in your possession first and foremost. A bird in the hand is worth at least 10 in the bush in this case. Please see my article “How to Buy Physical Gold and Silver” for more information on the best ways to purchase precious metals.
Once you have a base holding of physical silver, you might want to consider purchasing shares in select silver miners. This gives you additional leverage to the rise in the silver price and my strategy is to occasionally pull out a portion of the paper profits in order to increase my physical holdings. It has worked very well over the past decade and I believe will continue to be a prudent way to maximize your returns while building your safety net at the same time.
In terms of ETFs, I stay away from unallocated funds such as GLD and SLV that may or may not have physical metals to back up your shares. The custodians of these funds are the same banks that have huge naked short positions against silver, so the ETF strategy does not make sense to me. The exception would be the Central Fund of Canada (NYSEMKT:CEF), which holds your gold/silver in unencumbered, allocated, audited vaults in Canada. They do not lease out your metals and have a mandate to always maintain at least 90% of assets in gold and silver bullion, although it is typically 95% or higher.
Alexco has a dual-focus business model in which they are engaged in a profitable environmental consulting/reclamation/mine closure business, but also own a project in one of the highest grade silver districts in the world – Keno Hill. The Keno Hill Silver District has produced more than 217 million ounces of silver with average grades of 40 oz/ton silver, making it the second-largest historical silver producer in Canada. Despite this impressive history, Alexco believes just 5% of the area has been explored. With low silver prices in 1989, the Keno Hill project was forced into government receivership and had huge environmental liabilities. Alexco was brought in by the government to clean it up, realized the value of the project and in December of 2007 became 100% owner.
Silver Wheaton (NYSE:SLW) has since taken a stake in Alexco’s future production, which should give you further confidence in the potential of their properties. Alexco recently completed a $25.7 million financing for continued development of the Bellekeno mine, which is on track to commence production during Q3 of this year. In addition to this near-term production, Alexco has begun an aggressive exploration program for 2010 which has the potential to significantly increase their resources. I believe Alexco has blue-sky potential and could easily double in value over the next 12-24 months even if silver prices only advance modestly. If silver makes new highs by the end of 2010 as I suspect, shares of Alexco could see an astronomical increase.
Disclosure: I own shares of Alexco, but have not been compensated in any way to write about the company.