Stay Angry And Get Physical (Silver)

Includes: GOLD, HL, PAAS, SLV, WPM
by: Galt's Gulch

Over the past year, the price of silver has both risen to new heights – and subsequently crashed due to manipulation. All the evidence of this manipulation is consistently ignored by the mainstream media, whether it be bullion bank malfeasance (can anyone believe there is a low to which a financial company will NOT stoop?), MF Global’s theft of client money (which would have been used to take delivery of precious metals), massive paper contract bombing (during times of low liquidity), and even a CFTC commissioner’s acknowledgement of the scam. And now, the price has been crashed again, people are despairing, and the game seems over – for the silver bulls. On a personal note, I expect to lose 100% on all of my GLD puts (which are a relatively small position for me). So why am I optimistic?

First, because the true nature of the game has been revealed. From this point forward, the only rule is that there are no rules. This signifies that the final end-game is closer than you think, because if the rules have been abandoned then the system itself is in jeopardy. As a result, I am

  1. rescinding my prior recommendation to buy GLD puts based on the recent MF Global scandal – this strategy is no longer viable given the outright theft that has been allowed to take place.
  2. I continue to recommend shares of solid silver mining companies; Hecla Mining Co. (NYSE:HL), Pan American Silver Corp. (NASDAQ:PAAS), Silver Wheaton (SLW) etc.
  3. I am calling the bottom on precious metals.
  4. I have outline a potential scenario of how people who are perennially short could exit their positions at the expense of us longs.

1) GLD puts are no longer an option. I had (erroneously) assumed that both the futures markets and the option markets would continue to work. The fact that MF Global was allowed to collapse means that holders of options may not be allowed to profit if, for example, GLD collapses. Instead, what could happen is that the fraud at GLD may become widely known but not officially recognized, which would mean people naturally abandon it – thus allowing the people who run the scam to buy the shares back and shut down the ETF, similar to the way the COMEX futures market has seen a decline in trading volume as people abandon it.

2) Shares of silver mining companies are relatively cheap compared with historical prices (for example, HL is trading at $5.22 with a one-year range of $4.86-$11.56, at a time when the company has almost no debt and substantial cash reserves – granted, there are reasons for its price, but it is a solid company). Similarly, PAAS is trading at $21.57 with a one-year range of $19.93-$43.06 and can repay its debt 11x over at any time. Silver Wheaton, which buys parts of other mining companies’ production, has some of the strongest silver flows in the business and has enough cash to cover its debt 8x over. These are all solid companies with strong net income; given an average silver price that is double what it was even a year ago, they all have strong potential to appreciate. Furthermore, Eric Sprott recently wrote a letter to silver mining companies asking them to maintain more of their capital in their product. While this probably has no immediate impact, it can definitely have a longer-term effect; if even a few mining companies begin withholding supply, it could be the final straw that breaks the paper trading system. That, of course, would lead the price to skyrocket.

3) Given the sheer amount of fear in the marketplace and the steep drops, it’s easy to understand how many investors are afraid. After all, gold’s fallen almost $400 from its peak around $1900 and silver’s fallen to the upper $20s range from almost $50. However, over the past year there have been more central banks announcing plans to start stockpiling gold than ever before; even the smaller countries are buying massive amounts of gold. Citizens in India, and China, which represent about a third of the world population, are buying as never before. The citizens of the EU are beginning to understand that there is no way out for the EU and are therefore starting to buy. Mining companies are reporting that large buyers are coming directly to them to sign deals instead of going through the exchanges. The Comex has been discredited due to the MF Global scandal. Gold buying is now fashionable, not crazy. And those of us who bought in 2008 well remember the drop from $1000 to the $700s. As a percentage, this recent drop is still less than it was in 2008, so why would I be worried? Actually, I’m angry at myself for buying too early, and I’m angry at those who keep trying to drag out the inevitable. At times like these, I’m going to get more silver, take it home, and cackle “my precious!”

4) Imagine you are tasked with preventing the gold price from rising. How would you do it? First, you set up an “ETF” to divert people’s interest in metals away from the actual physical metal and into a stockpile of metal that you control – using your opponent’s money. Then, on your precious metals exchange, you repeatedly crash the price by issuing tons of shorts, calculated to create an avalanche of paper hitting stop-loss triggers, on low volume days. All the while, you sell metal (reserved for your ETF) into the market. Eventually, however, you’re going to lose as the world economy grinds to a halt and people keep buying gold. The question becomes – how do you shut down the ETF and the exchange shenanigans without going to jail? If the ETF's fraud is revealed or the exchange defaults, you lose and investigations begin. So you need to find a way to lose without going to jail.

If you create doubt that your ETF doesn’t have any metal, people will start to sell the ETF shares, which you can then buy back at a discount. Eventually, you can liquidate the ETF due to a “lack of market interest” – preventing people from proving that the ETF had no metal when it closed. Maybe you add in a fire or two that conveniently destroys all the records. Simultaneously, on your exchange, you break a clearinghouse and steal customer money, leading everyone “in the know” to leave your exchange, while raiding the customers for funds to buy precious metals. By forcing people off the exchange, you create a market inefficiency that helps to prevent sales of precious metals, thus eliminating the “demand” from large buyers! If buyers want 1 million ounces but the supply can’t keep up and nobody wants to buy at a higher price, then they don’t buy at all (in the short term – longer term, they just buy from the miners – but you only care about the short term!) If these buyers are too big to buy, you are by definition left with the small players who don’t buy a lot – meaning that your existing stockpile can drag the game out just a bit longer. And of course, after the large buyers exit your exchange, you alone set the paper price (because you are trading with only yourself). Nobody gets caught or goes to jail, and you keep the price down as long as you can, until one day the physical market finally takes over. But in the interim, you suppressed the market as long as was physically possible with no one being able to prove a thing. Neat, isn’t it?

Disclosure: I am long HL, SLW, PAAS.