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Silver, Paper versus Physical

Over the past few weeks as the Silver spot market price depressed, J P Morgan closed most of its 190 million oz short position on Comex - a rare event. They may have done this because the CFTC Comex watchdog is about to hold a Public Meeting to examine the Comex Precious Metals huge long and short positions.

Whatever the reason it means that prior to the Comex Silver close in late March there is no major reason for J P Morgan to sell a big chunk of the ETF Silver they hold on the Spot Market trust to crash the price and protect their short positions – this is the first time for a over a year that the Silver spot price may not suffer its’ monthly Comex close scuttling, and this makes the market very bullish.

Another thing that will make the Silver market bullish when it becomes widely known, is the fact that physical silver stocks are misreported – we are told there are 600 million oz of stock when in fact there is NONE!

Let me explain:

The Morgan Silver Report shows that the post war high point of world Silver holdings was 1989. In that year the world had 2200 million oz of silver. Since then the rising cost of mining the stuff and it's poor market price performance has reduced the amount of Silver extracted from the ground and world stocks have declined rapidly.

In the sixteen years between 1989 and 2005 world Silver stocks were on a virtual straight line decline of 125 million oz per year as industrial Silver usage and jewelry production was not fully replaced by newly mined Silver. The low point of world Silver holdings was apparently 2005 when there was just 200 million oz of Silver left.      

Now five years later, drawing that straight line down the Silver Stock Graph, we should be out of stock, but the Morgan Silver Report tells us that stocks have grown to over  600 million oz. How amazing? That is 3x growth, and its’ a sudden reverse of a sixteen year declining trend of 125 million oz per year into a growth of 100 million oz per year, a net turn around of 250 million oz per year.

This sudden increase in stocks would be great if it were true, but its’ not. Silver mining production has not increased significantly during these five years. For example mining production in 2007 was 668 million oz, then in 2008 it was 671 million oz. The other source of silver, recycling, is very small because the relatively low cost of silver encourages manufacturing to waste it (use it only once.)

So this must be an accounting error. From where has this erroneous book entry appeared, because it can’t be physical? Well, the only major change in the market during this period has been the advent of Silver ETF’s in 2006. JP Morgan, who hold the ETF Silver on ‘Trust’ must have inflated the books, issuing paper as Silver and claiming it as physical stock. It should come as no surprise – this is how Banks operate.

So in summary - The world needs 125 million oz of Silver per year and there are no sizable Silver stocks left -only J P Morgan's ETF Paper Silver which some  investors still seem silly enough to buy.

Lesson: Get out of Silver ETF’s and into physical Silver or Silver Mining Stocks now!




Disclosure: Long on Silver Mining Shares