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July 06, 2008

Silver Fallacies
by David Morgan

I recently read an "advertorial" suggesting silver to be a fantastic investment, and I could not agree more. However, the author was stating that all short positions have to eventually be covered with physical silver and that when this took place there would be a price explosion.

It is a fallacy that all short positions have to be covered and the shorts will have to buy silver to cover. First, to state that all positions have to be covered is misleading; a position can remain open for a very long time, because as the contract becomes due, it can be rolled over. Technically, it is not the same position, because when it is "rolled forward," it is a different month and involves a different contract, but basically the contract is moved out to a later date. This rolling takes place all the time in the futures markets.

The second fallacy is more important because almost all the shorts in the silver market can close their positions with cash, no silver required. Let's say silver moves UP fifty cents in one day and you are short the market. You just had what is known as a bad day. You will get a phone call from your broker asking you for more money to be placed into your account. You can instruct your futures broker to close out your short positions and all you would be responsible for is a check, not silver. This does not mean that a price explosion to the upside cannot take place. However, it is important to recognize that if physical silver were required to cover the short position the price movement could be far greater!

Yes, silver does get purchased and moved off the exchange, but this is only about one to two percent of all the activity as represented by market activity. This is another area not very well understood. Each month the CFTC publishes delivery notices, but these are notices, not actual deliveries. Many in the industry know that some of these delivery notices are NEVER acted upon! Yet we see some pretty well respected Internet sites that proclaim so much silver was gulped up off the exchange. This is not true; other notices and/or paper swaps or transactions offset most notices. In simple terms, there could be "notices" for several million ounces of silver in a given delivery month, but when all is said and done not much has really happened. Oh, let me restate: a whole lot has happened on paper but not much in a physical way.

Yet, with all this paper silver flying around, the physical market is the most important and will at some point drive the price, no matter what the paper pushers intend. Since the world's financial system is becoming so stressed with bad debt that cannot be repaid, institutional and retail investors alike are seeking higher quality investments. First, this will translate into government-backed debt (bonds), and certain currencies will become the flavor of the month. For example, the euro or Canadian dollar will be favored, but all of this "money movement" is really the last vestige of the bankers selling people on the idea that paper currency is safe if only you are smart enough to choose the right paper currency.

As the carry trade unwinds and a new era of quality replaces one of quantity, the precious metals will reassert themselves in the overall financial landscape. Gold will be sought by institutions and, yes, even the central banks again at some point, but silver is held by few governments -- China and India being the only two -- and both hold pitifully small amounts of silver at this point. The once vast silver holdings of the United States of America were depleted several years ago.

As momentum builds and more and more precious metals are purchased, the prices will be reflective of these purchases, and since one of the main purposes for purchasing will be wealth preservation or financial survival, don't rule out the underdog -- silver! You see, big institutions, banks, and the elite will flock to gold, but remember "the poor man's gold"? Literally, millions of people have something to protect and these people will flock to the safety of the physical silver market.

This buying frenzy will drive the price far higher than most people imagine at this point, since there are far more "poor" people than rich people and since there is far less silver than gold available in investment form. The percentage gain in silver and silver related investments will be noted in financial history, just as the silver "corner" by the Hunt Brothers was in 1980!

It is an honor to be,

David Morgan
Silver-Investor.com

Mr. Morgan has followed the silver market daily for over thirty years. Much of this Web site, www.silver-investor.com, is devoted to education about the precious metals.

Mr. Morgan has been published in The Herald Tribune, Futures magazine, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, and The Wall Street Journal. Mr. Morgan does weekly Money, Metals and Mining Review for Kitco. He is hosted monthly on Financial Sense with Jim Puplava. Mr. Morgan was published in the Global Investor regarding Ten Rules of Silver Investing, which you can receive for free. His book Get the Skinny on Silver Investing is available on Amazon or the link provided. His private Internet-only newsletter, The Morgan Report, is $129.99 annually. To suscribe to the Morgan Report click here.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Stone Investment Group is not and does not profess to be a professional investment advisor, and strongly encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before making any investment decision. Stone Investment Group and/or independent consultants or members of their families may have a position in the securities mentioned. Investing and speculation are inherently risky and should not be taken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions you make regarding any information discussed herein.

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