Tuesday, February 22, 2011

Silver Default Looms !!

I apologize in advance that this essay is entirely without humor, completely sober, and deadly serious.

As I write on Sunday evening, Feb. 20th, silver prices are up another 40 cents to $33.10, another 30 year high, going back to the previous high of $50 from Jan. 1980.  In the last two trading days, last Thursday and Friday, silver prices increased about a dollar per day.

What's going on?
As I read on the blogs, about 53,000 silver contracts for 5000 oz. each are nearing the first delivery day on Feb. 28th.  At that time, each contract must be fully funded to await delivery in the following 30 days, or sold before then.  By the way, 53k x 5k = 265 million oz. 
The crazy thing is that the four COMEX approved warehouses have only about 100 million oz. of silver in them.  So, in essence, a default looms.
Will this be it?  If so, what will happen?
Usually, all but a very few contracts roll over to the next months.  The futures contract holders rarely stand for delivery, as in their view it is too difficult, and too costly; they are in this game for the leverage.  They usually only put down 10% of the money, so that if silver gains another 10% in price, they double their investment quickly.  And if silver moves down 10%, they lose everything!
But here's the kicker.  COMEX just raised margin requirements 50% on Friday, meaning that the longs had to put up something probably like 15% instead of the usual 10%.  (I have no idea of the real figures, as I have never traded futures, I have never had a futures broker, and don't know where to go for that data.)  This means that the longs were not scared out of their positions, as the silver price went up, not down, as the manipulators had intended.
What I do know is that usually, the majority of futures contracts stand about 3 months away from delivery.  But not now.
Tonight, 53,000 contracts are looming for either close out, or they will stand for delivery.  Out of about 150,000 to 200,000 contracts! 
Harvey says 150,000 contracts in open interest.
321gold.com says 200,000 contracts in open interest.

The current situation will be resolved in 8 days, and again, in another 30 days after that.  Both deadlines are worth watching closely. Either way, this situation presents several problems.
Clearly, if the longs stand for delivery of 265 million oz., when there are only 100 million oz. in the warehouses, there will be a short squeeze, and the price can go ballistic to the upside, perhaps prices could go up by 5 times higher in a few days.
However the longs don't seem to realize that the shorts can cap the price by several other manipulative methods.  They can deliver paper cash, or SLV shares as well.  The shorts and COMEX can also limit total physical silver deliveries to as little as 1.5 million ounces to any individual, or 7.5 million ounces total, if my memory of the rules serves.  If they do that, the shorts can delay a short squeeze at the COMEX.
But this would create another problem.
A cash settlement, or settlement in SLV shares, or a limit on physical silver deliveries, would be recognized as a default, or a "failure to deliver".
If any such kind of default would take place, it could cause a run on any remaining silver at any other location, such as directly at the refineries, or bullion wholesalers, or bullion dealers like myself.
I hope no such default takes place, as I don't want to go out of business for a few days, or a few weeks, or a few months, while I wait for my suppliers to get re-stocked. 
In any event, I think it's important to realize several fundamentals.
1.  The dollar itself -- is fraud.

2.  Silver futures contracts -- are fraud.

3.  Fractional reserve banking -- is fraud.

4.  Fractional reserve silver selling -- is fraud.

5.  The nature of paper money and all frauds is that they tend to collapse rather suddenly, with little warning, especially when their ability to pay debts is called into question.

6.  Argentina maintained a peg of their peso to the dollar, and it lasted until they could no longer make interest payments in dollars.  Then, their peso collapsed in value nearly 75% overnight.   Even Americans, with American dollars, in American banks (in Argentina) had their dollars forcibly converted into pesos, and their ability to withdraw money severely limited.

7.  The same thing can happen to the dollar.

8.  Silver prices must be seen to have the potential to explode by about a factor of 4-10, literally overnight.  This means we might see silver prices at about $33/oz. on one day, and silver prices from $130 to $330/oz. the next day. If that happens, I might close up the JH MINT for anywhere from an hour to a day or so, until I can guarantee a source of silver from my suppliers. I will likely be able to remain in business though, because if there is a price quote, it means silver is available at such prices.
The most likely course is that the paper traders continue their game of "chicken".  Both sides will swerve at the last moment and avoid a collision.  Prices will likely go up to about $35 to maybe as high as $40 next month.
We will likely have another record sales of silver bars and coins. The US mint will likely have another record of sales of 1 oz. American Eagle silver coins.  They might run out for a week at a time, again.
We will likely have plenty of silver available at about 6% over spot, while all the physical silver ETF's trade at about a 8-12% premium over "spot" prices.
But then again, you never know.  I can predict that the busses will likely run on time,  and I will likely be right, until they don't.  Better order silver now, while you still can.

My greatest fear is that silver will run out.  When silver runs out, people will buy other things to protect the value of their dollars, such as food.  If people start buying up food, in amounts of up to $100,000, food prices will soar, and that will cause food prices to exceed the values that most people can afford, and then, most people will begin to starve.  The beauty of gold and silver is that you cannot eat them, and thus, there is no such thing as a price that is "too high" of a price for gold and silver.  My wife and I stocked up on food this weekend at COSTCO.  We spent only $700, the least we have spent in months.  We filled up the back of our Ford Excursion.  You can see what problems would be created if wealthy people begain to buy 50 to 100 truckloads of food at a time, in the event that silver became unavailable.

I strongly advise you to take possession of real gold and silver, at anywhere near today's prices, while you still can.   The fundamentals indicate rising prices for decades to come, and a major price spike can happen at any time.
Further links for further study:

The Silver Institute -- for silver statistics
Eric Sprott (a billionaire) is very well informed. The 3 men he listed, Ted Butler, Dave Morgan and Jason Hommel are among the smartest guys in the room when it comes to silver.
ECB emergency lending jump persists
Traders ponder whether spike is result of bank error or renewed stress
CPM Validates Imminent Comprehensive Silver Shortage Predictions
$500 Silver, Max Keiser Explains His Price Target -- 19 February 2011
Bill Murphy: "Silver can double in a week, the price is held down with derivatives!"
May 11, 2010  (When silver was priced at $20/oz.)
Why no talk of $32,567/oz ? by Jason Hommel, Jan 2, 2003


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