Six signs the Silver market has gone nuts

[Denny]

You don't know what any of those guys could do. No one does and they are a liar if they tell you they do. They could sell for no reason at all. That is the world of portfolio management at a big bank.

When silver was at $25 I thought this was just another run up and wouldn't be interested in making a bet that the dump is coming. At high $40s I am willing to make that bet. I don't know any more than any other person on the street but when i see a chart like that and it is a 30 year high, I'm willing to place a little wager on what happens next. And hey, if I am wrong who gives a damn, I am betting $100 and if I am right I'll make $5,000, just another Monday over here.

Right. I do the occasional put as insurance.I figure 1% of my initial investment could cover my losses on a 20% dip. If I'm wrong, it's more than likely I made up that 1% and then some.

See? I'm learning over here! Just keep the spare room ready for us if I completely fuck this up. LOL

[Broncojohnny]

Ya, but look at the small market the physical silver actually is. JPM and friends won't be scheming so much for just a small market. They just got caught with their pants down at a key time the dollar and the US's "good word" is in serious question. I'm not "forever and ever" on silver, but I just don't have an excuse to pull the trigger, nor do I see one coming yet.

You don't know what any of those guys could do. No one does and they are a liar if they tell you they do. They could sell for no reason at all. That is the world of portfolio management at a big bank.

When silver was at $25 I thought this was just another run up and wouldn't be interested in making a bet that the dump is coming. At high $40s I am willing to make that bet. I don't know any more than any other person on the street but when i see a chart like that and it is a 30 year high, I'm willing to place a little wager on what happens next. And hey, if I am wrong who gives a damn, I am betting $100 and if I am right I'll make $5,000, just another Monday over here.

[Denny]

I'm not versed very much, actually hardly at all. That is why I discuss these topics with guys like Eric, Alan and Jody.

I do buy only physical bullion since I have lost faith in the paper markets (even the certificates). I look at it as a personal piece/peace of mind. I'll tell you right now, that I'm anticipating some sort of major pullback, but only in order to set up for a larger run.

This quick rise has me tense.

[V8tt]

Hey Denny...do you buy your Silver in bullion? Is there any benefit to doing it that way? Just curious...We had 4 ounces of gold (sold about 2 months ago) and was curious if there is a better way to buy commodities.

<---not as versed in that area as you and others on here but willing to listen.

[Denny]

Ya, but look at the small market the physical silver actually is. JPM and friends won't be scheming so much for just a small market. They just got caught with their pants down at a key time the dollar and the US's "good word" is in serious question. I'm not "forever and ever" on silver, but I just don't have an excuse to pull the trigger, nor do I see one coming yet.

[Broncojohnny]

Other than being a contrarian, do you see anything that makes you think it's about to bust?

In the short term nothing. In the long term oh hell yea, it has all the classic signs of mania written all over it. Everyone is talking about, you have people saying it will never go down, you have people shouting "this is a paradigm shift" from the rooftops. The only thing we lack is conspicuous consumption, that is, people who have made tons of money flaunting the wealth they have made in silver. Those are all classic signs of mania in everything from tulips to dot coms to railroad stocks going back four hundred years.

Keep in mind that none of the things you have named, the weak dollar, the overall economy, Fed policy, none of that has to change in order for it to blow up. It can be something as simple as a big time player deciding they want to book their profit and changing from a buyer to a seller. That is really all it takes, even if everything you have said is 100% true. That's mania. Actually it fits everything you say about JP Morgan and banks in general, it is how they screw the little guy. They get everyone on the train and then cash the fuck out before it goes off the cliff.

[Denny]

Other than being a contrarian, do you see anything that makes you think it's about to bust?

[Denny]

All manias end very painfully for people who drink the Kool Aid right up until the end which can come at any time. I hope you get out with all of your gains. I think I'm going to take some $25 puts on SLV.

Might want to try 30 @ 6 months out... seriously. No doubt, there is a BIG pullback a coming, but I'm not seeing a top on the longer term.

[Broncojohnny]

It's articles like this that make me smile. He has called (or at least alluded that) most of these points are bullshit.

My points are:
1. The mania- Ya, it is a mania, but look at the size of the overall physical market and the percentage of the people in it. Is 2-3% of the population REALLY that big of a mania? With a little market like this, a few new buyers could easily be considered a mania.

2. A failing US dollar and screwed up Fed practices- I shouldn't have to get too detailed in this, but between how the rest of the world is viewing us (China, S&P, IMF, etc) and how we ARE monatizing our debt like there's no tomorrow, what else is there? Other failing currencies? LOL! Other Assets? Ya, I can see me with $300K of crude oil in my back yard. Leslie would LOVE that! Stocks? I learned my lesson in 2008. If the can turn off the lights on Lehman Bros and GM, they can do it anytime... all while being given a "AAA" rating.

3. New found uses- Silver is by far the most industrially demanded precious metal and new uses are being found every day. I won't list all (since I have numerous times already), but it is reportedly being used as much as can be pulled out of the ground these days.

4. Global demand increase- It's just not the "weak-minded" people like me (as the writer put it). We're talking big governments and other institutions.

5. The paper silver market- anyone who says there isn't a heavy manipulation is a fool. Period. Everytime silver starts a rush (like today), the COMEX increases margins to pull it back down. How many times has that been done? Members of HSBS and JPMC have said their silver is highly leveraged. Christensen was on tape, saying they're leveraged 100:1 in the silver market. Defaults have been happening already. Thankfully, the nice people trying to take possession actually settle in cash at sometimes up to 80% over the price.

6. As much as I hear people in favor of silver, I hear 10 times opposing it.

That atricle lost any credibility when he wrote, "Silver isn't water. It isn't bread. It isn't housing, or clothing. It isn't even an iPad." Well, neither is the paper with the funny old guys printed on the front and the Masonic images on the back (had to add that for a LOL). But we can get the things we want with both, right?

Weak, weak article.

All manias end very painfully for people who drink the Kool Aid right up until the end which can come at any time. I hope you get out with all of your gains. I think I'm going to take some $25 puts on SLV.

[Denny]

It's articles like this that make me smile. He has called (or at least alluded that) most of these points are bullshit.

My points are:
1. The mania- Ya, it is a mania, but look at the size of the overall physical market and the percentage of the people in it. Is 2-3% of the population REALLY that big of a mania? With a little market like this, a few new buyers could easily be considered a mania.

2. A failing US dollar and screwed up Fed practices- I shouldn't have to get too detailed in this, but between how the rest of the world is viewing us (China, S&P, IMF, etc) and how we ARE monatizing our debt like there's no tomorrow, what else is there? Other failing currencies? LOL! Other Assets? Ya, I can see me with $300K of crude oil in my back yard. Leslie would LOVE that! Stocks? I learned my lesson in 2008. If the can turn off the lights on Lehman Bros and GM, they can do it anytime... all while being given a "AAA" rating.

3. New found uses- Silver is by far the most industrially demanded precious metal and new uses are being found every day. I won't list all (since I have numerous times already), but it is reportedly being used as much as can be pulled out of the ground these days.

4. Global demand increase- It's just not the "weak-minded" people like me (as the writer put it). We're talking big governments and other institutions.

5. The paper silver market- anyone who says there isn't a heavy manipulation is a fool. Period. Everytime silver starts a rush (like today), the COMEX increases margins to pull it back down. How many times has that been done? Members of HSBS and JPMC have said their silver is highly leveraged. Christensen was on tape, saying they're leveraged 100:1 in the silver market. Defaults have been happening already. Thankfully, the nice people trying to take possession actually settle in cash at sometimes up to 80% over the price.

6. As much as I hear people in favor of silver, I hear 10 times opposing it.

That atricle lost any credibility when he wrote, "Silver isn't water. It isn't bread. It isn't housing, or clothing. It isn't even an iPad." Well, neither is the paper with the funny old guys printed on the front and the Masonic images on the back (had to add that for a LOL). But we can get the things we want with both, right?

Weak, weak article.

[Slowhand]

Who knew that there was rational thought going on concerning the silver fad? I'm game to short a semester's worth of student loans.

[Broncojohnny]

Since it is just about time to man my guns and go short on this particular mania:

http://www.smartmoney.com/investing/economy/6-signs-the-silver-market-has-gone-nuts-1303502720960/

The madness overwhelming the silver market has to be seen to be believed. Prices have skyrocketed in the past few days. The U.S. Mint has sold out of Silver Eagles, and is quoting several weeks' delivery.

Everyone is getting in on this. While I was in a local coin and precious metal dealership this week, two well-dressed men came in, eager to snap up some silver bullion bars.

It's getting ridiculous. Here are six good reasons this is a mania.

1. The price spike
Look at the chart. Does that look like a spike to you? It looks like a spike to me. Can you find anyone who doesn't think it looks like a spike?

At $44, silver is now at the highest levels since the tycoon Hunt brothers tried to corner the market, illegally, back in 1981. That's when it skyrocketed – very briefly. Then it collapsed.

Nothing is certain, but spikes are there to be sold. When a price moves that high, that fast, it creates high-danger situation. The few occasions in your life when a spike goes even higher will be more than offset by all those spikes which collapse.

If you buy into this at these levels, be aware of the risks you're taking. You can't buy low and sell high if you buy high.


Silver, price per ounce, 1984-2011
Source: Factset

2. Madness in silver funds
Take a look at the Sprott Physical Silver Trust ( PSLV: 21.83*, -0.28, -1.26% ) , a silver fund run out of Canada. It's very popular with the silver bugs, because it lets you claim your actual bullion and carry it off. That's great if you think all paper assets, including stocks and exchange-traded funds, are a giant hoax.

Sprott's stock is booming. It has doubled since January and jumped again Friday to $22.11, a new high.

News Hub: Gold at Record, Silver Flirts With $50



Paul Vigna discusses why gold prices are a fresh record and silver is flirting with $50 an ounce first the first time since 1980. ( Watch video )
Sprott's assets consist of silver bullion. Value: $18.11 per share. In other words, anyone buying the stock is paying 22% above net asset value. So even while silver has zoomed to $44 an ounce, someone buying shares in Sprott is effectively paying $54 an ounce.

On the other hand, look at the boring old Central Fund of Canada ( CEF: 24.95*, +0.15, +0.60% ) . It's the grand-daddy of bullion funds. It's been around for 50 years.

The Central Fund holds silver and gold (and a little cash) worth $24.32 per share. Just over half of that is in silver. The Central Fund's stock is selling for $24.80.

That's a more modest 2% premium to net assets. But the silver bugs don't want it, because it isn't just silver, and because you can't redeem your shares for bullion.

Who pays a 22% premium when they could pay 2%?

3. Silver vs. gold
This chart compares silver to gold over the past 25 years. And silver, right now, is out of control.

On average, since 1984 an ounce of silver has been worth about 1.56% of an ounce of gold – or, to put it another way, an ounce of gold has been the monetary equal of 64 ounces of silver.

But in today's mania, an ounce of silver is being valued at around 3% of an ounce of gold, or twice the average. The ratio is 33-to-one.

Silver bugs will tell you than once upon a time the ratio was even more favorable to silver than that. In the 1800s silver was valued at 16 ounces per ounce of gold. Will those days return? Silver bugs clearly believe they will. But to bet on that happening is to bet that the market has had the relationship between these two completely wrong for most of the modern era. That's quite a bet.

I am not taking a view here about precious metals generally. The hard money school argues that as paper currencies get debased, scarce and valuable assets simply gain value. I've argued before that there is a reasonable, serious case for gold, even if some of the more popular arguments are total claptrap.

But if silver is a good thing, then gold is also a good thing. What on earth is a case for silver that excludes gold? It doesn't make sense. By modern standards, at least, it now looks very expensive compared to gold. Heaven knows what madness will happen this week, but from a strategic point of view -- that is, over the medium term – this is typically a sell. If you want a precious metal, it would seem to be an obvious conclusion to sell silver, buy gold.


Ounces of silver per ounce of gold, 1984-2011
Source: Factset


4. The conspiracy theories
The major ones claim that giant banks, especially J.P. Morgan Chase and HSBC, are massively "net short" of silver: In other words, they owe huge amounts of silver to others through the derivatives market. So, as a result, they are "desperate" to keep the price down, and they are engaging, or have engaged, in massive manipulation of the market to do this.

Make of it what you will.

Okay, so the theories involve a lot of paranoia. And they raise some pretty basic questions. Like, Why wouldn't these banks just close their positions? And, How can you know a firm's net position if you're only looking at its liabilities and not at its assets?

But let's put those quibbles to one side. You can believe this stuff, or not. But if the silver bugs are right, and the theories have merit, something odd is going on.

The skyrocketing silver price ought to be driving these banks to the brink of disaster. And yet their stock prices are doing very well. HSBC Holdings PLC ( HBC: 54.30*, -0.06, -0.11% ) has risen about 5% so far this year, and about a quarter from last summer's lows. J.P. Morgan Chase ( JPM: 44.71*, +0.03, +0.06% ) is up about 3% so far this year. It's back to levels seen before Lehman Brothers imploded.

If these two banks are bust, they are doing a good job of hiding it.

Perhaps this, too, is a conspiracy. Maybe the Council on Foreign Relations, the Bilderberg Group, the Pope and the Duke of Edinburgh are secretly keeping these banks' stocks up.

If so, I would have thought the easy bet for conspiracy theorists would be to bet on the collapse of these banks' stock by buying "put" options. A $20 put option on J.P. Morgan, good till January 2013, costs just 60 cents per share. If the stock goes to zero, the silver bugs will all be millionaires. All the upside of the silver conspiracy, with very little risk.

5. The bloggers
A lot of the people pushing these conspiracy theories are doing so on blogs.

Big surprise.

There's a lively community of silver bug bloggers. And they are having a fair amount of influence, especially on the naïve.

Make of the conspiracy theories what you wish. But do consider the sources. Before you take some blogger as the independent voice of truth, take a look at the banner ads on his site.

You'll notice they're all for gold and silver merchants. Every time someone visits that blog, gets all excited about the conspiracy theory, and then clicks on an ad to go buy some gold or silver, the merchant pays the blogger a fee.

Conflict of interest? Working an angle? Or just an innocent practice? You make the call. But understand the economics. These guys have a vested interest in panicking people and getting them to buy gold and silver. Fact.

6. A silver shortage?
People are rushing around saying there's a silver shortage. You gotta load up now, man! There's none left! After all, hasn't the U.S. Mint just stopped shipping Silver Eagles?

Some people foolishly try to engage the silver maniacs on this topic, and argue that there isn't really a silver shortage all. They say demand for silver Eagles in this mania has simply outstripped the production capabilities of the Mint.

Phooey. I don't care about any of that. My riposte is simpler: If there's a silver shortage – so what?

Silver isn't water. It isn't bread. It isn't housing, or clothing. It isn't even an iPad. I have gone several decades without possessing much silver – I have some cufflinks - and so far I feel just fine. One day, it's true, I will keel over and die. But even if I filled all my pockets with silver – even if I also poured silver coins down both socks, and stuffed more of them into my mouth, so that I could not, physically, carry one more ounce of silver, anywhere on my body – then the day, alas, would still come when I would keel over and die.

Silver won't save me. Silver is a totally pointless metal. (Okay, it does have some industrial applications — but even there it's generally substitutable. It's pointless, or at least a luxury, for ordinary people.) If there is a shortage, so what? You do not need to go out and stand in line for hours in the hope of buying the last silver coins in your local dealership. You do not need to pay way over face value for silver bullion or a silver trust in a last, desperate move to get some silver before the market closes forever.

Madness.