silver commentary

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    Just posting a commentary found on Investmentrarities.


    ESSAY OF THE MONTH
    March 24, 2004


    Anonymous
    London Bank

    Investment Analyst

    * Amid the greed and frenzy of the secular precious metals and commodities bull market (and the rise in crude oil prices, we note with modest contentment, is making most sell-side analysts look like the overpaid bumpkins that they are), one story may cause investors to reach for the history books. "Is silver scandal on the horizon ?" writes Kelly Patricia O'Meara of Insight Magazine:

    "a growing number of investors believe that the silver market has been manipulated to hold down the price.."

    Silver analyst and investor David Morgan suggests that the demand for silver has exceeded the supply from the mining sector for over a decade, the shortfall amounting to roughly 150 million ounces of silver per year, or 1.5 billion ounces over the past decade. Until quite recently, diminishing supply and rising demand for silver had led to no price movement of any significance. (A cursory glance of the USD spot price on Bloomberg shows that silver has now risen by 40% since November 2003. The start of an inevitable gravitational correction ?) Independent commodity analyst Ted Butler suggests that a small number of silver traders - eight or less - have sold silver they don't own and cannot get unless they have some way of obtaining for delivery all of the world's silver production for the next couple of years. Given that there have been silver deficits for 15 years, this scenario looks unlikely. (Not everyone, of course, has lost their shirt on silver. Warren Buffett profitably bought 130 million oz. between July 1997 and January 1998 in anticipation that "equilibrium between supply and demand was only likely to be established by a somewhat higher price.")

    In 1970, Bunker Hunt, scion of the H.L. Hunt oil dynasty, decided to invest in silver at the price of $1.50 per oz., most likely as an inflation hedge. (The US government had made it illegal for its citizens to own gold.) By early 1974 a Hunt silver pool had amassed silver contracts equivalent to 8% of the world's silver supply. The family flew on chartered 707 jets to Chicago and New York, were met by a convoy of armoured vans, then flew to Zurich and another convoy of armoured vans. Silver was dispatched to six different Swiss locations. The Hunts continued to accumulate silver positions. In late 1979, the silver price doubled from $8 to $16 per oz. and provoked panic conditions on the COMEX and CBOT. CBOT changed its trading rules and raised its margin requirements. In January 1980, COMEX in turn changed its trading rules and was backed up by the CFTC. On January 17th, the silver price hit $50 per oz., putting the Hunt's unrealised profits at $3.5 billion.

    But they were up against institutional short positions. COMEX suspended silver trading on January 21st. The silver price collapsed. After Hunt liquidations, the family owed $1.5 billion dollars. Fearing a widespread financial collapse (pre-echoes here of Long-Term Capital Management), the Federal Reserve approved a bailout plan with a syndicate of banks.

    So history would appear to be repeating itself. Will the shorts win out again ? If Jim Rogers, China, India, the current commodities bull market, very recent silver price history and our own predilection for precious metals are anything to go by, they deserve to get profoundly stuffed. Unfortunately for believers in free markets, the gold and silver markets would appear to run the risk of falling invariable victim to enormous intervention and price manipulation on the part of central banks and other large institutions. But since push is coming to shove in our world of overflowing and overvalued paper assets, this contest should be livelier and more evenly matched than in the past.


 
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