BEST OF JIM COOK

December 6, 2005

THE WORST THING YOU CAN DO

Despite warnings from Ted Butler, people still continue to purchase silver in unallocated or pool accounts. According to Ted, any time your purchase is combined with others, most of the silver is not there.

People buy this silver because it’s cheaper. No wonder. Let’s say my company sold you silver in a pooled account where you don’t get specific serial numbers. We could buy futures contracts to hedge the silver we sold you, and use your money for our purposes. We wouldn’t make much money hedging perfectly, so there would be an inducement to speculate. That’s usually what happens. Twenty-five years ago, Bullion Reserve, a California company, guessed wrongly in the futures market and sixty-million dollars in silver was found to be missing. The company president took his own life.

According to Ted Butler, any company operating in this fashion should be avoided. Even if you buy a storage program that gives you the serial number, you have risks. Usually that’s because there’s no financial disclosure. You don’t know the financial status of the company. You don’t know if they’re speculating. In some cases, you don’t even get a storage agreement directly between you and the company doing the actual storage. They’re only a middleman with no financial statement available.

In the past, when silver prices were fluctuating dramatically, and public interest in silver was high, major failures occurred. Invariably, these companies were speculating in silver futures. If you think some companies are too big or too smart to fail, remember Handy and Harmon, who shut their doors when their hedges backfired. Make no mistake about it, if the silver market explodes, or if trading gets hectic, you run the risk of becoming an unsecured creditor to a bankrupt company, instead of enjoying the immense profits that higher prices would bring. A few months ago no one thought it was possible for Refco to disintegrate, but they did.