BUCKLE UP
By James R. Cook
Mid-December 2008
"Bernanke’s gonna keep printing money until they run out of trees."
Jim Rogers
A friend called me Sunday morning to tell me his son had dinner the night before with wealthy members of a family who were in tears. The entire family fortune had been invested with Bernard Madoff. Apparently, a number of families at a local country club also had their money managed by Madoff. Suddenly their wealth has disappeared. Imagine the heartache and agony to wake up one day to this devastating loss. What do once-wealthy retirees do with no chance of income?
This is the second financial scandal to ravage my state. A few months ago, a businessman who owned numerous companies went down in flames. He ran a Ponzi scheme to the tune of $3 billion of investor money. He’s going to jail. Unfortunately, a lot more financial sewage could be floating to the top soon. In this environment you can’t be careful enough.
Even the largest financial entities are suspect. Analyst James Quinn writes, "Hank Paulson has dished out $180 billion to the largest 30 banks in the country in an effort to keep them solvent. It has now become quite clear that the largest banks in the country, with the ‘smartest’ MBAs, took excessive risk, created and then bought their own toxic derivatives, and lied to the public and their shareholders about their true financial position."
The money managers, the talking heads on financial TV, and the perma-bulls have been proven wrong. It’s time to start listening to the people who have been right. I’ll quote a few of them in this article. They have all warned about the dangers of runaway money and credit expansion. Most people are still underestimating the extent of this crisis. They are hoping the stock market will recover and everything will go back up again as it has done before. What will happen is unknown, but it’s dangerous to base your beliefs on the things you want to have happen. If you only want to listen to Wall Street types who constantly express optimism, you can lose even more. Commenting on these bullish analysts, Dr. Krassimir Petrov, wrote, "This type of analysis reminds of the anecdote where a man falls out of a skyscraper; when asked by someone on the fifth floor window how things are going, he answers ‘go far so good, I’m simply moving quickly.’"
Economist Petrov goes on to say, "Unfortunately, the depth and length of the crisis are currently being discounted. At the moment, the crisis is in its initial phases." Analyst Christopher Laird would agree. He writes, "The U.S. accumulates $9 trillion of national debt in 240 years, and in a mere year and a half, adds another $8 trillion? And for what? The credit markets are still frozen solid." He continues, "Over $1000 trillion of leveraged markets are unwinding, and if you add up all the central bank efforts to loosen credit markets and do bank bailouts, it adds up to roughly 15 to 20 $ trillion. Well, $20 trillion is not near enough to stop $1000 trillion of markets deleveraging. So, the efforts are doomed to fail."
James Quinn conveys this worrisome message. "There are $50 trillion of credit default swaps still outstanding. The hundreds of billions in taxpayer funds that have been poured into AIG have been used to pay out CDSs [credit default swaps]. According to the brilliant bank analyst, Chris Whalen, at least $15 trillion of these CDSs will need to be paid out. All the Central Banks in the world cannot create that much paper out of thin air."
Quinn continued, "Colossal amounts of credit card debt and auto loans will be defaulting in 2009. Consumers currently owe $2.6 trillion of consumer debt, up from $2.1 trillion in 2004, or a 24% increase….With 3 million more job losses in 2009, the credit card losses will be much greater than $100 billion. JP Morgan, Bank of America, and Citigroup will sidle up to the taxpayer trough again due to these unforeseen losses. Nationwide, an estimated $575 billion in new and used auto loans are written every year by auto manufacturers, banks, credit unions and other lenders…..With the average length of auto loans exceeding 5 years and the tremendous downturn, there are millions of consumers underwater with their car loans…..It is quite clear that consumers are collapsing. The toxic combination of reduced spending and mass layoffs will bring down the last remaining pillar of the economy, commercial real estate…..After the coming horrific holiday sales, weak heavily indebted retailers will be filing for bankruptcy en mass. Mall owners that had expanded hastily with generous amounts of debt in the last few years will see rents dry up and their debt payments will choke them to death…..Office occupancy will decline and rental income will tank."
There’s more! Newsletter editor Greg McCoach warns, "The latest forecast for the annual U.S. Federal budget deficit in 2009 for more than US$3 TRILLION! That is over $2 TRILLION more than last years budget deficit that we used to complain about."
Investment manager Puru Saxena expresses his view. "It is worth remembering that our world’s financial system has been hijacked by money-printers. Whether it is the Federal Reserve, Bank of England or the European Central Bank – they are all creating money ‘out of thin air’ and inflating the supply of paper currencies…..Whilst paper currencies (cash) regained some purchasing power in the past few months due to forced liquidation in the asset markets, there is no chance that they will maintain their value over the medium to long-term. History is littered with numerous paper currencies which became totally worthless and I suspect many of the current ones will also disappear."
None of this information and advice bodes well for the dollar. Newsletter editor Ron Struthers writes, "The fundamentals of the US$ are in the worst shape they have ever been and once the short term effect of de-leveraging has run its course, the dollar is going down, big time." Newsletter analyst Boris Sobolev concurs, "If the Fed continues, as declared, to support interest rates at artificially low levels by the way of debt monetization, a major down-leg in the US dollar is inevitable."
Editor Clive Maund warns, "Watching investors fleeing into the perceived safety of US Treasuries is akin to watching people board the Titanic in the movie – you know that they are doomed. This is because the United States is totally bankrupt – more than bankrupt in fact, since its debts are physically impossible to repay in any circumstances and what we are witnessing now is the cowards way out – the creation of money in whatever quantity is necessary to prevent total gridlock…..This has one inevitable outcome – hyperinflation, which, incidentally, can take hold even in conditions of deepening recession/depression."
Olivier Garret writes this for Casey Research, "How will our country repay its debts? The current bailout represents 62% of our GDP. Our current deficit of almost $11 trillion may exceed our GDP next year…..our government will need to attract trillions of dollars annually to fund its programs and commitments. The foreigners who have financed our irresponsible spending for many years will no longer be able to afford it, let alone finance more of our reckless behavior…..Once this inflationary cycle starts, foreigners will realize that their investment in T-bills are depreciating rapidly. There will be a massive exodus that will put more pressure on the dollar and on interest rates."
What’s an investor to do? How do you protect yourself? After the Treasury gave Citigroup $300 billion, one of the bank’s financial analysts wrote these words. "Gold is poised for a dramatic surge and could blast through $2,000 an ounce by the end of 2009 as central banks flood the world’s monetary system with liquidity." Although silver isn’t mentioned, it should be clear that the reasons for a rise in gold will also boost silver, probably even more so.
Finally, editor Ned Schmidt predicts, "With the Federal Reserve committed to unlimited creation of dollars and Obama committed to unlimited government spending, the U.S. dollar’s value could become the Dog of 2009…..Obama will be like a gift falling from the sky to gold [and silver] investors."
FLIGHT TO SAFTEY
By Theodore Butler
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
We live in perilous financial times. If you are not alarmed with the flow of financial events, then you are just not paying attention. The problems are serious and growing, the solutions limited. It’s as if everything that could go wrong, has gone wrong. I’d much prefer to write of a growing domestic and world economy, with increased demand for silver. But financial and economic headwinds have converged to interrupt world growth.
What does this portend for silver? As I have written recently, the current bad news is good news for silver. That’s due to silver’s unique dual role as a vital industrial commodity, as well as an age-old investment asset that the world has always turned to when times get tough. When times are good, silver can be compared with natural resources, like copper and oil. When times are bad, silver should be compared to gold as a financial lifesaver. Sad to say, times are bad. To highlight just how bad, I’d like to reference some recent events and what I think they portend for silver.
There is a worldwide flight into assets of quality. This is no minor event, it is a tsunami. In the past week, demand for four-week U.S. Treasury Bills, considered by many to be the ultimate flight to quality asset, was so great that investors bought them at auction for the lowest yield in history - zero percent. In other words, investors in these securities were willing to forgo any return on the $30 billion purchased, for the promise of the return of the principal amount. The demand for the return of principal for these securities was so great that investors bid for four times the amount actually sold. None of us has ever witnessed this kind of demand for such low-yielding securities. Safety is the name of the game.
It is easy to see why the safety of one’s financial assets is suddenly all-important. The news is truly rotten and wealth is disappearing before our eyes. It is estimated that already more than $10 trillion ($10,000 billion) of value has been lost in the world market decline so far. Governments around the world, including the U.S., have responded with trillions of dollars of bailouts, stimulus and massive deficit spending programs. The scale and scope of the destruction of asset values and the offsetting financial injections are almost beyond our ability to grasp. Mind-boggling is not an overstatement.
Unlike government securities and unlike gold, the value of silver is sharply lower this year. That decline is not the result of the selling of physical silver, but of the paper variety on the COMEX. In fact, compared to gold, the physical shortage and premiums on various forms of retail silver are higher and delays in some cases are longer. This may prove that physical silver is tighter than gold. The price decline in silver, relative to gold, indicates silver is dramatically undervalued to gold.
This is not a knock on gold. All the conditions appear in place for a big gold price rise. The market structure on the COMEX, the growing physical demand, the palpable fear in the air, all point to gold as an important go-to asset. Gold holds no counterparty risk and that’s especially relevant in the current climate. All the positives about gold apply to silver, in spades. Silver is rarer and scarcer than gold and it sells for less than 1.5% of the price of gold. So, if you like gold, you should love silver.
Gold is finite and there are physical limitations on creating more. Compare this to the infinite amounts of paper and electronic money being created out of thin air. Recently, I have read sober analysis that suggests gold will be priced at multiples of its current price due to the rapid expansion of monetary reserves. Take those same calculations and apply them to a comparison of gold versus silver. This is an oversight that creates a special opportunity for those that investigate the facts. Dollar for dollar, there is 400 times more gold than silver in the world. Let that one fact sink in and everything else will fall into place.
The next time you read of hundreds of billions, or trillions of dollars of bailouts and government simulative spending, remember there is only $10 billion of silver bullion in the entire world. And very little of that is available for sale, as it is strongly held by true silver believers. The inevitable rush to safety into such a small pool of metal will send the price soaring.
Warning Signs
By now, the world is aware of the largest Ponzi scheme in history, the alleged $50 billion fraud by Bernard Madoff, a fixture on Wall Street for almost 50 years, and of special significance for silver. Madoff was widely respected and trusted by his clients. The pain of betrayal compounds the financial devastation. Knowing you have been cheated makes it much worse. Victims include well-known individuals, charitable organizations, hedge funds and banks. It is said to be the largest investment fraud in history. This will only accentuate the flight to safety. The more people reflect on this episode, the more they will be motivated to buy gold and silver. For thousands of years, gold and silver have been trusted assets in times of distrust. Silver (and gold) may go up or down, but they can’t defraud you.
There are some remarkable similarities between the Madoff fraud and the manipulation that I have alleged in silver for the past 20 years. Both have occurred over long periods of times. Both involved sophisticated investors, including individuals and institutions. Both occurred under the nose of government regulators expressly created to prevent such frauds - the SEC in the Madoff fraud and the CFTC in the silver manipulation. Both regulators were given numerous public warnings of wrongdoing for many years. Both agencies neglected to look into the allegations or investigated and found nothing wrong.
Of course, there are differences. All are now aware of the Madoff fraud while only a few thousand are aware of the COMEX fraud. It is not a mainstream media event. The SEC is under intense and well-deserved criticism for its failure to regulate and terminate the fraud. Criticism of the CFTC will come in the future.
Another difference between the Madoff and COMEX silver frauds is that evidence of fraud was largely concealed by Madoff, while the evidence of fraud in COMEX silver is contained in government data. There was no readily available public data that would have made it easy to see that Madoff was running a fraud. Some sophisticated investors did investigate and steered clear after performing their due diligence. In silver, the data contained in the CFTC’s Bank Participation and Commitment of Traders Reports are all that a reasonable person needs to see. These freely accessible reports clearly indicate a concentrated short position in COMEX silver far beyond anything held in any other commodity. Rather than offer a plausible explanation for how one or two U.S. banks holding 25% of the annual world production of any commodity could not be manipulating, the CFTC instead stalled and began a drawn out investigation during which silver investors were devastated.
Sadly, for Madoff investors, it is too late. For silver investors, it is starkly different. The manipulation has caused prices to nosedive, but this same fraud promises phenomenal future returns. When the Madoff fraud was revealed, it was all over, the money was gone. In silver, when the fraud is universally recognized, the payday for silver investors will have just begun. We will then have embarked on the long-term journey of sharply higher prices that rewards all silver investors properly positioned. With Madoff, not being in was the key. With silver, being in is all that matters. Make sure you are in.
The only real risk facing silver investors is how you hold your metal. This Madoff affair should wake up metals investors holding pool or certificate accounts with no serial numbers. Hold your silver in your personal possession or in bona fide storage. Don’t store your metal with the dealer you purchased it from. The storage agent must be separate and distinct from the sales agent. The big problem with Madoff is that he held everyone’s funds. When he went under, everyone’s money went under with him. As certain as I am of silver’s coming price advance, I am equally certain that many silver investors will lose their money by holding bogus accounts. You have one of the great opportunities of a lifetime with silver. Don’t expose your profit potential to unnecessary risk.
EXPERTS!
Analyst James Quinn wrote an article entitled "Have You Listened to an Expert Lately?" Here are some excerpts,
"It is essential that every citizen do their duty and skeptically assess everything they are told by politicians, bureaucrats and corporate CEOs. They will continue to speak authoritatively like they know exactly what will happen in the future. They are lying. None of these experts can even predict what will happen next week, let alone next year."
"The Federal government will not bail out lenders – because that would only make a recurrence of the problem more likely.
George W. Bush, Sept. 2007
"These institutions [Fannie and Freddie] are fundamentally sound and strong.
Christopher Dodd, Chair, Senate Banking Committee, July 12, 2008
"I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists."
Barney Frank, regarding Fannie & Freddie, 2007
"There is a chance that housing prices could fall, but its effect on the economy will be limited."
Alan Greenspan, 2005
"Derivatives have permitted the unbundling of financial risks."
Alan Greenspan, May 2005
"The market impact of the U.S. subprime mortgage fallout is largely contained and that the global economy is as strong as it has been in decades."
Henry Paulson, January 2007
"All the signs I look at show the housing market is at or near the bottom. The U.S. economy is very healthy and robust."
Henry Paulson, 4/20/07
"I’m not interested in bailing out investors, lenders and speculators."
Henry Paulson, 3/2/08
"….the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."
Ben Bernanke during Congressional Testimony 3/2007
"….the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."
Ben Bernanke, 6/5/07
"It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions."
Ben Bernanke, 10/15/07
"The worst is over."
Warren Buffett, on Bloomberg TV, May 3, 2008
"Bye, bye bear market. Say hello to the bull and don’t let the door hit you on the way out."
Jim Cramer, August 4, 2008
"The stock market is cheap on a price-earnings basis, profits are fabulous, both here and abroad, stocks are a lovely place to be."
Ben Stein, August 13, 2007
"We finished the year positioned better than ever to capitalize on the array of opportunities still emerging around the world."
Stanley O’Neal, CEO of Merrill Lynch, January 2007
"Nobody saw this coming."
Angelo Mozilo, CEO of Countrywide Financial, July 2007 after he sold $138 million of stock
"I’m confident our company is in the right businesses for the long term and that our strategy of being in high growth businesses and markets, our laser focus on customer service, our expense discipline, and our commitment to strong credit risk management, will create value for our shareholders in the future."
Ken Thompson, CEO of Wachovia, October 2007
"The lesson that must be learned is that you cannot trust anything ‘experts’ tell you. They are looking out for their own best interests, not yours. For the last two weeks I’ve watched ‘experts’ conclude that the U.S. automakers must be saved and a stimulus package of at least $700 billion is needed to save America. The same experts that told us everything was fine a year ago are now telling us we must spend at least $700 billion to save our economy. Why should we believe them now? Our country, our banks, our consumers, and our corporations are extremely overleveraged. We cannot stimulate ourselves out of this overleveraged situation. The debt must be paid off, and it cannot be done without much pain and sacrifice. Stimulus is just another name for more leverage. President elect Obama says that we can’t worry about the short term impact on the deficit. When was the last time that government worried about the short-term, medium term, or long-term impact of their actions on deficits? That is why our National Debt is $10.6 trillion and we have $53 trillion of unfunded liabilities."
DELAYING TACTICS
By Theodore Butler
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
The CFTC sent out form letters to me and others asking for specific evidence about a manipulation in silver prices. A number of you asked me how to respond. It is important to understand what the Commission is trying to accomplish with their notifications. They are not really looking for specific evidence. They are looking to buy time.
All the evidence the CFTC needs is already known to them. Their August Bank Participation Report indicates that one or two U.S. banks held a concentrated net short position equal to 25% of the annual world mine production of silver. Such a degree of concentration, on either the long or short side of any market, is manipulative, in and of itself. If the CFTC disagrees, they should simply explain why such a large concentrated position should not be considered manipulative and put the matter to rest. Forget the taxpayer funded, long drawn-out investigation, just an explanation.
I have provided the Commission with additional specific evidence, in the form of proof that there was intentional forced liquidation of almost 15,000 long silver/short gold spread contracts on the COMEX over the past six weeks. The proof is known to the CFTC. It is contained in their weekly Commitment of Traders Report (COT). That should be enough evidence for anyone. But wait, there’s more.
The December Bank Participation Report (BP), and the most recent COT of December 2, provide even more evidence of manipulation in COMEX silver. While the number of contracts held by the one or two U.S. banks is lower than the peak in August, the percentage of concentration of the total futures market has grown to the highest level in history. Whereas the one or two U.S. banks held 25.4% of the entire market in August, the big U.S. bank(s) holds 29.9% now. And when all spreads are removed (as they should be), the concentrated short position of the big U.S. bank(s) rises to almost 40% of the entire COMEX futures market.
Further, the level of historic concentration on the short side is confirmed by the latest COT. The level of the net short position of the four largest traders is now 46.6%, the highest level in five or six years. Adjusting for spreads, the true net short position of the big 4 is an astounding 60% of the entire market. What this means is that the short position is becoming more concentrated, as fewer and fewer participants choose to be short a market at stupid low prices. The only traders willing to increase their short bets are the manipulators. This is who the CFTC is protecting.
With silver prices far below the cost of production, there is little economic justification for legitimate short hedging. After all, who would choose to lock in a loss? Therefore, there is little evidence that the big concentrated short position is legitimate. That’s why fewer and fewer traders are interested in shorting silver at current price levels. The COT also indicates that the next 4 largest traders (5 through 8) now hold the smallest net short position in 11 years. Just the few manipulators remain short.
Tell the CFTC to stop looking to you for specific evidence of manipulation and to start analyzing their own data. Tell them to stop stalling and to start doing their jobs.
[Editor’s note: We would also tell them to talk to Ted Butler. Any investigation that bypasses him is truly bogus.]
SILVER
By James R. Cook
We strongly advocate you hold 10% of your net worth in silver and gold. It’s entirely possible that the economy will unravel further and assets will continue to lose value. It’s more serious than most people want to believe. We may never go back to the way the world was. The government is well on its way to destroying the dollar. All the expensive social programs, the wars, the deficits and the political management of our money are ruining us.
As the economy crumbles, we are at risk of social unrest. A decaying dollar that succumbs to runaway inflation would eliminate most government entitlements. We don’t want to go there. I mention this to convey the seriousness of the present circumstances. If you don’t have an absolute minimum of 10% in silver and gold, you’re ignoring a waving field of red flags. If the government continues to borrow for bailouts, increases money and monetizes debt, we are in for an earthshaking rollover.
We saw what happened when demand increased for gold and silver. We ran out. Get your life jacket on before the Titanic starts to sink. Precious metals are the only lifeboat in a financial holocaust. You can believe the government will fix things, or you can own the single most trusted and liquid asset that ever existed on earth. It’s paper money or the money that evolved in the market over thousands of years. The former always fails. The latter never does.
We currently have bags of 90% U.S. silver coins available. They are among the best silver products. They have a $1,000 face value. You get 2,000 silver halves, 4,000 silver quarters or 10,000 silver dimes. There are 715 ounces of silver per bag. A bag weighs 55 pounds and is the shape of a bowling ball. We ship them in half bags, registered and insured through the mail in boxes marked "machine parts." The coins are all dated prior to 1965 when silver was eliminated from our coinage.
We also have uncirculated bags of Kennedy half dollars, Roosevelt Dimes or Washington Quarters. They have 725 ounces of silver and are generally dated in the 1960s. The supply is small.
U.S. Silver Eagles: From time to time we have them available. These one-ounce silver coins are newly struck by the U.S. mint. They have a face value of one dollar. They have a Walking Liberty on their shimmering surface and are big beautiful coins. We also have one-ounce silver Canadian Maple Leafs and silver Austrian Philharmonics available on a limited basis.
One-hundred ounce bars are another great way to own silver. They carry the hallmark of various mints. Each bar weighs around 7 lbs. We currently have them available.
Ten-ounce bars: These small portable bars are attractive and make a nice diversification. We have a limited quantity.
Circulated Peace Dollar Bags: These coins were struck from 1921 to 1935. Most are still bright and shiny. Dates are primarily in the 1920s. A bag contains about 770 ounces of silver. These are beautiful coins and still reasonably priced. We have a few bags available.
If you want to store your silver, 1,000-ounce silver bars are a good way to go. These large 60-pound bars are stored at HSBC, one of the world’s largest banking groups. They stand behind the security of the bars. You get a storage agreement in your name and the serial number of your bar. Nobody can match this storage arrangement. (Other storage programs are in the dealer’s name and don’t give you serial numbers.) Call us and buy some 1,000-ounce bars. 1-800-328-1860 They’re a great way to own silver with the safest possible storage program. We also have 100-ounce bars available for storage or for shipping to you.
Call us now and buy silver.
Sincerely,
James R. Cook
President
P.S. I wrote the following paragraph in 1998.
People cannot foresee the things they don’t want to happen. In other words, your interest and need for some other outcome make it unlikely you will be ready for an economic shock. It’s human nature. No matter how inevitable it may be, most people won’t see a crash coming. Because the full fury of a market and currency collapse will strike you so unexpectedly you stand to be devastated by it. Every paper asset you own, everything you count on, and everything that has been promised you for your retirement can be swept away in a torrent of fear and panic. In the long economic history of the world, no nation’s economy or paper money has escaped the pitiless repudiations, failures, depressions, shocks, devaluations, hyperinflations and bankruptcies that have remorselessly wiped out the gullible citizenry.
For 30 years, various soothsayers have issued warnings of a frightful economic crash. So far they have proven to be wrong. Many people use this as a reason to scoff at such warnings. Because no severe economic crisis has afflicted us in recent memory does not mean that such an event can’t occur. In fact, the reasons these warnings were issued remain very much intact, and, in all cases, are more serious than before. The day of reckoning may have been postponed but it only has served to compound the problem. |
