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What to Own as Silver Gets Ready to Rally

This post came to courtesy of CMI Group and can be located on a website called 'The Sovereign Investor', they think a bit like we do in that their preference is to hold physical silver and not the paper that promises delivery.

Back in 1995, I bought 250 million ounces of silver.

And no, that isn’t a typo.

I had high hopes for silver in 1995. It was trading below $5 an ounce, which was dirt-cheap, but I could see that it was terribly undervalued.

Along with a few other traders at Salomon Inc., we made the purchase of physical silver – actual silver bars. I held 125 million ounces in Brooklyn, New York, and over 100 million ounces in London for safekeeping. What I didn’t realize was the stress our buying was about to put on the silver market.

Not long after that purchase, I received a call from the chief regulator of the London Bullion Market.

“Hello Andy, this is Terry from the Bank of England. Rumor has it that you boys own a lot of physical silver here in London. We would appreciate it if you would lend that silver so there are no disruptions in the London market.”

Holy cow, I thought to myself, there’s not that much silver in London! The dealers were concerned that they wouldn’t be able to meet their promises to their paper silver holders.

I learned an important lesson that day: there was not as much physical silver out there as the banks, dealers and regulators would like us to believe.

My 250 million ounces stretched the limits of the silver market, and it wasn’t the first time it had happened. In 1979-1980 the Hunt brothers bought 200 million ounces, causing similar market stress. Two years after my purchase, Warren Buffet bought at least 135 million ounces, again pushing the limits of available silver.

Today, with even more paper silver out there, the situation has only gotten worse. With silver poised to make a major move higher, are holders of paper silver about to be hung out to dry?

Paper Silver is a Potential Disaster

No one knows how much silver is really in the London vaults, but from that phone call in 1995, I learned there is a lot less than the dealers hold on their books.

Today, there is more paper silver out there than there was back in 1995. Much of it is because of the popularity of a new instrument in owning silver: the silver ETF (SLV). SLV has total net assets of around $8.8 billion.

At $29 an ounce, the ETF represents over 300 million ounces of silver… but it doesn’t guarantee it. People holding shares of the ETF are promised delivery of their physical silver if they ask for it, but what happens if those supplies aren’t there?

Like in the banking business, dealers manage their unallocated silver liabilities using a method called fractional banking reserves. The theory is that all the holders of unallocated silver out there will not call for physical delivery at the same time; therefore, the dealers need only hold a fraction of the silver on their books in physical form.

But the silver market has changed over the past decade – there are many more investors in silver today because of products like ETFs and a wider spectrum of portfolios holding paper silver. The higher the price of silver goes, the greater the likelihood of a run on physical silver and a potential shortage. And right now, silver is positioned to head higher…

Two Reasons Silver Will Break Higher

Silver has started to move recently – it’s up more than 12% since the end of June. And, technically speaking, it’s looking to go much higher. Momentum is in its favor, and the indicators are looking bullish.

See larger image

The other big reason that silver will follow through is that it’s dirt cheap relative to the price of gold.

See larger image

The gold-silver ratio at 56:1 is way too high. In 1980, the ratio was 16:1, which would imply a silver price of over $100 today! While we might not get back to those levels, the ratio has started to decrease steadily over the past few weeks. With the ratio dropping and gold rallying, we have a good sign that the price of silver is set to explode!

Once it starts moving, I expect the physical silver price to make a new all-time high above $50 in the coming months. Beyond that, I can see it trading much higher – perhaps $75 or more.

Avoid Paper Silver – Buy the Real Thing

The moral to this story is that to get ready for a rise in the price of silver, buy physical silver, not paper. All of the evidence points to the fact that there is not enough silver to satisfy all the holders of paper silver. If people start to realize that their paper silver can’t be backed by the real thing, that paper suddenly plunges in value. Physical silver may be clumsier than holding paper, but no regulator, dealer or anyone else can change the value of the actual metal. If there is a run on silver supplies, you’ll have the real thing instead of potentially worthless paper promises.

Make sure you buy physical, allocated silver bars and store them with a reputable institution like EverBank, the Hard Asset Alliance, or in your own home vault.

Silver today is still around $30, but it won’t stay there for long… make sure you are holding the real thing when it starts to move.

Your eyes and ears in the commodity markets,

Andy Hecht



Have a good one!


We closed another winning trade yesterday and will update the charts and stats shortly.

Our trading success rate is 91.00%

92 profitable trades out of 101.

Our model portfolio is up 459.99% since inception

An annualized return of 76.75%

An average return of 35.10% per trade

Our annual performance figures are as follows:

2009 We made a profit of 23.89%

2010 We made a profit of 158.66%

2011 We made a profit of 40.95%

In 2011 we outperformed:

S&P by 42%

HUI by 53%

Gold by 31%

Silver by 41%

The 2011 Annual Report by be accessed via this link.

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September 2, 2012 | Unregistered Commentersilvershark110

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