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Wheaton River to remain unhedged, expects higher gold price next year
By Ted Butler
InvestmentRarities.com
Tuesday, March 8, 2005
Perhaps "accident" may not be the precise word to describe what I
see coming in silver. After all, Webster's defines accident as
"an unforeseen and unplanned event or circumstance." While that
definition certainly encompasses what I see ahead in the silver
market, I need to add a qualifying adjective to complete my vision.
That word is "unavoidable." The silver market is headed toward an
unavoidable accident.
This will not be like any accident you have ever witnessed or
experienced. This is an accident you can fully prepare for and
greatly profit from. This coming silver accident could favorable and
permanently alter your family's standard of living and financial
security.
The great news is that preparations for this accident are simple and
merely depend upon you applying common sense.
At the core of what makes the coming silver accident unavoidable is
the immutable law of supply and demand. Supply and demand ultimately
governs how all markets function. While some markets, including
silver, can be controlled or manipulated in price for long periods,
eventually such manipulations must end if they are at odds with
supply and demand.
Nothing has been more at odds with the basic law of supply and
demand than the silver market. For many decades the world has
consumed more silver than it has produced. That has necessitated a
draw down of previously produced silver -- the inventories. There
has never been a situation in any commodity where such conditions
have failed to cause a dramatic price increase.
While supply and demand mandate a sharp price increase in silver, it
has not yet come. That's the groundwork for the coming silver
accident. When it comes, the price will explode and reach levels
that are talked about for decades to come.
The primary factors mandating a silver accident are excessive naked
short selling and leasing. Silver has the largest short position
that has ever existed in anything. This is the key component to the
coming silver accident. The total naked short position in silver
measures into the billions of ounces and towers over real world
supplies. This combined short position includes the COMEX, all other
exchanges, forward selling and leasing, the cumulative issuance of
unbacked silver bank certificates, unallocated storage programs, and
pool accounts. No other commodity has such a huge naked short
position.
It is, basically, this bloated short position that's at the heart
of the coming silver accident. It is this same excessive short
position that guarantees a financial windfall for your family. A
naked short sale is the sale of something you don't own. While it is
common in financial markets, more than 99 percent of the world's
population will never sell short anything in their lifetimes. That's
because it's an unusual and unnatural financial transaction.
Unbridled short selling can artificially depress the price. That is
why we have restrictions on short selling that date back to the
great stock market crash of 1929. In commodities there must be a
short for every long on every futures contract. Regulations are
supposed to preclude excessive long and short speculation via
speculative position limits, but these regulations have been
abandoned in COMEX silver, despite the efforts of many of us to
correct that.
There is one other aspect about short selling that is important to
grasp. Whereas the word "sale" means closure or finality in all the
billions of daily world business and financial transactions, a short
sale is always an open or incomplete transaction. A normal sale
marks the end of a transaction. A short sale marks the beginning of
a transaction. A short sale must be completed at some point, in some
way. There is no exception to this rule. Either the short sale is
repurchased and closed out, or that which has been sold short is
actually delivered and the open short sale is closed.
Precisely because all short sales must be closed out, a silver
accident is guaranteed. When I say that silver has the largest short
position in history, I am also saying that silver has the largest
number of incomplete transactions in history. Forget, for the
moment, the manipulative and depressing effect this monumental short
position has had on the price.
All short sales must be closed out in some way. With silver, could
it be by delivering silver? Against the billions of ounces of silver
sold short, how much do we have to deliver to close out these
incomplete transactions?
In the COMEX warehouses there's 100 million ounces. That represents
most of the known silver bullion in the world, but it's mostly
owned by investors other than the short sellers. Maybe there are a
billion ounces of silver in the world -- in coins, small bars, and
silverware, but that's not eligible for delivery against the
silver short position of billions of ounces.
Not only is all the world silver in existence woefully insufficient
to cover the monstrous short position, but most of this insufficient
quantity isn't even owned by the short sellers.
That's why I've made such a big deal about the uniqueness of
a silver short position that's larger than existing world
inventories. It eliminates one of the only two legitimate ways a
short sale can be closed out. That's why we've never seen any other
commodity with a short position greater than what actually exists.
How can you have a short position in anything greater than what
actually exists?
The only remaining legitimate way a silver short position can be
closed out is if it were bought back by the short sellers. From whom
are these short sellers going to buy hundreds of millions and
billions of silver ounces from? Or, more correctly, at what price?
Since actual delivery is out of the question, the only way the short
sellers can buy back their bloated silver short position is to get
every owner of real silver and every owner of paper silver to sell
out. The price that would be necessary to accomplish that feat would
qualify in any reasonable definition as an accident.
While there is no way to determine when the silver shorts will spook
and rush to cover, time is not on the shorts' side. At some point
they must try to buy back and cover the silver they can't possibly
deliver.
It is not important to know in advance what the actual trigger for
the silver accident will be. All you need know is that with the
critical and long-term physical deficit in silver, the short-selling
charade must end. Since we can't determine when, don't focus
on the timing; focus on the inevitability of a delivery crunch.
Long-time readers know that Investment Rarities has been
underwriting my articles for the past four years. For most of that
time the silver price averaged between $4 and $5. For the past year
the silver price has been $6, $7, or $8. Does this increase mean
that the price has finally responded to the law of supply and
demand, and therefore eliminated the chance of a silver accident?
Normally a price increase of 50 or 100 percent in a commodity should
be sufficient to balance any consumption deficit. That's a big
move in any commodity. But not for silver. That's because the
consumption deficit in silver is unlike any other commodity deficit.
Silver has been in a structural deficit stretching back for more
than a half century. You don't undo the damage of 60 years with a 50
or 100 percent gain.
There is zero evidence that production or consumption has been
impacted by the price or that the silver deficit has been cured.
There has been no worldwide rush to find new silver mines in
response to higher prices. Silver may have increased in price, but
there has been zero effect on near-term production increases or
substitutions in demand. No one has switched to gold or platinum
jewelry because silver is up in price. The law of supply and demand
hasn't been affected one bit as a result of the recent price
increases. The prerequisite for the coming silver accident is very
much intact.
But it takes more than a bullish supply and demand equation to cause
a violent price event. Bullish fundamentals point to higher prices
but not necessarily a price accident. In the silver short position,
we have the needed reason, in spades, for an accident.
As a result of the 60-year structural deficit, we have exhausted
just about all the world's silver inventory. That includes just
about all world governments' silver inventory. When the
unavoidable silver accident occurs, there will be no one to douse
the price fire. This can't be said about any other commodity.
This fact distinguishes between a gold and a silver accident. In
gold in a financial meltdown or currency crash (popular reasons
given for a gold price accident), world governments own enough gold
to extinguish a price explosion. In silver they don't own enough
silver to put out a fire.
It's rare to be presented with an unavoidable financial accident
that you can personally benefit from. If you find my argument has
merit, then position yourself in silver before the coming accident.
If you wait until the accident happens, it will be too late.
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