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December 19, 2010
Issue 127  -  Silver, the Poor Man's Gold
I really haven't written a lot about silver lately, and since I believe it will outperform nearly all investments in the coming years, this blog will focus on it. 
Silver is one of the most useful of all elements with many, many different applications.  Not only that, it is being consumed rapidly by a growing global economy.  Most people don't know that silver is actually rarer than gold when you consider the amount above ground plus the unmined amounts in the ground.  Silver is ten times more plentiful than gold in the earth's crust.  The historical ratio for price is about 16:1, gold:silver.  However, the price ratio currently is about 47:1.  This is rather odd if you think about it.  Why wouldn't gold sell for 10 times more than silver?
I believe this is related to manipulation.  There is no logical reason that silver shouldn't be selling at $100 a ounce.  How is silver manipulated?  Let's look at table from the Bank of International Settlements with annotations from Rob Kirby:
This table shows the derivative totals for gold and "other precious metals."  Look a few lines up from the first red circle and you see the gold line.  Gold derivatives total $417 billion while others is $127 billion.  Silver is totally dominant in quantity over any other precious metals such as platinum.  Why is the silver derivative number 1/3 of the gold number?  With the current price ratio it should be 1/47.  If the ratio was just comparable to earth ratio, it would be 1/10.  Why is this?  Manipulation.  There is no other logical reason in the world to explain it.  These derivatives are being used to keep a lid on silver prices.
Still not convinced?  Explain this from Zero Hedge:

Water, Meet Blood - JP Morgan Admits To, Reduces Massive Silver Short Position, Proves Millions Of Conspiracy Theorists Correct

In the latest example that virtually every conspiracy theory is almost always inevitably proven to be fact, the Financial Times reports that JP Morgan, the firm targeted by thousands of "tin foil hat" wearing, conspiratorially-oriented "gold bugs", has cut back on its US silver futures. "JPMorgan has quietly reduced a large position in the US silver futures market which had been at the centre of a controversy about its impact on global prices for the precious metal." And in what can only be considered an unprecedented victory for all those who have over the past year agitated to putting JP Morgan out of business, most recently spearheded by the likes of Mike Krieger and Max Keiser, by forcing a massive short squeeze on its commodities trading desk, we learn that "the decision by JPMorgan was an attempt to deflect public criticism of the bank’s dealings in silver, a person familiar with the matter said. The person added that the bank’s position in silver would from now on be "materially smaller" than in the past." Of course, the latter is pure and total bullshit: as Bart Chilton indicated over the weekend, it is JP Morgan who at one point or another (and possibly very recently) controlled as much as 40% of the silver market, via a massive short. Attempting to make others believe that this short could be covered without pushing the price of the silver metal to over $100/ounce is an indication of either how stupid JPM believes the general population to be, or just how desperate the firm is to end the ongoing short squeeze onslaught. Either way, we are confident that this first unprecedented confirmation that a) JPM is indeed massively short silver and b) that it is hurting bad, will merely redouble efforts to put the world's biggest financial company out of business. Lastly, this means that silver is about to really blast off as the push to really hurt JPM takes off in earnest.

So JP Morgan has a dominant role in the silver pits?  This is directly tied to the derivatives.  It all fits together in giant manipulation scheme.  Personally, I don't believe that JP Morgan has reduced their shorts. (at least all that much)  I think they are trying to talk the market into thinking that they aren't in trouble.  I believe that is a ruse.  I think they are actually in big trouble.
One of the reasons I think this is the many uses of silver.  The Silver Institute divides the uses into traditional, industrial and emerging.  Let's take them one by one.
This category includes, coinage, photography, silverware and jewelry.  All of the these uses are decades old and very established.  Photography uses silver and is recycled.  Digital photography has supplanted traditional chemical development which has taken away demand, but the other new uses has more than made up for it. 
The industrial uses are much more diverse.  Briefly, here are those uses.
Batteries  -  Because using silver in batteries is expensive, they are typically used in small applications such as button cells.  Silver batteries are also being used in lieu of lithium due to safety concerns.
Bearings -  Bearings which have been electroplated with silver are much more durable and are used in high usage, heavy duty applications such as jet engines.
Soldering  -  Lead solder has been phased out in Europe and silver solder is being used in more and more applications due to safety concerns.
Catalysts  -  A catalyst is used to start or aid a chemical reaction.  Over 600 tons of silver is used each year to produce ethylene oxide.  This is used in the manufacture of flexible textiles and as an ingredient in automobile antifreeze.
Electronics - Due to it's excellent conductivity, silver has many uses in electronics.  These include switches, inks for use in RFID chips, prepaid toll passes, coatings for CDs and DVDs, and in plasma display panels.
Emerging   p-  This is the most exciting area for silver investors with new uses being discovered almost daily.
Coatings -  Once polished, silver has near 100% reflectivity, making it perfect for energy efficient windows.  These so called low e windows perform well in summer and winter.  1 in 7 pairs of prescription sun glasses incorporate silver to allow quick tinting.  Silver is actually melted into the glass.  Silver ions also have antibacterial properties.  They are added to paint which helps prevent mildew and fungus from forming.
Solar Energy   -  Silver paste is used on solar panels to help collect energy.  Solar energy is a growing industry and is helping push the need for silver higher.
Water Purification    Due to its bacteria killing properties, silver is being used more and more in purification systems.  The ancients knew that water stored in silver casks lasted longer.  This is fast growing use area for silver.
Medical Applications   This is by far the most exciting and fastest growing segment of silver use.  I'm going to use a direct quote from the silver institute for this description:

Only recently, however, have scientists discovered how the white metal does its work. Quite simply, silver interrupts a bacteria cell’s ability to form chemical bonds essential to its survival. These bonds produce the cell’s physical structure so bacteria in the presence of silver literally falls apart. Cells in humans and other animals have thick walls and are not disturbed by silver. Therefore, silver prevents bacteria growth but is harmless to humans.

One of the most important uses of silver as a biocide is in hospitals and other health care facilities because they grapple with MRSA (Methicillin-resistant Staphylococcus aureus), a type of life-threatening Staph germ. Also referred to as a ‘superbug,’ MRSA is resistant to almost all chemical antibiotics, so many hospitals are employing silver-imbedded equipment including surgical tools, catheters, needles, stethoscopes, furniture, door handles and even paper files.

One of the most promising applications is in silver-imbedded bandages for burn and wound victims. The silver ions help prevent infection but also speed healing because the body doesn’t have to focus its energy on fighting infection.

Currently we’re seeing a surge of applications for silver-based biocides in all areas: industrial, commercial and consumer. New products are being introduced almost daily. Established companies are incorporating silver based products in current lines - clothing, refrigerators, mobile phones, computers, washing machines, vacuum clearers, keyboards, countertops, furniture handles and more. The newest trend is the use of nano-silver particles to deliver silver ions.

This will continue to add to the demand of silver, keeping the price high.

Silver-imbedded bandages prevent
bacteria growth and speed healing.
Silver is one of the best performing assets over the last year and I expect that to continue for years to come.  Make sure you have some physical silver to protect yourself and to take advantage of the continued rise.  Silver is very volatile, so it is a good idea to buy on price drops.  If you don't have any, I would divide the money I wanted to invest and buy monthly over a 6 month time frame to initiate your position. 
This week had an unexpected press release:
Mexus Gold U.S. Announces Operating Equipment Arrives at Ocho Hermanos Mine in Hermosillo, Mexico

CARSON CITY, Nev., Dec. 16, 2010 (GLOBE NEWSWIRE) -- Mexus Gold U.S. (OTCBB:MXSG- News), announced today that the Ocho Hermanos mine located in northern Mexico and owned by Mexus Gold U.S., Mexico Division, Mexus Gold S.A. de C.V. is now ready to enter into production operations with the arrival of equipment provided by Mexus Gold U.S.

Mr. Paul Thompson, CEO stated, "The transport and installation process of this equipment is very important to us as a Company. I think it shows our commitment to our projects in Mexico and our ability to provide the means to make this type of project move forward. Our permitting process is going well with all of the paperwork required to initiate operations completed and filed with the appropriate authorities. In addition, we were encouraged by our ongoing drilling program in such a manner that we felt we could move forward into the initial production stage of developing the Ocho Hermanos project."

 This is an added bonus of owning Mexus.  Even though I primarily bought for the cable reclamation, they do have precious metal properties and it looks like they may be producing metal much quicker than I thought they would.  This can only help the share price. 
President Paul Thompson has said on a radio interview that this property will mine 25-30 tons of rock a day.  The property has very high silver content, at least 100 ounces a ton.  Let's run some numbers here:
silver $29 an ounce
100 ounces per ton x $29 = $2900 per ton
25 tons a day x $2900  =  $72,500
$200 per ton costs (this is high) x 25 tons  = $5000 a day costs
$72,500 - $5000 = $67,500 per day
30 days x 67.5K  = $2,025,000 a month
Even assuming they don't get full value for the metal, and that they don't work everyday, this will be a HIGHLY profitable property.  Not sure how much ore they have, but I think it's safe to say they probably have at least a years worth.  Conservatively they should pull in at least 12-15 million dollars in the first year.  At 27 cents, the stock is valued at $40 million.  This is a price to earnings ratio of about 3.  No way the stock stays at a PE of 3.  A PE of 15 is "normal" which would translate to a price of about $1.20.  Even halving this estimate gives a lot of upside from here.  This announcement has actually made this company a little less "speculative."  These guys have done what they said they were going to and I think the share price will eventually go higher as trust is built up.  I still think any price less than 34 cents is a good risk to reward chance.
Goro  (closed at $27.00, down $.69, average price paid, $6.10) 
Mexus Gold  (closed .27, up 4 cents, average price paid, $0.20)   
GORO June 11, call options, strike $20 (closed at $8.50, even, average price paid, $5.60)
SLW options  March 2011 expiration
        40 strike (closed at $3.00,  down $.75, price paid $2.75)
        45 strike (closed at $1.64, down $.62, price paid $1.62)
I'm glad (not really) that these positions took a large hit if they can educate someone reading this as to the HIGH volatility of options.  My positions here are down from 55-80% in less than 2 weeks.  I hope this will explain why I say they are so risky.  I still think these could turn around, but the odds are against me now.  AEM was hit especially hard due to a less than expected earnings report.  This is why I spread the risk over 3 stocks. 
Call Options, gold stocks, January 2011 expiration
       AEM - 90 Strike (closed $.28, down $1.15, price paid $1.45)
       GG - 50 Strike (closed $.23, down $.31, price paid $.57)
       NEM - 65 Strike (closed $.51, down .73, price paid $1.12)
This week's video is a performance of my favorite Christmas song.  It's called the The Prayer and is sung by Celine Dion and tenor Andrea Bochelli, have a merry, merry Christmas!