Silver Bells

Silver Bells

This is the Christmas that keeps on giving...if you're a silver investor. I was happy to read the headline on my Wall Street Journal this Monday morning, December 27th, "Price of Silver Soaring".

According to the article, "In the past four months, [silver] has upended forecasts, rising 51% to a series of 30-year highs, before inflation. Silver closed Thursday at $29.31 a troy ounce, up from $16.822 at the beginning of 2010. Among the four major precious metals—the others being gold, platinum and palladium—silver is up 74% this year, on track to be the second-best performing commodity after palladium, which is up 86%. Gold, by contrast, is up 26% and copper just under 28%."

The article called silver's rise an "unexpected surge".

Of course, if you've been around Rich Dad for long, there's nothing unexpected at all about silver's surge. I've been encouraging my readers to invest in silver for years now. And I've been buying silver since it was $5 an ounce. For me, it's been a very Merry Christmas. Here are a few reasons why I love silver:

  • Silver is an industry metal that is consumed, not hoarded
  • On top of being a precious metal, silver is used in electronics, medical devices, water purification, and for making jewelry
  • There is a shortage of physical silver for sale on the market
  • The gold/silver ratio is historically 14:1. If gold were $14 an ounce, silver was $1 an ounce. Today, ratio is around 50:1. Silver has a lot of catching up to do.

Is there really a shortage?

As I read through the Wall Street Journal article I came across a puzzling line, "Pricing [of silver] are rising despite oversupply and a lackluster recovery in industrial demand." While this is partially true, it distorts the overall investment picture.

The silver market is a complex one—and a manipulated one. The biggest silver investors are commercial investors like JP Morgan and HSBC, and Exchange-Traded Funds (ETFs).

Yet, there is a big difference the big investment firms, and the ETFs. The big commercial investment firms take short positions on silver that require no actual transfer of physical silver and the ETFs buy physical silver to hoard and sell as shares (though there is debate as to whether they have enough to cover the shares they sell).

Short selling, or shorting, simply means you sell something you don't own. The big investment firms sell borrowed silver from the COMEX and pocket the money. And they take massive short positions, which keeps the price of silver low and the "supply" high.

Here's the problem. According to SeekingAlpha.com, "As of December 10, the COMEX holds only 106mm of silver, or roughly enough to cover 21,000 contracts. From the most recent Commitment of Traders report from the CFTC, there are more than 137,000 silver contracts outstanding. That means if only 15% of silver long holders decide to take delivery of physical silver, a short squeeze unlike any other ever seen may result. The reason the COMEX shortage could turn into such an explosive story is because the lack of physical silver available to cover the existing futures obligations."

So, where is all the physical silver going? It's being either scooped up by the ETFs, which have no intention of trading. They make their money by selling shares on the open market and collecting fees. Or it's being used up in industrial processes and is gone forever.

The rules are changing

For years this hasn't been a problem. The COMEX and the big silver investors were happy working together to manipulate the price of silver and keep it low. All this is changing now, however, because there is a change in the rules of how short positions in silver can happen.

The Commodities Futures Trading Commission (CFTC), which is to COMEX what the SEC is to the New York Stock Exchange, has passed a new law which will make the big traders and the COMEX play fair on the global silver market.

Basically, the CTFC has reduced the size of the short positions big investors can take. That means big investors will have to shore up their positions on their existing contracts, what's called a margin call, which means they'll have to buy physical silver to send back to the COMEX.

The problem of course is that there's a shortage of physical silver.

So, when the big investors go into the market to purchase the physical silver to shore up their massive short positions, they'll pay a premium—and silver prices will rise.

In the end, this is the type of news you won't get from the established media. While it's true that silver is rising due to increased investor demand despite an oversupply, as The Wall Street Journal writes. It's not the whole truth. The "oversupply" is a result of silver contracts, not physical silver available on the market. Once people want to take possession of their physical silver, the price of silver will rise as investors scramble to cover their short positions.

I'll continue to ring the silver bell. I'm convinced more than ever that silver is the safest and best investment today, but not for long. The price will rise and it will rise quickly. Continue to expand your financial education, and keep a close watch on the silver market. Also, be on the look out for my next Yahoo! Finance article in January, which goes into more depth on this topic.

Happy New Year from Rich Dad.

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