Silver @ $400oz adjusted for Inflation from $50 high 1980

Why I got into silver
(Thinking back over 10 years)
Silver Stock Report
by Jason Hommel, December 17th, 2009



When I started working for myself, I made my very first money, enough to save for the very first time, but I was working so hard, over 80 hours a week! I guess God finally caught up to me, because, at some point, I began to think. And that's when it all started.

I thought: Why am I working myself to the bone, sleep depriving myself, to save up little pieces of paper in a bank, that does not even have the pieces of paper that they say are in my account? It's fraud upon fraud.

Yes, yes, I know what they tell us, that they are lending my money out, to be able to provide a return, enough to pay me the "interest". Sorry, 1% is not enough to get excited about, not when I've been living with 4-5% inflation my whole life. I saw the increases in the prices of candy and comic books in the 70's when I was a kid. I know.

I heard at the gun store from a guy who said that gold was cheap at anything under $350/oz., because the miners can hardly produce it for that, he was amazed at the low prices, and he thought that buying it was a zero risk opportunity to make some money.

I forget now, but I probably did a little research on the internet, which confirmed what he was saying.

So, I bought some gold and silver from the local coin shop at Tebo Coin in Boulder, Colorado, something I wanted to do my whole life, but never had the money to do.

I got 4 ounces of gold, and about 400 silver dimes. I got an American Eagle, a Kruggerand, a Mapleleaf, and a Philharmonic. I think I paid about $300 each for them, or so.

I had already bought a gun, because it seemed to be the responsible thing to do, but this was really cool. Now I had Gold, silver, cash, and a gun!

I kind of felt like an outlaw or something. I felt like I was robbing the banks, but legally!

I also stocked up on some food. But I quickly sold the food, and moved home.

I had to convince my dad. Y2K was coming up. He had way more money than me to protect, and he could prepare much better than I could, "just in case". We spent less than 1/2 of 1% of his net worth on preparations, and converted less than 10% of his wealth into silver and gold. Not too bad.

One day, my dad asks me, "Which is better, silver, or gold, and how do you know?"

Good question. It forced me to research more. I already knew the silver market was smaller, and that there was no investment demand, and thus, any new investment demand that went into silver would push the price way up.

Back in 1998, there was more investor selling than buying. Coin shops would send excess silver to refiners. From their perspective, they were drowning in silver. From an investor's perspective, the silver coming from investors selling is an "unsustainable supply source" one that, when it ends, will cause a whipsaw price change to the upside, even without any new investor buying!

In 1999, investors started buying 90% "junk" USA silver coinage dated 1964 or earlier, to prepare for Y2K, in case the banks crashed from computer failure, or bank runs. Prices for on those silver coins soared from about 5% over spot, to 50% over spot of $5/oz., in just a few months. We got a bit scared at that, and held on.

My grandmother had some bonds. My father next suggested that we try to convince her. So, I wrote up a small report about what I learned. I detailed that silver mine supply was about 500 million ounces, recycling was about 200 million more ounces, and government selling was about another 50 million ounces. Recycling included "investor selling".

Demand consumed it all, all 750 million ounces produced or recycled each year. Demand consisted of about 45% industrial demand, mostly in electronics, 25% jewelry & flatware demand, and 25% photography demand, and about 5% coin/medallion production.

The shocker was the relative numbers. At $5/oz., the size of the annual silver market was a tiny $3.7 billion, world wide.

In monetary terms, that was nothing. The money in US banks stood at $4 trillion, 1000 times as large.

She seemed a bit convinced, but where would she get silver, and where would she put it? She was too old to guard it, she was nearly 80. Sigh.

Very little has changed in 10 years.

Photography demand has dropped by about 10%, and investor demand has increased to about 10%, effectively replacing it, creating no new significant investment buying pressure.

Silver Eagle production has increased from 10 million coins to 20 million coins per year. In a 600 million oz. annual mining market, it's almost an insignificant change, this increase in coinage of 100%.

Silver has gone from $5 to $17.

M3, money in the banks, has gone from about $4 trillion to about $15 trillion.

The increase has been at about the same rates. Silver is just keeping pace with the inflation.

No significant money has yet flowed into silver, which is the event that will cause silver to vastly outpace in value all other investments or real property.

Popular press that writes about how much silver the ETF's "have obtained", have no clue about how much the ETF's have, since their silver is not able to be audited.

JP Morgan is the custodian of the silver for SLV.

JP Morgan has the largest short position in silver at the COMEX.

SLV's silver cannot be audited, as JP Morgan has the right to have sub custodians and sub sub custodians hold silver for the SLV. READ THE PROSPECTUS!

This means they can back up the SLV with long positions in futures, since "someone else" has the silver. So, SLV is backed by futures, and futures can now be backed by SLV.

It's now fraud backing fraud. But business as usual for the banks!

JP Morgan has $80 trillion in derivatives exposure, while the next largest banks have only $35 trillion, and the 4th largest has only $4 trillion.

What has changed significantly is that the fraud of "holding silver for investors", silver that was never purchased, and does not exist, has vastly increased.

Creating "paper silver" is similar to inflation. The effects of rising prices for REAL silver are not seen right away, there is a delay. The delay will one day manifest itself in silver rising much faster than it did in 1980.

The 1980 peak saw silver rise to $50/oz.

You can adjust for inflation in many ways.

1. If you go by government CPI numbers, the former peak would be about 2.5 times higher, or $125/oz.

2. If you go by the increase in M3, the increase in the paper money creation, which is the real inflation, then the increase is about 8 times higher, from about $1.8 trillion to about $15 trillion, so silver's "inflation adjusted" high would be $400/oz.

Silver moved up $10/day back then. We could see silver thus move up by $80 day sometime in the future, when things "blow up" in the financial world, or even more per day.

3. The third kind of inflation is the derivatives. There are a notional $1000 trillion of derivatives, mostly interest rate derivatives, or bets on the change in interest rates. People don't really buy very much gold in this era, they mostly place bets on the way they think interest rates will go, using highly leveraged bets. Mostly interest rates are flat. I suspect most of the bets thus fail. You need a change in rates for people's bets to pay off.

The comparative numbers are that the world's annual mine production of gold is about 2400 tonnes, or about 75 million oz., worth about $85 billion.

All the gold in all the world, ever mined in all of human history, stands at about 155,000 tonnes, or about 5 billion ounces, worth about $5.5 trillion.

The $1000 trillion of notional value of mostly "interest rate" derivatives simply dwarfs the gold market.

I write that more for future students of history than for people today. Most fools alive now simply don't get it. Future generations would simply not believe the stupidity of this generation, unless I wrote it down.

4. The fourth kind of inflation is a narrow subset of derivatives, including all the different kinds of "paper silver". This would include futures, options, ETF's, silver pools, silver certificates from Perth or Canadian Banks, and "over the counter" silver obligations.

For ten years, I was told that the "over the counter" silver obligations were unknowable, but probably the biggest kind of fraud.

Last year, I finally got a hold of some data on the over the counter silver derivatives.

The BIS report on commodity derivatives.



It shows there is $203 billion in "other precious metal" notional derivatives owed by all the world's banks.

That's mostly $203 billion of silver fraud, because the silver market is a $10 billion market, with investors only buying $1.7 billion per year!

We ought to know who the BIS is. The BIS is the Bank for International Settlements.

http://www.bis.org/

http://en.wikipedia.org/wiki/Bank_for_International_Settlements

"The Bank for International Settlements (BIS) is an international organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government.

The latest report shows an increase in the "notional amounts outstanding" in the "other precious metals" category, from $96 billion in Dec. 2008 to $203 billion in June 2009. They only report twice a year.

Please note, the entire annual silver mine production is about 600 million ounces, at $17/oz., is $10.2 billion.

Thus, the banks owe 20 times more "other precious metals" than silver is produced per year.

Does the "other precious metals" category include platinum and palladium? Sure. But those markets are as small, if not smaller, than silver!

The world produces about 8 million ounces of each.

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