"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Friday, April 29, 2011

It's The Physical Stupid!

     I've found myself addressing folks on various fronts about the recent run up in silver prices (I was referred to this article in one email).  There appears to be a school of thought that tangents with Normalcy Bias and that is when something runs up in value at parabolic levels, its a bubble.  This is what I am talking about, these people are focused on the fiat value of the derivative.  

What you need to know is that the derivative is used to "discover" the price of a contract that possesses the legal right to claim delivery of the underlying asset at an agreed upon time and price in the future, which is silver in this case.  What I am trying to explain is that this entire market is a set up, there is not enough metal to cover the contracts written by the iShares SLV Trust and thereby the price on the assets in the market, the stage 1 derivative which is the /SI Physical Silver contract, are not truly representative of a free market place where all participants can make rational decisions based on the supply and demand of the commodity and without the with holding of material information.  If the stage 1 derivative vehicle is mispriced, then the stage 2 vehicle used for average investors is also mispriced because it represents the "discovered" price of Physical Silver minus the liabilities of the Trust (which is iShares SLV in this case that Blackrock designed and structured and hired Bank of New York Mellon to be the trustee and JP MorganChase to be the Custodian)

Before we go further I will lay it out for you right here:  This isn't about the perceived value of silver on some far off date.  This is about the Big 4 or Big 8 Precious Metals Market Markets, whichever party you're in, selling contracts for the right to metals that they claim exist but don't actually have stored in vaults with individual serial numbers and specifications of weight and purity.  There are a boat load of suckers out there thinking they will get silver delivered to them when their contracts expire and most of these people are in the school of thought that this offers protection against a devaluing currency.  In this case why don't I sell you a napkin?  It's paper and there is nothing backing whatsoever but I'll just sell it anyways and call it /SIK1 (May Physical Futures Contract ticker).  That is what we are dealing with here.  What the hell do you think will happen when the Comex, Nymex, LBMA settle in fiat currency and not metal, regardless if its 50-100% above spot price?  People will flip shit.  Do not call this bubble.  Those that do are unaware how much they do not know.  This is all factual data and the truth is hidden in the details.  Its not about the SLV, it's the Physical stupid!  You would find yourself in good company if you stockpiled physical silver.  Here are some uses for it:

     Either I missed the CME release yesterday or I saved it in the wrong place but I missed the influx of silver to JPM inventory.  They had 30,844 Troy Ounces and today they have 141,436, a growth of 455%.  JPM now has enough Silver in storage to fill 28 contracts.  This Silver could be stored from a private individual and have no connection whatsoever to the CME or the silver market that JPM is a market maker, depositor and weigh-master, and custodian for.  Don't fall for the "normalcy bias".  Americans are about to get screwed.  The Fed will do QE3 and the debt limit (which I know says is $11.3bn, is not updated to account for the many recent revisions to the law but I linked to it to continue the fact based cycle) will be raised (Treasury Direct says we passed it already), many smart people know this, it's not some grand forecast. 

     The manipulation has been documented, the CFTC held a hearing on it (see video below), and the whistle-blower was the target of an attempted assassination.  This is not bubble.  The price of the SLV may be a bubble because it is only useless paper that is sold by a trust as a vehicle with the principal goal of being a "price discovery" mechanism.  The value of the SLV is the spot price of Physical Silver minus the liability of the trust, which is Blackrock iShares SLV.