Izzy Friedman: What Now For the Price of Silver?

http://goldsilverworlds.com/gold-silver-experts/izzy-friedman-what-now-for-the-price-of-silver/

Gold vs. silver

Click on chart to enlarge.

Yes, I'm a self-admitted gold bug, but I'm actually more bullish on silver. Here's why, according to John Williams of shadowstats.com:

Gold and Silver Highs Adjusted for CPI-U/SGS Inflation. Despite the June 28th historic high gold price of $1,261.00 per troy ounce, gold and silver prices have yet to approach their historic high levels, adjusted for inflation. The London afternoon fix, per Kitco.com of January 21, 1980 would be $2,382 per troy ounce based on July 2010 CPI-U-adjusted dollars... and would be $7,727 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars [all series not seasonally adjusted].

In like manner, the all-time high price for silver in January 1980 of $49.45 per troy ounce [London afternoon fix, per silverinstitute.org] has not been hit since, including in terms of inflation-adjusted dollars. Based on July 2010 CPI-U inflation, the 1980 silver price peak would be $139 per troy ounce and would be $450 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars [again, all series not seasonally adjusted].

Note that his calculations for inflation are different than the official CPI data released by the US Bureau of Labor Statistics, which have been altered over the years and hence, grossly understate true inflation.

Also, silver has underperformed relative to gold, as it is an industrial metal used in many different applications, and with weakness in global economies, silver's price has been dampened. But it has appreciated since the market meltdown in 2008 because investors are starting to realize that silver is also a store of value, much like gold is. And because it is not hoarded like gold is, the pending shortage of physical silver will exacerbate the squeeze on silver prices.

Gold on the cusp of a parabolic move

John Embry of Sprott Asset Management believes gold is on the cusp of a parabolic move up, despite central and bullion bank price manipulation in the paper futures markets. Physical shortages will drive prices higher.

http://www.sprott.com/Docs/InvestorsDigest/2010/06_23_2010%20Gold%27s%20on%20the%20cusp%20of%20a%20parabolic%20move%20up.pdf

LBMA shuts down bullion bank trading data

http://www.zerohedge.com/article/lbma-closes-public-access-key-bullion-bank-trading-data

GATA's Adrian Douglas (recently famous for facilitating the emergence of whistleblower Andrew Maguire) seems to think so, after his observation that the LBMA has decided to block "access to statistics relating to the trading activities of its member bullion banks. This information has been available to the public since 1997 but as of this week it is available only to LBMA members." His conclusion: "There is a cover-up of back-door injections of liquidity of physical gold, and the LBMA now is trying to conceal trading information. I interpret the LBMA's move to secrecy as a sign that the opportunity to get real metal is closing fast."

Investors could have been blindsided by the events of 2008, but anyone who misses the writing on the wall about what's going on in the bullion markets is just foolish. The bullion banks have sold far more metal than they can deliver, and more and more customers are asking them to deliver. This has led to back-door bailouts and cover-ups.

Anyone who has "unallocated" bullion should be very concerned. The LBMA itself describes owners of "unallocated bullion" accounts as "unsecured creditors." That means that the account holder has no collateral or title to any bullion.

Bullion bank unallocated account agreements require the bank only to settle in cash for non-performance. That means when the physical squeeze that is evolving takes gold and silver prices to multiples of the current price, holders of unallocated metal accounts will not get any bullion, nor will they be compensated at the prevailing market price.

The potential perils of paper gold and silver ETF's

I've blogged on this topic several times, and it's worth revisiting.

http://dailyreckoning.com/golden-shell-games/

The gist of the article states that the GLD and SLV ETF's are good proxies for the spot price of their respective precious metals, but in the event of "failures to deliver" physical gold and silver, the prices between the ETF's (paper contracts) and the physical prices would decouple, as the physical shortage would cause the prices of the actual metals to soar, while the ETF prices would languish. The reason is the precious metals COMEX futures contracts and ETF's are not backed by allocated bullion. They are derivatives, much like mortgage-backed securities were derivatives of the actual mortgages themselves. Buyers of said derivatives lost everything when subprime home borrowers defaulted on their mortgages. Holders of COMEX precious metals futures contracts, and the GLD and SLV ETF's would be similarly exposed to counterparty risks.

So if you believe you can trade the fluctuations of gold and silver prices, then the GLD and SLV ETF's may be a cost-effective trading vehicle. But if you are looking to hedge against inflation, currency debasement, and/or financial crisis, owning physical gold and silver may be a safer play, despite hefty premiums.

See disclaimers in the side bar.

Disclosure: no position in GLD or SLV.

Ted Butler on the shortage in physical silver

The physical shortage in silver will precede a run in gold. I may be a gold bug, but I'm even more bullish on silver.

http://news.silverseek.com/SilverSeek/1266344983.php

Disclosure: long gold and silver mining shares