(And/or Why don’t I start a Fund?)
Silver Stock Report
by Jason Hommel, September 12th, 2008
Let me answer, and in the process, reveal a trade secret that I’ve been somewhat reluctant to share, until now.
As more people come to understand that the silver price is manipulated, fraudulently, through the excessive selling of futures contracts unbacked by real silver, mostly sold to gamblers who don’t have the money or capacity or intention to take delivery, people start to get angry at the fraud. The expect someone to do something. Like the miners, or me.
I can explain why the mining companies do not act. I know. They told me. It’s very simple.
Mining is a highly regulated business. Who regulates it? Governments.
Who is stomping on the silver price? The bankers who own the governments. The miners are smart enough to know this.
So, for miners, barking about manipulation is like trying to fight one arm of the octopus when you are already dealing with five or more of its other arms. What arms?
Mining starts with staking a claim. To do that, you register with the government.
To keep your claim, you must do a minimum of work to keep the claim up to date. To do that, you need a work permit, from who? The government.
To explore, you need a permit from the government.
To drill, you need a permit.
To mine, you need a permit.
Sometimes you need up to 6 or more permits before you start mining!
You might need an environmental permit, a road permit, a water permit, a processing permit, a tailings permit, a mining permit, and more!
After you start mining, there is a maze of tens of thousands of laws that you must comply with. Environmental guidelines, safety regulations, etc.
Any one of a number of different government agencies, literally at whim, can shut you down and tie up operations for years.
Even the restaurant business is impossible to operate with 100% compliance with all Federal regulations. And how easy is that business by way of comparison?
Miners can’t really run away. They are stuck in one place, where the mine is. Even if they flee one mine to mine in other nations, they have to comply with the regulations of the other governments. And many governments outside the U.S. tend to be more whimsical in nature, which hurts mining, and hurts humanity, because humans need things that miners produce. So, miners need to be familiar with not only the 100,000 regulations in the U.S., but also the million different laws throughout the world that are all constantly changing.
Since miners can’t run, they must be diplomatic.
So, that tends to explain why they don’t complain about paper market manipulation. They have enough to complain about already.
But there is another reason. It’s called human nature. Why do so few silver investors complain about government or banking manipulation? Would that do any good? And really, there’s no need to complain. Just take advantage. If silver is cheap, why complain? Just buy it. Miners too. If silver is too cheap, they just look to acquire cheap properites that are neglected. That was the business strategy of many of today’s silver miners, and they did well.
People also ask me, “Why don’t the miners just not sell silver?” They can’t, because they have expenses. Miners might have only a 10-20% profit margin, so, to have any profits at all, they must sell 80-90% of production, minimum. In this climate, some silver miners might be losing money, with no profits at all! Therefore, they cannot afford to withhold production.
Shutting down production is also not easy, but an extremely costly process, costing many millions. Workers tend to like a steady job. If you fire them, they may find work elsewhere, and never come back to a mine that is “barely capable”. Mines that get shut down, often never re-open, even if prices rise. Miners tend to look elsewhere for better opportunites after a mine shutdown.
Many miners know that price dips are usually temporary, just as price spikes are temporary. They would rather lose $1-2 million during a dip, than spend $5-10 million or more to shut down production, or something like that.
Another reason why the gold and silver miners don’t act to heavily lobby congress is that they don’t have enough money! Their competition, the Federal Reserve, can print the money, so who has more to spend to get what they want?
Another reason why they don’t act to lobby government to stop manipulation is that they would have to act as a group to be effective. Getting free minded men to act as a group is next to impossible.
Another reason why they don’t act is that if they acted individually, they may feel it would be expensive, and that their competitors, who might not act, would benefit just the same.
Another reason why they don’t act is that how do you ask government to act to prevent market manipulation in futures? Ted Butler has been trying for decades now, with no solution or end in sight. Besides, why would some futures not be manipulative, but more futures sold be manipulative? Where do you draw the line? There is no line, and there is no answer there, except to only allow people to sell what they have, and not sell what they don’t have. That would end futures. Why would you sell what you have today, in the future. If you have it today, you’d sell it today if you wanted to sell. So, the entire concept of futures is fraudulent.
But these are high level concepts that many miners don’t agree with anyway, so why would they act to end futures? Miners who take on debt want to lock in a price for their metal in the future, because they want security more than freedom. Also, some miners would rather sell futures, and take the money, and use it to build mines, rather than dilute their stocks.
Here’s my trade secret. Many mining company executives tell me, “Jason, keep doing what you are doing. We can’t do or say what you do, because it’s too risky, or illegal for us. But we agree with you. So, just keep at it.”
There is another reason they cannot say what I say. There is regulation on what they can say! I, on the other hand, have the protection of freedom of the press. Since I’m not a public company, and not a brokerage, I can freely express my opinion.
See, there is a gap in the market. That’s my trade secret. It’s a gap that I’m willing to fill. Anyone can do it. It’s rather easy once you get started. In fact, you can start with no money at all. Many companies might pay you good money, or free stock, just to promote their company, after you have established yourself as a writer, with an audience. But that’s not my business model. I invest directly, only if I think the company is worth it. I’m not for sale that way.
Here’s another trade secret. The money powers want financial commentators like us to stay in business. I, and other newsletter writers, gather truth about the financial markets that cannot be found elsewhere, not even by government agents! The government and money powers know this. The government especially likes the U.S. to remain a financial center, which it is, due to the freedoms that we have. Besides, this way, they can read our information, yet ban it in the mainstream media so that it does not get out to many more people.
Here’s the downside of writing: You also have to be willing to let other people call you a fool or worse, when you stand up for truth, in an era when most men have forgotten what truth is, or don’t know what it is.
But people also ask me, “Why don’t the miners sell their silver to the highest bidder, in their own market, and avoid the COMEX altogether?”
Two reasons! First, that’s not how commodities are sold. Commodities are generally thought to be sold at THE price. That’s why they are commodities.
The second reason is that silver miners rarely produce silver. What? Yes, ironic, but true.
Most miners produce dirt, or high grade dirt containing metal, called ore.
Other businesses, Concentrators (which are a part of some silver miner’s operations) concentrate the ore into concentrate.
Other businesses, Smelters, (which are a part of some silver miner’s operations) turn concentrate into dore bars of 97% purity.
Other businesses, Refiners, turn dore bars into .999 fine COMEX good delivery bars, or silver shot.
Other businesses, Mints, turn bars or shot or scrap into 100 oz. bars, or coins.
Other businesses, Coin Shops or Bullion Dealers, buy bars or coins and sell them to the public.
So miners rarely sell silver coins to the public.
Therefore, for a miner to “hold back production”, they can’t really do it. They can’t hold back silver, they could hold back ore. And they can’t time it to the market price, either, because they will ship ore, and receive the price at the market price, sometimes months later after the ore works its way through to the refiners. So, what if they withheld ore now? They might not receive the price until 3 months from now, which could be $20. And what if they shipped ore then? Three months later, the price might be $15. So, they just ship on a regular schedule, and accept what comes.
So, that explains why miners don’t sell silver to the COMEX. They sell ore to the refiners or smelters, and get a smelter credit, which might be based on a percentage of the COMEX price. The smelter might not sell to the COMEX either, it might get turned into silver shot, and sold directly to jewelers, and never reach the COMEX. Most silver does not go through the COMEX, which is often avoided by people in the industry, who trade directly with each other, but use COMEX prices merely to price their trades with each other.
Some silver miners produce about 1000 coins ever few years for promotional purposes that they give away, or sell, at trade shows. You should go to a show. You might collect up to 5 silver coins in one show!
But those coins typically cost the miners about $4-6/oz. over the spot price, just to produce, because the have to pay for the sculptor and dies used to stamp the coins. So, they don’t really make money selling coins in bulk. And that’s typically not what their customers, investors, want. Investors in mining companies typically want to try to leverage the silver price, and make more, by investing in a mining stock, than by buying silver. So, it’s hard for them to sell silver to their investors.
So, to answer the final question, “Jason why don’t you do something, such as start a fund to pool money together to take delivery off the COMEX?”
Well, I’m a free market guy. I don’t believe in investment pools. Any time money is pooled together, it’s dangerous for several reasons.
1. Silver is safer if it is distributed among many people.
2. Silver is harder to steal if it is distributed among many people.
3. Markets function better if money is distributed among many people.
4. Silver and money are more wisely invested by each individual who is responsible for it, rather than by one manager.
5. Your small personal amount of money will tend to grow faster than a larger pool of money.
6. Large pools of money encourage individual complacency and denial, and tend to hinder the free market.
But I would not want to risk taking silver from the COMEX anyway. I think they are at risk of default, and I’m not willing to take that risk. After all, they sell more contracts than silver in the warehouses. Look up the numbers of the open interest. Multiply by 5000 oz. per contract.
Then look up the warehouse inventory totals.
http://www.nymex.com/warehouse.aspx
And finally, I don’t want to submit myself to the regulation that prevents people from running funds from saying things.
The solution: A NEW MARKET!
The solution to all these problems is self evident to me now. We just need a better trading site for silver and gold, much better than COMEX, where people cannot sell what they don’t have which would eliminate the fraud of unbacked futures contracts. Such a site should have lower fees than ebay, and where people can place bids for fungible metals products, unlike what ebay offers.
A new metals market will do several things. Primarily, it will encourage and facilitate individual action in a free market. It will accomplish this, because:
1. It will reduce the spreads, and thus improve the liquidity of silver.
2. It will create a more liquid market for silver, which will enable and encourage arbitrage profits, so that others can take delivery from COMEX, at their risk, to their profit.
3. It will create a new price structure, from which miners can expect to be better compensated by the refiners.
4. It will enable continued trading of silver, as the site would tempt silver out of the hands of the public at real market prices, and thus keep people away from hoarding food which could cause mass starvations around the world.
Fortunately, my top programmer is on it, and I’m in contact with other people who have expressed interest in trying to create a new metals market. If we are all very fortunate, my programmer will have this project completed within 3 weeks.
Sincerely,
Jason Hommel