Friday, 10/4, Market WrapUp (Silver is Undervalued in a Major Way)

Financial Sense Online ^ | 10/4/2002 | James J. Puplava

[B4Ranch]

If a strike does come, maybe Bush will see it and cancel it for 80 days.

[arete]

It is a lockout, not a strike.

I stand corrected. It is a lockout.

Richard W.

[razorback-bert]

By Bob Chapman - October 4
We hear many stories and suppositions and this is one of the latest regarding Barrick Gold. Supposedly they have hedged part of their production through a spot deferred forward sale contract. Barrick makes a forward contract with a bank to deliver gold at a certain price at a certain date. But what makes these contracts different and also dangerous for counter-parties is that Barrick has the right to defer the delivery of gold for periods ranging from five to ten years. More recently, they may have entered into contracts that allow them to defer delivery for 15 years. Rather than give you the details, these kinds of contracts would be beneficial for Barrick and if Barrick decides to defer the sale there would be trouble. One bank, probably JP Morgan Chase, has $41 billion in gold derivatives, a portion of which is with Barrick. If gold goes up and Barrick defers, which we are sure they would, Morgan would have to find $5 billion in gold. If Morgan buys in the market it would force prices considerably higher, either that or the US government, which we believe is guaranteeing Morgan’s action, would deliver the gold, which we doubt because they may not have it or they may not want to face the public’s wrath for selling it or Morgan reneges and goes into liquidation. If Morgan goes down the entire derivative structure goes with it. It could be that the Congress could take Morgan into receivership and allow the American taxpayer to pay the debt, but that would cause a number of Senators and Representatives to lose their jobs. Whatever the outcome in a situation like this we believe all derivative positions would be cancelled or zeroed out. That means all hedgers would no longer be hedged and they world have to return to a receiver part of the funds they received, which would put them all in a precarious financial position. The ensuing financial chaos would send gold prices considerably higher. It could be that in cutting such a sharp deal for itself that Barrick may have laid the groundwork for the destruction of the derivative market and the financial system. It won’t now take much to create a crisis. Full Story

http://www.goldseek.com/cgi-bin/news/InternationalForecaster/1033767700.php

[Cicero]

For what it's worth, I think silver and gold are both in long-term bull markets now, but that they are both likely to go down a bit over the next few weeks, before they test the resistance levels again.

[razorback-bert]

http://www.occ.treas.gov/ftp/deriv/dq202.pdf

I highly recommend that you read this PDF file. It isn't a difficult read.

See page #18 in the table titled "NOTIONAL AMOUNT OF DERIVATIVES CONTRACTS OF THE 25
COMMERCIAL BANKS AND TRUST COMPANIES WITH THE MOST DERIVATIVE CONTRACTS
JUNE 30, 2002, $ MILLIONS
NOTE: DATA ARE PRELIMINARY"

JPMORGAN CHASE BANK NY
Assets 581,407 (million dollars)
Derivatives 25,910,300 (million dollars)

Here is the first couple paragraphs of this GOVERNMENT report.

The OCC quarterly report on bank derivatives activities and trading revenues is based on call
report information provided by U.S. commercial banks. The notional amount of derivatives in
insured commercial bank portfolios increased by $3.8 trillion in the second quarter, to $50.1
trillion. Generally, changes in notional volumes are reasonable reflections of business activity
but do not provide useful measures of risk. During the second quarter, the notional amount of
interest rate contracts increased by $3.4 trillion, to $42.7 trillion. Foreign exchange contracts
increased by $183 billion to $5.8 trillion. This figure excludes spot foreign exchange contracts,
which increased by $332 billion to $504 billion. Equity, commodity and other contracts
increased by $85 billion, to $1.1 trillion. Credit derivatives increased by $54 billion, to $492
billion. The number of commercial banks holding derivatives increased by 12, to 391. [See
Tables 1, 2, and 3, Graphs 1 and 3.]
Eighty-five percent of the notional amount of derivative positions was comprised of interest rate
contracts with foreign exchange accounting for an additional 12 percent. Equity, commodity and
credit derivatives accounted for only 3 percent of the total notional amount. [See Table 3 and
Graph 3.]
Holdings of derivatives continue to be concentrated in the largest banks. Seven commercial
banks account for almost 96 percent of the total notional amount of derivatives in the
commercial banking system, with more than 99 percent held by the top 25 banks. [See Tables 3,
5 and Graph 4.]
Over-the-counter (OTC) and exchange-traded contracts comprised 90.1 percent and 9.9 percent,
respectively, of the notional holdings as of the second quarter of 2002. [See Table 3.] OTC
contracts tend to be more popular with banks and bank customers because they can be tailored to
meet firm-specific risk management needs. However, OTC contracts expose participants to
greater credit risk and tend to be less liquid than exchange-traded contracts, which are
standardized and fungible.

See also:
http://www.thestreet.com/markets/aarontaskfree/10043321.html

[razorback-bert]

Brazil's Lula, the name the former metals worker goes by, says those who have short-sold his country's currency to all-time lows will pay the price once he is elected and the currency rebounds.

Alas, Team Brazil's real has lost more than a third of its value since Jan. 2, making Lula's warning to currency speculators take the shape of a promissory note. "Watch the Sunday night news," says McAvity, editor of newsletter Deliberations on World Markets.

Brazilians, beset by their battered currency and the soaring prices a cheap currency inflicts on a nation such as Brazil, will be watching their cash flow, and so will the big banks in New York and London.

That cash flow next week could be the swirl down the loo of big banks' Brazil loans and International Monetary Fund-sponsored debt. The IMF in September approved a $30 billion Brazil loan and insists Brazil has no need to restructure its debts.

The IMF would allow Brazil's central bank to spend as much as $16 billion to defend the real. Currency speculators, it is fair to say, are licking their chops.

[RightWhale]

sitting on this $4.65 silver for so long

The death of emulsion photography would explain part of that. But hang on to the silver. They say it is effective against werewolves.

[gcruse]

Here's my take on silver. As you can see, silver was
about $4 and ounce in the seventies. It recently
got to and held at $4.50 after years at $5.00. None
of these numbers is inflation adjusted. Hint: how
much is a 1972 dollar (before Carter's inflation
malaise) worth now?

One of the largest, if not the largest, users of
silver is the photographic industry. For environmental
as well has financial reasons, electrolytic and other
means of silver recovery have become de rigeur. I would
estimate that 85% of all photo silver is reclaimed and
reused. That's silver that doesn't need to be mined.

Digital cameras have broken the $500 barrier and the
price continues to head down. The silver based
photofinishing industry will be gone in less than
twenty years.

Silver should be classified for what it is, an industrial
metal. There is nothing precious about it anymore. Put
your money in something else.

[HP8753]

The death of emulsion photography would explain part of that. But hang on to the silver. They say it is effective against werewolves

It's also good for turning political wannbe's blue. >>Stan Jones

Blueboy Libertarian Senate candidate from Montana

;-)

[ccmay]

But hang on to the silver. They say it is effective against werewolves.

har har! Good one.

Here's another reason for silver to be in the doldrums:

Lots of "silver" sold in stores is actually steel.

I have a personal grudge against the metals flacksters- my grandfather, God rest his soul, got caught up in the Hunt Brothers chaos years ago and lost much of my inheritance by speculating in silver. I'd sooner put my money in Brazilian stock options than in so-called "precious" metals.

-ccm

[STONEWALLS]

"One of the largest, if not the largest, users of silver is the photographic industry. For environmental as well has financial reasons, electrolytic and other means of silver recovery have become de rigeur. I would estimate that 85% of all photo silver is reclaimed and reused. That's silver that doesn't need to be mined."

.....back in the late 70s I knew a guy that had a wrecking company.....he intentionally low-bid a job to tear down an old hospital that had been built in the 20s...he didn't give a damn about making money on the demolition... what he wanted was the cast iron drain pipe that ran from the x-ray developing room in the basement all the way out to the street.....and sure enough, the pipe was choked with silver from all those years of x-rays...

...a lot of crazy stuff happened back then....including folks who sold their family heirloom sterling for scrap prices.....

Good luck to everybody...

Stonewalls

[cibco]

I think it would be appropriate here to give that famous piece of advice from Lazamatz...

.

.

.

.

.

.

.

WE'RE ALL GONNA DIE!!!!

[Gritty]

These equity markets are breaking down fast.

Politically, this is a landmine for Bush and the GOP this year because their demise is so easy to demogogue by the Dems and their Media suck-ups. If they can just change the subject away from Iraq in time for the Elections....

[rohry]

"The death of emulsion photography would explain part of that."

Use of silver in photography is expanding at an annual rate of 4% per year. You can look it up.

[cibco]

Wouldn't you say that most of the people in the world still consider silver coin money? Viewed in a different prospective from the citizens in the US.

[rohry]

"Wouldn't you say that most of the people in the world still consider silver coin money?"

I don't know, but I do know that in all these countries that are experiencing currency crashes (Turkey, Brazil, Argentina, etc.), the people would be cashing their paper money in for silver coins if they could.

[rohry]

Sorry, billhilly, the wife says I can't buy anymore silver. I guess have to withdraw my offer to buy your twenty year old ingot.

[cibco]

Yes. I remember during the crash in Indonesia (98?) seeing reports of people converting to gold & silver on the chance they would have to flee the country. A good insurance to have on hand.

[RightWhale]

Well, okay, it's not quite dead yet. Just because everybody I know has a digital camera doesn't mean the rest of the world is there already. I understand a few people still aren't connected to the Internet as well.

[rohry]

"Just because everybody I know has a digital camera doesn't mean the rest of the world is there already."

I don't have a digital camera despite that I am usually one of the "early adopters." I like using my trusty 35 MM and don't want to pay hundreds of dollars for lower quality pictures.

In fairness, the growth in film sales is due to the sale of disposable cameras and other cheap cameras in the third world.