Silver to do a Black Swan.

Posted on July 20, 2009
Filed Under General Insanity |

So as I am doing more pricing on silver on the Internet, I run across this term “Black Swan.” With a little investigation, I found that the term Black Swan means an event that goes outside of the six-sigma limits for statistical forecasting that is catastrophic in nature. Being an engineer all my life, I have come to rely heavily on statistical analysis for predicting events in production cycles in factories. It has proven to be highly accurate and I have made some amazing cost savings come into effect in the various places I have worked using these statistical techniques. These same statistical mathematics and modeling methods are used by investors and stock brokers around the world. The adage for these statistical models is, “the best predictor of future performance is past performance.” In most cases this adage is true. The exception to this rule though, is referred to as a “Black Swan event.”

To put this into an easy to understand analogy, you need only look at the story of the Farmer and the Turkey. A farmer buys a young turkey and raises it for 364 days. He feeds it, gives it water and shelter. He cleans up after it and keeps it safe. From the turkey’s perspective, he does a statistical analysis of the food, water and shelter he has been given for the last year from the farmer and projects it out. From this progression line he projects that he will continue to get more of the same food, water and shelter for the foreseeable future going at least another year. On day 365 the farmer takes the turkey, cuts off its head and serves him up for Thanksgiving dinner. That is the turkey’s Black Swan event. It is an event that is statistically not predictable and is catastrophic for the turkey.

Interestingly, especially for history buffs like myself, the price of silver for the last 5,000 years has been pretty static in relation to gold. Historically, it has been at a 16 to 1 ratio for virtually the entire time man has engaged in commerce and trade. If gold were at $160/oz, then silver was at $10/oz and so on. We know this because we have accounting records on the relative trading prices of silver and gold going all the way back to the time of the Sumerians. Today, with gold trading at approximately $950/oz and silver at $13.50/oz, the price ratio of silver to gold is at 70 to 1! This ratio has never happened before in the history of mankind and the records are pretty consistent on this fact. So the two questions that need to be asked are: Why is the ratio so far out of balance? What will the inevitable results be?

To answer the first question, as to why the price of silver is so out of balance, you have to look at how large silver traders play the game. Unlike other commodities, silver trading is controlled by a handful of players. Where gold has stockbroker limitations on how many contracts a broker can carry (500 contracts), there are silver brokers carrying in excess of 5,000 trade contracts. Limiting the bulk of the world’s trading to only a handful of brokers leaves plenty of room for price fixing. Since most of these brokers are simply selling paper and not physical silver, they can place trades at ratios of 20 or 30 to one on the silver they actually have on hand. This makes silver trading today a giant Ponzi Scheme as most of these traders have contracts to sell silver short, meaning they make a profit if the silver prices decline.

“With 142,578 contracts outstanding, for 5000 oz. each, that’s 712 million ounces, which is more than all the world’s silver mines produce each year, which is about 550 million ounces according to the CPM group. The COMEX warehouses only store 133 million ounces, and not all of that is registered for delivery against a contract, therefore, there is paper contract fraud selling going on, which manipulates the price down.” (http://silverstockreport.com/2008/fraud.html)

Many silver analysts believe that we are actually consuming about 110 million troy ounces of silver more per year than what we are producing world wide and that this has been going on at that rate for about the last three years. The problem with this thinking is that there have been worldwide silver shortages going on since the 1920’s. There were many silver shortages in the USA in the 1960’s with no corresponding major jump in silver prices as well. So making the argument that there will be a Black Swan event for silver in the near future for 2009 based on the silver shortage looks like poor logic and is simply premature conjecture in my opinion. However, there is more to this story.

“So even though 8 times more silver than gold was produced throughout history, 5 times more gold than silver exists above ground today, due to silver’s industrial consumption profile over the past 100 years.” (http://www.midasletter.com/commentary/09012001_Real-Silver-Availability.php) Due to this massive disparity in physical silver stocks, many forecasters expected the Comex and the London Mercantile Exchange to implode in December of 2008. This also did not happen, but what did happen was the USA and Great Briton pumped Trillions of Dollars and Pounds into their financial systems in order to prop up those very same banks and brokerages that were at risk due to the mortgage derivatives they held. The fact that they were also at risk on silver was only secondary, but they were saved none-the-less. Likely, this input in cash kept them alive at a crucial point in the silver market game. That then brings us to our second question, what will the results be to the current silver trade pricing?

The answer is, the Black Swan event. The major players in silver have been able to control the price of silver and make a lot of money on it even though silver has been in short supply in recent years. This has been going on for a very long time dating back several decades. Statistically, you would expect these very same players to be able to continue to control silver prices going forward as well. But just like with the farmer’s turkey, Thanksgiving Day is coming. There are several new forces in play that even these major players cannot control and that have not existed in the past.

The first is, come December 2009 most world governments will not have the will or the cash to bail out all the major banks and brokerage houses a second time. If the bottom falls out of the world economy again on the next big “economic bubble” this October, it will be all over but the shouting for many of these fine financial institutions. If you follow the Web Bot prediction guys (http://urbansurvival.com/week.htm), you will see they predict the next Wall Street/Banking crash to occur on or around October 25, 2009. The last economic crash these guys predicted was to occur on October 7, 2008 and they were dead on with that prediction. (Though I might add these Web Bot predictions have not been especially accurate on other non-economic forecasts.)

Second, with now over $20 Trillion of un-backed bailout money from the various major world governments dumped into the world economy, inflation is about to come roaring at us like a freight train. Inflation will affect everything including prices for commodities like gold and silver as well as food and hard goods. If you are a bank and you have twice the paper for silver “puts” placed (betting prices will fall) than physical silver on hand and it is all due for a December, 2009 closing date while inflation hits driving up silver prices, you will go bankrupt. This will likely destroy several of the largest banks in the United States forcing the US government to step in and take full control of these banks under the FDIC rules. It will be the Black Swan event for silver. The Comex turkey will have lost its head and will be served up for dinner.

Right now silver is at a 70 to 1 ratio on prices relative to gold. This is not a once in a lifetime opportunity. This is a once in the history of mankind opportunity. Buy silver now while it is still cheap. I expect you have until the end of September to acquire as much as you can. Anytime after that, I think you can throw statistics and past performance out the window figuratively speaking. Silver prices are going to take off like a Black Swan, with a loud crack of the wings and a lot of ripples in the lake.

Clayton

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