Is the Silver Market Too Small to Buy?
Jason Hommel
This week a popular gold community advisor warned
that investment advisors create a self-fulfilling prophecy when they
influence market participants to buy small market cap stocks.
I agree completely.
But this other advisor then went on to imply that
such advice to buy small market cap stocks is not valid, or not
legitimate, and he implied that the best advice is the kind of advice
that cannot influence the market. He further implied that the only
valid investment advice is if you advise people to buy large market cap
stocks that don't move up or down in response to advice to buy or sell
it.
I couldn't disagree more.
The reason why I write is to convince other people
to take prudent actions. If I feel the best course of action is to buy
an undervalued small market cap stock, then that's the advice I'll
give, and the advice is not invalid just because the market is small.
In fact, the very fact that the market is small, and the price is
cheap, is the exact reason you want to be buying in the first place.
That's how you discover the undiscovered values that enable you to buy
low and sell high.
I think it is rather inconsistent for a gold
community advisor to claim that only large market cap stocks are valid
investment picks. After all, it was not long ago that the market cap of
the entire gold stock market was as low as about $25 billion.
It is completely irrational to claim that you should
not advise people to buy into a sector, because if people followed your
advice, and went into that sector, it would move up.
If less than 1% of the value of the bond market and
if less than 1% of the value of M3 moved into gold, the dollar value of
gold would explode, and perhaps collapse the entire dollar system.
The bond market is about $15 trillion. 1% is $150 billion. M3 is about $9 trillion. 1% is $90 billion
The annual mine supply of gold to market was 2600
tonnes in 2002. At $400/oz., that's $33 billion. The annual demand of
gold is reported to be 4000 tonnes. At $400/oz., that's $51 billion.
Do you see the comparative size of these markets? Ponder that for a moment.
If the 1% ($150 billion) of the bond market and 1%
($90 billion) of M3 tried to buy physical gold in a year, that would be
a demand of $240 billion for gold. At $400/oz, that would be a demand
for 600 million ounces, or 18,661 tonnes, which would completely
overwhelm the gold market by several orders of magnitude of demand
greater than exists today.
Obviously, if you advise people to sell bonds and
dollars and buy gold, gold will move up. Does that make it an
irresponsible thing to advise people to buy gold?
Likewise, it is not irresponsible, or any less
valid, to advise people to buy into the smaller silver market and
silver stocks. The fact that the silver market is so small is exactly
the reason to buy into the sector now.
So, who is really giving irresponsible advice?
I think it is irresponsible to advise people to buy
Futures contracts. I believe there has been an excessive creation of
Futures contracts, to the point where fulfillment is impossible.
The bullion banks, as reported by GATA, reportedly
owe 15,000 tonnes of gold to the central banks that they cannot repay,
because if they went into the market to buy that much gold, the market
price would scream upwards.
Several large mining companies also owe lots of
gold, more than they can repay without moving the market to the upside
against themselves.
Defaults on promises to pay in gold are inevitable.
If the big traders must default, what makes the little traders think
that their Futures contracts will be honored?
I believe Futures contracts will default, and that
the paper longs may get nothing, or a cash settlement, when they run
out of silver or gold to deliver.
I believe the dollar is fraud. I believe bonds are
fraud. I believe fractional reserve banking is fraud. I believe Futures
contracts are fraud. I believe it is a moral failure to be deceived by
fraud, and that it is a moral failure to buy or sell Futures contracts.
The purpose of Futures contracts is to divert
investment demand away from gold. The existence of Futures contracts
does this through many ways. First, a wealthy person who may be
interested in buying gold will be encouraged to buy Futures contracts
instead, because the gains are said to be greater if gold goes up.
Therefore, this person buys a paper promise, instead of buying physical
gold, and the investment demand has been properly diverted.
Second, after the wealthy person buys a Futures
contract, the price of gold is manipulated downward by the expiration
date, so that the Futures contract expires when the gold price is lower
than the paper contract price. Therefore, the paper contract expires,
"worthless".
Third, if the price does go up, the person who
bought the paper contracts is rewarded with more paper dollars, which
again diverts investment demand away from physical gold, because the
paper game worked brilliantly in the mind of the sucker. Thus, the
paper pushers succeed either way.
Fourth, another wealthy person may feel that he may
always have the opportunity to buy a Futures contract for gold, instead
of buying gold itself. Therefore, this other investor may think, "If
gold really begins to take off, then I'll buy a Futures contract, but
not today." This also diverts investment demand away from physical
gold, since the buying decision is delayed. This person will not buy
gold until after the Futures market collapses, and then they will
realize (too late) the difference between a paper promise and gold.
Here are the key differences:
An expiring paper contract is no substitute for
gold. Gold does not rust. Gold does not expire. The same piece of gold
lasts for thousands of years. That is one of the very important
properties that makes gold valuable in the first place. Virtually every
other asset you can buy decays in value over time, whether a car, or a
house, or a dollar due to constant erosion of inflation. A Futures
contract expires over time. This is the exact opposite of gold.
A paper promise is no substitute for gold. Gold is
payment in full. A paper contract can be defaulted on. Gold cannot
default. Contracts can fail. The excessive creation of Futures
contracts, and the few entities who are creating most of them, (the
bullion banks that are already short the 15,000 tonnes) virtually
guarantee performance failure.
Admittedly, stocks have many disadvantages.
Companies can go bankrupt. Stocks can be diluted as companies issue
more stock. But stock ownership is ownership of an asset -- the metal
in the ground. Yes, silver stocks are risky, and I advise people to be
prepared to be able to lose 100% of their stock investment. Does the
other advisor warn people of the default risks of owning a Futures
contract? I wonder.
If you would like to be on my email list for my free
weekly silver stock report, email me at jasonhommel@yahoo.com Also,
come visit my web site at www.goldismoney.com
13 November 2003
Other essays by Jason Hommel:
25 Reasons To Support The Sound Money Bill - 08 July 2004
I'm Insanely Bullish On Silver - 19 June 2004
Silver Stock Evaluations - 22 May 2004
The Silver Bull Is Back - 04 May 2004
Late April Silver Update - 22 April 2004
Silver Juniors With Cash Flow - 04 March 2004
Major Frauds of the U.S. Monetary System - 26 February 2004
Market Perspective & Cabo Mining - 12 February 2004
Usury Enslaves - 19 January 2004
Sterling Mining - 29 December 2003
The U.S. Trade Advantage With China - 17 December 2003
Rising Gold Prices Will Help The Economy - 02 December 2003
Miners to Use Silver as Cash - 27 November 2003
Private Placements in Silver Companies - 20 November 2003
Is the Silver Market Too Small to Buy? - 13 November 2003
Inflation & Deflation During Hyperinflation - 06 November 2003
Silver Price Expectations of Silver Stock Investors - 30 October 2003
Buying & Tracking Canadian Silver Stocks - 29 October 2003
Canadian Zinc--Silver Potential - 23 October 2003
Silver Stocks--Comparative Valuations - 4 - 13 October 2003
Silver Stocks--Comparative Valuations - 3 - 06 October 2003
Silver Stocks--Comparative Valuations - 2 - 29 September 2003
Silver Stocks--Comparative Valuations - 1 - 22 September 2003
Silver and Cardero Resource - 08 February 2003
The Moral Failures of the Paper Longs - 22 January 2003
CFTC Response to Silver Problem - 14 January 2003
People Talking About $32,567/oz - 10 January 2003
Letter To Authorities of Silver Markets - 06 January 2003
Why no talk of $32,567/oz ? - 02 January 2003
Refuting Myths about Gold - 28 October 2002
Controlling Gold with Paper - 10 June 2002
Impending Gold Futures Default - 29 May 2002
Certain gold stocks are still cheap - 07 May 2002
A Few Supply and Demand Fundamentals of the Dollar and Gold - 06 May 2002
New DROOY Institutional Holdings - 21 February 2002
Hommels View of Gold - 23 March 2001
Gold Price Under Differing Scenarios - 24 June 2000
Goldismoney.com
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