Please Welcome Guest Blogger, Tom Henry…

Dear Readers:

Thanks again for checking in.  I am pleased to tell you that my good friend and experienced investor Tom Henry has agreed to write a piece for my blog.  Tom made an excellent call by shorting the market from ’07-’09 during the horrible bear market selloff. Unfortunately for me, I stayed long the market… enduring huge financial pain.  When Tom  speaks, I listen.

Please find his blog piece as follows:

” It’s off to Work We Go ”

11/8/2010

By Tom Henry

Is this the watershed moment for the silver market?  It’s been trading thirty years to get here from the last major scandal.  And now it’s here.

Last Wednesday, CFTC Commissioner Bart Chilton declared that “there have been fraudulent efforts to persuade and deviously control that price (of silver).  Any such violation of the law in this regard should be prosecuted.”

On November 3, 2010, plaintiffs’ firm Kaplan Fox & Kilsheimer filed a class-action complaint in the U.S. District for the Southern District of New York on behalf of investor Eric Nalven alleging that defendants JP Morgan and HSBC “engaged in a scheme to manipulate and suppress the market for COMEX silver futures and options contracts.”  This is one of several similar suits against the same two large banks.  The complaint states that “in August 2008, defendants JPMorgan and HSBC controlled over 85% of the commercial net short positions in COMEX silver futures contracts and 25% of all open interest short positions.”  A significant portion of these silver shorts landed with JP Morgan through its acquisition of Bear Stearns, which closed on June 1, 2008.  According to the complaint, JP Morgan added to the already extensive portfolio of short positions shortly thereafter and colluded with HSBC to control the market.

The silver market is thinly traded, lending credence to the possibility of manipulation.  In fact, when silver hit $50 on January 17, 1980, it was rumored that one third of the world’s silver was owned by two brothers: Bunker and Herbert Hunt.  When the Hunts unwound their positions, silver collapsed to $3 an ounce.  And in 1988, Bunker Hunt was convicted of having illegally attempted to corner the silver market back in 1980.  Could silver be off to the races now as JP Morgan and HSBC unwind their positions?  The banks supposedly began to reduce their bearish bets in March 2010.  Since then, silver has risen more than 50%.  Undoubtedly, a significant portion of this increase is due to the fact that expectations for inflation have been aroused by the Fed’s comments and actions, but gold is only up 23% for the same period.

Unlike gold, silver has a variety of industrial applications.  Silver is used in batteries, electronics, bearings, solar panels, catalysts, brazing and soldering.[1] These applications consume silver and render it non-recyclable.  Currently, there are 1,234,590,000 “investable” ounces of silver in aboveground supplies.  This compares to 4,585,620,000 “investable” ounces of gold.[2] Gold trades for $1,393 per ounce and silver for just $26.72 per ounce.  Considering that silver has been used as currency historically in a similar fashion to gold, this strikes me as a gross imbalance.  The ratio of silver to gold underground is roughly 17:1, not 51:1 as the price ratio implies.  Silver has had a great run so far this year, but maybe there’s still a long way to go.

**The author of this article and/or his family own long positions in iShares Silver Trust (SLV) and Silvercorp Metals Inc. (SVM).

[1]The Silver Institute,  http://www.silverinstitute.org/silver_uses.php

[2] “More on the Case of Silver, David Galland, http://www.caseyresearch.com/editorial/3812?ppref=CRX192ED1110A

Thanks again for your time.

I look forward to your feedback.  Peace.  JB

Full disclosure: I am not an registered advisor, broker, or dealer. I’m only stating my opinion, not offering advice.  The purpose of my blog is only to stir good conversation and debate about market-related issues.  Again: I am not hear to offer advice of any kind as it relates to stocks or any other security.   I am not responsible for any losses you may incur as a result of acting on my blog.   I look forward to your input and feedback. Peace.  JB

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