Silver SLV / PSLV Update 05/04/11

Submitted by: Francis Soyer

Lets review the silver thesis and understand what the last couple weeks have been about:

1. Over the past 8 days the CME has raised margin rates three times being an 8%, 10% and then another 12% increase on Monday followed by another round of 100% increases in rates from large futures brokers in chicago yesterday.

2. This rampant increase in rates comes on the heels of Bernanke's testimony which triggered massive buying (a vote of no confidence and that the Fed is losing credibality) and is a vote of no confidence on the worlds reserve currency the USD.

3. Comes days after April 24th 2011 when China's Central Bank and Monetary Policy member Xia Bin announced that China will be dumping $2.3 Trillion of US debt nearly a two thirds of their holdings and went on to say that these will be shifted into "strategic resources" to diversify. The only thing strategic that I can see to replace money with money is Gold and Silver!

4. Comes shortly after Japan will need to raise $1 Trillion by dumping U.S. Debt to recover from their earthquake.

5. Comes after a series of margin hikes from the CME and Futures Brokers after the November announcement that China and Russia will commence trading in their own curriencies and dumping the U.S. dollar for trade with eachother. And yes this means they will be using their own currency to buy and sell OIL with EACHOTHER. For those who do not understand... The worlds oil trade settlement standard is the global the reserve currency the US Dollar. China and Russia have officially flipped the bird to the dollar in this announced move. http://www.ibtimes.com/articles/85424/20101124/china-russia-drop-dollar.htm

So lets try to quantify what this agreement means outside of the fact that China is also Dumping Two Thirds of their USD. The answer is that for 2010 China traded or purchased roughly 9 million barrels of oil per day. So lets multiply 9 x 365 and we get 3,285,000,000 barrels of Oil for the year or 3.285 Billion barrells of Oil.
Now lets assume according to the chart below that for 2011 on a conservative estimate that demand will be 10 million barrells a day for China which gives us 3,685,000,000 barrels of oil for the year or 3.685 billions barels. Now lets use another conservative estimate for oil in dollars for the year of 2011 and say the average price for the year woul be $100 per barrel. So for 2011 China in U.S. dollar terms will buy 3.685 billion x $100 on average giving us a dollar value of  $365,000,000,000 or $3.65 Trillion that we will need to subtract from the value of the USD in terms of demand in settlement of Oil contracts from here on out. This is in addition to the $2 + Trillion that China announced it will be dumping of U.S. Dollars. Hence from estimate point of view we need to calculate $2 Trillion + $3.65 Trillion or $5.65 Trillion of additional debasement of the USD for 2011-2012!  http://www.oilslick.com/Commentary/?id=2192&type=1



6. QE I and QE II (Quantitative Easing Program from the Fed which is printing money out of thin air and devalues the USD) QE I printed based on conservative estimates $1.5 Trillion and then launched QE II for $600 Billion and is expected to end in June. QE I began in November of 2008. The close price for UUP or the dollar index ETF closed on that day at $26.55. As of today May 4, 2011 with roughly six to seven weeks left of Money Printing out of thin air UUP is trading as of the close on May 3, 2011 at $20.97. So the total program of QE I and II of $2.1 Trillion or money printing which does not include any of the above mentioned and comming real influences on the debasement of the USD was a decrease in the value of the dollar by %21.01.

The coming $5.65 Trillion in coming debasement is equal to 2.69 Times the total value of QE I and II. Thus by doing a simple calculation by assumption that if $2.1 Trillion is debasement or money printing equaled a decline of  %21.01 then by reason we should calculate that another $5.65 Trillion or 2.69 Times %21.01 of continued debasement means the using UUP as an example 2.69 x Neg $21.01 gives us Neg %56.51 or a coming haircut of $11.85 per share on UUP which gives us an ending price using yesterdays close of UUP in the next year or so of $9.12!!! What is more concerning is in addition to the China Factor these numbers do not include Brasil or India two other large and growing economies that have made it clear that they are no longer willing to play with unclse same, are taking their ball and bat and going home.

7. So what does the above boil down to or how do we summarize what is occuring? The value of Money or currently but not for much longer the USD or the Global Reserve Currency is falling and rapidly so. That said we should ask well, what is Money?

Here is a basic rundown:   http://en.wikipedia.org/wiki/Money
Medium of exchange


When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange. It thereby avoids the inefficiencies of a barter system, such as the 'double coincidence of wants' problem.


Unit of account

A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt. To function as a 'unit of account', whatever is being used as money must be:

Divisible into smaller units without loss of value; precious metals can be coined from bars, or melted down into bars again.

Fungible: that is, one unit or piece must be perceived as equivalent to any other, which is why diamonds, works of art or real estate are not suitable as money.

A specific weight, or measure, or size to be verifiably countable. For instance, coins are often milled with a reeded edge, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.

Store of value

To act as a store of value, a money must be able to be reliably saved, stored, and retrieved – and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time. Some have argued that inflation, by reducing the value of money, diminishes the ability of the money to function as a store of value.[4]

Enter Gresham's Law

Gresham’s law, observation in economics that “bad money drives out good.” More exactly, if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation. Sir Thomas Gresham, financial agent of Queen Elizabeth I, was not the first to recognize this monetary principle, but his elucidation of it in 1558 prompted the economist H.D. Macleod to suggest the term Gresham’s law in the 19th century.
Money functions in ways other than as a domestic medium of exchange; it also may be used for foreign exchange, as a commodity, or as a store of value. If a particular kind of money is worth more in one of these other functions, it will be used in foreign exchange or will be hoarded rather than used for domestic transactions. For example, during the period from 1792 to 1834 the United States maintained an exchange ratio between silver and gold of 15:1, while ratios in Europe ranged from 15.5:1 to 16.06:1. This made it profitable for owners of gold to sell their gold in the European market and take their silver to the United States mint. The effect was that gold was withdrawn from domestic American circulation; the “inferior” money had driven it out.

So what does the above mean in terms of Silver? It means that as Fiat Money depreciates Silver or Gold as a store of value, a commodity, than can be measured by units and is accepted as currency Silver and Gold Appreciates. Why? Because gold and silver is finite in supply and annual production. It is finite because most of it or 60% of it in Silvers case is used to make things like circuit boards, mirrors and computers and yes Jewelry too. So of the 40% of Silver every year that is not spoken for can be used as currency or Money. With more and more people buying Silver to replace crap money for good money or money that can not be printed out of thin air, do you think the CME by raising margin rates until they are %100 the value of contracts for delivery are doing so to protect you the Silver investor? That they are doing this in your best interest? Or do you think that they like any other governmental organization around the world say like China or Russia would rather have Silver or Gold in their vaults rather than paper and cotton USD notes that continue to devalue on a daily Basis? In my opinion the answer is simple. The CME, The Fed Reserve, the U.S. Goverment for that matter will do everything in its power legally and not to part people from their silver and gold. Why? Because it has value and that value will continue to rise so far beyond imagination that when we review this past few days one year from now we will be puking in our waste baskets wishing we had taken out a second mortgage on our house and bought every ounce of Silver asd Gold we could have gotten our hands on.

8. The above, is just one part of the picture as to why the CME and the governments that back them will do everything they can to drive you out of Silver and Gold. In part two I will discuss supply, demand and inflationary issues that are all also placing upside presurre on the two that the monetary part does not get into.

Think about it.

Francis Soyer