Market Curiosity: Exploring Markets And Systems

September 18, 2011

Silver is still a GARGANTUAN opportunity, enhanced by derivatives

Filed under: Editorials — Tags: , , , — Jeff Fitzmyers @ 2:53 pm

When I looked into it previously (The obvious and GARGANTUAN silver opportunity), the above ground silver to gold ratio ranged from about:

5 to 1 (meaning silver could now be at $350/oz) to
1 to 5 (meaning silver could now be at $9,000/oz)

That is just to reach some sort of equilibrium, today, if the paper supply was exhausted. Then add a dash of monetary panic, which might send gold to $10,000/oz. And silver not overshoot on the ratio itself would be disappointing 😉 So then with gold at $10,000:

5 to 1 (meaning silver could now be at $2,000/oz) to
1 to 5 (meaning silver could now be at $50,000/oz)

People don’t laugh so much anymore at all these high projections. Big numbers are becoming common from credible names:
+ Stephen Leeb – Gold, Minimal Downside, $12,000 Upside
+ Eric Sprott: “Expect The Gold To Silver Ratio To Hit Single Digits”

The US mint has only sold $40,000,000 worth silver eagles this month so far. Money wise, that is absolutely nothing. If the derivatives fail soon, it seems like most US people will be completely surprised and will not know what to do at all.

A bigger question is if these little smolders in metal derivatives will become critical mass for the 465 trillion debt derivatives bomb? I assume that would be completely and nearly instantly unmanageable. Debt derivatives are involved with almost everything, sometimes in very complex ways. A million black swans in a glorious field of unintended consequences.

Tom Stevenson: ETFs have potential to become the next toxic scandal … ETFs are not the cheap and transparent vehicles the marketers would have us believe… When UBS’s $2bn black hole hit the screens on Thursday, no one who read the FSB report was surprised to see the words ETF and rogue trader in the same sentence… A third claim, that ETFs are simple products, may once have been true but it no longer holds water. Many of these funds are now fiendishly complicated and way beyond the comprehension of the individual investors and professionals alike who are buying them. Here are just a few of the reasons why ETFs are not all they are cracked up to be… First, around half of the ETFs in Europe today do not match the index they are designed to track by holding all of its constituent shares. Unlike the plain vanilla “full replication” ETFs which do, 45pc of the market is in the form of so-called “swap-based” ETFs which instead use derivative agreements, often with investment banks, to simulate the performance of the underlying assets.

+ Chart of silver fractional bullion banking suggests silver at $225 to $1,000/oz

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