I was not only excited to get the news about Osama being killed on Sunday night, but as I said earlier this week, it was a great time to be at the Pentagon. The trip went well, but it was only a launching point and I’ve got a LOT more work ahead.
Back to Osama…I have been absolutely shocked about how much of a distraction the whole event has been from several immediate concerns that we need to be aware of. That is one of the reasons why I haven’t even responded to the posts on the blog about whether or not Osama was really killed this week. Other than being fodder for conspiracy debate, it doesn’t help people get prepared for what’s coming or help people who are currently in survival mode. Here’s what I mean:
- People in the South are just starting to recover from the massive tornadoes and the loss of life and property that they caused. I just got an email from a guy today who told me he had a big tornado headed towards the office where he works, it split before it got there, and came back together on the other side. It gave me chills and brought up a question as old as time: Why were they spared and others not? Their building and business is still in one piece, but their lives are in turmoil because of all of the damage and destruction that happened around them.
- The Mexican central bank bought 100 TONS of gold. In another vote of “no confidence” in US monetary policy, the Mexican government has converted approximately $4.5 billion of dollars and pesos into gold.
- Speculation continues that China may invest $1 trillion more in gold. Interestingly enough, they will probably get $15-$20 billion out of their own mining operations in China this year and more from mining operations that they’ve been buying with their excess US dollars. The big thing here is that it’s another vote of “no confidence” in the dollar.
- Silver margin requirements went up by 50% in roughly a week and silver prices dropped over 20%. COMEX (commodities exchange) raised margin rates 9.2% on Wednesday, April 27th, 13.2% on Friday the 29th, and 11.6% on Tuesday, May 3rd. Here’s what that means:
Let’s say that a silver miner has a mine where it costs $30 per ounce to get the silver out of the ground and turn it into silver rounds (coins). If the price of silver is under $30 per ounce, it doesn’t make sense for them to mine any silver, since they’d be losing money on every ounce they dug up.
Even when silver gets over $30 per ounce, the company may not decide to start mining because the price of silver might drop below $30 per ounce in the weeks or months that it takes them to get the operation up to speed.
Enter futures contracts. Futures contracts allow silver companies to lock in the price of silver at a fixed future date so that they won’t get hurt if the price of silver goes below their cost to extract it and bring it to market. The people who are on the other end of these contracts think that the price will be higher than the price of the contract.
This tool (futures contracts) has been used for decades to help protect farmers, ranchers, miners, petroleum producers and other commodity producers from drops in the market that might happen between when they commit resources to generating the commodity and when it’s ready for market.
Enter the speculators. In order to make it more attractive for people to buy futures contracts, the exchanges allow investors to control the contract with only a fraction of the money that would be required if they actually have to buy the contract. Back to the silver miner example, if a miner entered into a futures contract in May to sell silver at $30 per ounce in December and the price was only $25 in December, then the investor who bought the contract would still have to pay the miner $30 per ounce, even though the price was lower.
The amount of money that investors have to pony up to buy a silver contract is relatively small. As of April 26th, you could control 5000 ounces of silver worth $235,000 with only a $11,745 investment. This is about 5%, or 20:1 leverage and a move of just over $2 per ounce would wipe an investor out or double their money. As a result, many speculators bought contracts hoping to make quick, easy money as silver went up.
COMEX is responsible for fulfilling the contracts if the investor defaults, so they normally have 6-8% margin requirements for silver to protect themselves and they prudently decided to raise margin requirements to flush out some of the underfunded speculators buying silver contracts. So, if you’re upset about the drop in silver prices, don’t get upset at COMEX, get upset about underfunded speculators who were exercising their right to play with the big boys running the price up and not being able to pony up when amateur hour was over.
Before you think I’m being too hard on the speculators, I’ve been one of those underfunded speculators in the past, and I realize how stupid I was to try to play with the big boys without proper funding. If you are one of the people who got caught in the ripsaw this last week, lick your wounds *quickly*, consider it the cost of education and move on wiser.
As a result of the increased margin requirements, underfunded speculators had to quickly come up with the money or quickly sell their contracts. The increase in the number of sellers and increased requirements for buyers caused a drop in the price of silver. As COMEX gradually tightened the belt a little more, trying to get the margin requirements back up to the 6%-8% range, more speculators either got wiped out by the price drop or had to sell their contracts because they couldn’t come up with the additional margin requirements. Many had to sell contracts that they had in other commodities to cover their silver contracts, which pulled other commodities down as well.
On Thursday, May 5th, 9 days after the first drop, margin requirements are $16,200 per contract, up from $11,745 and the price of silver is $36 per ounce, down from $47 per ounce. Silver dropped over 23% and the margin rate is up to 9%.
Nothing with precious metals happens in a bubble, and at the same time the margin requirements were going up, George Soros ANNOUNCED that his fund had sold silver and gold because we have less of a chance of deflation than he previously thought.
There are a couple of nuggets here: First, the announcement came out in the middle of the margin increases. Time will tell, but my guess is that the actual selling happened before the margin requirements went up. Second, it’s my guess that Soros knew that margin requirements were going to go up, that it would cause a drop in the price of silver, and he made a smart move to sell. I don’t think he believes we have any less risk of deflation and wouldn’t be surprised if he buys back in within the next couple of weeks.
With as quickly as the dollar is dropping and the expectation of another round of quantitative easing, I wouldn’t be surprised if COMEX will continue to raise margin rates even higher…with price drops happening every time they do. There is speculation that they’ll institute 100% margin requirements, but that would drop their trading volume and severely hurt their income and I doubt that will happen unless the Fed completely takes over the exchanges.
In any case, this is something to watch if you have money in precious metals. If you’re a newbie, you may be shocked. If you’ve been around awhile, you’re used to the crazy swings by now.
- Mississippi flooding: This is already very bad with thousands of people having to evacuate and it’s looking like it could reach epic proportions and strategic relocation is going to be a VERY real consideration for many who are in low-lying areas who may be subject to flooding from spring runoff and/or from more levees being strategically blown-up.
Our thoughts and prayers are with you…and it’s silly to think that any of us are immune from natural and man-made disasters like the recent tornadoes and the coming floods. These events are both reminders of how import it is to have contingency plans.
Make sure that your company has remote data backup plans in place. If there’s an EMP, it won’t matter, but there are dozens of smaller disasters that could quickly wipe out your data and kill your business/employer if you don’t take prudent precautions.
Also, make sure that your company has backups in place for your vendors. If your credit card processor or biggest supplier is in Southern Louisiana and you know they’re likely to be affected by flooding, protect yourself by getting a backup in place BEFORE you need it.
If you’ve got Commissary privileges, it’s case-lot time and I encourage you to stock up. I went with a friend this week to help him stock up and there are some decent deals to be had on food you probably already eat. With food inflation accelerating and the dollar dropping, I think it’s prudent. Here’s a link to the schedule: http://www.commissaries.com/stores/html/store.cfm?dodaac=N&page=case_lot_dates
And, again, I can’t emphasize enough how vital it is to make sure that you’re making daily progress in your preparations. Spiritual, physical, water, food, shelter, & skills. And, if the process is overwhelming, if you need a simple and proven way to get friends/loved ones up to speed quickly, or if you just want to make the most progress in the shortest amount of time, I want to encourage you to check out the SurviveInPlace.com Survival Course.
Over 10,000 people have gone through it with rave reviews. From Special Operations personnel, law enforcement, and paramedics to retirees, couples with kids, and students. If you haven’t gone through it yet, I encourage you to at least take a couple of minutes and go to SurviveInPlace.com and read the course description right now.
What are your thoughts on the dollar and precious metals? How about the tornadoes and floods/coming floods? Any Texans out there who are getting a little frustrated with the bad treatment Texas is getting from the Federal government in terms of funding, disaster relief, EPA restrictions on drilling, and not getting a space shuttle? (Obama is making it clear that he doesn’t like states who believe in states’ rights.)
One more thing… If you are considering buying gold, you must do this FIRST.
Before you buy a single ounce of gold or any gold stock, please take a minute to check out the information posted recently by a U.S. geologist. In short, he says there may be a unique way for you to potentially boost your gains in the gold market by a significant amount over the next few years.
You’ll find his full presentation, here…
Until next week, God bless and stay safe.