Perspectives: The Perfect Financial Storm?
Financial Storms Heading Towards the U.S. Economy
May 26, 2001 © Copyright 2001 James J. Puplava

IV. THE ULTIMATE STORM TACTIC - PRECIOUS METALS

The Gold Market: Suppression or Seismic Anomaly?

Demand Exceeds Supply
During the last decade, demand for gold exceeded supply year after year. Under normal circumstances and in free markets, the price of gold would be expected to rise. Instead it has steadily declined. Why? Central Bank gold sales and gold leasing have made up the supply deficit. In the case of central bank sales, the gold is sold into the open market helping to fill the gap between demand and supply. Under gold leasing, central banks lease out their gold to bullion banks who either sell or lend out the gold for sale.

     
Source: Veneroso Associates, GATA African Gold Summit, April 2001

By either estimate in the above tables, the demand for gold has been much greater than mine supply for the last decade. The logical question is: Why has the price declined? The price of gold has declined because it has been suppressed by gold sales and leasing and by the paper markets in gold. In fact, there are many who feel the figures offered by GFMS are clearly understated. Many in the gold camp believe to account for gold’s price demise, the sale and leasing of gold has been much greater than officially reported, as shown in Veneroso's sales and loans above figures. Members in the GATA Camp believe that the numbers reflected in the analysis done by Frank Veneroso Associates are more accurate.

Holdings Estimates Difficult to Measure
Because the precious metals markets are opaque, it is difficult to get a precise figure on the amount of gold and silver that has been sold and leased. Suffice to say the amount has been huge in order to keep the price of gold suppressed when it is running annual supply deficits. Central banks are the largest owners of gold in the world. Their gold holdings are estimated to be 33,000 tonnes. GFMS estimates the amount of gold lent out into the market by central bankers ranges from 3,000-5,000 tonnes. Veneroso & Associates estimates that figure is considerably higher, more in the range of 10,000-16,000 tonnes. The amount of physical gold held in central bank vaults is never made public. So we must deal with estimates based on mine production and demand.

     
Source: Veneroso Associates, GATA African Gold Summit, April 2001

Lower Price of Gold Sparks Depressing Chain
Looking at these figures, it becomes obvious that the price of gold is being artificially suppressed by a constant supply of gold being fed into the market. This has triggered a chain of events that has further suppressed the metal's price. The first is that lower prices reduce the supply of gold by making it unprofitable to mine. Many mines have shut down and new investments have been held back because mining gold has been unprofitable. Low returns on investment have kept new capital from entering this market. A recent Bloomberg article highlighted the fact that gold output worldwide could plunge by 35% by 2008 due to low prices. 8 Gold production in South Africa, the largest producer of gold, is estimated to drop by 29% this year. Similar production declines are expected in Canada, Australia and in the U.S.

Lower prices are also driving marginal producers into bankruptcy or out of the business. These low prices are also preventing the largest producers from opening new mines. Capital deferrals are increasing and exploration spending has fallen by 70%. Many mines are running at a loss or are surviving by going into debt – eating up their capital or mortgaging future gold production through hedging.

The gold mining industry is also going through a period of consolidation. The average cost of production, including cost of capital, taxes, financing, exploration and overhead, is pushing the breakeven costs to $290 an ounce. Because many marginal and smaller producers cannot compete at today’s low prices, they are going out of business, being forced to merge, or are being acquired by the larger low-cost producers. Industry consolidation has caused a vast number of companies to disappear since 1994. In the end, industry analysts estimate the industry will be dominated by only a handful of key players. This consolidation phase is not expanding supply – it is simply removing it. The survivors are holding back investments and operating only their low-cost mines.

Lower prices have also forced many gold producers to sell their gold forward in order to obtain cash and stay afloat. Forward sales have kept many of the marginal producers on life support. Bankers are requiring many miners to sell part of their production forward in order to obtain financing. This practice increases the paper supply of gold in the market and further suppresses its price. Because the price of gold has been low for so long, many of today’s miners have been forced into hedging most of their production. Llarge and small companies have sold several years of production forward through hedging programs. This prevents them from ever realizing an adequate return on their capital. Should gold prices spike as they did in September of 1999 after the Washington Agreement, when central bankers agreed to limit their gold sales going forward, those gold hedges could end up bankrupting the companies. This nearly happened to Ashanti Goldfields.

Gold Leasing – Shell Game for The New Millennium
Of all of the events responsible for keeping the price of gold down, none is as onerous as the practice of goal leasing itself. Under this scheme, central banks lease out their gold to bullion banks. The bullion banks either sell the gold outright or lease it out to others. What is difficult to gauge is how much of this gold actually leaves the vaults of central banks. In many instances, the leased gold remains at the central bank in “custodial” form. The borrower sells the leased gold to another party in the form of a promissory note. By keeping the gold in its vaults, the central bank has created the equivalent of fractional gold banking. This allows the central bank to earn multiple fees on the same amount of gold. This old shell game works as long as there is never a run on the bank. It works as long as all lessees do not demand physical delivery at the same time.

Paper Gold – Fractional Gold Banking
The leasing and selling of gold has allowed the paper market for gold to expand at a more rapid pace. As shown in this chart, the annual production of gold and silver is much smaller than the paper market. In fact the actually physical market is dwarfed by paper gold. This world of paper gold has grown and multiplied in a similar fashion to the credit markets. I call this paper market for gold "fractional gold banking." It is based on the same principles as fractional reserve banking. A small base of actual physical gold has been used to multiply the market for gold paper.

This paper gold market consists of options, swaps, futures, repurchase agreements and loans. The bullion banks treat their metal deposits in much the same way as they do deposits denominated in money. These deposits are used as a base for lending. The same amount of gold may be used in several transactions between sales to producers, jewelers, or other bullion banks. In this process, the bank may use that one ounce of gold in a half a dozen transactions. The physical market hasn’t changed, but the paper market has multiplied. By multiplying their base of lending, banks can collect more fees in the process. Bullion banks aren’t the only ones playing this dangerous game. Central banks are guilty of the same practice. Since much of the gold they lend remains in their vaults in custodial form, central banks are allowed to make multiple loans on the same amount of gold. This enables them to earn multiple streams of interest on the same ounce of gold. Like bullion banks, central banks don’t expect that all owners of gold will want delivery at the same time.

Lessees and the owners of gold notes are not oblivious to the fact that due to the size of the gold paper market, there may be more gold leased than actually exist in central bank vaults. Like depositors at a bank, they are counting on the fact that not everybody will want physical delivery at the same time.

Lethal Leverage in Gold
It is estimated by experts in the field that banks have leveraged their lending business in gold and silver by a factor of 5-10. Some banks are even more aggressive with factor loadings as high as 40. Hedge funds have been known to be even more aggressive. LTCM was leveraged by a factor of 100 when it collapsed in 1998. This shell game works as long as there is no run on the banks. Since the world of derivatives is mainly settled in cash, it generally doesn’t present a problem. A large problem, if not a disaster, would occur if note holders, lenders or lessees were to demand physical gold delivery. Annual gold production has averaged 2,500 metric tonnes a year. Gold demand has averaged closer to 4,000 tonnes per year. Annual deficits are now approaching 1,500 tonnes a year. The market has been in deficit for over a decade. That deficit will only get worse as gold production falls due to lower prices and marginal producers disappear or shut down their mines.

It's All Just A Paper "Tower of Babel"
So with gold now running annual deficits of 1,000-1,5000 tonnes a year, with gold leases now amounting to between 4-6 years worth of outstanding production, what happens if physical gold is demanded? What could trigger a run on the banks? – some unforeseen event, a calamity that no one expects, at a time when no anticipates – a rogue wave catching all parties by surprise. If that were to occur, the paper "Tower of Babel" would collapse by its own weight. It would be a monetary crisis unlike any we have ever seen. It would be the financial equivalent of The Perfect Storm. The central banks are aware of this possibility. It may be the reason that gold lease rates have been rising. It probably signals the end of the gold carry trade and gold leasing. When interest rates rise to a level which makes borrowing unprofitable, borrowing ceases. Without the steady supply of leased gold to dampen prices, the price of gold should rise to equilibrium levels. Many believe that level to be around $600 an ounce – twice the level of today’s market price.

If investment demand, which has been absent this last decade, comes into play, then the price of gold would move beyond equilibrium levels. The rise in the price of gold would be stratospheric. I'd venture to say that it’s price spike would make the days of Internet IPOs look tame. Investment demand could be the one factor that overwhelms the market. Where would the gold come from? Inventory levels have been steadily declining. The level of current gold production could not meet gold demand. And it takes years to bring a mine on line. So where would the gold come from? It won't be found. The only answer would be for gold to be revalued in price – rising to its true value.

The Silver Market: Suppression or Seismic Anomaly?

A similar situation exists in today’s silver market. But, in the case of silver, it is much worse. As a commodity, silver has been running a supply deficit for over 11 years. However, in the case of silver, there are no large central banks to fill the gap. Unlike gold, silver is consumed. In addition to its financial properties, it has many industrial uses that range from photography, electronics, batteries, electroplating, medical/dental to water purification. Industrial demand for silver has grown steadily at an annual rate of 4.5% a year since 1982. Yet silver production has only grown at an annual rate of 2.4%. Silver, like gold, has been running an annual deficit for over a decade.  Deficits have remained constant and yet the price of silver has declined.

Supply and Demand Imbalances
Similar to gold, silver prices have been depressed by many of the same factors. Official government sales, leasing, short selling, dishoarding by investors and producer hedging have all worked in unison to keep the price of silver depressed. For close to a decade, silver deficits have averaged over 100 million ounces a year. Despite these deficits, its price has declined. As a commodity, what makes silver unique is that its industrial uses keep expanding. Its main pillars of demand – industrial, photography, jewelry and silverware – keep expanding into other areas. Demand for silver as an anti-bacterial agent is expected to double over the next six years. There is also increased demand for silver as a water purifier. It is used in batteries and now it may also be used in energy to help increase the output of electricity. More recently, silver has been used in electronic manufacturing as a substitute for palladium. Since many of these applications consume silver, the aboveground stockpiles aren’t as plentiful as gold.

It is clear from studying silver supply deficits that the market remains undersupplied relative to fabrication demand. While demand for silver has been increasing, mine production of silver has been unable to keep up with demand. Declining prices have forced many mines to shut down while low prices and low returns have chased capital away from the industry. Many mining companies have been forced into bankruptcy; while other marginal producers have been kept alive on life support systems through hedging programs. Lower prices have also caused companies to slash exploration budgets and development programs. For example, I can think of one silver producer, with excellent mine prospects, that has held off from development because of the current pricing environment.

Production of silver may fall even further in the future should economies around the globe slow down or head into recession. Free market economies account for 70% of silver supply. Interestingly, silver is mainly a by-product of mining other minerals like copper, gold, lead, zinc, nickel and other metals. Most companies don’t report their production of silver. Instead, they use it as an offset against their primary metal production. A lot of silver comes from copper and gold mining. With gold at historically low prices, further reductions in output are likely. Recently, companies such as Phelps Dodge, the second largest producer of copper in the world, have shut down 11% of their production. Many companies have found the high cost of energy too expensive to run their mines. Companies have found it more profitable to sell their energy contracts rather than maintain ongoing operations.

The key point of these graphs is that inventory levels have been drawn down. Aboveground stockpiles are dwindling. Mine production has been unable to meet up with demand. Investment in new mine production has been minimal. At the same time, demand for silver continues to grow. This is an untenable situation that cannot last much longer simply due to the laws of supply and demand. The fundamental case for silver is compelling if one examines the current demand/supply imbalance. However, this silver supply imbalance is only one side of the story.

Investment Market Imbalance in Silver
There is also a market imbalance. The low price for silver has caused many dealers and bankers to exit the business. With inventories being drawn down, many companies in the storage business have no longer found it profitable to maintain operations. This has removed several key market intermediaries, thereby making the market less liquid for speculators, traders, commodity fund managers and hedge funds. When an investment market gets thin, they become less efficient and less liquid. This discourages new investors from entering the market. Key players prefer larger, more liquid markets. Lower prices also threaten long-term price stability. As prices decline, less product is brought to market and made available for investment. It becomes an ever-shrinking market.

Breakdown in the Price of Silver
The result is that the silver markets have been breaking down. Trading activity on the COMEX has fallen.  Huge short positions have further weakened prices. Last year silver traded the year down 15% to a price of $4.635. This year, silver is trading down as well. Volatility, declining option and futures activity, dealers exiting, and falling turnover levels, make the silver market less attractive and liquid for investors. Essentially, low price levels have locked silver into a technical trading pattern making it difficult to break through. Shorting silver has been a profitable trade much in the same way as shorting and leasing gold. Currently short positions of 60,297 contracts reportable and 9,113 non-reportable are equal to aboveground bullion stocks.

Silver Leasing Takes A Toll on Investment Return
Silver leasing has further depressed price levels making it easier to short the market. As this table indicates, lease rates are attractive remaining under 2%. This allows for more silver to be brought to the market and sold. But the term "leasing" is a misnomer for the silver and gold markets – especially for silver. The misnomer comes from the aspect of return. When you lease something, the item isn’t owned. It is borrowed. This implies that the item leased is eventually returned.

Silver leasing is like leasing a car for three years. The lessee would have use of the car for three years. But at the end of the lease term, the lessee has an obligation to return the car. This example dramatizes the difficulty silver leasing presents to the current lessees of silver. As long as lease rates remain low, they can roll over their loans and remain profitable. The problem arises when lease rates rise to a level matching alternative investment returns and thereby make leasing an unprofitable enterprise. The leased silver would have to be returned. Which means it would have to be replaced. Looking at supply deficits and declining inventory levels, this might present a problem if many lessees and short sellers return to the market at the same time. Lack of product availability, lack of liquidity, and lack of alternative venues would cause prices to spike, creating pandemonium in the silver market.

Because the metals market is opaque, one never knows what is transpiring in the short term. Major players accumulate their positions through the international interbank markets. This affords them greater privacy than buying on the exchanges like the COMEX. An example would be Buffett’s purchase of silver through Salomon Brothers. Buffett’s activity only became known after an investigation into Philbro, one of Salomon’s subsidiaries. Philbro showed that they weren’t manipulating the market, but were instead acting as agents for Berkshire’s purchases. News of Buffett’s purchases sent a shockwave through the silver markets, causing lease rates to spike, silver prices to jump, and short sellers to rush for the exit gates. This is the sort of thing that could happen again, but this time it may become more virulent. Why? There is less supply today then when Buffett accumulated his 130 million ounces.

These ten reasons indicate a very bullish argument for silver. Industrial demand and alternative uses for silver continue to increase while mining production, new investment and inventory levels decline. These three issues have been the main fundamental argument of the silver bulls.

I believe there is yet another argument that is even more irresistible... What would happen to the price of silver during a monetary storm or a Perfect Financial Storm?  Very few mining analysts talk about this subject. Dave Morgan and James Dines come to mind.

Nowhere To Run

The Missing Element: Investor Demand
It is the position the gold and silver markets would hold, in the event of The Perfect Financial Storm, that presents such an intriguing study. For as I will shortly illustrate, there are few places to run to. Metals analysts have made their bullish arguments on supply and demand fundamentals only. Very few have entertained the thought of a possible monetary storm. I have shown that both gold and silver are running supply deficits. Demand has exceeded supply for over a decade now. The supply deficit has been made up by government and central bank sales, metals leasing, inventory draw-downs of existing stockpiles, and forward hedging. Today's inventory levels have been drawn down and remain thin. The one element missing from a rise in metal prices has been the absence of investor demand. Two decades of rising stock prices and double-digit returns in the stock market have lured investors away from precious metals. What could bring them back?

Higher prices and higher returns are the only sparks that could revive the precious metals markets. Without higher prices, you can’t get a high enough return to attract new capital. From a fundamental perspective, that day is surely coming. Supply and demand imbalances can’t exist forever. If they did, there would be no one left in the mining business. From an economic perspective, a monetary storm such as we had in the 1970’s, or in fact The Perfect Financial Storm could create a loss in confidence in the financial system and paper assets. The world of paper currencies doesn’t have an enduring track record. Gold and silver have existed for as long as we have recorded history. Fiat currencies on the other hand have a spotted track record. The inclination to rob people of their assets through inflating the currency has only worked in the short-run. You can’t keep people fooled forever. You can fool some of the people some of the time. But in the long run, the truth will always surface.

Confidence Shift
As long as people have faith and confidence in paper, the gold and silver markets will have difficulty competing with paper assets. Paper assets pay interest and dividends. That cash is spendable. Gold and silver pay nothing unless you own a dividend-paying mining stock. But in a severe monetary storm, confidence in paper could quickly evaporate. Until recently, monetary storms around the globe have favored the dollar. The greenback has been a place of refuge. Investing in dollars earns investors interest – something they do not get with gold or silver. The next monetary storm could expose the weakness in the dollar. Mounting trade deficits, a weakening economy, and rising inflation rates visa vie the G10 economies make our financial markets vulnerable. Should the next monetary storm involve the dollar, where would investors run to with their capital? The answer I believe will be real money – which is gold and silver. In a severe financial crisis involving the dollar, gold and silver could once again resume their historical role of money.

Should this scenario play out, the rise in gold and silver would be a monumental event. The precious metals market is too small to absorb the incremental demand coming from investors without an explosion in price. I have already illustrated that demand far exceeds supply. Both gold and silver have been running deficits for a decade. Those deficits have been made up by central bank selling and gold leasing in the gold markets. In the silver markets, aboveground inventories have been vastly depleted. If you add investment demand on top of industrial and consumer demand, the precious metals markets would be overwhelmed. There isn’t any excess capacity that could quickly be brought on line to handle investor demand. And I seriously doubt if under severe monetary duress, central bankers would part with their only real asset – gold.

The Funnel Effect of Equities Demand
As the above table indicates, low prices have caused the industry to consolidate. Weaker companies have gone under or have been absorbed. Nineteen companies no longer exist. Ten companies are barely hanging on some are on their way out. Thirteen companies are hanging in there, but could become a target for the larger players. There are very few equity outlets for investors to run to. The industry has consolidated so much that there are very few pure gold mutual funds around anymore. Since there aren’t very many companies to diversify into, many gold funds have turned into natural resource funds to find a greater choice of selection. Imagine what would happen to gold equity shares if even a small portion of the estimated $24 trillion worldwide equity market turned towards gold and silver.

Physical Demand Increasing
The physical market would also be incapable of absorbing the inflow of funds. World gold and silver production is estimated to run around $24 billion a year. There is no way this market could handle excess demand coming from investors. Prices would have to head north of the moon to bring aboveground supplies to the market. Even with higher prices, it would take time to bring new supplies on line. It is similar to what is now occurring in energy in the United States. We haven’t run out of oil and gas or the ability to generate electricity. We have simply run out of excess capacity. The same holds true for the gold and silver markets. We haven’t run out of gold and silver. We have run out of spare capacity to deliver it. Like energy, mines have been shut down in the same way oil and gas wells have been capped. The industry has consolidated to the point there isn’t the available production that could quickly ramp up to fill demand gaps. Outside central banks there are no large supplies available to the market. In the case of silver, there aren’t any central banks with a large hoard of silver. Besides, in a monetary crisis, even the central bankers would realize the folly of parting with their most precious asset.

Over the last decade the paper markets have given investors the impression that there are plenty of supplies of gold and silver lying around. The gold and silver derivatives markets have multiplied in size in comparison to the actual physical markets. Dealers and bullion banks have been able to pyramid the paper markets on top of the physical market in a way that is similar to fractional reserve banking. They in effect have fractionalized the precious metals markets. This explosion of paper has allowed bankers and dealers the ability to earn multiple fees on the same ounces of gold and silver. Like fractional reserve banking, there is no problem unless there is a run on the bank. That is when the shell game becomes exposed.

... And No Way Out
If investor demand were to return to the precious metals markets, it would create sheer chaos in the financial markets. We would see bullion banks exposed on their gold leases. Derivative contracts in metals would implode. The same would be true for short positions in gold and silver. Most paper contracts are settled in cash, or in other words, paper. The metals markets are different. Except for commercials, most contracts are settled in cash. What would happen if investors in those contracts started to demand physical delivery instead of cash settlement? You can quickly see the trap the shorts and the lessees of metals have laid for themselves. There would be no way out. They would be cornered. Where would the additional silver and gold come from, if investors wanted physical payment instead of paper or cash? There is simply not enough stockpiled in the COMEX warehouses. Warren Buffett owns more silver than what is available at the COMEX. Could this be why he is holding on to his silver?

   

Source: Sharefin from http://www.sharelynx.net/ 
Note: Deficit is the difference between mining production and total demand.

Show Them No Mercy

This raises another issue. What happens if some shrewd investors realize the delicate imbalance that now exists in the gold and silver market? A shrewd investor could quietly accumulate positions much in the same way that Berkshire bought its silver. Unlike the days of Bunker Hunt, silver is incredibly cheap. If you adjust silver for inflation, it is nearly at a century low. Buffett bought Berkshire’s position with pocket change. There are many large, sophisticated hedge funds that through the power of leverage could literally corner the market. If Long Term Capital with $3.5 billion in equity could borrow $125 billion and control $1.25 trillion in derivatives, how much easier would it be to do the same in the gold and silver markets? If annual production of gold and silver amounts to only $24 billion, and if the market cap of the world's gold and silver equities amounts to only $40 billion, this is not out of the realm of possibility. A company such as GE, which had $38.4 billion in EBITDA, could buy all of the world's mining companies with one year of pre-tax income. They could also buy all of the gold and silver produced in the world.

What if?
What would happen, if investors got tired of losses in the equities markets? What if they realized that inflation was much higher than officially stated. What could happen to this market, if value investors realized that silver and gold is selling at or below costs of production? What if some large investor or fund decided to take advantage of the untenable position of bullion banks or the gold and silver shorts. What if the shorts and the lessees asked for mercy and none was given? This is the condition of the metals markets today. A very thin line exists between price suppression and price explosion. The difference is ignorance.

The Gift That Keeps on Giving
For many years now, gold and silver investors have been discouraged by decades of low prices and more recently by depressed prices. If your only investment these last two decades has been gold and silver, that is understandable. However, you are now looking at a gift that will keep on giving. For the last decade, central banks and their intermediaries, the bullion banks, have suppressed the price of gold. The central banks have subsidized the bullion banks through low cost leases. The bullion banks and the shorts have sold off gold and invested the proceeds in higher paying investments. In the case of silver leasing and short selling, they have depressed the price of silver. These machinations have kept the price of gold and silver suppressed.

There are two ways of looking at what they have done which I think will help clarify the present situation. If you are a value investor, or appreciate a gift when it is given, you will be grateful for the opportunity. In the act of selling and leasing, gold and silver central banks, intermediaries, and short sellers have artificially depressed their price. In effect, they have unwittingly subsidized the price of gold and silver for long-term investors. If your goal is to buy low and sell high, now is your chance. Metals prices for gold and silver remain at historical low levels despite supply and demand imbalances that have subsequently created growing deficits. Fundamentally, this can’t go on forever. The lower the price, the less that is produced. Lower prices also discourage new investments from being made in mining, which prevents supply from ever keeping up with demand.

If you are a short-term investor, speculator, or an investor without a sense of value, this situation may not make sense. There is no "high" in today's precious metals markets,  if you’re a thrill seeker. Buying low at give-away prices and waiting patiently for them to rise, takes wisdom and fortitude. If you’re looking to make a fast buck, this isn’t your game. You may become depressed every time gold or silver prices break or if they remain confined to a narrow trading range. However, if you are looking at one of those rare moments in time when the possibility to make a fortune presents itself, this is one of them. This is a lot like buying equities back in 1981. It was a time when nobody wanted to buy stocks and bonds. Interest rates were high and equity prices were depressed. Dividend yields were at 7% and stocks were selling at 7 times earnings. The consensus thinking was that the equity markets were dead. Business magazines and experts ran stories about the death of equities. In much the same way, today's experts talk about the demise of gold and silver markets. When every expert agrees that the metals markets are dead, it is time to look at resurrection.

Some Final Thoughts on Precious Metals
The best way to invest in precious metals is in physical gold and silver. There aren’t large inventories of gold and silver, so you want to make sure you take possession. If you are a large investor, look at securing warehouse certificates for your gold and silver investments. I would suggest reading Ted Butler’s articles at Gold-Eagle.com and David Morgan’s writings at Silver-Investor.com. I would also suggest reading the Gold Derivative Banking crisis at Gata.org. Subscribing to LeMetropoleCafe.com is another way to keep yourself informed on the gold and silver markets. I have listed various websites accompanying this article where you will find information and different viewpoints to broaden your horizon.

A brief word of caution when investing in gold and silver equities. You want to be careful when investing in gold and silver equities. Many companies have hedged all or most of their production. A major spike in metal prices could actually cause them irreparable harm. There are only a handful of gold companies worth investing in. In the case of silver, I can only think of two. It is important that you understand the risk to mining companies that have hedged all of their production at today’s low prices. They will not participate to the same extent as unhedged companies who have major production capabilities and who sit on prime gold and silver properties. A major price rise could send many of these hedged companies into bankruptcy. Before you invest in them, obtain an annual report. Look at the footnotes. Do your homework before you invest. If you’re not sure about the company's hedge position, call and speak to a company official high up the ladder. If they won’t divulge the information, avoid investing in that company.

One final note on investing in the precious metals market. Before investors take any action on the information and opinions expressed in this article, I recommend that investors seek the advice of their investment advisor.

Part 10:  Riders on The Storm