Sell Gold, Buy Silver


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Mr. Gao co-found and became the CFO at Oxstones Capital Management. Mr. Gao currently serves as a director of Livedeal (Nasdaq: LIVE) and has served as a member of the Audit Committee of Livedeal since January 2012. Prior to establishing Oxstones Capital Management, from June 2008 until July 2010, Mr. Gao was a product owner at Procter and Gamble for its consolidation system and was responsible for the Procter and Gamble’s financial report consolidation process. From May 2007 to May 2008, Mr. Gao was a financial analyst at the Internal Revenue Service’s CFO division. Mr. Gao has a dual major Bachelor of Science degree in Computer Science and Economics from University of Maryland, and an M.B.A. specializing in finance and accounting from Georgetown University’s McDonough School of Business.

by Robert Kiyosaki
Friday, January 14, 2011

You may have noticed that gold is hovering around $1,360 an ounce (sliding recently after a big run-up) and silver is around $30 an ounce. That means in November of 2010 alone, gold increased in price by 2 percent and silver by 14 percent. Investing in gold and silver beats saving money in a bank earning less than 0.1 percent per month. Once again, this is further evidence that savers are losers as central banks of the world print trillions of dollars.

With paper money declining in value, millions of people are finally climbing on the gold wagon. Everywhere I go, I see signs that say, “We Buy Gold,” calling out to people desperate for cash to trade in their gold jewelry.

For years now, I’ve said that silver is a better investment than gold.

To quickly summarize, here are a few reasons:

• Silver is consumed and gold is hoarded.

• Silver is a precious metal and is also an industrial metal that is used in electronics, medicine, water purification, and jewelry

• Today stockpiles of gold are increasing while stockpiles of silver are decreasing. (This means there’s an abundance of gold and a shortage of silver).

• The gold/silver ratio is historically 14:1. This means that if gold were $14 an ounce then silver would $1 an ounce. Today, the ratio is approximately 50:1. Silver is extremely underpriced. If silver held to the historic 14:1 ratio, with gold at $1,400 an ounce then silver should be $100 an ounce — not the $30 an ounce it is today.

In my opinion, when you combine the fact that there’s a shortage of silver and that it’s underpriced, silver is the safest and best investment today…but not for long.

A logical question is, “Why is the price of silver suppressed? Why is silver so much lower than gold?”

There are two primary reasons for silver’s low price.

Number one, central banks buy gold, not silver. To bankers, gold is money and silver isn’t. Today central banks are buying tons of gold, with India being one of the biggest buyers. This elevates the price of gold, leaving silver the bridesmaid but not the bride.

The price of silver is manipulated. The price of silver is intentionally kept low. While this is criminal, it’s not illegal. Yet for decades, COMEX, the commodities exchange, has been in cahoots with the biggest silver investors at the expense of the little silver investor. This is about to end, thanks to some regulatory changes that may offer the biggest opportunity for silver investors between January and March of 2011.

What has changed?

Rumors are flying that more than 25 lawsuits have been filed against commercial investors such as JP Morgan and HSBC, accusing them of price manipulation to keep the price of silver artificially low.

The Commodities Futures Trading Commission (CFTC), which is to the COMEX what the SEC is to the New York Stock Exchange, has passed a new law which will force COMEX to play fair, forbidding such massive short positions on silver.. The actions of the CFTC are one more reason for last November’s 14 percent price rise in silver. The price manipulation of silver is about to end.

How was the price of silver kept low?

Big investors short-selling silver have kept the price low. For decades, the biggest players in the silver market, commercial investors such as JP Morgan and HSBC, have taken massive short positions on silver.

What does short selling mean?

Short selling (shorting) means you sell something you don’t own. Simply put, you borrow something to sell with the promise you will return what you borrowed.

It’s not much different than going to your neighbor to borrow 5 pounds of flour and promising to return 5 pounds of flour in a month.

Shorting is done in all markets: commodities, stocks, bonds, and real estate.

The commercial banks, generally large banks such as JPMorgan and HSBC, sell borrowed silver from the COMEX and pocket the money. The banks use that money to invest in other higher-returning investments such as stocks or bonds.

Meanwhile, COMEX has earned billions of dollars from the interest on the borrowed silver. The commercial banks and the COMEX both profit from this large short position of silver, the larger the better.

Now, with the new CFTC law, the commercial banks will need to buy back silver and return it to the exchange. The problem is not a money problem. The problem is a shortage of silver.

When the commercial banks start buying rather than selling silver, this will cause the price of silver to rise, increasing the costs to replace the silver. It’s simple supply and demand.

This massive big short has left the banks with a large margin-call when a broker asks an investor to bring an account up to a minimum position. How big is the margin call in silver? It is estimated that the total net short position on the COMEX is 550 million ounces of silver. And that’s just on the COMEX. Worldwide, it’s estimated that the short position is 2 billion to 3 billion ounces of silver.

If this is true, that means 2 billion to 3 billion ounces of silver have been borrowed and need to be purchased and replaced.

Again, the problem is not a money problem. The problem is that there’s not enough silver to cover the margin-call.

When will this margin-call occur?

The laws passed by the CFTC and Congress take effect by March 2011.

If the laws aren’t repealed, the big commercial banks will be forced to buy silver to replace the silver they’ve been borrowing. When they buy, the price will go up.

And if the price of silver goes up during this buying period, their losses will grow like an atomic mushroom cloud. This means that the big banks and COMEX will be doing everything possible to keep the price of silver low so that they can buy silver to cover their exposed positions. In the next two to three months, you will probably see huge swings, up and down, in the price of silver.

I’ve been buying silver for years, starting at under $4 an ounce. One year ago, silver was about $17 an ounce. Today it’s about $30 an ounce. I believe $50 to $60 an ounce is possible for 2011.

I believe it’s possible to see the price of silver gain more in one year than it has gained in the past twenty years.

As I close this column, I advise you to read this great interview of Ted Butler, the person who has for years single-handedly been demanding Congress to force the COMEX and big commercial banks to play fair.

As Ted Butler states, “It is time to sell gold and buy silver.”


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