Monday, March 24, 2008

Silver certificates, are they actually backed with bullion?

First of all I'm more than willing to post original work by other silver bugs, it gives the blog a fresh perspective and gives me effort free content since I don't always have the time to be prolific having a real job and a couple of crazy kids to herd.

With permission, here is a letter sent to me by Larry Johnsson, who could not for some evil google reason post his comments to my last article on a retail silver shortage.

I am a part-time writer about the gold and silver markets and have contributed quite a bit to GATA - Midas writings, a few articles elsewhere, and have a fairly extensive network with various metalbugs. I couldn't post a comment on your blog over your latest "we are out of silver" theme so I do so by email. My concerns about this news involve silver certificates. What I would like to know (given the nefarious flaws of this paper silver obligation) is whether those in line down at ScotiaMocatta are still being offered silver certificates in lieu of metal. Understandably the bullion bank is liable for a class action suit when holders of this now risky paper now realize that there is NO silver available on demand, AND that these holders will be (and have been) CHARGED storage fees for metal that isn't there. There are lots of dark corners in this situation where problems are going to lurch into the limelight. Keep in mind that most of these (and other) so-called paper positions comprise around 90% of all "silver" purchased and that in the case of silver,,,,each ounce (that they no longer hold in their vaults in Toronto) has been sold at a minimal fractional reserve rate of at least 10 times. What the holders of silver certificates are seeing is a default. They will be cashed out of their positions.

One of our networked friends was down at SM attempting to buy silver (about 2-3 weeks ago) and managed 5 ounces. The clerk mentioned that things were looking tight for supply. The fellow behind him was loudly proclaiming that he wanted to see his 250,000 ounces - for which he had certificates. At a guess, he did not see his silver,,,,,and he now knows that he has been had. This is VERY serious for the third largest bullion bank in the world,,,,mark my words!

At any rate, here is what I wanted to post,,,,and now you have a little more too. Post it if you feel that it is appropriate information for you blog.

If you are looking for a theme that works for the whole financial crisis - right down to the currency level - it can be summed up by stating that paper positions are in jeopardy of failing their asset ability to be redeemed by the owner. The currencies themselves are failing their promises too. Most people hold paper assets and have yet to see that what is happening is going to a redefining of the world financial culture. And it will be a painful experience for almost everyone you know!

And a very wise person on Kitco talked about it some 9 years ago. This poster summed it all up with the statement "all paper will burn". Now we are watching this process unfold.

Best regards,
P.S. I like to see things confirmed from more than one source. So we have, indeed, arrived at that magical time that was predicted by some pundits (Mohide in his 1985 book, Silver, for example, who predated Ted Butler's world view by over 10 years.)

We are out of investment silver. Those who foolishly trusted in silver certificates as proxies for metal - and did so in easily storable sized weights of purchase has let the banking sector rob them. I feel no sadness for them for trusting a bank needlessly when most of these purchases can comfortably rest in ones own hand. But these people will now know that, this was fraud, pure and simple. We have been watching this thing unfold for 10 years and it has been only the last 3 that have been truly revealing. You read the Midas piece, my response, and now this one.

Keep in mind that ScotiaMocatta is where the Canadian banking system gets its bullion. I remember back last year that a Royal Bank out in Winnipeg was reportedly unable to order silver from SM. This situation means that no bank in Canada likely has silver for its clients. Concurrently, Midas reported some large commercial user having his account cancelled at SM....These are all anecdotal,,,but very telling.

For the past 3 years or so I have maintained that the Toronto vaults of ScotiaMocatta were going bare. I have always speculated that "excess" silver was flowing to COMEX to add to the figures of the stockpile that SM holds in their vaults there. It was a premise, but not one that had to be true because, after all, a shortage is a shortage and the problems were going to turn up some day. Predictably they were going to show up at SM and I have been watching for this very carefully. That day is now.

Are we really out of silver? No, not quite. But we would seem to be out of investment sized silver. And that amounts to the same thing!

What are people who want to buy silver now to do? Buy a futures contract and take delivery in 1000 ounce bars (you should be able to take delivery in Toronto). Find a dealer who still has some. LOL

What this SM thing implies that refiners have stopped making the smaller bars and are trying only to keep the COMEX paper market afloat by making the industrial size only. We have all watched the registered stockpiles increasing over this time period. We can speculate endlessly about the details,,,,but this much is clear. Investment demand cannot be met when industrial demand is competing.

But one detail remains clear and easy to speculate about accurately: silver is much more likely to blow up gold than visa versa, and with this correction upon us, I can probably safely say that under $1000 ounce gold is perhaps behind us. We won't run out of investment gold, but it is going to put some dents in the household budget now. But look at it this way: it's in a good cause,,,,and it's a no-brainer for future security and considering where it is going in price, still a bargain.

Best not to miss the boat, yes?

Larry has very valid points, if there is no silver in the Scotia vaults what is backing silver certificates? Are certificates set up as a fractional reserve type system or do they simply represent fictitious bullion the kind Morgan Stanley was charging people storage fees on but had never bought.

Should a bank collapse, these silver Certificates will be a worthless claim on an asset banks don't posses.

This causes quite a dilemma for us silver bugs, we can't get what we want, coins and bars. We can't trust what we can get, paper silver, and finally the money that should have flowed to physical bullion from certificate sales which would have pumped silver back to it's appropriate value has probably been funneled into the very short contracts that suppress our investment. Where the hell are the regulators in all this?

Thanks for the imput Larry.


Anonymous said...

Great posts.

Just wanted to add I experienced the same thing at main branch Scotia on Thursday(March 20), when I wanted to buy a tube of silver Canadian Maples.

They really didn't have anything, except a tube of 1989 Silver American eagles, which I ended up buying.

Anonymous said...

I actually heard about a silver shortage at the bank a while ago (March 13 I think it was). I was at the Toronto Scotia tower buying some silver maple leafs, and the guy next to me was asking about buying silver. They replied with a comment about there being a shortage of silver bars at the moment.
At the time I thought it was just a temporary thing that one day, and definitely not that this would extend to Silver Maple leafs as well. As for certificates, I have always thought certificates are a bit of a shaky way to buy (not just for silver, but for anything really), since all you really have is their word in knowing the silver actually is there.
Illegal or no, just because they promise something doesn't mean it will happen.

Lord of Wealth said...

You must have beaten me there on thurs or had a more proactive teller because I was offered nothing.

I do have to say though I have never been asked if I wanted certificates after I've asked for bullion. I think they've probably had enough informed and rude answers that they only offer it to those who ask real newbie questions.

While I don't think it would do much good we should send a petition and letters to the appropriate Canadian authorities questioning bank practices re bullion backing of certificates.
At least we can cause some noise and let them know we are watching.

So who and how many people should we contact? and should we do letters or one of those online petitions services?

Anonymous said...

I was interested in purchasing silver oct. 2007 from Royal Bank. I was offered silver certificates and after asking whether or not they were backed by physical metal I was told repeatedly (i asked some skeptical questions) that they were backed by 10 oz bars. When I returned to pick up certificates I asked how long it would take to redeem for silver. That's when they told me that it didn't really represent silver at all and that i would have to pay a premium to get the physical metal. They ended up helping me out because of their slip up but only because of the questions I asked while purchasing. Being new to the market I was very lucky that I didn't get cheated. Beware of silver certificates.

Anonymous said...

Lord of Wealth,

I was there around 11:00AM on the Thrusday. When I got there, there was a long line for FX, but no line for Precious metals. By the time I left (I hate doing all that scotia paper work, it takes forever), the line up for Precious Metals was very long. I didn't see it like that the previous times I was there.

I came close to buying certificates as well for my RRSP, but i couldn't get over the idea that certificates are no different than fiat.

I did finally go with the Questrade RRSP Gold, where they say the Gold is segrated and stored at the Royal Canadian Mint. It was the closest product I could find that allowed me to store physical for my RRSP.


Lord of Wealth said...

Some silver is in at Scotia see post

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Anonymous said...

Wealth . net 4 7 10
northland ever true's only
bullion bank has very little
actual bars, mostly paper i o u's

MUFC said...

Tomorrow will be a great day for silver.
The comex is short of contracts, we will see silver $40++.

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