Paper v Physical

Last week we had two prospects tell us that they had silver stored with major New York brokerage firms. One man had 50,000 ounces he’d bought from them years ago. The other had 20,000 ounces with another well-known firm. They have both been paying storage fees. However, neither one had any kind of proof that they owned real silver. They could not get a storage receipt with the exact size and weight of the bars. Nor could they get serial numbers for the bars.

According to silver analyst, Ted Butler, if you can’t get proof that real silver is in your name, then the silver doesn’t exist. "Why wouldn’t they give you the serial numbers if they had the bars?" asks Ted. "It’s easy enough to do that and it’s something that silver buyers who store silver should insist on."

A few years ago Ted Butler addressed this very issue. "the same careful thinking and analysis that goes into the decision of whether to invest in silver, is often not present in the decision of where and how the silver will be stored. Here, I think many silver investors may be making a big mistake. That mistake is in assuming that just because you may have a piece of paper that reads that you own silver, that there is real silver backing that piece of paper. In fact, I would assert that the vast majority of silver pieces of paper, such as foreign bank silver certificates, pool accounts and all leveraged contracts have no real silver behind them. How could they? No one can provide evidence of more than 150 million ounces of verified silver bullion in the world, yet we have billions of ounces of silver promised by various pieces of paper…..


What they have been doing, issuing and letting their silver certificates remain unbacked by real silver, is an immensely profitable business. For twenty years, or more, by not having to go out and buy and store real silver whenever a customer buys a silver certificate, the foreign bankers have been printing profits for themselves. Their customers give them cash upfront, and not only do these banks have full use of that cash, they do not have to pay any interest on that cash, and get this - they charge storage fees, for silver that doesn't exist. It's better than stealing, because if you just stole the money from someone, you wouldn't get to charge additional storage fees. It's a racket.


Now, I have surmised that there may be a billion ounces of silver involved in these certificates, but I think the figure may be much, much more. Here's my reasoning - while a billion ounces of silver may be a lot of silver, it sure isn't a lot of money. Five billion dollars, over twenty years and all the banks that are doing this is peanuts. One man, Warren Buffett, bought almost a billion dollars worth of silver, by himself (of course, he couldn't get full delivery when it came down to it). I personally witnessed one transaction recently, where one entity bought 10 million (paper certificate) ounces from a major Swiss bank. You don't think, over the span of 20 years and the hundreds, or thousands, of banks involved in this silver certificate scam, that there hasn't been 100 others like this entity? What's five billion dollars, spread over hundreds, if not thousands of banks worldwide?


There are two things that should come to every silver investor's mind. One, is there silver behind my certificate? There most likely is, if you a have a certificate that spells out the serial numbers on the bars, or a specific description of the silver held (bags of coins for instance). There probably is, if the storage function is separate and distinct from the dealer selling you the silver. There probably is, if it's registered in your name and not the name of your dealer. If you have all three, no sweat. But, if you hold a certificate where the silver is not described specifically, or is unallocated form, or is in a pool account, or there are no storage charges, you would be wise to assume the silver doesn't exist. That doesn't mean you will automatically lose, when silver takes off, but it becomes a question then of the credit quality of the entity you are doing business with, which is a very different analysis than the merits of silver. You would then be betting upon the financial viability of a dealer whose books you have not analyzed. Appearances can be deceptive. Remember, a few years ago, the then largest silver refiner in the world, Handy and Harman Refining, suddenly went bankrupt and all silver pool owners and depositors were left in the cold. Also, there may be small print wording in these unbacked silver certificates that may prevent you from getting your silver in physical form, or that deny you the true world price at the time you may wish to sell.


The second thing, concerning silver certificates, that should come to every silver investor's mind, is the market implications that a silver price rise would have on those issuing non-silver backed certificates. This is what I was mainly referring to in my mention that these certificates are a separate and distinct short position. Even if you are not worried that your dealer may renege or go out of business (in the case of a large Swiss bank, for instance), in the event silver rises in price dramatically, the implications for the silver market will be profound. While those who have been issuing these non-backed silver certificates have profited immensely over the decades by having free use of their silver depositors' money, there is a cost to be paid for those profits in the event of a silver price spike. Even if the depositors don't demand their silver, many will want to cash out at high silver prices. The issuing banks will be liable for those profits, and the only way the banks can limit their liability is to offset their suddenly very naked silver exposure, is to buy silver in some form, paper or physical. At some price trigger point, $15, $30, $40, these banks will panic and buy en masse. Ask yourself this - if the silver short sellers that these banks have been for decades, suddenly turn collective buyers at any price, to the tune of hundreds of millions, or billions of ounces - who will be there to sell to them such quantities? Still think $100 or $1000 per ounce is unreasonable?


My advice here is not aimed at only new silver buyers, I am speaking to those who have bought silver already, over the years, with no input from me. My advice for those holding paper silver in questionable form is to get your silver into unquestionable form. Get out of pool accounts and unallocated silver, and into real and allocated silver. Hold your silver in hand or with someone you trust. The additional costs will prove well worth it. Make the switch now, while you can. Don't wait for the price to rise, it may be too late. I can't think of a worse outcome than for someone to have invested in silver for a long time, to be denied a profit when the price rises, because they held the wrong form of stored silver. Please don't let that happen to you."

- James R. Cook, Investment Rarities Inc.