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The ins and outs of ‘silver selloff’ explained – New Dan Mangru Financial Commentary May 5, 2011

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MANGRU ON MONEY

The ins and outs of ‘silver selloff’ explained

Exclusive: Dan Mangru reveals why small-timers are crushed and big boys win


Posted: May 04, 2011
8:22 pm Eastern

By Dan Mangru
© 2011 WorldNetDaily

It sounds so harsh. The rich get richer and the poor get poorer.

Almost makes you want to go out and register as a Democrat. That way we can redistribute some of this wealth as our current president would like.

But the current silver market is a classic case of irrational individual investors driving up the price of the market, only to have sophisticated institutions leave them holding the bag.

Well how did this happen and what happens to the silver markets from here?

The silver rally goes back to the bailouts of late 2008. After $700 billion of TARP, billions more to save the auto industry, and the election of Barack Obama, it became very clear that the U.S. was in the mood to print cheap money.

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After reaching a low of $8.79, silver began to slowly rally. First it rallied due to Ben Bernanke almost tripling the monetary base. Then it rallied due to the $860 billion Obama stimulus. Then it continued to rally after Obama became the first president in United States history to rack up a yearly deficit in excess of $1 trillion.

Before we knew it silver was trading in excess of $30 per ounce.

Wow. What a move.

After going up some 400 percent individual investors started to take notice. Then as the U.S. markets started to sputter, Ben Bernanke and the Federal Reserve instituted something called Quantitative Easing 2 or simply QE2.

QE2 has the net effect of placing more U.S. dollars into the financial system and ultimately into circulation.

When more dollars are placed into the market without the necessary demand, inflation happens.

BINGO.

This was the impetus that individual investors needed to get in the game. Silver again started to skyrocket.

Then came news that Bernanke didn’t plan to stop QE2 by this June and planned to take it further.

Blastoff.

We now saw silver hit intraday highs in excess of $49, a sign of major speculation and irrational exuberance.

You see in silver markets, many individual investors are leveraged buyers of the metal. What that means is they take a loan out to buy more silver than the money they have in deposit.

While some individual investors use a smart amount of leverage, many times they are tricked into borrowing anywhere between 4-8 times their money.

Case in point, if you had $10,000 cash in your account, you could buy let’s say $50,000 worth of silver borrowing at 5:1 or five times the amount of money you have in the account, for a total borrowed amount of $40,000.

Utilizing margin is supposed to maximize your profit, but when used unwisely, it maximizes your risk.

If you bought silver between $47-49 with this type of margin, your overall account value would be in the area of $37,000-$39,000 (depending on fees, costs, etc.).

That means that you have lost all of your original $10,000 and you are now liable for the difference between your account value, in this case $37,000-$39,000, and your loan value, which in this example is $40,000.

Had you just bought $10,000 worth of silver, your account would be down to about $7,500-8,000 but you would still have positive equity. With unsafe leverage in our example above, you end up owing between $1,000-$3,000. This is known as a margin call.

From $8k to owing up to $3k. That’s a very big swing.

Now getting back to overall markets. Realizing that leverage and speculation were driving prices higher, the CME Group (which is the owner of the Chicago Mercantile Exchange) hiked margin requirements three times since the beginning of last week.

This caused firms to tighten up their leverage and some firms even made stricter requirements than the CME Group.

The reduction in the amount of leverage that can be used caused selling pressure to increase last week which brought silver down to $45 an ounce after trading higher than $49 per ounce just days before.

Then add on top of this a once in a lifetime event (literally), with the death of Osama bin Laden. This sent silver prices, which rallied back to $48.22, down to $42 per ounce.

However, once the market absorbed the Osama factor, silver prices rose in excess of $47 off its Osama lows.

Institutions know the game. They knew that with margin requirements tightened that if they started selling they could trigger a significant selloff in silver. So they did.

As institutions were selling, individuals who were overleveraged in silver began what the term “margin call” means. As the price went down, it triggered individual investors to sell their positions in order to cover their investment amounts. This drove down the price of silver even further.

Add on top of this hedge fund gurus like George Soros indicating that he will start to liquidate his long gold and silver positions, and the down market can take on a life of its own.

As the market continues to go down further, shaking out most individual investors, we will start to see institutions re-enter the game, buying back in the $30s the same metals that they sold in the $40s.

You see even the institutions that are just getting out now (in the low $40s to high $30s range) aren’t concerned because they’ve been buying silver since it was trading in the $15-20 range.

So to them all they lost was just a couple bucks of profit.

But the opportunity to take silver from $49 to let’s say $36 just to buy it back again and ride it all the way to $50, that’s a score.

For silver buyers out there, key adages provide the proper insight into these markets.

The first adage to follow is to remember history. Historically, gold trades at a 16 times premium to silver. These days that ratio is at 38 (meaning the price of gold is 38 times the price of silver.

Although margin requirements on silver are now more onerous than those on gold, the underlying fundamentals and price ratios for silver make it very attractive.

Secondly, individual investors in silver should be long-term players, not short-term flippers.

Silver is a dangerous metal. It can go up and down as much as 20 percent in just a couple of days. We’ve seen that before. We’ve seen it now. And we will certainly see it again.

If you are a long-term player you can afford to sit out these short-term hiccups and just focus on the long term fundamentals. The U.S. dollar is heading down, emerging markets are consuming more, and the demand for silver (industrial, inflation-hedge, and luxury) is increasing.

Just look at U.S. debt. We have $14 trillion in unfunded Social Security liabilities, $77 trillion in unfunded Medicare liabilities, and $19 trillion in unfunded prescription drug liabilities.

That’s $110 trillion new dollars that we have to print just to cover our existing liabilities. God forbid that President Obama figures out a new way to start spending even more money.

So when you want to know where the price of silver is going, I’m going to give you the same answer that Steve Forbes gave me today while we talked at Starbucks, “Just follow Ben Bernanke.”

Because as Bernanke gets the orders to print the dollars to pay the bills, silver will go up and up and up.

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Read more: Why small-timers are crushed and big boys win http://www.wnd.com/?pageId=295069#ixzz1LULA2Lab

Freedom Fest Panel – Alternative Investing – The Mangru Report on Fox Business September 24, 2010

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Watch extended coverage from Freedom Fest 2010 with Dan Mangru moderating a special panel on Alternative Investing.  While so many investors are confused as to what that actually is, for the purposes of this panel alternative investing is any type of investment outside of stocks, bonds, options and mutual funds.

The panel features David McAlvany of McAlvany Wealth Management, Van Simmons of David Hall Rare Coins, Jack T. Reed author of How to Protect Your Life Savings, and Terry Coxon of Passport IRA.  They will provide key insights on topics such as gold investing, the currencies most likely to beat the U.S. dollar and why the U.S. dollar might be good to hold in the short run, whether investors should pay down debt as opposed to making new investments, how to buy real estate during hyperinflation, and the importance of liquidity.

Anthony Pulieri: The Bears Running Wild for a Decade in Stocks and the Bulls Charge Forward in Gold…. June 23, 2010

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Exclusive Commentary By Anthony Pulieri

Chief Investment Adviser

Joseph Glenn Commodities

I look at the U. S. stock market and see nothing but the destruction of wealth over the last decade and it sickens me to continue to see an entire society all in and over committed into stocks.  Are you kidding me?

We have just seen The Lost Decade.  The U.S. economy has expanded at a healthy clip for most of the last 70 years, but by a wide range of measures, it stagnated in the first decade of the new millennium. Job growth was essentially zero, as modest job creation from 2003 to 2007 wasn’t enough to make up for two recessions in the decade. Rises in the nation’s economic output, as measured by gross domestic product, was weak.  Household net worth, when adjusted for inflation, fell as stock prices stagnated.  Home prices declined in the second half of the decade and consumer debt skyrocketed.

I continue to see nothing but absolute market volatility and pressure downward.   Whether it was the dot.com bubble bursting, or the massive real estate mortgage foreclosure crisis, all the way to the 2008 market debacle and destruction of wealth, the last 10 years have been nothing but turmoil for the average American.  When it comes to investing, the last 10 years have been nothing but a short term traders market.  The buy and hold strategy that had succeeded for so long is no longer a recipe for success.

I had discussed that this market came way too far way too fast at the peak of 11200 on the Dow and the S&P move to 1200 was not justified.  This was just a short term bear market rally and here we are about to break the important 1040 mark.   If we see this break through a test of 950 could approach very quickly. I am still sticking with my belief of 9000 on the Dow and possibly even lower at 8400 in the short term.  Technically speaking the market seems to be breaking down.  It is having major trouble breaking through the almighty 200 day moving average.  If it is able to do so we could see a short term bounce, but if not the market will experience an extreme sell off and it will happen at lightning speed.

The European contagion has been growing and will continue to spread at a steady pace.  The entire continent of Europe is in major long term trouble and the Euro continues to get crushed. We have seen a dead cat bounce off the lows for the Euro but it is absolutely a flawed currency and the down trend will continue over the long term.  I do not see how this can change in the short term and what this has done is create a lack of confidence globally throughout Europe and America. The stock market trades purely off of confidence and there is none out there.  Can you blame anyone for not having confidence after all the years of credit expansion, easy money and free spending? What do you expect?  We would be able continue to spend at a pace not even imaginable just 20 years back and succeed?  Will the policies ever get reeled in? We have chosen to inflate our way out of it and the Federal Reserve is left with no answer except to print more dollars. The strategy to inflate our way out of the deep recession we are currently in will culminate with the ultimate demise of the U.S. Treasury market and the U.S. dollar.  Large investment flows have been flooding into the U.S. dollar but we have seen that trend reverse this week. This rally is over and we will see the U.S. dollar get demolished in the midterm and long term.  Rick Santelli, said it best, “it is the tallest midget in the room”.

I turn my focus and investors to Gold.   This market is an absolute bull market and has been for 10 years now.  I believe the talk of a bubble is absolutely false.  If you look back to all of the bubbles that have popped what you see is extreme volatility when the top is hit.  We have yet to see any volatility in gold and it has done nothing but built an impressive base technically for 10 years with higher highs and higher lows alongside heavy volume.  A short term move to the downside is possible to 1170 but there aren’t any sellers on any level in gold.  Whenever it dips 10-15 dollars we see more buying right away. So until we break the 5 month uptrend I am no way selling my gold.  I am a long term investor though and always have been.  If we are able to retest and break 1250 I believe 1320 will be hit very quickly.  Ultimately 1500 will be broken through by year end.  Over the long term, 12-24 month forecast, 2000 per oz gold will be met with ease.  Central Banks globally have switched from being net sellers of gold to net buyers.  This is a huge change historically and very bullish.  The global production cannot keep up with demand.  The South African Rand Refinery has seen an increase of 50% in coin demand last month alone alongside an 86 year low in production, yet one more example of the bullish nature of Gold.

I stand firm in my belief that Gold will continue to trend higher because of the lack of faith in fiat currencies. The Dollar has been going down for the last decade and has gone down by about 30% since its high. The euro is in a major down trend due to the European contagion spreading and has just begun.  Gold is the currency of kings and has weathered every single economic storm known to man.  It has survived every major war and will always be a store of value to protect your wealth.  If you look back in history you will see that every paper currency in the history of mankind has ultimately devalued to nothing and gone to zero.   Protect your wealth and buy Gold.  The enormous web of uncertainty permeating throughout the world will continue to drive Gold higher and ultimately lead to tremendous gains in your portfolio.

Anthony Pulieri is the Chief Investment Adviser to Joseph Glenn Commodities.  For more information please CLICK HERE NOW.

Jim Rogers One-on-One – On Greece Bailout and Social Security – The Mangru Report – Episode 3 May 17, 2010

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All the way from Singapore, the Founder of the Rogers International Commodity Index, and the author of A Gift to My Children, Jim Rogers speaks candidly with Dan Mangru of The Mangru Report.  During their conversation Jim Rogers explains why the Greek bailout could eventually overturn the U.K., why that’s not the end of the world, why the Financial Reform Bill is a waste of time, why Ben Bernanke can’t get a job, why Madoff got a clean bill of health from the S.E.C., regulators too focused on pornography, his best advice for seniors nearing retirement, and the age old question of why he wears bowties.

Be sure to tune into The Mangru Report Every Saturday and Sunday at 5:30 p.m. on Fox Business Network.