Good to see you’re interested in this bonus section! So, here’s the skinny on that
Precious Metals Power Play I told you about. Let me begin with some background info.

Do you remember an earlier lesson where I told you the ratio between silver and gold was set by the government at 16:1? That means it takes 16 ounces of silver to purchase one ounce of gold. Why do you think that ratio was chosen? The answer is simple. The 16:1 ratio is an historic benchmark. At some point gold and silver will return to that ratio…maybe even to a 12:1 ratio. Lately, the ratio has been around 60:1, four times what it should be. To put it another way, the price of silver would have to increase by 300% just to be on a par with gold! Many people who watch the precious metals markets expect it to happen this year, 2010.

There seems to be a pattern wherein every 30 years or so that 16:1 benchmark ratio is achieved. The last time that happened was in 1980 when so-called experts said the Hunt brothers tried to corner the silver market. The white metal shot up to $80 an ounce. Yes, it happened in the early 1950’s as industrial production ramped up after World War II and in the early 1920’s, setting the stage for what would become the Roaring Twenties.

So think about it. Most people who invest in precious metals favor gold for its stability; silver for its potential for rapid appreciation. There’s the risk/reward ratio I spoke of in my last email.

Silver likes to spike high to reach that 16:1 ratio, then quickly settle back down. Silver and gold would stay at that ratio if the metals markets weren’t being manipulated by the central banks. And right now the Federal Reserve is believed to be a big manipulator, because when gold and silver rise at a significant rate, and they will, the US dollar should collapse. The Fed is holding off the inevitable for as long possible…but, I have a feeling it’s about to unravel in the very near future.

And here’s the key to the meteoric rise in precious metals. The vast majority of those who invest in precious metals do not take physical possession of their purchases. They foolishly accept a certificate (nothing more than a piece of paper) that says they have a certain amount of metal stashed away in a warehouse with their name on it.

Do you recall an earlier lesson in which I told you Fed rules allow banks to loan out 90% of cash on hand? For all practical purposes, if a bank has $100 on deposit, it can loan out 90% of that. Obviously, not everyone will come to the bank and withdraw all their funds at the same time. So the Fed rules say they only need to keep 10% of deposits on hand.

Do You Think Precious Metals Dealers Are Any Different?

The Commodities Futures Exchange Commission allows precious metals dealers to short gold (invest in the anticipation of the gold price dropping). The gold to back these short positions is the gold sitting in their warehouses. The gold you supposedly bought. If the price of gold rises, these dealers must cover their short positions. So if gold is trading at $1,100 an ounce and the dealers are betting it’ll drop to $1,000 (because the Fed is manipulating the price to keep it low, and thereby prop up a weak dollar) they make money when the price does drop.

But what happens when the price goes to $1,200? The dealers have to cover that $100 shortfall. What happens if the price skyrockets to $2,000 or $4,000? By the way, neither of those prices are outside the realm of possibility. And when people realize there’s a lot less gold around than they thought, the price must skyrocket as people rush in to finally take physical possession of their gold.

It’s estimated that if today, while things are still relatively normal, everyone who holds gold certificates (pieces of paper) wanted to exchange them for the gold and take physical delivery, it would take two years to settle all the accounts. See! The gold is not in a warehouse. It hasn’t even been mined yet. It’s still in the ground!

There’s speculation gold could rise to $6,000 an ounce. What then, will silver do? Some experts are looking at $400. So while gold could rise over 400%, silver will greatly out pace it, perhaps rising as much as 2000%.

What should you do? Well, you have to figure out that for yourself. As for me, I’m building my stockpile of silver bullion and taking physical delivery. I’m holding on to it until the price rise, then may exchange the silver for gold or perhaps get out of the market altogether and look for the next under-valued asset.

So, there’s an example of a good arbitrage play. You can take advantage of silver’s higher upside potential, then switch to gold’s stability…or not, it’s up to you.

Just as an FYI, there’s still more you need to know. You can’t just go out on a silver buying spree. That would be foolish, turning a sure bet into a big gamble. Not what you want right now. So talk to me before you do anything. Catch ya in the next lesson!

 
To YOUR Success,

Business & Marketing Mentor
Phone: 805-874-2410
Email: Larry@LarryCorbi.com