Value Disconnect

There is currently a serious disconnect between the value of silver bullion and the "paper" market of trading silver contracts.  On Friday silver closed at $10.17 per ounce.  The physical silver is backordered 4-16 weeks and 1 oz. silver coins on EBay are going for $20.  What’s the deal?  Central Bankers and Investment Banks (which have historically been used by Central Banks) have continued to suppress the price of gold and silver.  Many articles have been written on this topic and there is no question of intent.  Fiat currency is based on perception rather than reality.  The reality is that the Federal Reserve will hyper-inflate us out of this financial crisis.  Ben Bernanke studied the Great Depression and is convinced that they should have "turned on the printing presses".  If government manipulation is removed, gold and silver would immediate move to $1,600 and $20 respectively.

Another looming disconnect issue is the value of derivatives on the books of all the players involved in the financial crisis.  The Financial Accounting Standards Board (FASB) sets the ground rules of balance sheet reporting by all corporate entities.  See: .  The problem lies in how derivatives and related securities are valued.  I have heard arguments on both sides.  If you paid $10 million for a security with "insurance" wrapped around it (a Credit Default Swap), it has been reported as being worth $10 million on the books.  However, if the same instrument is sold in the market for $2 million then should your books reflect the $8 million loss?  If an individual were borrowing money from a bank on the asset, you can be assured that the bank would value the collateral at "market" value, not purchase value.  There is the rub!  Who is to say whether the investment will ever regain its original value.

In the Scripture, we are given warnings about using "unequal weights & measures":

Lev 19:35 Ye shall do no unrighteousness in judgment, in meteyard, in weight, or in measure.

Lev 19:36 Just balances, just weights, a just ephah, and a just hin, shall ye have: I [am] the LORD your God, which brought you out of the land of Egypt.

Proverbs 20:10  Diverse weights and diverse measures, They are both alike, an abomination to the Lord.

Valuations should be fair to all.

How do stock brokerage firms handle value disconnect issues for the brokerage clients who have margin accounts?  What are margin accounts?  They are accounts where customers can borrow money from the broker firm to buy additional shares held in their brokerage account.  The stock broker charges the client interest on the amount borrowed.  That interest is calculated daily on the outstanding balance.  How does the broker protect himself from loss?  The broker loans money based on the daily value of the margined stocks.  As the stock’s price declines, the amount that the broker will lend goes down.  In private accounts, the broker will lend up to 65% of the value of the stock thus requiring you to come up with 35% in cash or other securities that are marginable.  If the stock price is under $6 then the broker will only loan 50%.

Stock Price                            Margin Requirement

Over $6                                            35%                     

$5 – $5.99                                         50%

$4 – $4.99                                         75%

Under $4                                         100%

This sliding scale is fueling the cascading decline in the market.  When the stock price declines, the broker issues a margin call:

Margin Call:  A request for additional funds resulting from a decline in the equity percentage or from purchases in the account. A margin call can be met by selling stock, depositing fully paid for stock into the account or by depositing funds.

If the borrower is low on cash, he will sell stock to meet his margin call.  If the stocks he owns depreciate rapidly, he must sell more shares and more stocks.  He will typically sell his worst performing stocks first and his best performing stocks last.  If the decline is too quick and too steep, he will unload all of his stocks at any price.  That is what happened last week.

The following is a notable example of this reality.  A slumping stock market forced Aubrey McClendon, the high-profile head of one of the nation’s most dynamic energy companies, to sell "substantially all” of his 33.4 million shares of Chesapeake Energy stock, he disclosed Friday.  See:

I’ll bet he wished he could tap into that $700 Billion bailout money!  My stockbroker told me on Friday that he had been working from 7:30 AM to 9:30 PM on "margin" paperwork the entire week.  Each day the market declines generate more margin calls.  The decline evokes further decline until all the leveraging is forced out of the system.  This de-leveraging causes all prices to go down: stocks, metals, and energy because the borrower must sell everything to raise cash.  Hard asset prices will recover quicker than paper assets.  People still need energy.  They may not need those exotic financial services anymore.  People will be forced to "simplify".  One day soon the general public will wake up to the fact that gold and silver represent real money.  When that happens, their demand and price will shoot up and the gold and silver stocks will enjoy a parabolic rise in price.  At that time, unequal weights & measures will be corrected.

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