Alasdair Macloed Doubts Veracity of Silver Mining Hedges - Gold And Silver Daily, Feb 15th, 2011

Over the weekend I received an e-mail from Alasdair Macleod over at FinanceAndEcnomics.org... This is what he had to say regarding the Financial Times story about silver forward sales that I ran in this column on Saturday..."Ed, I was intrigued by the FT story you highlighted in today's Gold and Silver Daily, and I think there is a simple explanation, if it is indeed true."

"The FT story implies the transactions were initiated by the mining companies. I think this is unlikely, there being a greater likelihood that it was initiated by one of the big commercials, such as JPMorgan. Bearing in mind these are forward transactions, they do not appear in the public domain, and can be completed at any price, giving the bullion bank the opportunity to do a very special deal with a nice fat premium for a possibly reluctant miner. And what better time to do this, when the price has fallen and there is uncertainty in the market."

"So my guess is that it one of the Big Four [JPM?] covering its shorts, because there is no other way of doing so and the timing is opportune. Kind regards. Alasdair"

Silver analyst Ted Butler and I had a very long conversation on the phone yesterday about this Financial Times story that reported on the 100 million ounces sold forward by the silver mining companies...and Ted agrees that Alasdair may have a point.

The FT story is misleading in some respects, because it insinuates that all of these forward sales had just occurred during the first six weeks of 2011, when silver prices were at their peak...then heading lower. That was not the case at all, as most of these hedges were placed many months prior to the end of 2010.

Of that 100 million ounces, the standout was the 70 million ounces sold forward by Mexican silver company Minera Frisco...in which Mexican billionaire Carlos Slim has a huge position. These hedges were placed at $18.82 the ounce...and the last time we were that low in price, was back in the third week of August 2010...so that's probably when it happened.

Not only did they sell forward a huge chunk of silver...but they also did it for gold, lead, zinc and copper. Silver and gold hedges run for three years...and the base metals for two.

This is what Ted had to say about it in a note [headlined "Hedging Insanity"] to his subscribers yesterday..."I don't think I have ever seen such a dangerous hedge book [and I've seen plenty]. By my calculations, the company is already in the hole for upwards of $600 million on all its metal hedges...with silver accounting for $300 million of that total. Its additional exposure will be many times that amount if prices move higher, as they are expected to do."