Theodore is ocassionally wrong but committment to a secular trend is a wonderfull thing. Be right and sit tight, Ted. Hat tip to Duncan...
Sometimes, a number of forces come together to greatly alter events. I’m reluctant to employ the overused cliché, “A Perfect Storm,” but I am at a loss to imagine a better one to describe the confluence of forces I see converging for silver. Any one of the factors about to impact the price would be formidable, but in conjunction with one another should prove historic in force.
Consider first world supply and demand. Although current production (mining plus recycling) exceeds total industrial demand that’s not the case when investment demand is included. Prior to 2006 a structural deficit existed, where total fabrication demand exceeded total production, causing world silver inventories to decline to the lowest levels in hundreds of years. That ended in 2006. However, starting in 2006, the world began to wake up to the investment merits of silver.
Evidence suggests that investment demand is just beginning. For sure, industrial demand is not disappearing and is certain to grow in the years ahead as world economic growth and population increases kick in. But investment demand is the most immediate potent force in the silver equation. Investment demand, not industrial demand, can spread like wildfire. Investment demand is the real wild card.
Look at the facts. Silver investment demand kicked in with a vengeance in 2006. That’s primarily due to the introduction of new silver investment vehicles called ETFs (exchange traded funds) that allowed entities, especially institutional investors, to buy physical silver where that was not practical before. And buy they did. In the 3.5 years since the introduction of the first silver ETF, the total amount of silver purchased by these investment vehicles is around 400 million ounces. This is a staggering sum that no one ever anticipated. This is silver taken off the market. We can debate when it may come back to the market, but we can’t debate whether it was taken off. And new silver ETFs seem to be created daily throughout the world, promising the trend of growing demand will continue. Never has the world seen such silver investment demand.
Please remember, we are talking about a commodity of finite supply. Every ounce purchased for investment is one ounce less that is available today. After 60 continuous years of inventory destruction, there is very little silver inventory remaining. Every ounce purchased for investment purposes effectively shrinks the remaining inventory further. Compared to the mountain of money and credit available, the amount of available silver is miniscule. The 400 million ounces purchased by the ETFs over the past 3 to 4 years only amounts to $5.5 billion. That’s nothing in terms of dollars, but immense in terms of metal. Future attempts to put equivalent amounts of money into equivalent amounts of metal will send the price to the heavens.
This is not the only part of the silver investment boom. Retail demand in newly minted bullion coins, such as the American Silver Eagle, Canadian Maple Leaf, Austrian Philharmonic, and other coin series has never been stronger. The US Mint and others have struggled for most of the past two years trying to keep up with demand. Generic coins and bars have also experienced record demand and the retail market teeters on the verge of outright shortage.
What is motivating this record silver investment demand? I think it is three things: the greatest quantity of investment funds available to purchase silver, the lowest availability of actual metal that can be purchased, and the growing awareness of what a great investment silver represents. Let’s face it – in an investment world full of uncertainty and risk, there are not many assets that offer protection against total loss with exceptional profit potential. Silver can’t go bankrupt or become worthless, but can and will soar to many times its current price.
The new, and some say permanent, move to frugality and savings brought about by worsening economic conditions also favors increased demand for silver. When savers and investors are uneasy, the appeal of holding an asset that is no one else’s liability is especially comforting, particularly when such an asset can soar in value. Silver satisfies both the fear and greed aspects common to man. How many assets fit that profile?
The China Card
As powerful as those forces are, they are not the main factors of the perfect storm and coming bubble. A force that threatens to profoundly disrupt the silver market is China. After 60 years of it being illegal for Chinese citizens to buy and hold silver (and gold), it has recently become legal. Not only that, the government is actively encouraging citizens to buy silver, allowing it to be sold by banks. Early reports suggest that the Chinese government is succeeding, with stories of bank lines developing for people waiting to buy silver. With the world’s largest population that has an established and ingrained propensity to save, and with an historically attractive asset suddenly available after a void of 60 years, it’s hard to imagine how a rush into silver won’t develop.
In addition, reports of pending export restrictions from China, the world’s largest refiner and third largest miner of silver, threaten to create a one-two price punch never witnessed before. Years ago I wrote, at the urging of my friend and mentor, Izzy Friedman, how China was likely the big silver short, depressing the price to pick up refining market share and dominance in the world production of silver. After the low price drove out world refining competition, China could then be in the position of controlling the price and driving it as high as they desired. I can’t help but think that not only was such analysis by Izzy correct, but it may be about to be realized.
COMEX Crackdown
The most immediate potential force in silver is an issue that has dominated my attention for the past 25 years. The ongoing silver manipulation, caused by an unprecedented concentrated short position on the COMEX, appears to be racing towards a resolution. The main driver behind the pending resolution is the new chairman of the CFTC, Gary Gensler. After only three months, he has grasped and articulated the concept of concentration. I think he may use the term more than I do, as hard to believe as that may be. He understands the role of legitimate position limits in commodity law and has effectively communicated this concept. He is proactive, a rare quality in a public servant. It is an understatement to say he may be the best CFTC Chairman ever.
Even if Chairman Gensler fails to live up to my high expectations in the Commission’s future actions, he may have done enough already to bring the silver manipulation to an end. He has elevated the issue of position limits and concentration to such a level that it guarantees that questions must finally be answered about the unusual short side concentration in COMEX silver futures. He has received many hundreds of public and private messages about this specific issue. He can’t and won’t ignore the questions and demands from the public. He will address them in some way.
We are now at the one-year anniversary of the current ongoing silver investigation by the CFTC. This is the third silver investigation in five years. The current silver investigation came into existence as a result of articles written by me about the revelations in the August 2008 Bank Participation Report. This report showed that one of two US banks (most likely JPMorgan) held a short position equal to 25% of total world silver mine production. This is an unprecedented concentration, never witnessed in commodity market history. I asked the public question – how can such a concentrated position not be manipulative to the price of silver? Instead of answering, the CFTC decided to launch another investigation. This is what a government agency usually does when it can’t answer a simple and direct question.
But the new chairman of the Commission has not evaded direct questions on the important matter of concentration and position limits. He wasn’t the chairman when the question of concentration was asked last year. He wasn’t the chairman when silver was investigated three times in five years. That’s the big difference between then and now. Gary Gensler is the chairman now and that is all that matters. In my opinion, he will soon address the questions in silver.
There is also the question of the short side without concentration. Recently, I indicated that I thought JPMorgan had probably covered its big concentrated short position in other markets, such as the OTC market. In other words, it is my speculation that JPMorgan passed the silver short hot potato to unsuspecting entities. Please remember, this would be a transfer of the short position and its inherent risk to other parties, not an elimination of the position and its risk. It doesn’t really matter if JPMorgan transferred the risk, as far as the market is concerned. The short position still exists.
On just the COMEX alone, including all futures and call options, but subtracting all spread positions, there is close to 500 million ounces of net silver short positions. I don’t care who holds it, this short position exists. Given the current and future realities in silver, this is an incredibly uninformed short position. It is not backed by real silver. Given how much silver exists in good-delivery bullion form and who owns it, there is a severe mismatch between that available silver and the amount the shorts have obligated themselves to deliver someday. The short holders have no prospect of securing real silver, except to buy it in the open market, thus driving prices higher and hurting themselves in the process. The collective COMEX short position stands to lose $500 million for every dollar that silver climbs in price. Silver is about to climb many dollars in price. My point is simple. Forget who owns the COMEX short position; just remember they don’t realize what a precarious position they have placed themselves in. That they will panic and rush to buy at some point is guaranteed.
Industrial Panic
On top of all these powerful forces set to launch a super price bubble the likes of which the world has never witnessed before, looms what I think is the most powerful force of all – the coming industrial user inventory buying panic. As I recently wrote in “A Date With Destiny,” it is almost impossible for the users not to panic, once tightness in the silver market results in delays in shipments to industrial consumers. Such delays will threaten the very existence of many users continuing as ongoing concerns. None of these users will cease to exist without a fight. That fight will involve buying silver, at any price available. This will feed on itself, until it burns out in a frenzied panic. Investors will panic and buy when silver prices soar, but no one will panic more than the users, with the possible exception of the shorts.
Price bubbles are rare. We throw the term around quite loosely nowadays, having recently experienced two bubbles, the Internet stock bubble ending in 2000 and the housing bubble. But bubbles remain the exception, not the rule. There are some characteristics common to all bubbles. You have to start with a good underlying story or investment premise, like a brand new technology or a belief that housing prices only go up. The story is usually legitimate to begin with, but everyone gets carried away and higher prices eventually outstrip the underlying story. But the price rise creates fortunes for those that know when to exit. The silver story is more compelling than any prior bubble. So will be the overrun in price.
You can only have a bubble if large numbers of people participate and there is widespread borrowing to buy the bubble asset. At the end, people are buying only because prices are rising. I believe this will occur in silver and we must be ready to exit when that takes place. But the point is that we are so far away from these excesses that it’s unnecessary to worry about them now. It is wise to put the coming silver super price bubble into proper perspective. We’re not close to it yet.
And please keep this in mind – with no other bubble did we have these conditions; a large and concentrated short position, a looming physical shortage, a downward manipulation that might be attacked by regulators, the entry into the investment equation of the most populous nation on earth, and a prospective industrial user inventory buying panic. It is hard to imagine how silver won’t be the largest bubble in history. You’ve just been given an invitation to participate beforehand.
Copyright © 2009 Ted Butler
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Showing posts with label butler. Show all posts
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11 September 2009
28 July 2009
Silvers been far too cheap for too long ~ is it planning a divorce from Gold
Old-time country music fans will recognize the title as one of the late Tammy Wynette’s greatest hits http://www.youtube.com/watch?v=S9J7XE-ctMU Men and women are alike in uncountable ways, yet are also remarkably different. In every species, the female is from Venus, the male from Mars. Sometimes, even relationships that have endured for the longest time end in divorce.
Today, I write of the pending divorce I see in a relationship that the world has grown comfortable in observing for hundreds of years. As such, when it becomes obvious that the two will part ways, most will be shocked and in disbelief. Yet there will be no reconciliation and the split should prove permanent. The divorce I speak of is in the price relationship between gold and silver.
Gold will still be gold, of course, and will remain as it has been since the dawn of civilization, valued by the world’s inhabitants for its beauty and rarity. As will silver. Each will exist forever, as they have existed through the ages. Each will rise and fall in price based upon supply and demand and investment flows and the presence (or absence) of manipulation. Nothing can change that. What will change is the price relationship they have shared in everyone’s living memory. They are about to begin separate journeys.
In the coming price relationship dissolution, silver will be the cause of the break up. That’s because it is the price of silver, relative to gold, that is out of line. Just like a spouse long-abused in a one-sided relationship, silver will be the one to blossom once the marriage is terminated. Certainly, I am not suggesting that gold has abused silver, as inert materials can’t possible abuse anything. The abuse of the silver price has come from the long-running manipulation. It is the coming end of the silver manipulation that will set silver free to begin its own new price life.
One of the irreconcilable differences in the gold-silver price relationship is something quite visible. Yes, both have been manipulated in price by the concentrated short selling of the big bullion banks on the COMEX. But the amount of short selling in gold never exceeded the amount of real gold existing in the world that could conceivably cover the short position. For example, the current total commercial net short position in COMEX gold futures sits at 20.4 million ounces (as of July 21). The net short position of the 4 largest traders is 16.1 million ounces. That’s a lot in terms of dollars, almost $20 billion and $16 billion respectively, but not so much in terms of the amount of gold bullion in the world (2 billion ounces). The total net short position in COMEX gold futures represents just 1% of the gold bullion in existence.
Half of the gold bullion in the world is owned by government entities (remember, I speak of gold bullion only, not the total 5 billion ounces of gold said to exist in all forms). The US government, alone, is reported to own 260 million ounces of gold. If the big 4 gold shorts really got into trouble, just 6% of the US Government’s gold stash could conceivably be used to bail them out completely and make delivery, if necessary. Let me be very clear here - I’m not saying this will happen. I am saying it could happen. If the US, or any number of other world governments decided that a gold short covering price fire must be extinguished, they could put it out with physical material if they chose. Not would, necessarily, but could.
This is not the case in silver. The 4 largest traders are net short 235 million ounces on COMEX futures. While that’s not very large in dollars, at just over $3 billion, it is enormous in terms of the amount of silver bullion in existence. The big 4 in silver are short more than 23 times what the big 4 are short in gold, relative to above ground bullion inventories. But here’s the kicker - there is no possible way for any government entity to extinguish a silver short covering price fire by actual delivery of government owned silver. That potential price smothering material simply does not exist in government hands. The US Government, the world’s largest owner of gold reserves, and formerly the largest owner of silver reserves, now owns no silver. For those that are convinced that there is government involvement in the gold and silver price manipulations, this is a difference worth considering.
This is not the only difference that will lead to a gold/silver price break up. The reason we have such a mismatch in the relative size of the short positions compared to world inventories, lies in the very nature of what silver has evolved into over the past century. Silver became a vital industrial material and its formerly large inventories have been consumed to the point where there is less silver bullion in existence than there is gold bullion. That one in a million of the world’s citizens know this fact, promises to make the gold/silver price divorce, when it occurs, as sensational as the most notorious celebrity split. Only instead of reading of racy details in a trashy tabloid, the specifics will be carried in the financial press and in price reporting. The growing awareness of the particulars of the divorce will drive many to want to buy silver.
I have long anticipated this divorce, but now its timing seems at hand. This has been the recent theme of my articles, where I have evoked images of this could be the last time and game changers. As an analyst studying supply and demand fundamentals, timing is not normally the focus of my attention. If I am to be wrong, it will likely come on the timing side. That said, there are two features in the current environment that may bear on the timing of the coming gold/silver split. Whether this is the time should be revealed in these two factors.
One, the current relative structure in the gold and silver futures markets, as defined by the Commitment of Traders Report (COT), suggest the divorce may be near. In gold, the commercials are shorting heavily again, showing no fear in selling into the recent price rally. So far, the big shorts have not yet shown a similar willingness to short additional silver contracts. This holds the promise that they may not short on further price gains. Simply put, if the big silver shorts don’t sell additional contracts, the silver price will fly and the divorce papers will be filed. If they do sell, the price marriage will be held together temporarily.
The second factor involved is the course of the CFTC in dealing with the issue of position limits in silver. This is directly related to whether the big shorts sell additional silver contracts. If the Commission does the right thing (as I hope), and levels the playing field in silver, then the big shorts can’t sell more COMEX silver short. If that occurs, as it should, the gold/silver divorce will be final. If not, the bad marriage will linger.
Just like a marriage that never should have occurred, given the real facts, silver has no business being less than 2% of the price of gold. Whether it deserves to be equal to gold in price is debatable, but it certainly doesn’t make sense for gold to be 70, or 50, or even 20 times more than the price of silver. On any reasonable and objective measurement, from annual production to existing inventories, the gold/silver price relationship is lopsided. You may think my divorce analogy is a bit extreme, but the coming price out-performance of silver compared to gold will reward those who back the real winner. The current price relationship is on the rocks. Those that can switch gold holdings to silver should do so without delay.
Today, I write of the pending divorce I see in a relationship that the world has grown comfortable in observing for hundreds of years. As such, when it becomes obvious that the two will part ways, most will be shocked and in disbelief. Yet there will be no reconciliation and the split should prove permanent. The divorce I speak of is in the price relationship between gold and silver.
Gold will still be gold, of course, and will remain as it has been since the dawn of civilization, valued by the world’s inhabitants for its beauty and rarity. As will silver. Each will exist forever, as they have existed through the ages. Each will rise and fall in price based upon supply and demand and investment flows and the presence (or absence) of manipulation. Nothing can change that. What will change is the price relationship they have shared in everyone’s living memory. They are about to begin separate journeys.
In the coming price relationship dissolution, silver will be the cause of the break up. That’s because it is the price of silver, relative to gold, that is out of line. Just like a spouse long-abused in a one-sided relationship, silver will be the one to blossom once the marriage is terminated. Certainly, I am not suggesting that gold has abused silver, as inert materials can’t possible abuse anything. The abuse of the silver price has come from the long-running manipulation. It is the coming end of the silver manipulation that will set silver free to begin its own new price life.
One of the irreconcilable differences in the gold-silver price relationship is something quite visible. Yes, both have been manipulated in price by the concentrated short selling of the big bullion banks on the COMEX. But the amount of short selling in gold never exceeded the amount of real gold existing in the world that could conceivably cover the short position. For example, the current total commercial net short position in COMEX gold futures sits at 20.4 million ounces (as of July 21). The net short position of the 4 largest traders is 16.1 million ounces. That’s a lot in terms of dollars, almost $20 billion and $16 billion respectively, but not so much in terms of the amount of gold bullion in the world (2 billion ounces). The total net short position in COMEX gold futures represents just 1% of the gold bullion in existence.
Half of the gold bullion in the world is owned by government entities (remember, I speak of gold bullion only, not the total 5 billion ounces of gold said to exist in all forms). The US government, alone, is reported to own 260 million ounces of gold. If the big 4 gold shorts really got into trouble, just 6% of the US Government’s gold stash could conceivably be used to bail them out completely and make delivery, if necessary. Let me be very clear here - I’m not saying this will happen. I am saying it could happen. If the US, or any number of other world governments decided that a gold short covering price fire must be extinguished, they could put it out with physical material if they chose. Not would, necessarily, but could.
This is not the case in silver. The 4 largest traders are net short 235 million ounces on COMEX futures. While that’s not very large in dollars, at just over $3 billion, it is enormous in terms of the amount of silver bullion in existence. The big 4 in silver are short more than 23 times what the big 4 are short in gold, relative to above ground bullion inventories. But here’s the kicker - there is no possible way for any government entity to extinguish a silver short covering price fire by actual delivery of government owned silver. That potential price smothering material simply does not exist in government hands. The US Government, the world’s largest owner of gold reserves, and formerly the largest owner of silver reserves, now owns no silver. For those that are convinced that there is government involvement in the gold and silver price manipulations, this is a difference worth considering.
This is not the only difference that will lead to a gold/silver price break up. The reason we have such a mismatch in the relative size of the short positions compared to world inventories, lies in the very nature of what silver has evolved into over the past century. Silver became a vital industrial material and its formerly large inventories have been consumed to the point where there is less silver bullion in existence than there is gold bullion. That one in a million of the world’s citizens know this fact, promises to make the gold/silver price divorce, when it occurs, as sensational as the most notorious celebrity split. Only instead of reading of racy details in a trashy tabloid, the specifics will be carried in the financial press and in price reporting. The growing awareness of the particulars of the divorce will drive many to want to buy silver.
I have long anticipated this divorce, but now its timing seems at hand. This has been the recent theme of my articles, where I have evoked images of this could be the last time and game changers. As an analyst studying supply and demand fundamentals, timing is not normally the focus of my attention. If I am to be wrong, it will likely come on the timing side. That said, there are two features in the current environment that may bear on the timing of the coming gold/silver split. Whether this is the time should be revealed in these two factors.
One, the current relative structure in the gold and silver futures markets, as defined by the Commitment of Traders Report (COT), suggest the divorce may be near. In gold, the commercials are shorting heavily again, showing no fear in selling into the recent price rally. So far, the big shorts have not yet shown a similar willingness to short additional silver contracts. This holds the promise that they may not short on further price gains. Simply put, if the big silver shorts don’t sell additional contracts, the silver price will fly and the divorce papers will be filed. If they do sell, the price marriage will be held together temporarily.
The second factor involved is the course of the CFTC in dealing with the issue of position limits in silver. This is directly related to whether the big shorts sell additional silver contracts. If the Commission does the right thing (as I hope), and levels the playing field in silver, then the big shorts can’t sell more COMEX silver short. If that occurs, as it should, the gold/silver divorce will be final. If not, the bad marriage will linger.
Just like a marriage that never should have occurred, given the real facts, silver has no business being less than 2% of the price of gold. Whether it deserves to be equal to gold in price is debatable, but it certainly doesn’t make sense for gold to be 70, or 50, or even 20 times more than the price of silver. On any reasonable and objective measurement, from annual production to existing inventories, the gold/silver price relationship is lopsided. You may think my divorce analogy is a bit extreme, but the coming price out-performance of silver compared to gold will reward those who back the real winner. The current price relationship is on the rocks. Those that can switch gold holdings to silver should do so without delay.
28 October 2008
Time to buy Silver is my guess
A big supply shock may be in the works.~ kev
In a moment, I’d like to describe a new development in silver that should prove quite bullish to the price, but first I’d like to review some continuing facts that are significant in their own right. It would appear that the confluence of many factors point to sharply higher silver prices dead ahead. Yes, I know the price has recently collapsed. Ironically, it is that very price smash that is the basis for the coming price launch higher.
Since the recent top in July, the price of silver has undergone a dramatic collapse. As proven by data released in government reports, a large U.S. bank or two sold a massive number of COMEX silver futures contracts into the top and subsequently has covered a good number of those short contracts on the resultant price decline. Quite simply, this is the single most important factor behind the price collapse. The latest data appear to indicate that the price decline is now largely behind us.
The latest data in the Commitment or Traders Report (COT) indicate a near-record shift in market structure over the past three months. The total net commercial silver short position has been reduced by approximately 50,000 contracts (250 million ounces). This is an absolutely massive amount of commercial buying, and has pushed many COT measurements to their most extreme bullish readings in years. Similar commercial buying has occurred in COMEX gold futures.
Make no mistake, this massive commercial buying was no accident. This was precisely why silver and gold dropped sharply, namely, to enable the commercials to buy at the expense of speculative long liquidation. The commercials don’t do anything on this scale by accident. To think otherwise is naïve. Ask yourself this - if silver’s price smash did indicate we faced a long term future of lower silver prices, then why would the commercials, the dominators of the market, buy every contract they could get their hands on?
By no small coincidence, other unusual factors suggest silver prices should soon embark on a significant price rally. A notable increase in demand for 1000 oz bars can be seen in tightening price differentials between nearby futures contract months and by reports in the physical market, a marked increase in deliveries in the nearby October silver delivery contract, as well as recent withdrawals in COMEX silver inventories from those taking delivery on October futures. All are supportive of a pending shortage in 1000 oz silver bars, the industry unit of trade. When the shortage of 1000 oz bars becomes apparent, all talk that silver has only experienced a "retail" shortage, will be dashed. Coupled with the bullish COT structure, it adds up to strong upside price potential ahead.
But the sharply lower price of silver and other commodities has introduced a new bullish development that, quite frankly, I had not anticipated. It has resulted in unintended consequences that all should recognize shortly. So potentially bullish is this new factor that it appears to be on the order of a coming shock to the silver pricing structure.
It is said, in the world of commodities, that the cure for low prices, is low prices. In other words, according to the law of supply and demand, low prices discourage production and encourage consumption to the point at which the low prices are replaced with higher prices. The unprecedented deep declines in the price of silver and base metals, such as copper, lead, zinc, and nickel promise to disrupt the production of these metals. After all, no one can produce at a loss indefinitely. Almost without exception, the price of all these industrial metals has fallen deeply below the cost of production for most producers. This is not just anticipatory, as daily reports confirm continuing mining production cutbacks. In addition, smelter cutbacks, especially in China, the world’s largest refiner, have been ongoing for months.
What makes the sudden price declines so unusual is that have apparently occurred not so much due to specific supply/demand fundamentals in the metals in question, but more to general dark sentiment about general overall concerns about prospective industrial demand and credit issues. All commodities have been smashed, almost indiscriminately. But there is a highly unusual feature to the price declines. For the first time in half a century or longer, the price declines have come at a time of generally low inventory levels, in marked contrast to prior price declines.
Normally, the industrial metal cycle tops out with high prices amid high inventories. Then, the high prices diminish demand, which in turn pressures price, often to levels below the cost of production. Mines react to the low prices by curtailing production or shutting down, which stimulates demand and eats up the high inventories. When inventories reach levels too low to support further draw downs, prices rise until the next peak in prices and inventories. These normal free market cycles take years to unfold.
This time, prices have collapsed even though inventories are on the low side. Therefore, in spite of the fears of reduced industrial consumption, because of the sharply lower prices, production promises to fall faster, and the already low inventories can’t support draw downs for long. Although it is not currently widely expected, even in recessionary times, shortages can and will occur if supply (production and inventory draw downs) can’t satisfy demand, even though that demand may be reduced.
Separately, the resource boom over the past five years was characterized by a noteworthy lack of increase in additional production capacity of most non-ferrous metals. Now, with dramatic postponements and cancellations of new mining projects, due to economic and credit concerns, there will be significantly less production available if and when shortages occur.
The net result for silver could be profound. Not only is the current price below the cost of production for mines in which silver is the primary source of revenue, but the price of base metals like zinc, lead and copper, is also below the cost of production. Since the by-product silver from the mining of these three metals account for a full 60% of total silver mine production (400 million oz out of a total 670 million oz annually), the expected reduction in base metal production will have an exaggerated impact on silver production. Throw in the 200 million oz primary annual silver mine production and the vast majority of total silver mine production is in jeopardy. Finally, recycled silver of some 200 million ounces is perhaps the most price sensitive of all. Talk about the unintended consequences of sharply lower prices.
This is the first time since I have been studying silver that total production has been in such sudden danger of a sharp decline. In fact, it would appear to me that this could be the perfect bullish storm for silver. Please consider the facts. World silver inventories are the lowest they have been in hundreds of years, thanks to a century of industrial consumption. This is precisely at the same time of the most serious threat to production in memory. More than any commodity, silver has been demonstrating real signs of tightness, even before impending widespread production cuts.
What really sets silver apart from the other industrial metals that may quickly go into related shortage situations if prices remain depressed, is the special dual role of silver, as both a vital industrial material and as a primary investment asset that can be owned directly by investors of all means. Silver, like gold, is an asset desired by investors, particularly when financial conditions are unsettled. Copper, lead and zinc are not such assets. So whereas we can have easily see industrial shortages and sharply higher prices for base metals, even in a recession, if production declines enough, those sharply higher prices will not be accompanied by ordinary investors rushing to buy zinc coins or bars of lead. That, most definitely, will be case in silver.
In fact, as I wrote last week, it is not just that investors are likely to buy silver, there is already an historic silver investment rush in force. And this investment rush is even more significant since it has developed only in the past three years, after decades of net investment selling of silver. Again, I couldn’t make these things up if I tried. And please remember, even in a recession with lower industrial demand, if users can’t get the silver supplies they need, they will panic at some point and rush to build inventories.
I did not anticipate the brutal decline to below $9 an ounce. Fortunately, those who hold real silver on a non-margined basis, my consistent public advice, still hold their silver. The rise in premiums of many items, particularly U.S. Silver Eagles, has minimized the pain of the decline. New buyers, however, have just been given a gift beyond description. The collapse in price has had nothing to do with the merits of silver, but will have everything to do with the coming explosive rally. The uneconomic low price will shock the price higher.
In a moment, I’d like to describe a new development in silver that should prove quite bullish to the price, but first I’d like to review some continuing facts that are significant in their own right. It would appear that the confluence of many factors point to sharply higher silver prices dead ahead. Yes, I know the price has recently collapsed. Ironically, it is that very price smash that is the basis for the coming price launch higher.
Since the recent top in July, the price of silver has undergone a dramatic collapse. As proven by data released in government reports, a large U.S. bank or two sold a massive number of COMEX silver futures contracts into the top and subsequently has covered a good number of those short contracts on the resultant price decline. Quite simply, this is the single most important factor behind the price collapse. The latest data appear to indicate that the price decline is now largely behind us.
The latest data in the Commitment or Traders Report (COT) indicate a near-record shift in market structure over the past three months. The total net commercial silver short position has been reduced by approximately 50,000 contracts (250 million ounces). This is an absolutely massive amount of commercial buying, and has pushed many COT measurements to their most extreme bullish readings in years. Similar commercial buying has occurred in COMEX gold futures.
Make no mistake, this massive commercial buying was no accident. This was precisely why silver and gold dropped sharply, namely, to enable the commercials to buy at the expense of speculative long liquidation. The commercials don’t do anything on this scale by accident. To think otherwise is naïve. Ask yourself this - if silver’s price smash did indicate we faced a long term future of lower silver prices, then why would the commercials, the dominators of the market, buy every contract they could get their hands on?
By no small coincidence, other unusual factors suggest silver prices should soon embark on a significant price rally. A notable increase in demand for 1000 oz bars can be seen in tightening price differentials between nearby futures contract months and by reports in the physical market, a marked increase in deliveries in the nearby October silver delivery contract, as well as recent withdrawals in COMEX silver inventories from those taking delivery on October futures. All are supportive of a pending shortage in 1000 oz silver bars, the industry unit of trade. When the shortage of 1000 oz bars becomes apparent, all talk that silver has only experienced a "retail" shortage, will be dashed. Coupled with the bullish COT structure, it adds up to strong upside price potential ahead.
But the sharply lower price of silver and other commodities has introduced a new bullish development that, quite frankly, I had not anticipated. It has resulted in unintended consequences that all should recognize shortly. So potentially bullish is this new factor that it appears to be on the order of a coming shock to the silver pricing structure.
It is said, in the world of commodities, that the cure for low prices, is low prices. In other words, according to the law of supply and demand, low prices discourage production and encourage consumption to the point at which the low prices are replaced with higher prices. The unprecedented deep declines in the price of silver and base metals, such as copper, lead, zinc, and nickel promise to disrupt the production of these metals. After all, no one can produce at a loss indefinitely. Almost without exception, the price of all these industrial metals has fallen deeply below the cost of production for most producers. This is not just anticipatory, as daily reports confirm continuing mining production cutbacks. In addition, smelter cutbacks, especially in China, the world’s largest refiner, have been ongoing for months.
What makes the sudden price declines so unusual is that have apparently occurred not so much due to specific supply/demand fundamentals in the metals in question, but more to general dark sentiment about general overall concerns about prospective industrial demand and credit issues. All commodities have been smashed, almost indiscriminately. But there is a highly unusual feature to the price declines. For the first time in half a century or longer, the price declines have come at a time of generally low inventory levels, in marked contrast to prior price declines.
Normally, the industrial metal cycle tops out with high prices amid high inventories. Then, the high prices diminish demand, which in turn pressures price, often to levels below the cost of production. Mines react to the low prices by curtailing production or shutting down, which stimulates demand and eats up the high inventories. When inventories reach levels too low to support further draw downs, prices rise until the next peak in prices and inventories. These normal free market cycles take years to unfold.
This time, prices have collapsed even though inventories are on the low side. Therefore, in spite of the fears of reduced industrial consumption, because of the sharply lower prices, production promises to fall faster, and the already low inventories can’t support draw downs for long. Although it is not currently widely expected, even in recessionary times, shortages can and will occur if supply (production and inventory draw downs) can’t satisfy demand, even though that demand may be reduced.
Separately, the resource boom over the past five years was characterized by a noteworthy lack of increase in additional production capacity of most non-ferrous metals. Now, with dramatic postponements and cancellations of new mining projects, due to economic and credit concerns, there will be significantly less production available if and when shortages occur.
The net result for silver could be profound. Not only is the current price below the cost of production for mines in which silver is the primary source of revenue, but the price of base metals like zinc, lead and copper, is also below the cost of production. Since the by-product silver from the mining of these three metals account for a full 60% of total silver mine production (400 million oz out of a total 670 million oz annually), the expected reduction in base metal production will have an exaggerated impact on silver production. Throw in the 200 million oz primary annual silver mine production and the vast majority of total silver mine production is in jeopardy. Finally, recycled silver of some 200 million ounces is perhaps the most price sensitive of all. Talk about the unintended consequences of sharply lower prices.
This is the first time since I have been studying silver that total production has been in such sudden danger of a sharp decline. In fact, it would appear to me that this could be the perfect bullish storm for silver. Please consider the facts. World silver inventories are the lowest they have been in hundreds of years, thanks to a century of industrial consumption. This is precisely at the same time of the most serious threat to production in memory. More than any commodity, silver has been demonstrating real signs of tightness, even before impending widespread production cuts.
What really sets silver apart from the other industrial metals that may quickly go into related shortage situations if prices remain depressed, is the special dual role of silver, as both a vital industrial material and as a primary investment asset that can be owned directly by investors of all means. Silver, like gold, is an asset desired by investors, particularly when financial conditions are unsettled. Copper, lead and zinc are not such assets. So whereas we can have easily see industrial shortages and sharply higher prices for base metals, even in a recession, if production declines enough, those sharply higher prices will not be accompanied by ordinary investors rushing to buy zinc coins or bars of lead. That, most definitely, will be case in silver.
In fact, as I wrote last week, it is not just that investors are likely to buy silver, there is already an historic silver investment rush in force. And this investment rush is even more significant since it has developed only in the past three years, after decades of net investment selling of silver. Again, I couldn’t make these things up if I tried. And please remember, even in a recession with lower industrial demand, if users can’t get the silver supplies they need, they will panic at some point and rush to build inventories.
I did not anticipate the brutal decline to below $9 an ounce. Fortunately, those who hold real silver on a non-margined basis, my consistent public advice, still hold their silver. The rise in premiums of many items, particularly U.S. Silver Eagles, has minimized the pain of the decline. New buyers, however, have just been given a gift beyond description. The collapse in price has had nothing to do with the merits of silver, but will have everything to do with the coming explosive rally. The uneconomic low price will shock the price higher.
14 October 2008
The Masters Of Destruction
On Friday, October 10, the price of silver crashed, falling almost 25% from its price level 24 hours earlier. It is down roughly 50% from where it traded a few months ago. While a broad array of markets fell sharply in price that day and over the past few months, from oil to gold to grain to just about every commodity, none fell as sharply as silver. As regular market observers know, this is usually the case. I intend to explore why this is usually the case and what I think readers should do about it.
Does the sharp price decline mean that conditions have changed and that silver is no longer a great investment? I know it is human nature to assume that when the price of a commodity drops sharply in price, that there must be more of that commodity coming to market, or less demand. This is what we have all learned. But the facts in silver suggest something else entirely.
In my opinion, if conditions have changed, they have become more compelling and silver is an even better investment as a result of the price markdown. There is no great current or prospective increase in the supply of real metal coming to market. And if industrial demand does fall in the future due to deteriorating world economic conditions, it will be accompanied with falling production at current prices. Certainly, there is no evidence of anything but phenomenal investment demand.
Premiums on virtually every form of real silver have been sky-rocketing recently, especially on Friday’s price collapse. These premiums are the highest they have been in history, reaching 60% for certain items, like Silver Eagles. This is the clearest proof there is no developing glut of silver, as the price declines on the COMEX might otherwise suggest to some. At a minimum, the premiums dictate that none of this silver will be melted into bullion.
The purpose of this article is not primarily intended to encourage you to buy real silver, as it seems obvious to me that you understand that already. I’d rather explain the price decline, and what you can do about it (aside from continuing to buy silver).
The recent price decline was all about forcibly liquidating as many leveraged silver holders as possible, so the big shorts could buy back their short contracts. That is always the cause for major price declines. It has become almost impossible to force those who hold silver on a non-margined basis to sell on these price declines. Instead, investors buy real silver on the declines. The growing premiums prove that. All that’s left for the big shorts is to force those holding silver on margin to sell. That is done by rigging sharp price drops unexpectedly. This is the heart of the manipulation.
Never has there been as wide a disconnect between the price of a commodity traded on a licensed exchange and the products of that commodity in the real world. This raises the issue that no true price discovery is occurring, and that paper trading is setting prices. This violates basic commodity law. All that remains is a contract delivery default and/or disorderly pricing to the upside.
It is one thing to claim manipulation, and quite another to prove it. But the proof in this case lies in common sense and in the government’s own public data. The simplest proof of manipulation is in asking the question, what would the price have been absent the manipulators’ actions? What would the price of silver have been if one or two U.S. banks hadn’t sold a massive amount short in July? The only answer is that the price would be much higher absent that concentrated selling.
Coincident with Friday’s big price smash was the release of the October Bank Participation Report from the CFTC http://www.cftc.gov/marketreports/bankparticipation/index.htm
This is the report I wrote about in "The Smoking Gun" back on August 22, which documented that one or two U.S. banks sold short the equivalent of 20% of the world annual production of silver (and 10% of world gold production) during July, followed by a severe price decline.
The new data indicates that the big US bank(s), over the past two months, bought back 10,500 contracts of the 27,600 sold in July. Since the report was as of Oct 7, more contracts were most likely bought back on Friday. Calculating that the big bank(s) made a $6 oz profit per contract on the closeouts, indicates it realized more than a $315 million profit on the closed sales. In addition, at Friday’s closing price, further realized and unrealized profits on the remaining silver short position, amount to another $600 million for the big bank(s). To those who claim that they see no motive in why someone would manipulate the price of silver lower, here are 900 million reasons. Similar numbers apply to gold.
Since futures trading is a zero-sum equation, this means that the $900+ million made by the big US bank(s) has come from long futures traders’ pockets, dollar for dollar. Whatever some futures traders make, other futures traders must lose. No exceptions. Of course, just because someone makes what someone else loses does not necessarily constitute manipulation, no matter how large the amounts involved. What constitutes manipulation is concentration, intent and control.
That the big U.S. bank(s) had, and has, a concentrated silver short position is beyond question. In fact, the silver short position has been the largest concentrated position in history, by every reasonable measure. The data proves this. It is this concentration and control that is solely responsible for the severe price decline in silver. It is absurd to assume there was no intent to manipulate, not with a billion dollars’ worth of motivation.
There is nothing wrong with an entity making a huge profit, as long as that entity has done it fair and square. But the $900 million profit by the big U.S. bank(s) was not earned fairly or legally. It was theft through market control and dominance. If this wasn’t so obvious and proven by their own data, the CFTC would not be actively investigating a manipulation in silver. But a deliberate and thorough investigation is not enough with a crime in progress.
I have never publicly advocated that anyone buy silver on margin, futures or otherwise, although I do understand the attraction and it is my background. I have been clear that real silver should be bought on a cash basis. If you buy silver (or anything) on margin, you must be prepared for unexpected trouble in the form of sharp sell-offs requiring additional funds. Still, it is not right that margined silver holders should be cheated, by a crooked U.S. bank or anyone else, out of $900 million or any amount. Unfortunately, the problem goes much deeper than futures traders being cheated.
As large as the $900 million that the U.S. bank extracted from COMEX long silver futures holders may be, it is small compared to the total damage inflicted, as a result of this manipulation. After all, it wasn’t just long silver futures holders who were damaged. Far from it. When the total damage is tallied, it should become clear why I would refer to the big U.S. bank(s) that shorted COMEX silver in July, as the Masters of Destruction.
Since there are one billion ounces of silver bullion equivalent in existence, the value of that bullion was approximately $19 billion in July, when the big U.S bank shorted COMEX silver in massive quantities. As a result of that shorting and all the bullying and corrupt market dirty tricks since then, the value of total silver bullion was $10 billion on Friday, down $9 billion in little more than two months. That’s ten times the amount that the Masters of Destruction stole from long futures traders. Talk about collateral damage.
Yes, it’s true that the manipulation has created an incredible further buying opportunity in silver. And it’s also true that those holding silver on a fully paid for basis, still hold their silver and will profit from the certain price gains in the future. But that does not excuse the manipulation, nor minimize the loss of value. Who the heck does this big U.S. bank think it is, that it can inflict that kind of damage on innocent investors in silver?
The collateral damage is not limited to silver bullion investors. Shareholders in silver mining equities have suffered, at least, an additional $10 billion in losses over the past couple of months, as a direct result of the manipulated 50% decline in silver prices by one or two U.S. banks. We’re now up to 20 times the $900 million gained by the futures manipulators so far. Bear with me, as I’m just getting warmed up.
(I’m confining my remarks to silver here, but let me assure you that the equivalent total damage in gold is much greater. Quite literally, where the losses to silver bullion and mining stock investors run to tens of billions of dollars, the losses to gold bullion investors and mining shareholders runs into the many hundreds of billions of dollars. All courtesy of the Masters of Destruction.)
Aside from the damage to shareholders in silver mining stocks, the companies themselves, as ongoing concerns, have been severely damaged. The manipulation has driven the price well below the cost of production for just about all the primary silver producers. Just look at their stock prices. In addition, low base metal prices has meant that the current price of silver is now below the cost of production on a by-product basis as well. This guarantees that if silver prices don’t rise dramatically and soon, significant silver production will be eliminated. I don’t understand how mine management can sit by and tolerate this without fighting back.
Further, the collateral damage being inflicted on silver mining and exploration companies will curtail not only current production. Given the long lead times required to bring a silver mining prospect to production, the artificial low prices are causing unknown delay to future production. Thus, the manipulation promises long-term damage to the production of a vital industrial resource. It may be bullish for prices long term, but it is wrong.
While the industrial silver consumers may be reaping some small advantage in buying silver cheaper today than they would if silver prices weren’t artificially depressed, they stand to lose even more than the miners in the long run. Artificially depressed prices in anything must cause a shortage at some point. That’s supply/demand 101. This can be seen on the retail side of silver presently. When this shortage becomes obvious on the wholesale side, it will be the industrial silver consumers who will feel pain beyond what the producers currently are experiencing. It will be the user panic to buy inventory and keep production lines running that will cause prices to soar beyond reason.
Perhaps the worst collateral damage of the manipulation by the big U.S. bank(s) is not to futures traders, innocent bullion or mining share investors, the miners themselves, or the industrial users. The worst damage inflicted by the Masters of Destruction is to our important institutions, like our licensed exchanges and regulatory institutions, and to our confidence in our markets. Trust is hard to earn and easy to lose.
The CME Group, owners of the Chicago Board of Trade, the Chicago Mercantile Exchange, and now the NYMEX/COMEX, is the largest and most important futures exchange in the world. They stand to lose the most of all in the silver manipulation. If there is any silver delivery default or disorderly pricing event, they would appear to be responsible. Especially since they have been repeatedly warned. They have their reputation and potential massive litigation costs at risk. They are the frontline regulator, as dictated by law. Yet they refuse to respond to public allegations of manipulation in the COMEX silver market, in spite of hundreds of us contacting them. That is deplorable.
The CFTC has bowed to public pressure and has initiated an investigation by their Enforcement Division. Obviously, the Commission sees sufficient evidence to investigate, otherwise they would not waste taxpayer money on a useless investigation. Yet the evidence is their own data, which they and the CME Group refuse to explain. That the alleged manipulation is very much a crime in progress inflicting great collateral damage and neither regulator acts against it results in a loss of confidence in our regulators and markets. It diminishes us all.
That a crooked U.S. bank, in the quest to illegally generate a profit, would poison the water for so many unrelated and innocent parties is unconscionable. We have enough financial problems in the world presently with declining asset values. There is no room for the intentional destruction of values and markets. This blatant silver manipulation must not be allowed to stand.
The great financial crisis that currently impacts us all is the direct result of a regulatory failure to restrain a few wheeler dealers on Wall Street, who went hog wild in concocting crazy derivatives for personal profit. Now, we are left to clean up their mess, at great collective cost, both monetarily and to our faith in our institutions. Admittedly, silver is a much smaller market than the mortgage and credit markets, but the same principle applies, namely, many being damaged by a few. Plus, the damage has already been done in mortgages, while silver is ongoing.
In the great financial credit crisis in which we are presently engulfed, there are no simple solutions. In silver, there is a simple and effective solution. We must pressure the regulators to enforce the law and eliminate what remains of the concentrated short position in silver, never to return. Then we must insist that the short manipulator(s) be punished for the full extent of the damage it has inflicted on everyone.
When the CFTC finally admits what is already common knowledge to most observers, that is, that there has been an ongoing manipulation in silver, it will not be sufficient to base any resultant fines on just the damage in the futures market. All collateral damage must be considered. Don’t fine the big U.S. bank $1 billion for their ill-gotten futures market gains, fine them $20 billion or more for all the collateral damage they caused. And the CFTC shouldn’t remit any fines collected to the Treasury. A special fund should be established to compensate actual victims.
The only reason the CFTC is investigating silver, at all, is because you took the time to write to them. You must write to them again. And keep on writing. I assure you it does have an impact. In addition to the usual addresses of the Commissioners, the Inspector General, and the Chief Regulatory official of the CME Group, I am adding the address of the Acting Director of the Enforcement Division, Mr. Stephen J. Obie. It’s important that you let them know how you feel.
Wlukken@cftc.gov
Mdunn@cftc.goc
Bchilton@cftc.gov
Jsommers@cftc.gov
Does the sharp price decline mean that conditions have changed and that silver is no longer a great investment? I know it is human nature to assume that when the price of a commodity drops sharply in price, that there must be more of that commodity coming to market, or less demand. This is what we have all learned. But the facts in silver suggest something else entirely.
In my opinion, if conditions have changed, they have become more compelling and silver is an even better investment as a result of the price markdown. There is no great current or prospective increase in the supply of real metal coming to market. And if industrial demand does fall in the future due to deteriorating world economic conditions, it will be accompanied with falling production at current prices. Certainly, there is no evidence of anything but phenomenal investment demand.
Premiums on virtually every form of real silver have been sky-rocketing recently, especially on Friday’s price collapse. These premiums are the highest they have been in history, reaching 60% for certain items, like Silver Eagles. This is the clearest proof there is no developing glut of silver, as the price declines on the COMEX might otherwise suggest to some. At a minimum, the premiums dictate that none of this silver will be melted into bullion.
The purpose of this article is not primarily intended to encourage you to buy real silver, as it seems obvious to me that you understand that already. I’d rather explain the price decline, and what you can do about it (aside from continuing to buy silver).
The recent price decline was all about forcibly liquidating as many leveraged silver holders as possible, so the big shorts could buy back their short contracts. That is always the cause for major price declines. It has become almost impossible to force those who hold silver on a non-margined basis to sell on these price declines. Instead, investors buy real silver on the declines. The growing premiums prove that. All that’s left for the big shorts is to force those holding silver on margin to sell. That is done by rigging sharp price drops unexpectedly. This is the heart of the manipulation.
Never has there been as wide a disconnect between the price of a commodity traded on a licensed exchange and the products of that commodity in the real world. This raises the issue that no true price discovery is occurring, and that paper trading is setting prices. This violates basic commodity law. All that remains is a contract delivery default and/or disorderly pricing to the upside.
It is one thing to claim manipulation, and quite another to prove it. But the proof in this case lies in common sense and in the government’s own public data. The simplest proof of manipulation is in asking the question, what would the price have been absent the manipulators’ actions? What would the price of silver have been if one or two U.S. banks hadn’t sold a massive amount short in July? The only answer is that the price would be much higher absent that concentrated selling.
Coincident with Friday’s big price smash was the release of the October Bank Participation Report from the CFTC http://www.cftc.gov/marketreports/bankparticipation/index.htm
This is the report I wrote about in "The Smoking Gun" back on August 22, which documented that one or two U.S. banks sold short the equivalent of 20% of the world annual production of silver (and 10% of world gold production) during July, followed by a severe price decline.
The new data indicates that the big US bank(s), over the past two months, bought back 10,500 contracts of the 27,600 sold in July. Since the report was as of Oct 7, more contracts were most likely bought back on Friday. Calculating that the big bank(s) made a $6 oz profit per contract on the closeouts, indicates it realized more than a $315 million profit on the closed sales. In addition, at Friday’s closing price, further realized and unrealized profits on the remaining silver short position, amount to another $600 million for the big bank(s). To those who claim that they see no motive in why someone would manipulate the price of silver lower, here are 900 million reasons. Similar numbers apply to gold.
Since futures trading is a zero-sum equation, this means that the $900+ million made by the big US bank(s) has come from long futures traders’ pockets, dollar for dollar. Whatever some futures traders make, other futures traders must lose. No exceptions. Of course, just because someone makes what someone else loses does not necessarily constitute manipulation, no matter how large the amounts involved. What constitutes manipulation is concentration, intent and control.
That the big U.S. bank(s) had, and has, a concentrated silver short position is beyond question. In fact, the silver short position has been the largest concentrated position in history, by every reasonable measure. The data proves this. It is this concentration and control that is solely responsible for the severe price decline in silver. It is absurd to assume there was no intent to manipulate, not with a billion dollars’ worth of motivation.
There is nothing wrong with an entity making a huge profit, as long as that entity has done it fair and square. But the $900 million profit by the big U.S. bank(s) was not earned fairly or legally. It was theft through market control and dominance. If this wasn’t so obvious and proven by their own data, the CFTC would not be actively investigating a manipulation in silver. But a deliberate and thorough investigation is not enough with a crime in progress.
I have never publicly advocated that anyone buy silver on margin, futures or otherwise, although I do understand the attraction and it is my background. I have been clear that real silver should be bought on a cash basis. If you buy silver (or anything) on margin, you must be prepared for unexpected trouble in the form of sharp sell-offs requiring additional funds. Still, it is not right that margined silver holders should be cheated, by a crooked U.S. bank or anyone else, out of $900 million or any amount. Unfortunately, the problem goes much deeper than futures traders being cheated.
As large as the $900 million that the U.S. bank extracted from COMEX long silver futures holders may be, it is small compared to the total damage inflicted, as a result of this manipulation. After all, it wasn’t just long silver futures holders who were damaged. Far from it. When the total damage is tallied, it should become clear why I would refer to the big U.S. bank(s) that shorted COMEX silver in July, as the Masters of Destruction.
Since there are one billion ounces of silver bullion equivalent in existence, the value of that bullion was approximately $19 billion in July, when the big U.S bank shorted COMEX silver in massive quantities. As a result of that shorting and all the bullying and corrupt market dirty tricks since then, the value of total silver bullion was $10 billion on Friday, down $9 billion in little more than two months. That’s ten times the amount that the Masters of Destruction stole from long futures traders. Talk about collateral damage.
Yes, it’s true that the manipulation has created an incredible further buying opportunity in silver. And it’s also true that those holding silver on a fully paid for basis, still hold their silver and will profit from the certain price gains in the future. But that does not excuse the manipulation, nor minimize the loss of value. Who the heck does this big U.S. bank think it is, that it can inflict that kind of damage on innocent investors in silver?
The collateral damage is not limited to silver bullion investors. Shareholders in silver mining equities have suffered, at least, an additional $10 billion in losses over the past couple of months, as a direct result of the manipulated 50% decline in silver prices by one or two U.S. banks. We’re now up to 20 times the $900 million gained by the futures manipulators so far. Bear with me, as I’m just getting warmed up.
(I’m confining my remarks to silver here, but let me assure you that the equivalent total damage in gold is much greater. Quite literally, where the losses to silver bullion and mining stock investors run to tens of billions of dollars, the losses to gold bullion investors and mining shareholders runs into the many hundreds of billions of dollars. All courtesy of the Masters of Destruction.)
Aside from the damage to shareholders in silver mining stocks, the companies themselves, as ongoing concerns, have been severely damaged. The manipulation has driven the price well below the cost of production for just about all the primary silver producers. Just look at their stock prices. In addition, low base metal prices has meant that the current price of silver is now below the cost of production on a by-product basis as well. This guarantees that if silver prices don’t rise dramatically and soon, significant silver production will be eliminated. I don’t understand how mine management can sit by and tolerate this without fighting back.
Further, the collateral damage being inflicted on silver mining and exploration companies will curtail not only current production. Given the long lead times required to bring a silver mining prospect to production, the artificial low prices are causing unknown delay to future production. Thus, the manipulation promises long-term damage to the production of a vital industrial resource. It may be bullish for prices long term, but it is wrong.
While the industrial silver consumers may be reaping some small advantage in buying silver cheaper today than they would if silver prices weren’t artificially depressed, they stand to lose even more than the miners in the long run. Artificially depressed prices in anything must cause a shortage at some point. That’s supply/demand 101. This can be seen on the retail side of silver presently. When this shortage becomes obvious on the wholesale side, it will be the industrial silver consumers who will feel pain beyond what the producers currently are experiencing. It will be the user panic to buy inventory and keep production lines running that will cause prices to soar beyond reason.
Perhaps the worst collateral damage of the manipulation by the big U.S. bank(s) is not to futures traders, innocent bullion or mining share investors, the miners themselves, or the industrial users. The worst damage inflicted by the Masters of Destruction is to our important institutions, like our licensed exchanges and regulatory institutions, and to our confidence in our markets. Trust is hard to earn and easy to lose.
The CME Group, owners of the Chicago Board of Trade, the Chicago Mercantile Exchange, and now the NYMEX/COMEX, is the largest and most important futures exchange in the world. They stand to lose the most of all in the silver manipulation. If there is any silver delivery default or disorderly pricing event, they would appear to be responsible. Especially since they have been repeatedly warned. They have their reputation and potential massive litigation costs at risk. They are the frontline regulator, as dictated by law. Yet they refuse to respond to public allegations of manipulation in the COMEX silver market, in spite of hundreds of us contacting them. That is deplorable.
The CFTC has bowed to public pressure and has initiated an investigation by their Enforcement Division. Obviously, the Commission sees sufficient evidence to investigate, otherwise they would not waste taxpayer money on a useless investigation. Yet the evidence is their own data, which they and the CME Group refuse to explain. That the alleged manipulation is very much a crime in progress inflicting great collateral damage and neither regulator acts against it results in a loss of confidence in our regulators and markets. It diminishes us all.
That a crooked U.S. bank, in the quest to illegally generate a profit, would poison the water for so many unrelated and innocent parties is unconscionable. We have enough financial problems in the world presently with declining asset values. There is no room for the intentional destruction of values and markets. This blatant silver manipulation must not be allowed to stand.
The great financial crisis that currently impacts us all is the direct result of a regulatory failure to restrain a few wheeler dealers on Wall Street, who went hog wild in concocting crazy derivatives for personal profit. Now, we are left to clean up their mess, at great collective cost, both monetarily and to our faith in our institutions. Admittedly, silver is a much smaller market than the mortgage and credit markets, but the same principle applies, namely, many being damaged by a few. Plus, the damage has already been done in mortgages, while silver is ongoing.
In the great financial credit crisis in which we are presently engulfed, there are no simple solutions. In silver, there is a simple and effective solution. We must pressure the regulators to enforce the law and eliminate what remains of the concentrated short position in silver, never to return. Then we must insist that the short manipulator(s) be punished for the full extent of the damage it has inflicted on everyone.
When the CFTC finally admits what is already common knowledge to most observers, that is, that there has been an ongoing manipulation in silver, it will not be sufficient to base any resultant fines on just the damage in the futures market. All collateral damage must be considered. Don’t fine the big U.S. bank $1 billion for their ill-gotten futures market gains, fine them $20 billion or more for all the collateral damage they caused. And the CFTC shouldn’t remit any fines collected to the Treasury. A special fund should be established to compensate actual victims.
The only reason the CFTC is investigating silver, at all, is because you took the time to write to them. You must write to them again. And keep on writing. I assure you it does have an impact. In addition to the usual addresses of the Commissioners, the Inspector General, and the Chief Regulatory official of the CME Group, I am adding the address of the Acting Director of the Enforcement Division, Mr. Stephen J. Obie. It’s important that you let them know how you feel.
Wlukken@cftc.gov
Mdunn@cftc.goc
Bchilton@cftc.gov
Jsommers@cftc.gov
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