Amid all the recent attention I’ve placed on the continued manipulation in silver, some may mistakenly assume that diminishes the case for silver. Nothing could be further from the truth. I’m convinced that silver is a better buy than ever before. Here are detailed reasons why I believe that is the case.
One, the near-term emotional temperature of the market is low. There is no bullish “fever” where uninformed investors are driven to buy silver because of a sharply rising price. That will happen, but it’s not true now. While silver is still above the price lows of last fall and higher than year-end prices, the recent price action is nothing to write home about. The price has been below most of the important moving averages, causing silver to be “oversold.” This is a much better time to buy than when prices have already climbed and many are buying just because prices are rising. At those times the risk of a sharp sell-off is high. Now the risk of a prolonged price decline is much lower. Now is the time to buy low.
Two, leveraged speculators who normally buy COMEX futures contracts and Over The Counter (OTC) derivatives do not hold a historically significant number of long contracts. The big dealers have been so successful at forcing long speculators out of the market, that the speculative long position is at important low levels. This means that long speculators have already been forced to sell and no big selling from them appears probable. On any rise in price, they are likely to buy, adding a force to rising prices. Buy before they turn into buyers.
Three, available wholesale silver inventories appear to be tight. These physical silver inventories are falling into stronger hands. For decades the world’s largest stockpiles of silver were the COMEX warehouse inventories. These COMEX inventories were considered mostly commercial in nature with some portion being held for investment purposes. The COMEX inventories peaked at around 280 million ounces in the early 1990’s, and accounted for 90% of all visible silver inventories. After the introduction of silver Exchange Traded Funds (ETFs), there was a profound shift in the location and structure of world visible silver inventories.
Now, the combined inventories in the ETFs and other investment vehicles tower over the holdings in the COMEX by almost 4 to 1. (Over 400 million ounces in the ETFs compared to 120 million oz in COMEX inventories). Given the long-term nature of ETF investment holdings, this massive and historic shift in inventory composition means much less silver is now available to the market. This will exert a strong upward influence on price.
Four, all signs indicate that physical investment demand for silver on both a retail and wholesale basis is strong and could surge further. Until a few years ago, there was no net silver investment buying for decades. That pattern has changed with a vengeance. Clearly, the introduction of the ETFs have played a major role in this investment transformation.
The strong buying that we have seen does not appear to be “hot” money, but sober and determined accumulation. It wasn’t surging prices prompting buyers over the last six months. It’s due to a growing awareness and conviction about silver’s real supply and demand fundamentals. Importantly, there has been practically no buying of silver on a leveraged or margin basis. It’s mostly been cash on the barrel. These strong silver buyers will wait for significantly higher prices before selling. With higher prices inevitable at some point, the hot-money crowd should come in and blow the doors off the price.
Five, silver production is tightening, given the byproduct-nature of silver mining. As I have written recently, base metals production like copper, lead and zinc appears to have fallen significantly, also reducing the production of silver as a byproduct.
Six, world economic and financial conditions appear lined up to favor higher silver prices, no matter what occurs. If financial conditions remain unsettled, flight to quality buying in silver appears likely. If the world does return to better economic growth patterns, silver will benefit as a result of increased industrial consumption. Heads silver benefits, tails it also benefits.
Seven, more investors than ever have come to realize that the silver market has been manipulated and the government regulators and exchange officials are unable to persuasively address the growing evidence of a silver manipulation. The manipulation debate has become widespread in metal circles. It isn’t going away. The best the regulators have been able to do is to stall and pretend to be investigating. Fewer people are being fooled by such actions. A scam like the silver manipulation can’t continue when so many know about it. This scam will end suddenly and sharply in a price jump to the upside.
Eight, industrial demand for silver will continue to grow in the years ahead. New uses for silver appear regularly. A robust worldwide economy will initiate a new phase of silver demand. Higher prices will not diminish this demand because small amounts of silver are used in each industrial application.
Reasons nine and ten, silver prices are cheap on several important objective measurements. Silver is cheap compared to its own recent price. It is down more than 40% from its highs of one year ago, in spite of the strongest physical demand in history. More investment silver has been purchased over the past year than at any other period in history. At precisely the same time that prices have declined so sharply, more ETF-type buying has occurred than ever before and more Silver Eagles have been sold by the US Mint than ever before. We have witnessed the highest premiums on all retail forms of silver in history. This isn’t just me saying silver is cheap, this is the investment world voting with its collective wallet. Clearly, there is something wrong with this picture that can only be explained by manipulation on the COMEX and the OTC market by a few giant financial institutions, led by JPMorgan.
Silver is cheap on a cost of production basis. Never have the net operating results of so many different silver miners been so poor. The common denominator is too low a price for their main product. Silver is up three-fold from the lows of a few years ago, yet the silver mining industry still suffers. That’s because the cost of production has risen faster than the price of silver. That must be rectified.
Silver is dirt cheap relative to gold. While there is less above ground silver than gold, silver’s price has rarely been this low compared to gold.
The manipulation that explains why silver is so cheap cannot exist in a bona fide physical shortage. If the price stays low, growing numbers of investors buy real silver. That makes it harder for the manipulators to keep the price contained with paper derivatives. Some fret the scam can be continued indefinitely. If it were just a question of printing more money or more paper derivatives, perhaps that might be true. But it’s not about an unlimited supply of paper silver, it’s about a limited supply that guarantees the manipulation will end soon. The termination of controls on the price of silver will be something we look back upon and marvel over how long it existed. Just make sure you are looking back while holding as much real silver as you can.