The Silver Tsunami

Dr Jeffrey Lewis

At this point in the cycle, the silver market should be relatively easy for the average person to enter. Prices are beginning to move back toward natural supply and demand equilibrium, as large disruptions are occurring between the positioning of dominant futures speculators that have kept futures prices entrapped for nearly 6 years.

It’s easy to buy physical silver right now. It can be bought in person.

It can be through online dealers.

Relatively speaking, it requires relatively few ‘currency notes’ to acquire its cheapest form (closest to its commodity state) in the form of bullion or rounds, and silver that previously circulated in the currency otherwise known as 90% silver or ‘junk silver’.

But when you actually hold silver, it changes things.

It becomes not just ‘skin in the game’, but real weight in the game.

And then it becomes a little more complicated in that physical silver needs to be stored, watched, protected.

That often divides the landscape of potential investors.

Why get your hands dirty if you don’t have to? Why hold physical precious metals in your possession if there are other available (less burdensome) methods for storage, or options for exposure?

It’s similar to how some generations view farming or growing vegetables at home as unfashionable or a primitive practice for the underprivileged.

At the same time, all of this effort leads to somewhat of a “feedback” awakening.

A reminder of perhaps the factors that lead us to thinking about silver as a safe haven investment to begin with; as a protection against inflation, or in some cases, an opportunity to make money and ‘profit’ over the short, intermediate, or long term.

Currently, there are no significant retail shortages, though some forms have experienced notable cycles of retail scarcity over the last 10 years.

Obviously, this can change very quickly on a sudden surge in price, as the would-be retail investors awakens to price action.

Outside of the matrix of predictions and emotion, anyone can learn about the fundamentals of silver on the Internet.

Much silver information is disseminated through retail bullion dealers, producers, large industry consulting groups (World Gold Counsel) the chief US futures regulator (CFTC), The Silver Institute, and various exchanges and trading platforms.

These channels might be considered the ‘high-road’, because aside from a few prominent bullion dealers, there is a built-in incentive to quietly ignore the true nature of world price discovery.

If price discovery were revealed for what it is, many of these institutions would cease to exist.  (More on that in a moment).

Silver, for the mainstream inventor/observer, is therefore relatively easy to ignore and has only a very small, yet vocal group of “grass roots” advocates, bloggers, newsletter writers (some part-time, with day jobs like me), or analysts.

Compared with equities, foreign exchange, options, and even futures, there are relatively few (if any) ‘professional’ analysts who focus mainly on silver.

At best, most so-called ‘professional’ analysis of silver is lumped in with the other precious metals.

In addition, silver is ‘rationalized’ and evaluated from a derivative-based, technically driven price function that at best, secondarily informs on supply and demand – rather than the other way round.

This informs and cultivates the prevailing mainstream (lack of) awareness.

Silver, in the minds of the ‘intellectual class’, represents jewelry or silverware with only a very detached recognition of its role as currency and money throughout the years.

In most cases, it is (misleadingly) lumped in with it’s yellow cousin.

The average Joe is essentially oblivious to great silver option.

There is of course, an undeniable political climate that hangs over the opportunity. Silver is certainly not progressive in the minds of most.

In fact, if the metal is understood from a historical standpoint it is relatively benign, if not interesting to the laymen.

What silver might represent from an investment or monetary hedge comes across as a very regressive position, where seeking safety is considered conservative.

This can be dangerous in the current cycle of humanity, where hope for progress as the ultimate salvation is worshiped while the foundation for prosperity (economic, social, cultural) visibly unravels.

(The great irony is that silver is essential to the technological progress they worship).

Many arrive at precious metals looking for an investment alternative. Some come for protection from inflation or currency collapse. Many imagine silver as an useful currency, in addition to a basket of others items stored for emergencies. Many also arrive here in the aftermath of the serial booms and bust brought forth by sanctioned financialization.

While guarding wealth and maintaining purchasing power sounds prudent enough, most silver investors cannot help but see a huge option for significant monetary gains.

From whatever angle, just below a surface understanding, lies the recognition that it is nearly impossible to find any other investment vehicle so ridiculously underpriced. Silver is not only under valued in simple inflation-adjusted terms, but also in terms of visible (verifiable) supply and demand.

Digging a bit deeper we encounter the murkiness regarding paper versus physical silver.

And further we eventually uncover the currency or the yard-stick used to value practically everything, the empty fiat currency promise.

In the background to all of this is the primary mechanism of price.

Enter price manipulation. 

With silver, you also have a relatively easy commodity to control because, along with other commodities, it’s price arises from pure speculation on futures markets.

The reason why it’s easy to control is that relatively little collateral or a lot of leverage can be gained with very little money down in these markets, so large entities, speculators, can afford to manage price at a relatively low cost.

In terms of price manipulation, if you have control over the price, you can also, of course, leverage those positions for profit, profit that is very easy to look back and notice is a very consistent thing if you are the one controlling the price.

This conveniently fits with the higher order agenda required for maintaining ‘confidence’ in a currency by preventing anyone from knowing the relative value of anything.

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Central banks are engaged in a desperate battle on two fronts

What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, they seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.

It is important to recognize that the central banks have found the battle on the second front much easier to fight than the first…..

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Price manipulation and control comes from concentration and the size magnitude of concentration.

Concentration in a market simply means that one or a few entities are able to accumulate positions that are much, much greater.

Concentration is not exactly like a corner.

The concentrated position of ownership is manipulative by nature because it is impossible for a trade (by said entity) not to have massive influence in price.

For example, in the silver market, in the futures market, (the COMEX owned by the for-profit CME), you have essentially two classes of traders.

These big traders are actually, in fact, investment banks, large investment banks with deep pockets and some ways limitlessly deep pockets. The so-called commercials (though not producers by any stretch), as a class, trade with the other side of the speculative game, the funds that manage large pools of money for others. These are the managed money funds or hedge funds or speculative traders.

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From Wikipedia:

CME Group Inc. (Chicago Mercantile Exchange & Chicago Board of Trade) is an American futures company and one of the largest options and futures exchanges. It owns and operates large derivatives and futures exchanges in Chicago and New York City, as well as online trading platforms. In 2014, it gained regulatory approval to open a derivatives exchange in London. It also owns the Dow Jones stock and financial indexes, and CME Clearing Services, which provides settlement and clearing of exchange trades. The exchange-traded derivative contracts include futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, rare and precious metals, weather, and real estate.[5] It has been described by The Economist as “The biggest financial exchange you have never heard of.”

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Collectively they play by the “rules” of technical analysis. Price direction, volume, momentum are used to drive the market – not physical supply and demand.

Here, the great devolution of finance echoes in futures trading had once evolved to create price equilibrium and iron out the variances between need and production capacity.

As a result of the speculative class gone wild in futures, nowhere will you find today users and producers trading in any significant degree.

That’s probably an overstatement.

Historically speaking, after the Hunt Brothers were excommunicated from COMEX and the price of silver fell precipitously beginning in 1980, there were essentially no sellers left in the market.

This left the ‘market-makers’ or the liquidity providers as the main entities. They became the only sellers in a truly depressed market.

All the while, the demand for industrial silver continues as governments sold down stockpiles to the point where leading up to the turn of the millennium most above ground stockpiles were gone and the amount of silver consumed by industry and investment exceeded production on an annual basis.

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Now, all of you know these changes are necessary for a very simple reason–silver is a scarce material. Our uses of silver are growing as our population and our economy grows. The hard fact is that silver consumption is now more than double new silver production each year. So, in the face of this worldwide shortage of silver, and our rapidly growing need for coins, the only really prudent course was to reduce our dependence upon silver for making our coins.

Lyndon B. Johnson – Remarks at the Signing of the Coinage Act

July 23, 1965

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Generally speaking, commodities, especially cheap ones, are overlooked.

We don’t think about them in day to day life. They form part of the elements that make up the things that we construct in the whole, but relatively speaking, most of us don’t think about it or we simply take it for granted.

This giant concentrated short position accident was built up and allowed to continue overtime, passed on through the decades, now controlled by JP Morgan and probably ScotiaBank.

But this position always carries the risk that it could get run over.

Regulators, observers, economists, financial analysts have been able to ignore for the most part or even bash as conspiracy because things have gone on for so long.

It reminds me of the earthquake that occurred off the coast of Japan in 2011.

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The Diachii nuclear power plant was constructed in a very rational way. It was engineered to withstand an earthquake of the size that occurred. Japan needs energy.

Most of their energy needs to be imported, so nuclear power’s a reasonable option. Again, this facility was engineered sophisticated enough. The fail safe mechanisms did not, in fact, fail. They just hadn’t prepared. They weren’t prepared for a tsunami. One could ask, “Well, why not?” Couldn’t a seismologist have predicted that a subluxation of this size would create a tsunami?

It just hadn’t been considered as a significant risk or those who were considering it for a multitude of reasons, many of them could be involved with budgeting, they were ignored, so we got a complete disaster.

That’s what the magnitude of this concentrated position  (the very definition manipulation) in silver futures is like.

Silver is the poster child for this in terms of this large position.

When that position becomes overrun, or when one of the large commercial shorts (JPM) decides to cover and run, there is no possible way that the masses will not suddenly awake to news of this market moving. A market that no one really paid attention to before.

Once that happens, even though the silver market is so relatively small,

this ‘accident’ will be of such magnitude, what it will do is it will by a process of coalescing as create the situation where it’s impossible to ignore.

The ‘growth’ of the financial sector over the last 50 years has been unprecedented and cancerous. Yet much of that is considered progress. These ‘achievements’ have been used for as much good as ill. Mostly ill.

A ‘price’ that turns perception on its head.

Given the volume of paper obligations in need of fulfilling on sudden move up, in a market where the lone seller is gone, the price could move up and through that level quite easily. Therefore, $150 silver would be a conservative inflation-adjusted high.

It’s somewhat like having the situation where a jetty is built to protect a harbor. Enormous boulders are stacked so tall that no one can get to a vista high enough to see the volatility and/or the violence of the ocean behind that jetty.

It’s been effective for years and no one pays attention to it. Besides, the water’s very cold. No one dares to venture near or around the jetty. It’s too dangerous.

In our cognitive dissonance, we ignore it. The blockade has held up all this time. Regulators have ignored the risk of failure and/or actively denounced those who bring up the issue.

Until one day, out of the blue comes a big earthquake or a massive storm, and the jetty fails. With it, the violence of the sea held back by the jetty moves in, and the harbor will never look the same again.