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Silver : a call to acturtle and the rest of the HC

  1. yttrium

    3,816 Posts.

    The current interest in silver revolves around speculation of inventories being insufficient to meet the ongoing supply deficit without a price rise. The following is an excerpt of a post I made a bit over a week ago, though I would have been grateful for some criticism of the story.

    The known information about the silver market seems to be:
    silver was largely eliminated as a coinage metal during the last century; the bullion derived from this coinage has been a significant source of supply
    the market has been in deficit by an average of 120 million troy oz per annum for the last thirteen years; 2002 will be the fourteenth consecutive year of deficit
    about 75% of the world output of mined silver is as a byproduct of gold and base metal mining; despite the current base metal surplus silver remains in deficit; gold production is also predicted to decline over the next few years
    many primary silver producers have suffered great economic hardship because of the low silver price
    silver demand does not fluctuate wildly, rather it increases gradually
    there is a finite and unquantified supply of silver bullion
    silver bullion seems to be readily available
    the mainstream financial press ignores or is critical of silver as an asset class
    almost all speculation is paper speculation

    Surely there are many explanations for the behaviour of the silver market, though I hold the view that no matter what the status quo, you can bet that somebody is profiting from it. Here is one scenario:

    Around the mid 1980's, one or more bullion banks realised that they could make several times the market value of their silver through derivatives trading. The idea was simple enough: you trade silver derivatives and bullion at the same time.The success of this strategy relies on the assumptions of steady physical demand and speculative activity confined to the paper markets. You sell large amounts of derivatives and then ensure you profit from those derivatives by trading silver bullion to move the price against market expectation. By using this strategy the banks could realise a profit before expenses of several times the value of the silver bullion traded.

    Consider that the amount of paper silver traded is several hundred times the value of the silver bullion dumped by the banks, so a profit of a few percent of the value of paper silver traded equates to several times the value of the silver bullion traded. Thus fifty plus dollars an ounce silver is attainable with derivatives when the spot price is only five dollars an ounce or less.

    By the end of the 1980's, two things had happened. The silver market was in deficit, and the idea that digital photography would replace silver, leading to a lengthy market surplus in the future, was also gaining favour.The market deficit meant that the banks would need to sell silver in general, as the logical assumption of the market would be a rising silver price. So most derivatives sold would profit from a rising silver price. By selling silver to force the price lower, and against the market expectation, the banks could maximise their profits. The idea of a future silver surplus meant that any bullion borrowed could be paid back later.

    With the continuing deficit, the banks required more silver to keep the price depressed. This could be achieved in three ways, which are summarised as follows:
    Encourage the liquidation of bullion inventories by portraying silver bullion as a poor investment due to the advent of digital photography causing a permanent silver surplus in the future.
    Silver leasing: The banks believed that a future silver surplus was likely so borrowing physical silver posed little risk.
    Explaining the derivatives strategy to and acting as agents for holders of large silver bullion inventories. The holders get several times the market value of the silver and the banks get a percentage.
    This scheme continues today, and the Comex is grateful for the business. The only difference now is that because new uses are constantly being found for silver, a permanent silver surplus looks increasingly unlikely, despite the best efforts of certain parties to convince the market otherwise. When the amount of dumpable silver starts to run out, and the banks will know long before anyone else, the derivatives trading can be wound down. The only risk for the banks is a sudden and large increase in the demand for silver bullion, and possibly a large silver loan to repay. This could ruin the banks.<<


    I have no idea if there is any truth to the speculation of the CTs, but whether it is true or not is beside the point. If there were public access to derivative trading records and records of physical trading, then you could say " Gee, that's a nice story, but if you looked at the trading records you would realise what a load of rubbish it is." But without transparency in derivatives markets, all sorts of dishonesty is possible, and you can only speculate as to what sort of dishonesty may exist, if any.

    Without transparency, I wonder why anyone would buy silver derivatives, when it is possible that the money used to buy the derivatives drives a process that ensures the derivatives expire worthless. If there is any truth to the speculation of the CTs then a reduction in the volume of derivatives could indicate that available physical silver supplies are running out, or that buyers of silver derivatives are waking up.

    Perhaps this lack of transparency prompted Mr Munger to remark that to describe derivatives as sewage was insulting to sewage(Berkshire Hathaway owns 129 moz of silver bullion). It is not enough for the claims of the CTs to be treated with silence and contempt. Governments have an obligation to ensure that markets are ethical and transparent. The fact that serious accusations of manipulation in the silver derivatives market cannot be refuted by publicly available information suggests that Governments have not as yet satisfied this obligation.<<

    The excitement for silver is evident in the many bullish posts currently on HC, but they are adding to the hype and not the knowledge. I wish anyone well who has profited from the current interest, but I am more interested in testing the claims of the CTs. CTs are pretty good at weaving stories that are difficult to test, so I am interested in hearing criticism of the above story.

    I am greatly appreciative of posters like acturtle as they treat the forum as a theatre of debate rather than hype. I am all ears.

    Thanks in anticipation


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