One thing you can say about the recent sharp sell-off in silver, at the
very least, is that it forces you to think. In fact, my friend and mentor,
Izzy Friedman, wrote an article with that title a couple of years ago. http://www.investmentrarities.com/07-03-07.html Nothing focuses an
investor’s attention more than a sudden decline in price, especially in
an item one thought was undervalued to begin with. This is as it should be.
I’m not going to completely rehash the premise of the original
article, but instead try to simplify the lesson of this most recent sell-off
in silver. Why did it occur? And what should you learn from it?
Was there any obvious real world developments in actual silver supply
and demand fundamentals that caused the price to decline? Not from anything
I‘ve observed. Investor demand for real metal remained strong for every
measurable category from strong ETF flows and record coin production and
sales, to dramatic COMEX warehouse withdrawals, to continued disruptions in
silver production and refining. Industrial consumption, admittedly weak,
didn’t suddenly plunge anew in the last few weeks.
The explanation for the sell-off was the same as it ever was - price
rigging on the COMEX. The big commercial shorts engineered the market lower
to force leveraged longs on margin to sell, in order for the big shorts to
buy back futures and other derivatives. Once again, the derivatives market
tail wagged the real world price of silver dog. The good news is that the
concentrated short position, while still large and manipulative, appears to
be just about as low as it’s going to get, after this recent sell-off
and the engineered decline over the past 8 months.
OK, if that’s the answer to why silver sold off, what’s the
lesson? The lesson is that you must approach silver in such a way that you
are not a victim of the manipulators. Buy for cash, don’t borrow or go
on margin. You can’t prevent silver from dropping due to these rigged
sell-offs, but you can prevent your silver from being taken away from you by
forced margin call selling.
There’s a simple decision that every silver investor must make.
You must decide whether you believe that the price of silver is manipulated
or if it is functioning as a free market. This may sound weird at first, but
if you decide that silver is not manipulated in price, but is trading free
from control, you shouldn’t buy it or continue to hold it as an
investment, in my opinion.
That’s because if you believe that the price of silver is free
from an active downward manipulation, you must believe it is priced in
accordance with everything you see around you. You must believe that
consistent record demand for an item should result in sharply lower prices.
You must be comfortable with delays and rising premiums being compatible with
lower prices. You must be able to disregard documented proof of an
unprecedented concentrated short position as unconvincing, and regulator
stalling and double-talk as reassuring. You must see something I don’t
Instead, if you do see manipulation permeating the silver market, that
is the best reason for buying. If you see manipulation, you see an
artificially depressed price, a price screaming to be bought. If you see
manipulation, you see a condition that can’t last, that must end. If
you see manipulation, then everything makes sense about silver’s price
history and circumstances. If you see manipulation, you know the usual
commentary about silver is nonsense. If you see manipulation, you can
understand the sharp sell-offs. If you see manipulation, you know it will end
explosively to the upside.
While deciding for yourself whether silver is manipulated or not, here
are some additional reasons to consider silver at this time.
TEN REASONS TO BUY SILVER NOW
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
One, the near-term emotional temperature of the market is low. There is
no bullish "fever" where uniformed 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 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 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
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
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
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
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 of
physical silver 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.
(No one can
safely predict the future and it’s possible that Israel Friedman’s Butler’s analysis will prove
incorrect. Silver can go up, but silver can go down. It is up to you to read,
analyze, and arrive at your own conclusions. Prudence requires we emphasize
that precious metals may or may not prove to be suitable for your