What If Silver Isn’t Manipulated After All…

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Published : April 13th, 2018
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Category : Gold and Silver

There’s a headline to get the silver bugs riled up!

But take a deep breath. As far as I can see there is still every reason to thoroughly believe the market has been manipulated. And that there is a large short position that will eventually have to be resolved with a significant move higher in price.

I personally still largely subscribe to the Ted Butler school of thought. As based on his work, as well as my own research and trading background, I still believe that there’s a lot of paper silver that cannot be delivered at anywhere near today’s prices.

Yet while it’s always good to seek out the best most informed opinions you can find and learn what you can, I also have this other strategy that has served me well over the years. Which is basically to figure out what makes sense, and then spend the rest of my time trying to see where I may have missed something in my analysis.

Along those lines, while both my research and intuition lead me to believe the reason the price of silver isn’t already over $50 is due to the manipulation, it can still be useful to think about where we might stand if somehow that assumption is incorrect.

Because even in that scenario, there are a few reasons why buying silver at anywhere near $16 dollars an ounce could still possibly be viewed as the trade of a lifetime. Perhaps because the reasons are so simple and can also be easily verified.

Consider that last year First Majestic Silver CEO Keith Neumeyer mentioned:

“The cost of maintaining existing silver projects comes out to about $13-15 per ounce. In other words, to keep getting silver out of the ground from projects that are already up and running, it costs $13-15 per ounce.

So with the price of silver currently around $16, the margins are already so small that should the banks attempt to manipulate the price lower, some mining projects will no longer be economically feasible and are at risk of being shut down. Of course if that happens, that means less supply, which only adds to the positive factors supporting an eventually higher silver price.

Keith also mentioned in his interview that the cost of exploring and developing new mines is closer to $20. Which means that right now, projects which would be worthwhile with higher silver prices are not being explored. Again translating into less supply than there otherwise would be.”

Now I’ve never worked in a silver mine. But having spent a lot of time listening to guys like Rick Rule and others who I consider to be informed on the topic, I hear it’s not exactly the easiest business to be involved in. Certainly not the kind of thing that people are going to line up to do for free, or at an overall cost.

What this means is that there’s simply a natural market floor for how low the prices might go. Which is one of the main factors that’s always left me feeling comfortable owning silver at these levels. Manipulated market or not.

So while we are reminded more than ever that markets can do all sorts of quirky illogical things in the short-term, at some point, if the price of silver went down to $10 dollars an ounce, there’s eventually going to be less supply.

Now in terms of the pricing, I suppose there are different ways to value any asset. Certainly the industrial and investment demand plays a role. And at least when you’re pricing silver in terms of “dollars per ounce”, the monetary aspect has to play a role as well. After all, it’s just a fraction. Dollars/ounce. And if one half of the fraction changes while the other stays the same, the result must necessarily change as well.

Now with that said, consider the following 3 charts.

First is the monetary base chart, where you can see how it exploded and went vertical in 2008.

Next is a chart of the Fed’s balance sheet. Which you can see follows a similar pattern to that of the monetary base chart.

(chart courtesy of the Federal Reserve)

Lastly, here is a chart of the price of silver over the past 10 years.

Given what we can see happened with the money supply and the size of the Federal Reserve’s balance sheet, doesn’t the reaction in the price of silver seem a bit unusual? Especially when you consider what’s happened in the the stock, bond, and real estate markets over the past decade?

It sure seems like there’s a lot of catching up to do. Not to mention how there’s also every reason to believe that more printing is eventually on the way.

So perhaps my belief that things are not Kosher in the silver market is somehow incorrect. I don’t think that’s the case, and for what it’s worth, I’ve devoted a lot of my resources, both financially via investments and in terms of what I’ve done with my career towards expressing that opinion.

But perhaps what I’ve always found makes for a great trade is where you’re getting good odds, and have also given yourself significant margin for error. In this case represented in how you can look at the possibility of the manipulation as an upside call option. There are still a lot of reasons to believe that you win on your trade as is, and in the event the manipulation element turns out to be accurate as well, that just adds to the potential upside.

It’s also interesting that as I’m writing this, I’m realizing that I can’t remember the last time I really even heard any sort of case being made for why the metals would trade much lower from here. And that’s not for a lack of searching.

But with the possible exception of Harry Dent or Jeff Christian (neither of whom I happen to agree with), I’m not sure I can think of someone who’s attempted to even offer an explanation as to why it would be a good time to be short silver while the price is near the cost of production.

But when you think about how the world views silver, it’s not always quite the same as how most view your typical stock or commodity. Especially in recent years, rather than seeing silver accurately reflect the increase in the money supply, it’s almost as if it responds in a more binary fashion. Where there’s just a new wave of buyers created every time the market crashes and more become aware of just how fragile the dollar and debt system actually is.

Because if you’re reading this right now, there’s a good chance you already believe in the premise of why to invest in precious metals and are just continuing your due diligence. But remember that the majority of the world isn’t seeing it this way yet. And given that we are headed towards either a crash of the bubbles, more printing, or both, I do believe that one way or another, more people are going to start realizing the stunning dynamics in the silver market. Regardless of whether it’s manipulated or not.

So with all of the investment alternatives to choose from at the moment, as long as you have the advantage of time on your side, silver continues to strike me as having an almost historic investment profile. To the degree that it’s not easy to even find a good counterargument.

Of course if the reason the price is so low Is indeed because the paper short-selling has distorted the market, at the same time the largest alleged short seller has accumulated a massive amount of physical silver, it sure seems like there’s a lot to like about buying silver. Even if you have to wait a little while to see your bet pay off.

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Andrew Hoffman was a buy-side and sell-side analyst in the United States (including six years as an II-ranked oilfield service analyst at Salomon Smith Barney), but since 2002 his focus has been entirely in the metals markets, principally gold and silver. He recently worked as a consultant to junior mining companies, head of Corporate Development, and VP of Investor Relations for different mining ventures, and is now the Director of Marketing for Miles Franklin, a U.S.-based bullion dealer.
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