It has been a long time since I have written about the precious metals market on my personal blog. I don’t know that this will reach many involved in the recent silver market machinations but the few that still read my musing will at least receive an education.
Today, I was sent and article posted on ZeroHedge. These articles are typically anonymous and sometimes do have some good and valid points. But in this case, the author or authors have absolutely no understanding of the silver market and try to create a mountain out of a mole hill. This is an ongoing theme where the merchants of retail silver products armed with a minute understanding of the commodities markets and create a fictitious theme to promote more sales of their products.
The article today was quasi-fake news. What I mean is, they took legitimate news about changes to the legal documents of the SLV and the SIVR Exchange-traded Funds (ETF) and twisted what they said to have a totally opposed meaning to the actual purpose of those changes.
But before I proceed, for those who have not been following the news; the Reddit group Wallstreetbets famously known for putting the squeeze on the traders who shorted the GameStop stock and were quite successful, had decided that the silver market would be their next target. They believed that bankers and hedge funds were shorting the market and that this was holding down the silver price.
There is no doubt that there were some naked shorts in the market. Then when the Reddit crowd came into the market they shook them out on the rise to $30. However, they bought the metal mostly in the silver ETFs and also bought physical silver from the retailers wiping out physical silver stocks.
What does this mean? Silver stocks were wiped out? It means that physical silver in certain locations were no longer available and those that were available were demanding high premiums of as much as 50 cents an ounce. This is and was a short term a major aberration.
Silver is rather large and bulky. In large quantities it typically ships by boat and tractor trailers. Silver is produced all around the world, and it is principally a byproduct of Zinc, Gold and Copper mining. Then we have to mention that silver is also recovered from scrap recycling. One fact never mentioned by the silver promoters is that NONE of the producers of silver are in London or New York. These two are the primary markets for delivery to exchanges and vaults which are behind the ETFs and the COMEX.
Hence, lets do simple math. For example, a market may have a few million ounces of silver unsold in the hands of physical traders on any given day. Suddenly, there is a sharp increase in demand to ten million ounces in a short period of time. All gone! What does this mean? Is there no more silver? No, it means there is no more silver in New York or London for delivery to the investment market. This will mean that these funds and exchanges will need to get more metal into their vaults. Now they have to have it shipped from where they are produced which in this hemisphere is Canada, Mexico, Peru and Chile to name a few. They are also limited to only accepting silver branded and approved for delivery by the LBMA and the CME. Believe it or not there are brands that are not accepted by some exchanges. This is because the producers never felt the need to get the designation. Also, for the exchanges and funds there is only one size acceptable and those are a thousand ounce bars (this is approximate because these individual bars vary in weight). Hence, no other product on the shelf is acceptable.
On top of all that there is exploding interest from the retail market and manufactures of the small one ounce rounds, ten ounce bars and a hundred ounce bars are also competing for immediate delivery of metal and are willing to pay higher premiums. They need metal to make their products for resale. Hence it is a short-term battle to secure immediate deliverable metal in any form.
This occurrence was not something that the creators of the exchange-traded funds ever envisioned at their inception. They pictured an orderly market, which is the norm. Hence, after this occurrence they became aware that the language in the documentation did not work with the current market scenario. It became obvious they had to correct this language to buy them time to secure the metal in adverse market conditions.
This is what all the hubbub is about in the article Twilight Zone As ETF Provider Warns Buying Silver Will Harm Hedge Funds And Large Banks on ZeroHedge. They add, an additional twist, that the managers of these investments are more concerned with the banks and hedge funds than that of the investor’s interest. Again, what they conveniently fail to mention is that the ETFs are managed by banks and hedge funds, and it is in their vested interest to make sure that their investors are protected by managing the market conditions so that the business can progress in an orderly fashion.
They quote the following from the SIVR prospectus:
“As of the date of this prospectus, the Fund and other Silver ETPs are experiencing a sudden increase in demand of shares following an online campaign to harm hedge funds and large banks with substantial short exposures to silver.
The campaign encourages retail investors to purchase shares of Silver ETPs as well as physical silver in order to intentionally create a short squeeze. This activity could result in temporarily inflated prices of Shares and the difference between trading price and NAV per share may widen.“
The problem here is not the quote but the spin they give it. The authors intentionally picked these snips to infer collusion between the fund managers and the banks against the investors. They also imply that the managers do not want to see the price go up. This is the furthest from the truth, a higher price means more management fees. Explain to me why would they work against their own interests?
The quotes only state the truth of the cause of the market conditions and their just moves to correct and protect the interest of the owners of their product.
Finally, I am not taking a position on whether the price of silver will go up or down. The purpose of this post is to neutralize the false narrative being presented elsewhere. There are plenty of reasons to own silver but the false conspiracy theories being spread about are not one of them
2 thoughts on “The Truth about the Silver Market”
thanks for your thoughts.
im interested in understanding this dialogue about the supposedly massive net short positions that the top banks and traders have on in silver platinum palladium and gold. I don’t know if there’s another side to the story. It all just doesn’t make intuitive sense and it’s not believable as much as I’ve heard these claims for years. If true the size is so large that it seems unresolvable without chaos. Would love your thoughts on that topic. How do I get in touch with you directly, by Twitter or by email?
Sorry it took so long. I did an interview with Goldcore that is on YouTube that may answer your questions.