The law of supply and demand says if I grow fruit and it happens to be bananas and my neighbor and his neighbor do so as well then come season we will all have a big problem no matter how bumper the crop. Everyone understands no matter where in the world you live there will be some type of produce that has a general average price and will be sought after……….except for a period due to whatever circumstance prices will drop dramatically and you can’t give it away.
So you ask yourself where are all the “silver bananas”.
I mean we have a price that is nearly half what it was at its high back in March when Bears Sterns crashed and burned. The law of supply and demand in housing or fruit in season or whatever has this supply demand fundamental that if a price drops precipitously then it’s a fair bet there are heaps of damn bananas sitting around saying “for sale”.
As I type this, one client I am dealing with in Australia calls me disgusted that whilst opening an account for allocated silver bullion with the company I affiliate to, he also wanted a degree of local physical holdings and found out his order had been sold out from underneath him when he went to uplift it as another had come and paid quicker suffice to say there was nothing left for him as the supplier awaited more inventory.
That doesn’t sound like an “over supply” problem to me as this story is being played out all over the world in the smaller retail bars.
In researching this equivalent event where physical supply and price seem to be in opposition you have to go back to a period of time that historians look back on now and call the “London gold pool”. It has to be irony in listening and reading into this from various sources I find a research article that is an excellent overview by Phillip Judge back in 2001 and of all co-incidences, Phil is one of the heads of the very company I represent as a broker so I encourage you to read his piece on the London gold pool
If you prefer not to read up but just want the “executive summary”, the London Gold pool at its heart had central banks led by Governments work in agreement to keep the price of gold down. There was no debate or conspiracy type theory’s here either. This was out there plain as day although in truth like today it was probably only recognized by the discerning investor.
As Phil talks about in his article it failed when too many claims came in on gold to the degree it would clean out all last reserves so we have President Nixon left with the job of decoupling altogether the gold standard in 1971 and not without irony as befitting of the man to whom that task was given, he too was later decoupled off the power system when thrown out of office.
Nathan Lewis writes very well in his book “gold the once and future money” of the many leaders in history that have returned their nations to a sound money system linked to gold saw prosperity and those that did the opposite paid the ultimate cost. Let me say you don’t get a Julius Caesar at the end of empire, you get a Caligula or Nero so get ready for fireworks as we watch increasing intervention in all markets that will distort the real picture until one day you wake up and suddenly gold and silver are double the price. This is simply how history has always played out when markets are manipulated.
Paper selling intervention or should we call it the “paper gold pool”
So to the subject of silver and Gold’s great takedown of late
Well it took 7 billion on short selling of gold to drive that paper price down over a 5 week period and in silver 2.7 billion or the equivalent of between 3 and 4 years of annual delivery demand
3 US banks had 84000 short contracts or a 10 fold increase in a short position in less than a month
3 had 25% of all open interest contracts on silver jumping from a position of 4.8% to 25.4% of all contacts or 170 million oz
This is the largest short position ever taken in history by the banks in a short period and all just before the banking crisis hit.
Now you may laugh at a few billion stated above in light of the trillions being spoken of in the current bail outs. I mean a few billion in shorting metals seems like a banker’s morning tea money to go buy a few sticky buns and well you may be right.
For those using a trading position as well as holding physical it was indeed frightening to watch in NZ time about 12.30- 1.30 pm every afternoon just when all those northern hemisphere traders are fast asleep the sudden lurch that would descend like a storm and in the years I have followed silver and gold you used to be able to turn your market maker programme off in the afternoon so boring was it. In fact I never even used to bother with stops so reliable was the afternoon. If silver/ gold were heart patients in intensive care then any nurse would be happy with the rhythmical undulations of price but here we had in the month preceding the amazing events around the world our silver /gold patient resemble a full coronary arrest every day at the same time but who’s into conspiracy theory eh?
It was all just natural flow right, yeah……whatever!
So if you can freak out at how a banker or hedge fund’s morning tea money can destroy the value of your investment so quick, it might be useful to find out where all the silver bananas are as we agreed at the beginning of this article, supply and demand must make plenty available to the market given the collapse in price, right!
Well there is a shortage of likes we have never seen in silver and far more than gold. If you can worry that a few billion can destroy the paper price just wait and see what happens when those angry hornets using margin sting back. Leverage is a bit like a hornet’s sting really in that it can sting over and over or should I say both down and up. If you can have severe shortages of physical when the price is cheap, wait and see what we can have when the price is high and the same shortages are present or worse as traders like hornets sting “buy, buy buy” over and over again adding to the physical buyers who cant get hold of it!
98% of all futures contracts are settled in paper so very few ever take delivery into vaulted storage or on their person. If you don’t believe me look at what oil has done this day I round off my blog as traders drive nymex oil up the biggest ever one day jump of $20.00 and let me assure you they are not all setting up a fenced secure storage area in their back yard for the 100 barrels they just bought. Nevertheless the price did just jump and whilst there are vagrancies of contract roll over date to consider the point is clear, margin works both ways and physical shortages will dictate the final supply demand fundamental and ultimately the paper price
In the 70’s through to the culmination price highs gold increased 24 x and silver nearly 40 x
Silver can’t be mined by many of the world’s mines much lower than 15-17 bucks and most people want to make a profit so add some and you should have $20 at a minimum. Add the stupid ratio we have and it should be more like $50 plus, then there wouldn’t be a shortage and it would be mined to meet all demand. Such is the law of wacky races this one will correct way to the upside and then find a new level
I like David Morgan’s saying re silver. “If it doesn’t scare you out it will wear you out” so go get some nappies, be patient and enjoy the ride!
Disclosure ; Duncan Cameron is an affiliate of “Anglo Far East” and endorses bullion holdings on your person mixed with international diversification via this company that has rigorous 3rd party auditing procedures to verify clients holdings. Whilst I trade, make no mistake, trading is a pastime that can never replace core bullion holdings.
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