by Ted Butler, via Silver Doctors:
After studying the silver market closely for more than three decades, I find it nearly unbelievable that its single most important price factor is widely unknown. Admittedly, the vast majority of the investment world has little interest in silver and that’s unlikely to change any time soon. But underappreciation has its merits in the investment world. After all, silver does have a history of climbing in price higher and faster than just about any other asset and a multitude of factors now point to another massive price move higher ahead.
The factors favoring a big move higher revolve around the incredibly small amount of physical silver available for investment as a result of most of the silver produced over the centuries having been used up in industrial applications. That, in combination with the fact that more investment buying power exists today than ever in the history brings to mind the words of the famous silver speculator, Bunker Hunt, “silver is an accident waiting to happen.” Granted, silver also has a history of plunging more than other commodities, but since prices have already declined by 70% from the peak of five years ago, the next big move will, undoubtedly, be up.
Still, even among those who follow silver closely, remarkably little is mentioned about the one factor that just about guarantees much higher silver prices ahead. That factor is that the US’s biggest and most important bank, JPMorgan Chase, has accumulated the largest privately owned stockpile of physical silver in world history over the past five years – 500 million ounces. Only the US Government owned more silver than JPMorgan, but that was nearly a century ago and came when silver was used in common coinage. The US Government once owned several billion ounces of silver, but today holds no silver, having completely eliminated its holdings.
Further, the US Government never held silver with the intent of seeking a profit. In contrast, the only reason JPMorgan has acquired half a billion ounces of actual silver is for the express purpose of making as much of a profit as possible. By simple logic, JPMorgan will make the largest possible profit on its silver holdings only if the price of silver climbs to the highest levels possible. Simple reasoning also dictates that those holding silver, along with JPMorgan, will profit immensely when the bank does what it can to insure the highest possible price for silver. I’ll get into what JPMorgan must do to insure the highest possible price for silver in a moment, but first let me establish that the bank has acquired 500 million ounces of metal.
Most people think of banks as being involved in mortgages and checking accounts and are surprised at first at the thought that JPMorgan even deals in commodities, like silver. But the truth is that for many years, JPMorgan has been the largest US bank dealing in Over the Counter (OTC) commodity derivatives contracts in gold and silver. Even though JPMorgan always dealt big in commodities, its path to accumulating half a billion ounces of actual silver took a very specific and traceable route.
In addition to being the largest dealer in OTC precious metals derivatives contracts, JPMorgan was suddenly thrust into the role of being the largest dealer in gold and silver on the COMEX, as a result of being asked (by the US Treasury and Federal Reserve) to take over the failing investment banking firm Bear Stearns in March 2008. Few knew at the time that Bear Stearns was the largest short seller in COMEX gold and silver and its takeover by JPMorgan resulted in JPM being thrust into the role of it being the biggest short seller.
While it would appear that JPMorgan came to acquire Bear Stearns by government request, data from a different government agency, the CFTC, clearly indicate that JPMorgan came to dominate and manipulate silver pricing by means of maintaining and adjusting the largest concentrated short position in COMEX silver futures. (For the record, I complained to the regulators that what JPMorgan was doing was manipulative to silver prices and succeeded in generating a CFTC investigation into the matter. Still, the manipulation continued).
As a result of being able to sell short virtually unlimited quantities of COMEX silver futures contracts as prices rose and then buying back those contracts as it then caused prices to fall, JPMorgan made many hundreds of millions of dollars in the years immediately following its takeover of Bear Stearns in early 2008. But because the continued manipulation resulted in silver being priced too low for too long, by late 2010, signs of a physical shortage began to appear, in accordance with the immutable law of supply and demand, and silver prices surged to nearly $50 by April 2011, from as low as under $9 in late 2008. This caught JPMorgan flat-footed in holding COMEX short positions and necessitated it teaming up with the CME Group (owner of the COMEX) to rig the steepest selloff in modern commodity history, which pulled JPM’s short bacon from the fire.
Having looked into the abyss with its big short position as silver soared into the April 2011 price highs, it suddenly dawned on JPMorgan how little actual silver existed in the world and at that time it decided that the right side to be on in silver was the long side, not the short side. I fully admit to considering JPMorgan, at least as far as its dealings in silver are concerned, to being a criminal enterprise; but I also consider them to be the smartest crooks around. My definition of smart would include learning from one’s mistakes and being on the wrong side in the run up in silver prices in 2011 is what convinced JPMorgan to buy as much silver as it could.
But deciding to buy as much silver as it could and actually buying the metal are two very different things, even if you happen to be JPMorgan, with virtually unlimited buying power and market capability unmatched. One doesn’t just blink one’s eyes and place a market order to buy half a billion ounces of silver and call it a day – takes time, patience and cunning. Particularly considered how little available investable silver exists in the world. No matter how rich or powerful JPMorgan may be, buying 500 million physical ounces of silver, given the realities of actual available supply, would take years – as has turned out to be the case.
JPMorgan knew and knows that the amount of real world silver available for sale is limited by a few indisputable facts, namely, there isn’t much to begin with (say 1.3 billion oz in the form of 1000 oz bars) in the whole world and of that amount only a small percentage is ever available for sale at current prices – no more than a few percent. Compounding the small amount of truly available supply from existing holders is the bedrock certainty that most of the silver newly mined and produced is spoken for and consumed by a variety of industrial and other fabrication demands – investment demand must compete with those other demands, a circumstance highly unique to silver. For the past few years, less than 100 million silver ounces were available annually for investment after other silver demands were met.
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