Precious Metals Buying Guide
The Coming Silver Squeeze
History Suggests Price Objective of At Least $130
By Stefan Gleason and Seth Van Brocklin
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- It's fact, not fiction. New information on how silver prices have been artificially suppressed.
- With more claims on silver in existence than could possibly be delivered, an upside price explosion is setting up.
- Positioning yourself to profit from the coming silver mania – it's never been easier!
If Independent Living subscribers have assumed that we like silver, they would be wrong. We love it – and for good reason!
The supply and demand picture for silver is, in our view, extraordinarily bullish. Meanwhile, developments in global financial markets coupled with a growing global scramble for hard assets to hedge against currency debasement only adds to the bull case. Silver prices – still under their all-time nominal highs from 1980 – seem destined to rise dramatically.
Historical precedent coupled with current silver fundamentals point to the likelihood of an explosive super spike in the silver price and a high price plateau beyond that. The last super spike in silver began in 1979, after silver had risen steadily for a decade from prices below $2.00 per ounce. After a decade of gains, silver had been trading at around $5.50 per ounce. Just 12 months later, in January 1980, silver recorded a blow-off top at $49.45 – an incredible 800% upsurge over the course of a single year!
Of course, circumstances were different then. The Hunt brothers attempted to corner the market. (There was no true shortage, and their silver squeeze was easily thwarted by regulators who abruptly changed the rules on the paper trading market.) Double-digit inflation was raging, but the Federal Reserve actually responded by raising rates dramatically. And the market collapsed as spectacularly as it had risen.
Silver's Fundamental Picture
Looks Super-Bullish
But in many ways, the fundamentals today auguring for far higher silver prices are far more compelling and more sustainable than they were in the 1970s. A corner may well be developing in the silver market, but it's the whole world doing the cornering this time! Some key points to consider:
More than 800 million ounces are consumed each year, most of which come from new mine supply. Unlike other metals, silver is consumed in very small increments, making recycling very difficult. In other words, once silver is used, it is usually gone forever. At the same time, silver is generally an incidental cost in the products that use it – such that a dramatic increase in the price will not necessarily cause substitution. A hint of shortages could cause industry users suddenly to hoard the metal and drain remaining available inventories.
- Investor demand is surging. From 1990 to 2005, investors had been net sellers of silver. In 2006, we witnessed what appears to be a major sea change in the market. The public again became net buyers of silver. In the first two months of 2011, demand for silver American Eagles soared to a record-high 9,662,000 coins – forcing the U.S. Mint to curtail production and put all wholesalers on allocation (because they knew the pace of demand was unsustainable from a production standpoint). Meanwhile, physical-silver-backed exchange traded funds (ETFs) and other vehicles have seen dramatic inflows since 2006.
- The gold/silver ratio is currently around 40, which suggests silver is undervalued. The ratio of silver to gold in the earth's crust is 17.5:1 – and the price ratio has hovered in that range for most of recorded history (see graph). If history is any guide, the remaining bull market in precious metals could see silver outperform gold by a factor of 2 or more.
- Save for recent decades, silver has been used as money throughout human history and is in the process of reassuming that role. As faith in government fiat money (such as Federal Reserve notes) diminishes, savers and investors worldwide are embracing gold and silver as a store of value.
Silver-Dependent Industries Begin to Hoard
as a Dramatic Silver Squeeze Forms
With investors and industry fighting to get their hands on a metal that is now in a structural supply deficit, silver analyst David Morgan projects that a "demand squeeze" on silver will lead to an explosive move in prices, the magnitude of which will "make the tech bubble look like a warm-up." Forward-thinking silver-dependent manufacturers are moving with deliberate speed to secure direct access to mine production so the expected squeeze does not suddenly leave them high and dry. One silver minting insider, Reed Larsen, told us that "At the first whiff of shortages, industrial giants worldwide, who have billions of dollars invested in infrastructure, will lock up the future supplies they need at any cost. It could eventually be difficult to get the metal at any price, which is why we have already started locking up all the silver in the ground we need to serve our rapidly growing pool of bullion investors."
Silver Price Suppression Schemes
Will Eventually Unravel
The reason why silver prices have so far been contained below their 1980 highs is largely the result of central bank and government dishoarding over several decades – combined with financial shenanigans. Big-name financial institutions – in fact, some of the biggest names of all – have, with the blessing and encouragement of government, created a paper trading market for silver based on promises that are literally undeliverable. According to silver expert Jeffrey Christian of the CPM Group, the derivatives trading market for silver is fully 100 times bigger than the physical market to which it is supposedly tied! This kind of leverage in any market is generally considered reckless – a situation that could lead to a run on physical silver if just a few more buyers stand for delivery than normal.
Banks and related players are selling contracts for silver they don't own and never intend to acquire. It has the effect of soaking up demand that would otherwise go into the real, physical market.
The silver market is dominated by a concentrated short position (the largest of which is believed to be held by JPMorgan Chase, which a recent whistleblower further confirmed is carrying out market interventions, including those benefiting Treasury and Federal Reserve officials desiring to keep the U.S. dollar looking strong despite massive money printing). What's unique about the short position in silver is that no other commodity market is being sold down by a total of just four traders to such an extent. This concentration makes manipulation quite possible.
The institutional big boys who are influencing the silver market with gigantic short positions can continue getting away with it only so long as they are never forced to deleverage and make good on their promises – to cover their short sales with actual, physical silver. Whistleblower Harvey Organ stated in a recent interview, "The game ends when the people that own all these paper obligations say ‘enough, I'm going to be taking delivery'… The Comex [futures exchange] will be drained, and just about every physical facility globally will be drained."
Commodities Futures Trading Commission (CFTC) hearings into possible manipulation may have been partly responsible for silver's recent double in price, but the mainstream media have mostly ignored the evidence of ongoing manipulation.
Why $130 Per-Ounce Silver May Be Too
Conservative a Price Projection
Exactly when a full-fledged "run on the bank" in silver will occur is difficult to predict. How high prices will ultimately go in the silver squeeze that ensues is impossible to say. But it is reasonable to expect that long-term investors who buy physical silver at today's prices will be richly rewarded.
We believe that sometime in the relatively near future, the paper market for trading silver will rupture, taking prices to multiples of where they're at today, as a mad scramble for limited quantities of actual, physical silver ensues. To equal the 1980 high in 2011 dollars (based on the Bureau of Labor Statistics' Consumer Price Index) silver would have to reach $132.00. That is our minimum target price.
But based on more realistic measures of inflation (there's no perfectly precise measure, but the government's methodology has been corrupted by efforts to understate price-level increases), silver prices would have to get up to around $250 just to equal its 1980 peak in real terms.
Because currency depreciation is an ongoing process, any price targets based on inflation adjustments will need to be revised upward over time. And because the fundamentals for silver are more compelling now than ever before, it's quite conceivable that silver prices will move much higher in real terms than they did in January 1980. In fact, a few well-regarded analysts are calling for silver to get as high as $1,000 someday. Predictions like these might seem outlandish to most, but there is really no telling what could happen if widespread shortages develop in this vital metal. Silver is a notoriously volatile metal and can be expected to pull back swiftly and severely after any manic move. However, unlike the last time around, which saw silver give up the gains produced by the super spike (with sub-$4 levels seen in the 1990s), this move likely isn't going to be a fluke. The supply shock that's coming will affect the market on a more permanent basis. The "poor man's gold" could collapse from a hypothetical peak of $250 back down to $100, for example, but we aren't likely ever to return to the conditions that allowed for silver under $20.
Not Too Late to Beat the
Coming Silver Mania – Yet
If you're not on board with a position in physical silver bullion, there is still time to buy before the mania phase begins. But there may not be a whole lot of time left. Once the silver squeeze begins and what little inventories still exist are depleted, it may become next to impossible to buy silver through normal channels at a fair price. |
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