Silver: The Calm Before the Storm
Silver has been about as dull as it gets for years now. You wouldn’t know by looking at a price chart, but that is poised to change.
Look at the trading being done by one of the largest market movers in silver, and you’ll see some puzzling mixed signals.
Dig deeper into the supply and demand fundamentals, and it starts to make sense.
While bearish positions are hitting records, the underlying market has dramatically changed over the last couple years.
And those market forces, bolstered by the market mover, could very well set off a massive breakout for silver prices this year.
A Long History of Suppressed Prices
Large amounts of bearish positions in silver have been the norm for well over a decade now. Consolidation during and after the Great Recession is largely to blame.
JPMorgan inherited a massive amount of silver shorts when it took over Bear Stearns' assets right after the Great Recession. Combined with HSBC, the two megabanks covered 85% of all silver shorts.
These kinds of positions were incredibly difficult to wind down with substantial losses. There simply wasn’t a market to absorb what the bankers owned.
And so, they didn’t. They used their collective weight to manipulate silver prices lower and create their own profits.
The most egregious proof of this came from Andrew Maguire, a precious metals trader who sent detailed information in an email to the CFTC about what to expect in two days after he noticed signals from JPMorgan and HSBC traders using after hours high-frequency trades to crush prices.
The trader rapidly flooded the market with contracts representing a grand total of 7,000 tonnes. The seller then suddenly shifted and started purchasing everything they could. Still moving far faster than other traders, they walked with $3.6 billion.
The CFTC opened an investigation, but let the case linger, and ultimately closed it with no action.
It’s best not to bite the hand that feeds, or in this case will hire you in a couple years with a massive pay raise.
But since then, those massive institutional positions have changed, while traders have largely kept using the same rigged system to profit from suppressed silver prices.
What’s Happening Now
Silver prices have been locked in a price channel between $16 and $18 per ounce for a couple years now.
Add a bit of leeway to that price range, and we’ve been seeing a pretty flat market for going on five years:
The net short position for Chicago silver futures touched a record 39,604 contracts earlier this month.
Since then, they’ve retreated a bit to around 36,400 contracts, equivalent to about 182 million troy ounces, or 5,663 tonnes.
With such massive shorting, silver prices simply cannot move much higher. But the major market movers appear to be slowly switching sides.
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For example, JPMorgan owned no silver back in 2011. Since then, it has quietly purchased more than 133 million ounces. That is more than the Hunt Brothers managed back in 1980 when they tried to corner the market.
Meanwhile, the futures game continues. JPMorgan is still selling short huge quantities of paper derivatives.
Holding physical silver while using massive positions to suppress prices makes absolutely no sense, unless JPMorgan plans on changing to a bullish stance.
JPMorgan has no real incentive to stop fleecing smaller silver investors. No one is willing to stop it on the regulatory side, and no one really can in the markets without putting billions on the line in a risky open confrontation.
So why would it give up an easy dollar now?
That most likely has to do with the fundamentals of supply and demand.
Mine supply increased for 13 years straight through 2015. Both 2016 and 2017 saw production fall.
Meanwhile, industrial demand — which consumes about 60% of world supply — registered its first rise since 2013, largely thanks to increased use in solar power cells. Solar growth is poised to soar in the years to come.
Even jewelers and cutlers, which account for another quarter of total usage, have posted increases.
But while the silver bears are willing to plod on with the status quo, there really isn’t room to push prices further down. Silver is about as cheap as it ever has been, especially when compared to gold.
In short, while the supply and demand fundamentals have switched to a bullish outlook, investors were overly skeptical or just ignorant, and were willing to sell into the market in the $16-to-$18-per-ounce range.
The easy money from shorting silver is coming to a close, and a massive short squeeze is being plotted by the megabank that practically invented "how to profit by suppressing prices."
Keep a close eye on the silver market and look into investment opportunities. JPMorgan will pull the trigger, and it is only a matter of when. We’re in the calm before the storm.
Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page.
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