Why Invest in Silver?

I am a poker player and in poker there is a term- “pot odds”. The term is somewhat intuitive and basically means that the amount you will win if you make your hand gives you odds to call (sometimes raise) the current bet. There is also the term “implied pot odds” which refers to the total amount that you assume the pot will be by the end of the hand. While I think silver presents great pot odds, I also think it has tremendous implied pot odds. In other words I think silver is currently a good investment, but if silver does what it could and should, it will be a tremendous investment. Is there a guarantee on either scenario? No, but I cannot think of another investment that has the pot odds of silver.

The big question is when? If it is going to be another 10 years before silver lives up to its potential then obviously nobody would get too excited. But I believe the key to silver taking off in price is simply awareness of the Silver Story.   But, how people become aware of the silver’s status is much more complicated. I have frequently emailed most every politician and media outlet that I can think of stating the following; silver is being manipulated, it is a crime in progress, the government’s own COT report confirms the manipulation and recommend reading Ted Butler. An average investigative reporter (or ambitious intern) could glean enough information in a couple of hours to convince themselves that they could write a very interesting and important article about the silver market.

Currently the silver market setup is extremely bullish. I have explained this in the post Go Long! and other places on this site. The main point is that silver is a small market, both in supply and dollars. Butler does not usually speculate and is usually very conservative and cautious with his commentary.   Any investment is a gamble and all we can do is our best to compare risk to reward. I believe that public awareness of this manipulation is growing and the silver manipulation (to the downside) must come to an end sooner rather than later. This makes silver a great investment. Given the current state of silver I feel there is nothing wrong with trying to logically speculate on the outcome.  Following is what I think is most likely to occur with the silver market.

There are many triggers that could set silver off and up.   Typically, precious metals prices go up with uncertainty as investors look to use gold and silver as a “store of wealth”.   It seems to me that uncertainty is about as high as it has ever been in my lifetime- maybe with the exception of the Cuban missile crises. In my opinion we might not even need a trigger with the MMTs short silver by 369 Mozs. There are plenty of other triggers that could start the silver price on an upward trajectory. I think any of the following events are more possible than “normal” and could be triggers.

  • Widespread public awareness of the silver market manipulation.
  • A major military conflict.
  • A major or series of natural disaster(s).
  • Inflation rates increase significantly
  • Gold to silver (investment) conversion
  • A physical silver shortage
  • A stock market crash
  • An investor or group of investors (the public) buying silver

I’m sure there are many other potential triggers. Let me know what you think might be coming that could be a trigger. Anyway, whatever the trigger(s) is that starts the silver price upward movement I predict that it will happen as follows. The price will rise up toward the top of the range that it has been in for the last couple of years- $18 – $20/oz.   At this point will be the test as to whether the commercials sell into the market and try to continue the manipulation. If they don’t who are going to be the sellers? If the commercials do try to sell into the market, they need to be overrun before the manipulation ends. Once the manipulation ends does that mean that the commercials (or others) won’t try to re-establish it? No, but I think once the dam is broke it is going to be very difficult to re-establish at least until the physical supply gets back in balance. So, once the price goes to $20 or more there is going to be increasing public awareness of silver. Silver has been called the “poor man’s” gold because it is more accessible (pricewise) than gold. Many more people can go to their local coin shop and buy a Silver Eagle than can buy a Gold Eagle. Available physical silver is the key to ending the manipulation. There is only about 10 Mozs.of silver available per month for investment demand compared to the annual supply, after taking out what is used for industry and fabrication. See the Silver Institute annual survey under the Links tab.

The next leg up will be to $30+ as the public gets more excited about silver and buys more physical and EFT silver. As the price goes up and potential supply bottlenecks, the industrial users will become concerned about making sure they have silver so they can make their products. Some of these users may start looking for alternatives to silver, but that won’t happen overnight. Silver producers (miners) will look to mine more silver, but that won’t happen overnight either. Recycling/Scrap will increase but that will also take some time to get into the “pipeline”.   If industrial users try to increase their inventory this could cause a sudden demand of about 50 Mozs. See my post on Physical Supply for some more details on this scenario. The combination of investment demand and potential industrial demand will cause silver to go up to $50/oz. Silver between $30 – $50/oz. will be getting a lot of attention and the public awareness will snowball. Remember when the housing market was booming and you had everybody and their cousins flipping houses?

Once the price hits and goes over $50/oz. it will be “Katy bar the door”. I don’t know where that phrase comes from, but I think the meaning is clear. By this time MSM will be reporting on silver (and gold) and increasing numbers of people will be trying to buy into an already very tight silver market. I think it could take a year or so from the time silver breeches $20/oz. until it gets to $50/oz. It could happen slower or faster, but I think a year is a good guess. The last time silver hit a high ($48.70/oz.) it took about 7.5 months (163 trading days) to go from $20.31/oz. to the high. Once it goes over $50/oz. I think it will go up to $100/oz. fairly fast- maybe just a few weeks or months. Over $50, we are in uncharted territory. There may be investors trying to short silver to cap the price, the USG could be looking at ways to stifle demand- including confiscation, the COMEX may stop trading and/or be in disarray.   Any of those things could cause a lot of price volatility. I think anyone invested in silver will need to be on their toes. I am not forecasting what WILL happen, just what I think could happen and in some instances what is likely to happen. The main point is there could be several different routes on how we get there ($50+) and there will be many different things happening, so we will need to evaluate the situation at that time. I have seen predictions of silver at $100, $200 and even 1:1 to the price of gold. Obviously, I or no one else KNOWS what the price of silver will be and we will only know the high price once it backs off.

I do think that at some point after $50 and more likely after $100/oz. that silver will get into a “bubble” situation, so trying to hang in until the absolute top could get very tricky, but depending on how wild it gets could be very profitable. From now at $16.50 to $100 is a 600% gain. To grab a number that sounds reasonable to me I would say that silver in an un-manipulated market should be around $50/oz. (based on 2018 dollars). I think things will “get bumpy” (be volatile) once silver goes over $50, up to the top and then back down to what will become a stable price range.

The other big plus for silver is the current silver to gold (Ag:Au) ratio compared to historical averages for this ratio. Currently, it is up around 81:1 (takes 81 ozs. of silver to buy 1 oz. of gold).   Historically, that ratio has been more like an average of 55:1. Typically as silver prices rise the Ag:Au ratio goes down. At the two highs of silver on 1/18/1980 ($49.45) and 4/28/2011 ($48.70) the Ag:Au ratio was 17.2 (approx.) and 31.5 respectively. So, even though the gold price is likely to increase, the silver price is likely to increase more by 250% or more. The above ground gold market is estimated to be worth $8.1 trillion at current price of $1350/oz. So, what would happen if/when silver starts going up, 1% of gold money were to convert to silver. That would be $80 billion dollars and at $20/oz. in silver that would buy 4 billion ounces. The only trouble is there are only 1 -2 billion ounces of silver above ground, at least in 1000 oz. bars.  The graphics at Markets gives a very good visualization of the size of different markets.

So, silver is the golden child, so to speak. What could go wrong? As I have said I think the run up of the silver price could be very volatile, but I also think the pot odds are very good. See the section of Risk & Disadvantages to get an idea of some of the risks as I see them. Please comment with ideas of either the advantages or risks of silver investing.

Physical Silver Supply

The key to price with any commodity is normally supply vs demand. The more supply compared to demand means the price goes down. If demand is stronger than supply then prices go up. Those rules break down in the manipulated silver market. But, basically by manipulating the price down the manipulators have kept investment demand down. The industrial demand for silver has remained fairly consistent for the last few years- about 600 million ounces. You can look at the last Silver Institute survey.

Silver Institute Survey

You’ll see that both the supply and demand have averaged pretty consistently (within 10%) for the last 6 years. Between the industrial usage and the silver used for jewelry and silverware there are only 160 million ounces (6 year average) left for investment demand. This is only 13.3 million ounces per month. Think about most manufactures these days. They typically operate on a “just in time” supply system. They want to have as little inventory as possible. Butler wrote a good article on this years ago.

http://www.investmentrarities.com/ted_butler_comentary03-05-02.shtml

So for many if not most industrial silver users, silver is a small part of the total product. I have heard that there is about an ounce of silver in a car. The car manufacturer is much more concerned that the assembly line remains running than what the price of silver is. I don’t know what amount of silver manufacturers keep on hand, but to make it easy let’s say it is one month’s worth.  Now say there is a physical silver shortages. Deliveries are delayed. The natural actions of the purchasing agents would be to build up silver inventories. The manufacturer would want to at least double their lead times and probably more. So, currently the manufacturers use about 50M ozs./per month. Then, due to a shortage they want another 50M ozs. to build their silver inventory and they want it now. There is only an average “extra” 13.3M ozs. available per month that is currently being bought with investment demand. So, just an extra 50M oz. demand would put a strain on the current supply and demand causing prices to jump, causing more investment demand, causing more strain on physical silver inventory. I think there are many “triggers” that could cause silver prices to start moving up, but at some point I think that price rise will go into high gear once silver supply is constrained given the way people will react to supply shortages and higher prices.

Butler has reported that since 2011 JPM has been building a physical silver inventory.  He claims that currently they own about 700 Mozs. of silver.  This silver hoard definitely is a wild card in trying to predict the when and how of ending the silver manipulation.  JPM has accumulated this silver inventory over the last 7 years or about 100 Mozs. per year.  So, if investment demand added 100 Mozs. per year that would take up the slack if JPM backs off its accumulation.  Butler has also said that he believes JPM was buying Silver Eagle and Maple Leaf 1 oz. coins and probably melting them into 1000 oz. bars.  From 2011 – 2016 the average US Mint Silver Eagle sales were 41.2 Mozs. per year.  JPM apparently backed off in 2017 and the sales were only 23.1 Mozs. last year.

Assumptions, Risks & Disadvantages

Assumptions:

  1. JP Morgan (JPM) and other large commercial banks have been manipulating the silver price to the downside for at least 10 years.
  2. JPM has acquired 650 – 700 Moz. of physical silver per Butler over the last 7 years.

 

Risks & Disadvantages:

  • I think the risks of investing in physical silver are minimal, but should be noted and watched for.
  • 30 years ago silver was under $5/oz for quite a while. It went up to just under $50/oz. in 1980 when the Hunt Brothers tried to corner the market, then crashed when they were stopped. It went up to almost $50/oz. again in the months before May 1st of 2011 due to physical tightness. Then manipulators took the price down . They have worked it down and it has been in the current trading range ($15 – $20/oz.) pretty much ever since.
  • There is a small chance of the government or governments declaring silver a “strategic metal” and trying to confiscate it. I don’t think that it is likely or would likely be successful and wouldn’t happen until there was an actual physical shortage. But it is something to watch out for.
    • Gold and silver are traded internationally and if USG tries to confiscate it will just make these commodities more valuable.
    • I think if there is confiscation it will be mainly to get silver. Silver could be declared a “strategic metal” which it is and is needed for electronics and military equipment.
    • I think physical metal under your control would still be relatively safe, but if the USG wants/needs it hopefully they will at least pay a fair price.
  • Having physical silver under your direct control is the safest, but other methods may produce better returns and probably more risks and volatility.
  • There is an Exchange Traded Fund (ETF) for silver with the symbol SLV. Basically, a share of this is an ounce of silver (less accumulated fees). Currently, there are 326M oz. in this ETF.
    • Advantages of SLV are:
      • Can be traded thru most any brokerage account including most retirement accounts (you may have to sign additional notifications)
      • Has physical silver backing most shares.  There has been some shorting of the stock, but that has been fairly minimal and consistent for the last few years.
    • Potential Risks of SLV are:
    • You don’t have the silver under your direct control.
    • BlackRock, Inc. is the SLV sponsor, JPM is the SLV custodian.  I’ve seen many comments and questions about JPM being the custodian and the potential for them to somehow use that position to their trading advantage.  I haven’t seen any reported abuses, but something to keep an eye on.
  • Physical silver typically does have a fairly large premium.  At your local coin shop you can pay $2 -$4 premium on a Silver Eagle.  A 10 or 100 oz. bar may have a smaller premium.  While this premium is definitely a deterrent to trading silver as a short term investment, I don’t think it is for long term investment.
  • At some point the price could get into a bubble situation, but I don’t think that will happen until $100/oz. or more.
  • If the COMEX trading got too wild, I could see COMEX halting trading on silver.  Hopefully, we would get some prior indication that might happen, but if it does it should be bullish for physical silver and could be very negative for “paper” silver.

Go Long!

Go long! I shout. No, not a “hail Mary”, but it should be just an extra point kick to win the game. It seems so easy, if I had an extra few hundred million I would do it myself. But, I know that there are plenty of hedge funds and individuals where investing a few hundred million on a surefire big win would be a “no-brainer”.

So why hasn’t that happened with silver? I guess it doesn’t matter as much why it hasn’t happened to date as why not now? Now, when managed money traders (MMTs) are short 369 Mozs. of silver on the Comex. In the past it has been the commercial traders that sell to the MMT as the silver price rises. The managed money traders being mostly technical traders who seem to have a trading algorithm that the commercials can use to lead them in and out of positions by their collective noses.

I believe that one of two things will happen soon- 1. The commercials will start selling again on a silver price increase taking some more money from the (MMTs); OR 2. The commercials will back off and not sell, but then who will and at what price? Either way traders that want to make some real money should buy. We all know that the MMTs are not hedging, they are not going to deliver any silver, they have to buy back these contracts. I am a subscriber/fan of Ted Butler, so that is where I have gotten most of my information and from which I have formed my silver market opinions which Butler may or may not agree with. He has pointed out that this 369 Moz. short position iis over four months of annual silver supply and no other commodity has this kind of outsized short position. I am not even sure that comparing the position to annual supply is the right way to look at silver. After Industrial Fabrication and Jewelry & Silverware there are only 160 Mozs. (average over the last 6 years) of silver available for investment demand. So, since the MMTs are strictly speculators you could say that they are currently short over 2 years of silver supply for investment. Yes, as the price goes up to $30, $50 or $100/oz there probably will be some less silver used for fabrication demands, but that doesn’t take away from the fact that short covering and investment demand could and should overwhelm the silver supply available.

Again, who sells into this market? And why and at what price? I know there is some debate about the “why”, but silver is such as small market that it really shouldn’t matter. If there were 10 million shares of SLV (or other EFTs) purchased each month for the next 3 months I think we would see a very tight physical market get too tight and prices soar. This is a case where the COT report and logic should give us all the direction for the best next investment- Silver, go long!