Silver and the Unmentionables


The purpose of a taboo is to avoid destruction. Those who do not respect the taboos of a culture endanger the cultural identity.

Therefore, disregarding the taboos produces self-destruction and/or destruction.

Many of you read Jeff Clark's (of Casey Research) recent piece outlining the reasons why silver prices will likely move higher. It was a great piece from an organization with great reach. 

But it missed the unmentionable elephant in the room. Here is a summary in all its bullish glory.

1. Inflation-Adjusted Price Has a Long Way to Go

One hint of silver’s potential is its inflation-adjusted price. I asked John Williams of Shadow Stats to calculate the silver price in June 2014 dollars (July data is not yet available).

Shown below is the silver price adjusted for both the CPI-U, as calculated by the Bureau of Labor Statistics, and the price adjusted using ShadowStats data based on the CPI-U formula from 1980 (the formula has since been adjusted multiple times to keep the inflation number as low as possible).

The $48 peak in April 2011 was less than half the inflation-adjusted price of January 1980, based on the current CPI-U calculation. If we use the 1980 formula to measure inflation, silver would need to top $470 to beat that peak.

2. Silver Price vs. Production Costs

Producers have been forced to reduce costs in light of last year’s crash in the silver price. Some have done a better job at this than others, but check out how margins have narrowed.

Although roughly 75% of silver is produced as a by-product, prices are determined at the margin; if a mine can’t operate profitably or a new project won’t earn a profit at low prices, the resulting drop in output would serve as a catalyst for higher prices. Further, much of the current cost-cutting has come from reduced exploration budgets, which will curtail future supply.

3. Low Inventories

Various entities hold inventories of silver bullion, and these levels were high when U.S. coinage contained silver. As all U.S. coins intended for circulation have been minted from base metals for decades, the need for high inventories is thus lower today. But this chart shows how little is available.

4. Conclusion of the Bear Market

This updated snapshot of six decades of bear markets signals that ours is near exhaustion. The black line represents silver’s decline from April 2011 through August 8, 2014.

The historical record suggests that buying silver now is a low-risk investment.

5. Cheap Compared to Other Commodities

Here’s how the silver price compares to other precious metals, along with the most common base metals.

Only nickel is further away from its all-time high than silver.

6. Low Mainstream Participation

Another indicator of silver’s potential is how much it represents of global financial wealth, compared to its percentage when silver hit $50 in 1980.

In spite of ongoing strong demand for physical metal, silver currently represents only 0.01% of the world’s financial wealth. This is one-twenty-fifth its 1980 level. Even that big price spike we saw in 2011 pales in comparison.

There’s an enormous amount of room for silver to become a greater part of mainstream investment portfolios.

7. Watch Out for China!

It’s not just gold that is moving from West to East…

Silver market trading volumes rose sharply last year, mostly a result of the Shanghai Futures Exchange (SHFE) initiating overnight trading.

Don’t look now, but the SHFE has overtaken the Comex and become the world’s largest futures silver exchange. In fact, the SHFE accounted for 48.6% of all volume last year. The Comex, meanwhile, is in sharp decline, falling from 93.4% market share as recently as 2001 to less than half that amount today.

And all that trading has led to a sharp decrease in silver inventories at the exchange. While most silver (and gold) contracts are settled in cash at the COMEX, the majority of contracts on the Shanghai exchanges are settled in physical metal, which has led to a huge drain of silver stocks…

The bottom line is that the current silver price should be seen as a long-term buying opportunity. This may or may not be our last chance to buy at these levels for this cycle. But if you like bargains, silver’s neon “Sale!” sign is flashing like a disco ball.

For all its bullish glory, the basic impression this leaves is -

Well, the markets must know best after all, and all this will eventually get priced in. Just wait.

To get it so right and so wrong trumps the cause.

Anyone adhering to the taboo that silver is manipulated is punished - or marginalized - to the fringe.

Especially by organizations like this that predicate their existence under the assumption that the markets are bigger than intervention. They may be eventually. But while no one can time that eventuality, one can certainly prepare.

But to ignore the fragility caused by manipulation or price suppression - for silver or any other market - is perilous. In fact, silver is the poster child for market-risk.

Finance has created artificial bubbles in predictable cycles, each one trumping the size of the next in terms of size and destruction. Complaining versus extolling the virtues.

We all get the taboo.

One perception is that those who complain that the price is too low obviously have an agenda.

Of course, we will complain. But complaints begin to sound like a pitch, or a justification. Not a basic truth.

The mainstream financial media parades one actor after another promoting and extolling the virtues of paper; despite clear, real indicators that nothing backs the series of asset bubbles outside of intervention.

How hard would be to include, as the 8th factor, the irrevocable truth that prices have been suffocated for decades by a simple concentration of sellers versus a diverse group of buyers on (currently) the most important commodities exchange on earth?

That pregnant truth gives rise to most of the others.

Silver and its artificially low price are a reflection on monetary policy gone wrong.

A policy that begs for risk aversion. But taboo will not sell newsletters.

Taboos have a self protective mechanism. Conspiracy's cousin, they strictly and effectively punish any attempt at breaking its hold.

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