July 10, 2020
Ted Butler
Butler Research
The silver market appears ready to blow its top, much like a pressure cooker whose relief valve stopped functioning even as the heat and pressure continued to build. The gold market is also likely to overheat, but at least in gold, its relief valve – the price of gold – appears to be functioning somewhat and has bled off much of the pressure. After all, the price of gold is up substantially on a year-to-date basis and is not that far from all-time highs. While gold looks poised for further gains, perhaps substantial, its price relief valve has allowed much pressure to be released.
It’s quite different in silver, since prices are barely changed on a year-to-date basis and current prices are still close to 65% below the highs registered, both 40 years ago and again 9 years ago. Nothing could demonstrate the malfunctioning of silver’s price relief valve relative to gold than the recent 5000 year undervaluation of silver to gold.
As for why silver’s price relief valve has ceased to function (and gold’s valve is somewhat sticky), that’s obvious – the release mechanism was gummed up due to concentrated short selling on the COMEX. For years the concentrated short selling was led by JPMorgan, but the bank has recently abandoned the short side, leaving 8 other big shorts to deal with a mess when the lid blows off.
What are the heat sources causing the pressure to build in the silver market? For the past few months, the main heat source has been the massively insane quantities of physical silver purchased by and deposited into the world’s silver ETFs, led by the largest, SLV. More physical silver (220+ million oz) has been deposited into these investment vehicles over the past few months than at any time in history. Let me repeat that – never in history has so much physical silver been bought and deposited into silver investment vehicles in such a short time.
Common sense would dictate that much more physical silver being bought in less time would exert much greater upside price pressure. To be sure, silver prices are up from the March lows, but are flat from yearend and still down 65% from the peaks of 9 years ago.
This is not complicated math or advanced pricing formulae – more of a commodity being bought in the shortest time ever should result in a sharp price advance, most likely the sharpest in history. Absent such an expected advance, explanations for why this hasn’t occurred should be apparent. But that’s the problem, namely, no good – or at least legitimate explanations come to mind. Clearly, the price of silver – the release valve on the pressure cooker – is not functioning. Stated differently, this is yet another clear proof that the price of silver is manipulated.
It is because the price of silver has been manipulated – artificially suppressed – for so long, decades in fact, that an unprecedented level of pressure has been created. This pressure for higher prices, more than ever seen in any other commodity has to blow up at some point and all the signs suggest the explosion may be at hand. What signs?
The first sign is that it has become really difficult not to notice that the price of silver is not functioning as would be expected, given the surge in documented physical buying. Oh sure, there will always be a few who insist silver is priced correctly for what have to be the most nonsensical reasons imaginable, but for every recalcitrant bear, there are multitudes of newly converted silver bulls. In fact, I’ve observed more commentators previously skeptical or wishy-washy on the prospects for silver, turned such avid bulls that I wonder how it is that they made the conversion to bullishness so seamlessly.
It’s not hard to be extremely bullish on silver currently and the reasons for being bullish have never been more compelling. Even the Silver Institute, which to my recollection has never issued price predictions on the metal, is now calling for silver to rise in price due to the obvious explosion in physical investment buying, both on a retail and a wholesale basis. The only thing being left out by the Institute, of course, is why the price of silver is so cheap to start with. As is the case with many, the issue of price manipulation can never be acknowledged no matter how obvious.
Every day, more are coming into the bullish silver fold and I have yet to observe any defections. Certainly and most likely, the well-informed recent buyers of the 220 million physical ounces don’t appear set to abandon their bullish conversion. Unlike the previous two runs to $50, the buyers at this point are not chasing prices higher, but are accumulating in a highly measured manner – the antithesis of “hot money”. I’m convinced that the hot money phase lies ahead and when it does kick in, it will further blow the lid off prices.
It’s no secret that JPMorgan has supplied the 220 million ounces bought and deposited into the world’s silver ETFs these past few months, for the simple reason it is the only entity capable of doing so. The question is how much longer it will continue to do so. The moment JPMorgan stops supplying physical silver to the market and refuses to add new COMEX short positions, it does not appear likely that the remaining big shorts can keep the lid on prices. That this is becoming increasingly apparent to more observers and investors daily just adds to the pressure.
There is no question the price lid will be blown off the silver pressure cooker at some point, so even though it’s admittedly impossible to predict exactly when that will be, more relevant is what to expect as the lid comes off. Simply put, this will be something never seen. Even in the two previous silver price runs to $50, the short sellers never fully capitulated and managed to then rig prices sharply lower in a fraction of the time it took for prices to rise. Since so much silver has been acquired before prices have climbed much on this go-around, the prospects for massive downside liquidation appears rather limited.
My definition of the lid being blown off of the silver pressure cooker includes the big short sellers collectively throwing in the towel and moving to buy back shorts. That has never occurred, but it will at some point. In fact, we have yet to ever witness any real concentrated silver short covering on higher prices and this is probably the clearest proof that silver has been manipulated for all these decades.
The big shorts have always been able to ride out price rallies in silver over the decades, no matter how large, without ever collectively rushing to buy back short positions, in complete defiance of short selling norms in every other market (except gold). It’s frequently (and erroneously) said that all markets are manipulated, as a way of downplaying and dismissing the silver manipulation. But that ignores the fact that in COMEX silver (and gold) the big shorts have never collectively bought back shorts on higher prices. But that day is coming and may now be at hand.
Since we’ve never witnessed a collective short covering of the concentrated short position in silver, we can’t draw on actual experience to gauge what effect that would have on prices – all we can do is imagine. At the very least, such an unprecedented occurrence should be a shock to the price system. A true attempt at collective short covering by the big shorts should cause the price to vault upwards like never before. Where silver prices have jumped by dimes in the past, think dollars instead, and within almost impossible to imagine short time frames. In a genuine attempt at collective short covering by the big shorts, price jumps of dollars at a clip would have to occur.
The key is to look at the underlying mechanical aspects of what a collective covering of the concentrated short position means to the price and not the price itself. By mechanical, I mean how quickly the 8 big shorts can close out and cover a significant portion of the 70,000 contracts (350 million oz) they were short as of last Tuesday (to say nothing of the 200 million oz held short if JPM has leased the metal that has found its way into the silver ETFs). Only a small portion is capable of being covered on any given day. The good news is that future COT reports will provide the evidence (or lack thereof) of short covering as it occurs.
One reason I believe there is more of a pressure cooker analogy in silver than in gold, other than price pressure being relieved in gold as gold prices have risen much more than silver, is the dimension of the concentrated short positions in each. Over the past few months, an amount of physical gold roughly equal to the concentrated short position of the 8 largest shorts, close to 25 million oz, has been deposited into the COMEX gold warehouses. In fact, I believe the reason for the large physical inflows and large deliveries to date is related to the concentrated gold short position. Certainly, no one can claim 25 million oz of gold is impossible for the big shorts to come up with. After all, 25 million ounces of gold, while a very sizable $45 billion in dollar terms, is less than 1% of all the gold bullion in the world.
It’s different in silver, where the 350 million oz concentrated COMEX short position (to say nothing of an additional 200 million oz short position if my claims of leasing are accurate) seems to preclude that amount of physical silver being available to the big shorts. This is what separates silver from gold, namely, it is conceivable for the concentrated short position in gold to be offset by physical metal, where that would seem to be impossible in silver. The big silver shorts coming up with the equivalent amount of physical metal at close to current prices is about as likely as me discovering the vaccine for Covid-19 or becoming the new hairdresser to the stars. So, we sit and wait for the inevitable short covering and silver price explosion.
Ted Butler
