Written by Jeff NielsonMonday, 16 May 2011 11:25
As we witnessed the entirely illegitimate take-down of the silver market by the CME Group (the private corporation which operates New York’s “Comex” exchange), perhaps what was most appalling through this episode was the gross negligence of the mainstream media in reporting on this event.
To illustrate this negligence, I must start by doing what the mainstream media refused to do: examine the fundamentals of the silver market. At the time that the CME Group launched its attack on the silver market (on behalf of the bullion-banks it serves), the price of silver was approaching $50/oz. Let’s ignore the fact that silver’s sudden spike toward $50 was caused by the short-covering of JP Morgan, because even at $50/oz it is unequivocal that silver is still seriously undervalued.
It is possible for us to say this regarding the silver market because unlike any other “hard commodities” on the planet, we have price data for gold and silver going back nearly 5,000 years: the gold/silver price ratio. The original gold/silver price ratio was 13:1. This was in honour of the fact that gold was deemed to be the Metal of the Sun, while silver was deemed the Metal of the Moon – and there were thirteen “moons” for each cycle of the sun (i.e. a year).
With silver occurring as an element in the Earth’s crust at roughly a 17:1 ratio versus gold, while this price ratio wasn’t perfect, it was a very good approximation. Indeed, the fact that the gold/silver price ratio has averaged roughly 15:1 over the thousands of years since that time demonstrates how good a job our ancient ancestors did at pricing these metals.
Conversely, in our corrupt, modern markets, regulators and administrators claim that the price ratios for commodities can be whatever arbitrary numbers they fabricate – irrespective of the actual economic fundamentals for that commodity. Meanwhile the clueless shills in the media simply parrot this nonsense.
We are told by all the mainstream “experts” on precious metals that the gold/silver ratio “should” be in the range of 50:1 to 60:1. What justification do they offer for this totally arbitrary number? Over nearly the last century, this has been an approximate range for that price ratio.
In other words, for 98% of recorded history the gold/silver price ratio has averaged 15:1, while in the last century it has averaged 50:1 – and yet we are told to simply disregard that 98% span of civilization in favor of the “modern” ratio. The implication being that we have “evolved” to a better understanding of these commodities. The arrogance here is disgusting, and the ineptitude of the media in echoing this is unforgivable.
It is the most elementary supply/demand analysis that if two commodities exist in our physical universe in a fixed ratio to each other that they must be priced at a similar ratio. The only exception to that tautology would be if we valued the two commodities differently – based on their aesthetic or physical properties.
We arrive at a very simple premise: the only way that our “modern” gold/silver ratio could be valid (and sustainable) is if our species has suddenly (and capriciously) decided that silver is much “less valuable” than at any other time in our history. What are the facts here?
As anyone who understands precious metals is aware of, for close to 5,000 years gold and silver have been the best “money” ever devised by our species. I don’t have the time and space to detail those fundamentals here, but they satisfy the definition of money better than any other mediums of exchange we have ever been able to invent.
Has silver suddenly lost the status it has enjoyed as money for 5,000 years? Hardly – indeed exactly the opposite. Though having only recently jumped on the “silver bandwagon”, few argue the merits of silver more forcefully than Eric Sprott. He recently observed (when the price ratio of gold and silver was approximately 40:1) that the dollar-value of silver being purchased (as “money”) equaled what was being spent on gold.
In other words, though the two metals occur at a 17:1 ratio, holders of silver money are showing a 40:1 preference for silver. It is incontrovertible arithmetic that silver cannot bepurchased at a 40:1 ratio versus gold when it only exists at a 17:1 ratio. And the only mechanism which can reduce the demand for silver to a sustainable level is (much) higher prices. This is reinforced by the fact that even after the large move higher in the price of silver that the price ratio still remained at an (unsustainable) level of more than 30:1 at the time that the CME Group launched its attack. Thus considered solely as “money”, the fundamentals unequivocally dictate that the price of silver should be much higher – and needsto be much higher in order to achieve a sustainable equilibrium in this market.
However, looking at silver as money is literally only half the equation in this market. The other half is the explosion of industrial applications for silver. Over recent decades, there have been more new silver-based patents than those for any other metal, and industrial demand is soaring by a robust double-digit level every year (increasing by 18% in 2010).
Meanwhile, crippled by decades of silver being grossly under-priced (through the ruthless manipulation of the bullion-banks), even after a ten-fold increase in the price of silver, thedecimated silver industry has only been able to ramp-up mine production by an anemic 2% per year. Again the supply/demand fundamentals are absolutely unequivocal. Industrial demand increased by nearly ten times the rate of mine supply in 2010 – totally unsustainable. And (again) the only mechanism which can restore equilibrium to this segment of the silver market is much higher prices: to moderate industrial demand, while stimulating more mine production.
This means that the only significant “difference” between the first 4,900 years that we consumed silver and the last 100 is that while silver is valued as “money” as much as ever (if not more), that it is also prized for its industrial applications more than at any time in that 5,000 history. In other words, instead of being valued much more poorly versus gold (in relative terms) over the past 100 years, silver should have been valued even more highly (i.e. at a ratio even lower than 15:1).
This conclusion is reinforced – in unequivocal terms – by both the destruction of silver inventories and stockpiles, and the annihilation of the silver mining industry itself. In just a 15-year span (from 1990 to 2005) silver inventories plummeted by 90% - a direct consequence of silver being radically under-priced (due to manipulation). Meanwhile, more than 90% of the world’s silver mines were shut-down over the same period of time, because the price of silver was too low for those miners to manage to break-even in mining it. This is further incontrovertible proof that silver was grossly under-priced, and remains grossly under-priced.
Nearly 5,000 years ago, our ‘primitive’ ancestors were able to peg silver at a very reasonable/accurate 13:1 price ratio toward gold. Are we to believe that the modernadministrators of our commodity markets have a much, much less competent grasp of the fundamentals of supply and demand than our ancient ancestors – despite the wealth of data sitting under their noses, which is so unequivocal that any six-year-old could comprehend it?
It is simply not plausible that the CME Group could have held the legitimate belief that silver was “over-valued” when it launched its attack on the silver market. It is with this inescapable conclusion in mind that we can now view the actions of the CME Group: and its five hikes in margin requirements in less than two weeks.
The salient fact here is that after the first hike in margin requirements, the price of silver was already plummeting lower – in the opposite direction dictated by market fundamentals. Had the CME Group ceased its manipulative activities at that point, it could have still (plausibly) maintained that it was “managing” this market in a responsible manner. However the four successive hikes after that intial move completely rebut any/all legitimate motivations on the part of this entity.
Knowing that it had already pushed the silver market totally against the supply/demand fundamentals (toward even more totally unsustainable prices), it continued to ‘stomp’ on this market again and again.
What was the response of the mainstream media toward this shocking manipulation of the silver market? They ignored it. What was the “story” here according to the media? “The silver bubble has burst.” What evidence did the media offer to support their conclusion that silver was “in a bubble”? Nothing. Zero.
Understand that there is no simpler market to analyze than a commodity market. If there is an imbalance in the market and demand exceeds supply, inventories shrink – and the only means to restore equilibrium is higher prices. Conversely, where supply exceeds demand, inventories grow – and the only means to restore equilibrium is lower prices.
If supply grossly exceeds demand, then inventories suddenly explode higher – making a crash in the price inevitable. That is a “commodity bubble”, and it is impossible for a “bubble” to occur in any other way.
Meanwhile, in the silver market we have demand radically exceeding supply, while inventories continue to decline. Quite obviously, the silver market is the exact opposite of a “bubble”. Since no one who understands the silver market could possibly consider this market to represent an asset-bubble, this means that each and every one of the “bubble” articles which saturated the mainstream media was written by someone who knows absolutely nothing about the silver market, or someone who was intentionally trying to deceive their readers. There are no other possible conclusions.
What disturbs me here is not the malice of the CME Group or the the nonsense spewed forth by the media. Those are “givens”. Rather, it is the fact that instead of helping to heal this market the actions of the CME Group radically push this market toward default.
When you drive down the price of a commodity when it is already under-priced, and inventories are exhausted, clearly you are trying to cause the market to default/implode. Yet, as we already know, such a default-event directly implies the bankrupting of JP Morgan, which is sitting on the largest “short” position in the history of commodity markets – and facing incalculable losses when default occurs.
As I have stressed previously, the only “escape” (which I am able to perceive) for JP Morgan from its own silver-suicide is if the U.S. government once again confiscated the silver of its citizens (as it did in the 1930’s), and then funneled that silver into JP Morgan’s vault – to prevent that Oligarch’s bankruptcy.
Note that when default occurs we will be told by the morally and intellectually bankrupt media that default was “caused by excessive speculation”. It is only through demonizing the small number of investors who are conserving the tiny remnant of global silver stockpiles that the corrupt U.S. government will be able to “justify” confiscation to the American sheeple.
Obviously the reality is that this market has been destroyed by the “shorts” (and the administrators and regulators who illegitimately serve them). This is why it is so important to get an accurate account of these events “on the record” as they are occurring. It is also important to warn anyone foolish enough to hold silver in a U.S.-based account or (so-called) “bullion-ETF” that your silver will be the first (and last?) to be confiscated.
The looming silver-confiscation by the U.S. government is being as clearly “telegraphed” as the illegitimate maneuvers of the CME Group. Those holding silver in any sort of U.S. fund or account ignore those signals at their own peril.
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