Note: This is not financial advice.  I’m not a financial advisor and I’m wrong 100% of the time.  Investments are risky and nothing mentioned here should be considered financial advice.  Invest at your own risk.

By the time I actually click “publish” on this, silver could have wiped out all of its gains.  It moves in a volatile way.  At the time of this writing, silver spot is showing $16.70 and silver futures are at $17.07.  It has moved RAPIDLY the last 48 hours, and it’s been a treat to watch.

I watch the spot price a lot and in the last 6 months, I’ve seen it kiss $19 and the world melted down.  Gold quickly got back up on its feet and surpassed previous highs. Currently, gold is the highest its ever been in history in a lot of other currencies – but competes with the U.S. dollar for “safe haven” status.  Whenever the dollar weakens, gold goes up.  When they talk about $3 trillion rescue bills, it dilutes the power of dollars already in existence and thus gold gets stronger.

Silver also works like that, but it has a dual identity, so it goes schizo sometimes.  It is money, just like gold, and does react when massive spending bills happen, but it’s also an industrial metal.  So – when a great deflation happened, both gold and silver (and their GLD/SLV) were sold to cover a lot of margin calls.  This presented an opportunity to buy silver at One Gold for a ridiculous $12.75.

While the “paper price” of silver hit the skids, this was a function of futures contracts.  If you went to a coin shop to buy an ounce of silver, you would be laughed at to get silver at spot, or anywhere near it.  In fact, if you went on to ebay and looked at what American Silver Eagles were selling for, you would find it was $25-$30 each.

The problem is, the spot price was “broken”.

  1. Miners are not selling silver to production facilities for $12.75.  The “break even” cost for miners is $15.  So, that was “cute” they put spot price at under $12 at one point.  Absolutely adorable.
  2. Ridiculous investment demand shot premiums up over 100%.  No coin shop was going to sell you ASEs for less than $25, maybe more.

Well, as they say, “the cure for low prices is…low prices”.

Spot price was wayyyyyyy low and it presented a pretty good environment to invest.

But – how far could this go?

One lesson I’ve been learning is just because you think a stock is worth $100 and it’s at $50, it just doesn’t move there in a day, a week, or even a month.  There’s a lot of zig zag, breakouts, flags, triangles, and other fun shapes made on the way to get to $100.  It takes time.

With silver, I want to look at where this could go?  Could it go back to $4?  Possibly.  But if it costs $15 to produce it, how long until you are out?  Who would mine it for $4?  If you bought it at $16, why would you sell it at $4?

There’s been a lot broken with the spot prices, and it has been suggested by many over the years that the price of silver has been manipulated by big banks.  I recently completed an audio book called “The Big Silver Short” in which it talks a lot about the run up to $49 in 1980 and 2011.  Accounting for inflation, I read somewhere that in 2020 dollars, the spot price would be the equivalent of $150 and $78 today, respectively.   Both of those items were different circumstances which created the event.

But the question for today is, “what is the moon”?

It’s very difficult to answer because – is silver money or is it an industrial commodity?  You then also have to ask yourself what gold is worth?

Many people struggle to answer this question, but I’m going to try and break this down.

Commodities

From a simple supply and demand equation, one can say, “the price is the price” due to price discovery in the free market.  Commodities like corn, wheat, and beef sell in the free market.  They use things called “futures contracts”.  I’m not a trader, nor pretend to be, but the concept here is to try and define your costs and supplies downstream.  Maybe you were a restaurant steak chain and wanted to supply beef quantities for the next 6 months.  You would be looking for a specific price, and a seller would love to sell you at specific prices.

What we recently saw with WTI crude is the contracts forced them to “stand for delivery”.  What this means is, if you bought a futures contract with WTI crude, you needed to then come and get your oil.  Apparently, newbie ETF managers didn’t realize this and at the last minute, realized that they needed to take delivery of 2 million barrels of oil and….they don’t do oil.  So they had to pay someone to take this oil off of their hands.

Brent Crude doesn’t do this – if you want out, you would then have to “settle in cash”.

With silver and gold, there’s a massive “paper market”, unlike all of the other commodities.  This leads to a lot of speculative moves.

Manipulation

The silver market is tiny compared to gold.  It is said that if Apple took their available cash on hand, they could buy all of the above ground silver in the world 6 times over.  And that is one company.

Imagine if you are Tesla right now and you know each one of your electric cars needs 1 kilo (32 troy ounces) of silver – and you know you plan on making 100,000 cars over the next year.  You would then perhaps enter into futures contracts to buy silver to source for your cars.

The problem is, you have a few big banks that have manipulated the price of silver over the years.  Because it is such a small market, banks have been able to “short sell” thousands of contracts to drive down the price of silver.  This, in turn, would depress the price and allow the banks or others to come in then and buy cheap silver.  Due to this, it is rumored one of the big banks has nearly 1 billion ounces of silver and has recently dissolved their short position over 10 years of doing this.

There is only 2.5 billion or so known ounce of silver above ground.  So this one bank has 40% of all of the known silver.  They have also been under investigation for something called “spoofing” – which is like the above.  For example, maybe a major resistance line for silver was $17.00.  This bank would have intel that a lot of people have their stop losses set at $17.00.  So if it was at $17.20, they would generate thousands of contracts to push the price below $17.00, and it would then trigger stop losses and further push the price down massively.  It’s called “spoofing” and you can look this up for yourself – I’m not going to list the bank here.  Instead of “conspiracy theory” it’s now “conspiracy fact” – and of course, all parties are innocent until proven guilty.  Several of their traders have flipped on them and are being used as witnesses in a RICO case against them.

So – manipulation was a big part of silver pricing over the years.

The problem is, the chickens are coming home to roost.

  1. All of the “easy silver” to get has been gotten.  It is becoming more expensive to mine silver and many primary silver companies have gone out of business.
  2. Something like 80% of all silver produced now is a byproduct of “base metals” like copper, zinc, lead.  With a massive recession hitting us, less of these materials will be mined as their spot prices drop and large mines are mothballed.
  3. As industrial demand drops, silver initially drops – and then investment demand picks up and the demand skyrockets.  There’s 200 or so million ounces for investment demand worldwide – and that was before this mess.  I’d venture to say more people are getting involved.
  4. All of the short selling comes to an end, when the eventual price of silver puts northward pressure upwards.  The short sellers then need to replace or source the means of the contracts that people are standing for delivery on.

 

Tuesday could be an interesting day, and I felt this is why the price may have shot up.  But what do I know.  Tuesday I heard is the day where the futures contracts roll over.  And – unlike previous months, it’s quite possible now many people on the long side of the contracts will “stand for delivery.

Get this.  With WTI crude, you had all of this oil being ordered and the people that bought it were speculating – and they had no place to put it.  The EXACT opposite is true with respects to these contracts.  People WANT the metal, but the short sellers don’t actually have the metal.  This then forces them to go long and source metal from places.  This in turn shoots the prices up rapidly!!

Tuesday we may see some interesting moves.  Yes, bad labor numbers.  Yes, retail is hurting.  These things have moved gold into the “safe haven” status and you have seen gold go up for 18 months as this shit storm has been building up.  But THIS LEVEL of move with silver is not fear of the plague returning in the fall, it’s fear of people losing their asses because – people want their metals.

Scotia bank has recently decided to exit the metals market.  HSBC just recently lost $200 million in a SINGLE DAY on gold on March 23rd due to an issue similar to what I’m describing above.  What used to be 8 big banks taking short positions has now seemed to be whittled down over time, so as one bank takes their losses on backfilling their shorts, then this puts pressure on other banks to hold the line.  Problem is….they can’t hold it anymore.

  1. China has come back online and their industrial demand needs it.
  2. India has come back online, and they are BIG into silver and gold investments in times of crisis.
  3. The U.S. mint has been out of silver for months, mostly.
  4. Mines have been closed for months and new product isn’t getting to refineries.  Many mines have come back online, but one of the largest primary silver producers, First Majestic, is withholding their silver until prices get higher.  It is unclear if other mines are doing the same.

With travel also being very restrictive and flights not going as much, the perfect storm for a short squeeze could be unfolding.  Maybe not.  Maybe some of these contracts can settle in cash – unknown, but a possibility.

That being said, this could be a short term spike in silver with a return to maybe $16 in a few weeks.  But here’s the thing I’m learning.  You want the LONG, SLOW price increased to build support.  You do NOT want the price to go parabolic, because that means it will crash right back down.

Maybe within a week this hits $18.  Or $19.  Or $25?  This isn’t the move I’m talking about.

When silver hit $49 last, it was more or less towards the end of the recession when 2 things were happening:

  1. Inflation fears were coming.  All of the billions doled out started to created fears of inflation
  2. Industry was coming back online.  The Toyotas of the world felt there may be problems with getting enough product.  With years of mines producing less and less, demand had been drawn back and with it, supply.  As companies came roaring online, there was a perceived issue with sourcing which then created a form of frenzy to buy before the price exploded – this was in the back drop of a major bank covering their shorts.  So – this may have pushed it up higher than it should have been.  Maybe it would have been $35 without the push?

 

I would contest that we may be in the midst of a short squeeze and there may be a blip – but what can I expect over the next 18-24 months?

My low number is $30.  My high number could be over $100 per ounce.

The case for $30….

Over the last 5 years, there has been less and less silver mined and more industrial demand.  While we may be going into a recession, since 80% of silver is sourced as a byproduct of base metals, it would stand to reason maybe supply could be affected by 10-20%.  Additionally, while there is a recession, silver industrial usage takes up about 60% of all demand.  20% over the last few years has been investment.  I would contend that maybe industrial demand drops – but the supply would drop even further than the demand side.  Additionally, any new house in California 3 floors or less is required to have solar panels.  Each solar panel has 2/3 of an ounce of silver, and if you get 30 panels on your house, it’s about a roll of American Silver Eagles.  How many houses will be built in California this year and next?  Any other states?  Anyone else buying solar?  That now takes up about 10% of all demand, with it promising only to increase.

I can also make the argument that investment silver will double.

The case can also be made that we might be near the end of the silver manipulation game, with spoofing now being prosecuted.  Major banks are now getting out of their short position or recently have, putting more pressure on banks.

The case for $100 and up…

Many people know “gold is the money of kings, silver is the money of gentlemen, barter is the money of the poor, and debt is the money of slaves”.  Gold and silver have been money for 5000 years.

Well, there’s also a problem with our currency system.  I was born in 1975, so all I ever knew was dollars.  But many people don’t know that the dollar used to be pegged to gold.  They also don’t know that gold and silver are mentioned as the only form of money in the constitution, Article 1 sections 8 and 10.  If the US didn’t have the gold, they couldn’t print the money.  In a sense, this helped cause the Great Depression.  Lack of money in the system froze up everything.  It was a liquidity issue.

How did we get out of the depression?  What many people don’t know is that we got out of the depression by temporarily unpinning the dollar to gold, printing at will – and then in the 1930s profiteered off of being neutral in the beginning of the war and taking gold for payment.  At one point, we had 2/3rd of the world’s gold.  We then pinned the dollar to gold during the “Bretton woods” accord, and the US dollar became the world’s currency.  Many currencies in the world are pegged to the dollar.

But the problem was we started printing off more dollars than gold, and eventually, we were called on it. In 1971, Richard Nixon took us off of the gold standard “temporarily” which became permanent.

Inflation became rampant in the 1970s, and this helped take gold from $35 to $800 per ounce.  This was also the catalyst that took silver to $49.  They like to say it was the “Hunt brothers”, but they only had 100 million ounces for less than 5% of the silver market.  To put that into perspective, J. P. Morgan today is thought to have a BILLION ounces, or about 40% of all above ground silver.

Now…I don’t know about you, but there’s another $3 trillion spending bill about to happen.  Everything is shut down.  Unemployment hit great depression numbers – but this will be temporary.  They are firing up the printing presses…

  • which will lead to rampant inflation in 12-24 months.  They are only worried about keeping the wheels on now, not for the inflation that’s coming.

On top of all of the above, what’s going to happen when a lot of the stocks of the JC Penney’s of the world go to $.01?  When the airlines all start to file for bankruptcy?  Cruise lines taking massive loans that will stunt growth for 10 years?

BIG INSTITUTIONAL MONEY IS GOING TO MOVE TO:

  •  gold and silver
  • gold and silver stocks

Remember how small the silver sector is?  What do you think happens when Vanguard or the like tries to buy a billion in silver?  It will LAUNCH the price into orbit.  So – they would have to have smaller purchases.  But it is coming.

In years past, the 10 year treasury was something that people bought into – at one point it was like 15%???  To put that into perspective, it now pays .6% interest and inflation is “targeted” for 2%?

To quote Rick Rule, the 10 year has now become “risk free return” in which you promise to give the government your money for 10 years, and in return, they promise to give you notes back with less spending power than they once had.

So what happens when you have a Vanguard start to invest in GDX?  What happens when Fidelity wants to store 50 million ounces of silver?

We are only at the very, very beginning of this.

This is also about the end of our currency, as we know it.  I was born 4 years after they went off of the gold standard – but that was only 40% backing.  It was the dawn of the “petro dollar”.  Before that, it was the gold-backed dollar.

And I can see us getting to a fractional reserve system where we will need to have 10% or so in gold/silver.  Cryptocurrencies being developed in China are gold-backed.

But $100 silver???

The idea here is this:

  • Silver is found in the earth 9 times more than gold
  • Throughout most of history, gold has been valued roughly 10-15 times more valuable than silver
  • Currently silver is 120 times or so less valued than gold

I think when all is said and done, we hit $2500 gold.  I feel a vast majority of the price manipulation will be coming to an end in the near future.  The last BIG short bank is now THE big LONG bank.  They spent 10 years shorting to amass a silver pile like no one has ever seen….and now they let the price go.  And during these hard times, they can sell it off and massive, massive profits.

So maybe silver gets to a 40:1 ratio.  That is…$62.50 silver.

But when it snaps back, it performs better than gold and then corrects.  An overshoot.  May 30:1?  There’s $83.

But the inflation portion of this may take gold to $2700.  And there may be an overshoot to 25:1.  That gets you a situation with $108 silver.  In today’s money, I could see that coming back down to a long term $30-$45 per ounce.

There you have it!  Silver now is a steal at the price it is.

 

The miners….

Here’s the hidden play.  The miners.

If you buy $13 silver, maybe it gets to $26 to double your investment.  Maybe it gets to $52 for a 4X!!!

But get this, if silver costs $15 to produce and mines think the price will be $16 for the quarter, that’s $1 per ounce profit.  What happens if silver goes from $16 to $17?  Their profit goes from $1 per ounce to $2 per ounce, or double profits on a $1 price move.

So what happens when you go from $1 per ounce profit to $10 per ounce profit?  If you were buying silver, you would essentially double your money, but if you were buying mining stocks, that’s a 10x profit they have.  It’s a force multiplier…

In Q2 with all of the bankruptcies going on – this is where a LOT of money is going.  The bog money starts in the big mining money like GDX and SIL.  Then, the money goes to the juniors in the GDXJ and the SILJ.  These are baskets of miners, so you don’t have to look for them yourself.

So – what happens if you start with maybe $2000 of SILJ and all of the miners in there explode with profits?  You may get a 5x, 10x….maybe even a 100x?   Maybe not.  But the idea there is to find where you can put money into something, and get a lot more out.  In today’s environment, it’s what I’m doing.  You do you.  Don’t listen to me.