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.
I’ve written two previous notes about this here (part 1) and here (part 2) sort of leading to the setup of what has begun to happen. Over lunch, I watched a YouTube video which confirmed that it is beginning. Unclear how fast this will unfold, but silver was up $.40 today in response.
This video is an interview with Keith Neumeyer, CEO of First Majestic from today. They are the largest primary silver producer in the world, with 60% of their revenues coming from silver and 40% from gold. At 4:40 into the video, he breaks down that 46,000 contracts are “standing for delivery”. Each contract is 5,000 ounces of silver. So – those who bought silver futures contracts want their silver. I’ll do the math quickly for you – that is 230 million ounces. To put it into perspective:
- there are only 900 million ounces mined in a year
- Mexico and Peru, which produce 40% of all of the silver in the world, have had their mines closed for 2 months
- You cannot really find physical metals for investment – and those that do exist are seeing a 50% or more premium
- The U.S. mint has run out of silver twice already this year
- 70% or so of silver is produced as a byproduct of base metals, and with the shutdown of most manufacturing worldwide, this has the effect of removing a lot of silver from available supply
So – those of us following supply and demand knew that there was a LOT of demand for silver coming from investment purposes. We knew there wasn’t silver out there to be had.
What some of us also noticed was the concept of the concentrated short position has been getting busted. It happened with gold in March. I detailed how 3 banks lost their hats. I predicted something extremely similar was about to happen with silver. Lots of “phony” contracts dropped to short sell, having the effect of telling everyone “there’s plenty of silver!”. This has the effect of dropping price. If there is one person available for every 3 IT jobs available, the supply is short and the IT companies bid against each other for services. If there are 1,000 applicants for each IT job, then the supply is rich and cost of acquiring the talent is less. What the banks have been doing is more or less saying there are 1,000 people applying for each job to keep the prices low, then buying up what they can at the low prices when people are dejected at low silver prices and also sell. This is called “spoofing”, and J. P. Morgan appears to be having RICO charges brought against them for manipulating the silver market. 6 of their employees were arrested, and several have turned states evidence. This is detailed in earlier posts.
So…Friday, banks were served notice of who will “stand for delivery”, which means anyone who wrote up these contracts out of thin air are on the hook for producing a total of 230 million ounces. I believe most months there’s 50 or so million at most actually sold on the COMEX. Don’t quote me on that – my point is that this is an unheard of number, according to Keith Neumeyer. At 5:50 in the video, he mentions this should more or less break the COMEX. There’s a loophole in these contracts though. If you can’t produce the silver, you have to “pay out”. I don’t know much about this, or how much this is, but I heard it was called a “force majeure”.
What effect does this have?
- Banks that are “short” the silver can take from their vaults or buy on the spot market. Or horse trade. Or barter. Any which way you slice it, good luck coming up with 230 million ounces in a few days.
- Some banks may just “pay up” rather than producing the metal. This can add up to tremendous sums – but furthermore, you have manufacturers that now don’t have metal. What do you think that does to a Tesla? If you are highly dependent on silver for making your cars, iPhones, etc, and someone wants to just write you a check….your billion dollar plant is brought to its knees. This may have an effect of a “run on the bank” of manufacturers scrambling to buy product at spot.
- With banks and manufacturers flooding the “spot” market, this has an immediate effect of jacking up spot price. Instead of having 1,000 IT techs available, you find there are 5 for 20 jobs.
- Some manufacturers have enough and place orders in future contracts in upcoming months. This puts upward pressure on futures silver prices and thus brings spot price up with it. There’s still a $.50-.60 spread I noticed between the two, and until this gets much closer, the problem is still there. As of this writing, it’s a $.54 spread.
A few months ago, we saw what happened with WTI crude oil. With those contracts, you were FORCED to take a commodity with delivery. ETFs bought in to this and then were forced to take delivery, which is what you saw with -$37 crude oil. They can’t take delivery, so they were forced to pay someone to take it.
With this situation, you had people WANTING delivery and the COMEX not having the metal they said they have.
Of issue here – you have a “paper” market that neither verifies the short (seller) has the commodity nor to they validate you can take delivery on the long side. Much of these contracts are….paper. People speculate with the futures contracts. But this additional paper has the net effect of trying to tell people that there are 1000 IT techs for 200 jobs when the REAL number may be 5 techs for 10 jobs. This supply and demand is completely jacked up, and why some idiot like me could read the tea leaves and bet big on silver, just like the guys a few months ago bet big on oil tankers – because they SAW that there was more paper oil ordered than people who could receive it. People leased tankers at $30,000 a day in anticipation of this. They were then PAID to take 2 million barrels of oil at $37 per barrel, then could re-sell that oil at a later time with contracts for $45 per barrel. In effect, they made $82 per barrel for 2 million barrels ($164 million) against $30,000 a day for a tanker. Good stuff.
So I needed to understand this – and get this. Keith Neumeyer also discussed there’s another “short” level at $18.50, and if it crosses that, then there’s no real resistance above it. Spot is at $18.30 and futures at $18.84. I’m not sure if he was referring to spot or futures, but with the run on the next few days, I feel spot will cross $18.50 easily and the futures price should go over $19. This is sheer volume of demand overrunning the shorts.
Ted Butler reported that the shorts are already out $7.2 billion on silver, and for every dollar price goes up, it’s another $8 billion or so shared across the concentrated shorts. In the previous articles, I also write how some of the big banks who have been short gold and silver have been trying to unwind their short positions with the COMEX – Scotia, CIBC, HSBC. 6 months ago, J. P. Morgan cleared out their short position and now is net long 1 billion ounces – again, according to Ted Butler.
If I can add an opinion here from a casual observer from a 3rd rate (or perhaps 4th rate?) school – it appears that the short positions are crumbling and getting wiped out. The 46,000 contracts cannot be satisfied with product. This will cause significant financial harm to the shorts. This will lead manufacturers and investors to continue to scramble for silver that isn’t there. That’s a supply crunch…..
And it appears to be just beginning….
If the $18.50 resistance is gone, this can also blow out the shorts on First Majestic (AG) and other silver stocks. When the shorts get blown out badly, they have to become long to buy back the stocks they were shorting. This amplifies the move up because it’s not only investors that are buying, but those betting against them.
In the environment where the fed has literally just printed $6 trillion, bank shorts are getting murdered, bank profits are in the tank, and there’s a scramble for precious metals – with a side if inflation coming….all indications, in my opinion, are that silver is about to soar. Traditionally, “gold moves first, silver moves the furthest”, and this lag time is normally 3-6 months. Additionally, the gold to silver ratio before all of this mess was 95:1 and when everything bottomed out, it became 125:1. This then made silver the most undervalued to gold in the 5,000 year history of these metals. Remember, for 4900 or so out of 5000 years, the ratio was roughly 15:1.
If the price manipulation has finally been smashed with verifiable demand, this could then chart a path for silver to join gold on a 2-5 year bull run where silver may find its natural place at 15:1. Silver is also heavily used as an industrial metal, and as it would happen, the price of the metal could go up 10x and it would have virtually no effect on the price of the product that it was in. There are an estimated 6 billion ounces of gold and silver above ground, but half of the silver is thought to be in a landfill and not recoverable at such cheap prices. Gold, on the other hand, has been recycled and 97% of all gold ever mined is still available.
In the coming years….
- silver mining production has gone down as prices were suppressed and minable silver ore that was economically viable decreased.
- There is roughly 800-900 million ounces mined every year, and roughly 1 billion used. There has been a shortage for 5 years, and some of this has been satisfied with recyling.
- Silver demand – by my estimations, could be 1.5 billion ounces inside of 10 years. I believe the biggest three drivers for this are electric vehicles, solar panels, and investment demand. Currently, there’s 7 million ounces used yearly on 5G but apparently this is about to launch.
The conclusion here is that there’s 8:1 or so silver to gold in the ground, but the ore concentrates of silver get worse and worse over time. All of the “cheap” silver has been mined. So – there’s silver there, but it has much higher costs than the $11.75 per ounce that it laughably dropped to a few months ago. As prices get to $20 per ounce and higher, some of these junior companies and exploration companies will EXPLODE.
For example, if you are a mine with 1.5 billion ounces of silver, but your AISC (all in sustaining costs) are $23 per ounce, and silver is $18.50 per ounce – congrats, you have a hole in the ground. There’s a lot of junior miners out there like this I’ve invested in. Suddenly, when silver hits $28 per ounce, that mine is a vault of $7.5 billion and the junior might now have a market cap of $100 million. You do the math at what happens to your 1000 shares you bought at $.60 per share. Those shares explode by 75x.
That is why the price manipulation thing really needed to be addressed. We needed to be able to unlock more and more of these mines that have a higher cost of production.
Companies like first majestic have a bunch of mines in Mexico, but only 3 running due to AISC of getting to the metal. When many of these companies can just suddenly “light up” another 100 million ounces, what do you think it will do to their balance sheets?
What this exercise does is punish the shorts – to hopefully prevent “concentrated” shorts from driving down the price of a commodity. Some short as part of their business model to hedge their positions. So be it. It was the LARGE CONCENTRATION of big banks that dished out the paper contracts that just got spanked.
And I’m expecting silver price to go up all week.
But…do NOT list to me. My 5th rate school education will then force the price of silver back down all week just to spite me, so don’t invest on anything I say. Just get the popcorn out and be entertained.
Take a look at my picks from 2 weeks ago…
Bought FSM (fortuna) $5 strike for Jun 19 at .0552 ($5.52 per option, and I bought 20 options). FSM was like $3.80 at the time. Value of this writing at $550 and this could be epic if this run continues. Hoping for a 20 bagger.
Bought First Majestic at strike price of $9 for Jun 5 at like $.45. Bought 3 at like $130. Sold this for $390 which paid for these, the FSM above, and the First Majestic below. This was a 3 bagger.
Bought First Majestic at strike price of $10.50 for Jun 5 at .082. Bought 10 for like $82. Sold today for $400. 5 bagger.
This leaves the FSM I’m riding out. Total in was $310 and total out I’m looking for $2700 for a 9 bagger. I did this with some loose change, so part of me wishes I had loaded up…but the other part of me also didn’t trust my analysis more than a 5% chance of this happening.