The piece I wrote last Friday was apparently quite controversial to say the least. I have received a slew of e-mails telling me that I’m either nuts or outright wrong. Well, let’s first look at the math. COMEX deliverable inventories are, say 40 million ounces of Silver, at $28 per ounce this is just over $1 billion. Yes, I know, the world doesn’t revolve around the COMEX and there are supposedly a total of above ground inventories of 500-600 million ounces. Are ALL of these ounces deliverable? Probably not, but let’s assume just for yuks that they are. 600 million ounce at $28 per ounce is worth a whopping $17 billion. This amount is equal to about what the government needs to borrow every 5 days just to keep the doors open. This amount is less than many corporations have just sitting in cash balances. The global inventory of Silver is less than the market cap of scores of U.S. companies, and scores more of foreign companies. My point is that in today’s world, $17 billion is minuscule.
Several people wrote me saying that I was flat out wrong. They asked why, if I was correct about a mere $1 billion needed to blow the lid off of Silver, wouldn’t an Eric Sprott or Carlos Slim not just pony up $1 billion and drain COMEX of their Silver? I can think of several reasons, the first and most obvious being “position limits”. While the shorts can pile as much as they’d like on the short side, there are limits to total long contracts and long front month contracts (deliverable) that any one person or entity can hold. Also, the COMEX can and has in the past simply “changed the rules” and screwed anyone they like (just ask the Hunt brothers). Another issue is a “dark one”. If you had the wherewithal to purchase 100 million ounces of Silver, knowing what you know would happen to ALL markets (not just Silver) wouldn’t you be looking over your shoulder and under your car before you started it every day for the rest of life?
Along the same thought process but from the flip side, would you want to be THE ONE who pulled the trigger and ended the financial system as we know it? Could you live with yourself? If you could, do you think you would be vilified? Yes, I know, the next question is why doesn’t one of our foes spend a few billion Dollars and blow up the system if they could? Uh, are we not getting reports that the Chinese, Russians, Iranians etc. etc. have been buying and accumulating Gold each and every month? There is no hope whatsoever that these cash hordes can be converted entirely into Gold because there is simply too much cash and not enough metal but the longer the game lasts, the more “weight” that can be accumulated right? If you were in the middle of “converting” Dollars into metal, would you blow up and end the game or continue it for as long as you could (or as long as physical supply got delivered)?
I did once have this exact conversation, face to face with a billionaire. One of his statements will resonate with me until my last breath. He said to me, “Do you think that I want history written where my name is the one that always comes up whenever the collapse of the global financial system is discussed? I just can’t do it.” The most interesting part of the conversation was the actual road map as to how easy it could be done, the number he used was $3 billion. First, you buy options and futures on the next 2, maybe 3 contract months on the COMEX. You make sure that you have the cash available to pay 100% to settle each and every option and future contract. Then, well, you go on a buying spree and start putting a dent in the global inventory which is purported to be 500-600 million ounces. If you earmarked $1 billion for COMEX purchases, this remaining $2 billion might buy you 70 million ounces or so. Your $3 billion would buy in total just over 100 million ounces or roughly 20% of the supposed inventories. Here is the rub, unlike many other products, a higher price does not always lead to more inventory, we have already seen that production has not exploded (far from it) even with nearly 10 fold price increases. Conversely, some inventory will actually go into hiding and get withdrawn for sale or delivery. You will also experience others “riding your coat tails” and buying just because “the price is going up”. In any case, he thought that $3 billion would surely do the trick and the real number was probably under $2 billion.
I also received a few e-mails telling me that even if the COMEX inventory got wiped out, other product could be obtained elsewhere and shipped for delivery. “No problem, there is plenty of inventory” I am told. Well, I have to disagree with this because of recent anecdotal evidence. We have heard on several occasions where investors have requested that their Silver be delivered to them and when they finally did receive it, the mint date was AFTER not only when it was supposedly purchased but AFTER the request for delivery! This by the way was something that happened last year when Sprott Asset Management made their purchase in the first half. Not only did it take a lot of time for delivery, some of the bars received were minted after the purchase date, does this sound like “lots of inventory” sloshing around?
A little off topic but take a step back in time to 2008 when the Silver price was “crashed” to $9, what happened to inventory then? There was none! Unless of course you wanted to pay $16 per ounce or more when we were assured that the price was $9. Prices go “down” if there is more selling than buying, in this case, the only thing being sold were futures because physical was swept off of the streets. This is not the way ANY market should trade, EVER! Try explaining this to the CFTC, good luck! Once the Silver price explodes, there will be a level where more physical hits the market. It will however require a currency to swap into that holders of physical will have some faith in, I am not sure that this currency is even in existence yet.
One last comment, let’s say that I am completely wrong and the Silver market is not the under inventoried Ponzi that I believe it to be. Let’s say that it would take nearly $17 billion to buy up all (I know, it would take more as the price rises) of the available inventory of 500-600 million ounces. Is this amount of cash even a hurdle in today’s world? Hell, Europe has plenty of deadbeats that have already been given this much just to stay alive. We here in the U.S. have several states that will require this much an more to stay alive. $17 billion is nothing anymore, it is probably on par with what $17 million was just 40 years ago! We just gave General Motors $25 billion 3 years ago and now they need more to avoid bankruptcy again. The Fed passed out $16 TRILLION across the globe in 2009, this is nearly 1,000 times $17 billion. $17 billion is chump change! Maybe I am wrong and it will take more than $1 billion to expose the Silver fraud, maybe it’s $5 billion? Maybe $10 billion? Does it matter? Is there even a difference other than the amount of zero’s printed on paper or entered into a computer? The point is, each and every day there is more and more “paper” created and added to the “pool” of liquidity. At the same time there is less and less “inventory” of physical metal available for purchase from this liquidity pool. How does it end? Go ask a 3rd grader, it’s just that simple!