While there’s a lot of commentary about the large paper short position that exists in the silver market, there’s an additional factor exacerbating the situation that few have mentioned. Specifically, given the mindset of the investors that actually own silver, if the banks and hedge funds have to cover their short position, who are they going to buy the metal from?
In a typical free market the price of an asset would be where there is an intersection of supply and demand. Yet consider the mindset of the average silver investor, which is far from your typical market participant.
Most of the people who own silver purchased their metal primarily in response to endless dollar printing. Often with a belief that the printing will continue, ultimately until the dollar is worth little or nothing.
This is different from the typical investor profile in many of the other standard investment markets. Usually in trading markets such as the stock market, people invest with the hope that a position goes their way, and then eventually convert to cash or another investment.
But those who own physical silver are generally coming at their investment from a different perspective. They bought silver because of concerns about the currency system, and are not necessarily looking to book a gain and convert back into dollars just because the price hit $20 or $30.
If someone has expenses or bills to pay, then sure, it’s possible they might sell some silver to access funds. But especially with silver so far below it’s 2011 $49 high, and with more money in the system than ever, at least the silver buyers I’ve spoken to over the past decade don’t seem like they’ll be in any rush to go out and sell.
So if the banks wanted to unwind their position, who are they going to buy all that silver from?
Part of the answer depends on the context in which a move occurs. If we just saw silver rise to $100 per ounce without any news or further significant dollar degradation, perhaps there would be more metal holders who might wonder if the price has hit a top and if it’s time to sell. But if silver hits $100 because the Fed just launched QE 5, 6, and 7, are silver investors going to be clamoring to convert back to dollars at the same time there are more of them in circulation than ever?
Speaking for myself, I first bought silver in 2010 primarily because I finally grasped the situation with the money supply. Based on the amount of money that had been printed and simple math, it always seemed to me that if silver were allowed to trade freely, the price would simply have to be a lot higher.
Yet as I learned more about the market and what Federal Reserve actually does, I started to realize that just like in other hyperinflation scenarios, eventually the dollar price just stops being relevant. At some point there would just be no reason to trade back into something that’s lost it’s value.
What all of this leads to is an environment where there could be incredible pressure on the shorts to cover their position at the same time it would be hard to find an offer. Which is why it always seemed that the longer the banks sold metal they don’t own, the more of a corner they backed themselves into.
Perhaps they’ll ultimately be successful in unloading a portion of their position onto the hedge funds that buy or sell based on the 50 and 200 day moving averages. But regardless of who holds that side of the trade, my guess is that the majority of silver owners are unlikely to let them off so easy.
I often read comments by frustrated metal owners that accept the markets are manipulated, and question why that would ever change. Which is reasonable enough. Although keep in mind that even the mighty J.P. Morgan has historical precedent for getting caught red-handed with a position that was too big. As was seen with their London Whale trade back in 2012.
So while that doesn’t mean the manipulation will end tomorrow, it does mean that market dynamics are in place that could facilitate some large gaps up in