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Jeff Nielson is the writer/editor of Bullion Bulls Canada. He came to the precious metals sector as an investor in the middle of last decade, and quickly decided this was where he wanted to focus his career. Jeff's background includes four years of Economics at the University of British Columbia, before he went on to earn his law degree from that same institution.

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Silver: It’s All About Inventories

Originally published at BullionBullsCanada.com

While I have long since given up the “hunt” for intelligent analysis from the mainstream media on the silver sector, I have also become somewhat frustrated with much of the commentary I’ve seen from the more reliable/better informed commentators within the silver sector. Two “camps” seem to have emerged, separated by what I can only describe as a logical disconnect.

On the one hand, we have a group of very vigilant and bullish commentators who are squarely focused on the melodrama of ‘evaporating’ inventories now taking place in the Comex exchange (and any/every other warehouse where significant amounts of silver can still be found). Their reporting, while insightful, is almost surreal.

They are essentially engaged in a “countdown” until some “default” event occurs in the silver market, something these commentators look forward to with extreme anticipation, as to them this would signify “the end” of the silver-manipulation game the bullion-banks have been playing for the last 30 years (and actually much longer). Conversely, since such a default event directly implies the financial disintegration of the ‘monster’ silver-short, JP Morgan, I have much more “mixed feelings” about what such an event portends.

Living in the age of “too big to fail” banking Oligarchs, it is obviously naïve in the extreme to expect either JP Morgan or its servants who run the U.S. government to simply allow this bankster to be vaporized by the implosion of the silver market. Such an event would require settlement of its $100’s of billions ($trillions?) in losses on its gigantic, silver “short” position and its much larger losses on its silver derivatives – which it used to ratchet-up its suicidal leverage still further.

A much more realistic scenario is that when there is a default at the corrupt Comex exchange that the crooked operators of that market will simply suspend all trading in the silver market until the “disruptions” in the silver market have been resolved. Translation: the Comex will simply cease to honour/enforce any of its legally-binding contracts until after JP Morgan has found some way to weasel-out of its own annihilation.

Having spent countless hours studying this “equation”, I have concluded that there is no plausible way for JP Morgan to extricate itself from its self-created financial suicide other than through the U.S. government once again confiscating the silver held by its own citizens (as it did in the 1930’s). Given the magnitude of the silver-losses being hidden by the criminal-shorts, it is very unlikely that U.S. silver-confiscation alone would be sufficient to rescue all of the banking Oligarchs who have taken part in this manipulative shorting. Thus, we could easily see concurrent “confiscation” schemes in many/most/all Western nations.

Let me qualify that comment by noting that at this point “confiscation” would start (and likely end?) with all of the “bullion” held in bullion-ETF’s or bullion “accounts” – which were based in jurisdictions taking part in confiscation. The vast majority of personal bullion holdings are contained in this form and can be seized (literally) through nothing more than the click of a mouse.

It is highly unlikely that our governments have any appetite for smashing down doors and directly seizing bullion by force. First of all this would require a massive expenditure of resources (and extremely bad “optics” for our fascist governments), for a limited yield of bullion. Secondly, especially in the U.S., many of the same people stashing significant quantities of physical silver are also stashing significant amounts of guns and ammunition. They would not get much of this silver without (literally) a fight. Most likely, our governments would not go beyond the mouse-click – which also explains why the propaganda-machine has done its best to “herd” bullion investors into the large bullion-ETF’s.

Meanwhile, at the same time as all of this is occurring, we see an equally surreal discussion taking place in the silver sector regarding price. We have earnest, and in many cases very astute writers talking about “rising demand” and somewhat stagnant mine-supply, and then rather timidly assert that it was their opinion that silver prices “should” move higher. Even the highly esteemed Eric Sprott fell into this mental trap of understating the dynamics of the silver market.

In a very detailed and well-reasoned analysis – which even covered some of the inventory parameters – Sprott concluded:

In our view whatever froth and excess was present in the paper markets [the Comex] has likely been shaken out in the recent sell-off.”

His conclusions were pock-marked with qualifiers that something “seemed” a certain way in the silver market, and it was “their view” that fundamentals remained bullish. This is unnecessarily timid. Commentators in this sector can be unequivocal because the parameters are unequivocal: silver inventories are depleted; silver stockpiles all-but-gone. As the title to this piece exclaims, “it’s all about inventories”.

In the supply/demand equation, it is inventories which always “trump” all other factors in analysis – any and every time they move toward one extreme or the other. If inventories are large-and-rising, prices will fall irrespective of whatever data is presented exhibiting “bullish” factors for either supply or demand.

Those who are actual “producers” or “consumers” in a particular market have a fixed amount of physical space in which to store inventories. As that space fills up, these players will inevitably use the only “corrective” tool at their disposal: pushing prices lower and lower until the build-up ends.

At the same time, “traders” know that you don’t make money holding onto any commodity which is abundant (and becoming more so). You make money by either being one of the first to jump into a market of scarce supply/inventories, or you short the markets where supply has become abundant. Inevitably, the traders will also push prices down until the inventory-glut abates.

Obviously the reverse dynamic must be equally true: if inventories are small-and-falling, prices must rise irrespective of any other supply/demand data. Those who are actual producers/consumers in the market will become alarmed as their inventories plunge to “dangerous” levels, and they will inevitably push up prices until the inventory-erosion stops.

Similarly, traders will not only gravitate into sectors with scarce supply, they will increase their bets, knowing that the only possible way to reverse a dynamic of small-and-falling inventories is with much higher prices.

Let me digress for a moment to point out how the propaganda-machine (i.e. the mainstream media) refers to such behavior as “speculation” and/or “hoarding” – and demonizes all such investors. I have addressed this absurd propaganda before. First, buying into a market of small-and-falling inventories is (by definition) not “speculation” – since as I have already asserted, it is a certainty that prices must rise.

Secondly, a much better word to use instead of “hoarding” is “conserving”. Those people who stock-up on a particular commodity in times of small-and-falling inventories are healing the market. Not only are they conserving scarce inventories in order to prevent 100% depletion (the worst form of systemic shock for a market), but they are causing the higher prices which are necessary to reverse the dynamics from inventory-depletion to inventory build-up.

Higher prices simultaneously discourage demand, while stimulating supply – inevitably leading toward equilibrium. I have illustrated this obvious dynamic before using chocolate bars as an example, but let me expand on the implications still further.

As I have pointed out, if we were to suddenly price chocolate bars at 10 cents apiece (the price I paid as a child), store shelves would be cleaned-out of chocolate bars within days (hours?). Of equal importance, as long as the price of chocolate bars remained at 10 cents, inventories would remain permanently depleted.

The moment that more “supply” hit store shelves it would be instantly consumed by those lining up to buy. Effectively there would be “infinite” demand for chocolate bars at 10 cents apiece. However, I didn’t mention the chocolate bar producers in my previous example.

To begin with, it’s unlikely that they could “break even” selling chocolate bars at 10 cents apiece.  They would be forced to cease production, making the supply-crisis even worse. Meanwhile, those producers who could manufacture chocolate bars for 10 cents apiece and remain in business would look at the empty store shelves and tell themselves that chocolate bars must be worth more than their current price.

They would simply refuse to sell at a price which obviously does not represent any sort of market “equilibrium”. Thus, as long as chocolate bars remained at 10 cents we would have a permanently dysfunctional market of near-infinite demand, restricted supply – and no inventories.

Naturally this hypothetical example applies to the real-life silver market perfectly. In the 1990’s, bankster-manipulation pushed the price of silver to a 600-year low (in real dollars)  – every bit as absurd as buying chocolate bars at 10 cents apiece today.

We see those nations with Mints, that still produce silver money for their citizens permanently struggling to keep up with demand, and their inventories are frequently near-zero. And this is occurring despite these Mints raising their premiums – essentially a “tax” being imposed only upon the buyers of this form of real silver. Even with that tax, at the current, totally absurd price for silver they are unable to keep any inventory on their own “shelves”.

Just as in the hypothetical example with the chocolate bars, the current situation of small-but-falling inventories and empty “store shelves” must result in much higher prices for silver. Period. However, while higher prices are a certainty, “time” continues to remain a variable.

As an investor, I am more than willing to accept the uncertainty of time, when I already have the certainty of outcome (i.e. higher prices). I am especially eager to do so because I understand the dynamics of supply and demand. The longer the price of silver is suppressed to some level ridiculously out-of-sync with supply and demand (as proven by our depleted inventories), the higher the long-term equilibrium price.

Had silver been allowed to rise to $50/oz ten years ago, it is highly likely (if not certain) that this could have represented a long-term equilibrium for the market. However, thanks to another decade of illegal bankster-shorting ravaging silver stockpiles, it is now a certainty that any “long-term equilibrium” for silver would involve a price well into three-digits. Naturally, these supply/demand fundamentals are being multiplied by the currency-dilution (i.e. inflation) caused by the out-of-control money-printing by that same cabal of bankers.

The absolute “laws” involving inventories in markets are just as immutable as the Law of Gravity in physics. In physics, we know with certainty that “what goes up must come down”. In markets we know with certainty that when inventories go down, prices go up.

It is very rare to have an investment-insurance opportunity which offers such 100% certainty. Given the unfolding economic catastrophe created by the Western banker Oligarchs (and the politicians whom serve them), ordinary people have never needed such “insurance” so badly. Don’t miss your opportunity.

There Are 6 Responses So Far. »

  1. [...] By Jeff Nielson Implode-O-Meter Blog [...]

  2. The mythical monster short in silver is an urban legend.

  3. Well Allen, guess you’ve wrapped that up controversy. Crackerjack work!

    I guess we should all ignore the Committment of Traders Report, the Bank Participation Report, the OCC data, lawsuits against the bullion banks, etc. That’s a real relief; I hate pouring over those arcane documents!

  4. Have you ever considered those shorts as hedges against long positions in silver?

  5. [...] Silver: It’s All About Inventories By Jeff Nielson – Blog.ml-implode.com Having spent countless hours studying this “equation”, I have concluded that there is no plausible way for JP Morgan to extricate itself from its self-created financial suicide other than through the U.S. government once again confiscating the silver held by its own citizens (as it did in the 1930’s). Given the magnitude of the silver-losses being hidden by the criminal-shorts, it is very unlikely that U.S. silver-confiscation alone would be sufficient to rescue all of the banking Oligarchs who have taken part in this manipulative shorting. Thus, we could easily see concurrent “confiscation” schemes in many/most/all Western nations. [...]

  6. Yes, I and others (far more expert in the silver market than I) have considered that.

    I don’t believe there’s any credible source for those shorts having anything to do with hedging. My understanding is the producers are hedged on their own books.

    You do realize that the bank sellers of pool account programmes wouldn’t “hedge” these certificates by going short, right? Each sale of a pool interest is already a “short”. That means the proper way to hedge the programmes would be to go “long” on the exchange.

    Of course, all indications are that these pool programmes are naked short by their nature and are NOT hedged to the long side, at least not nearly to the extent needed to cover the certificates sold, by a factor of somewhere between 30-to-1 to 100-to-1 (e.g. the Morgan Stanley lawsuit, which Ted Butler spurred, which was won by the investors, and for which the defense whined that naked short sales of pool interests was STANDARD PRACTICE).

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