The following is the best article that I have come across on how the silver market works, the price manipulation, involvement of JPM, silver custodians, standing for delivery, history of short squeeze attempts, and a blueprint for the current one to work. It also covers the key differences between the iShares SLV silver ETF and Sprott’s PSLV physical silver trust. It is an incredible deep dive that all silver investors should take the time to read.
TLDR: SLV is a scam, as are basically all of the silver ETFs. If you want to buy silver, buy physical when premiums are low, or PSLV.
By TheHappyHawaiian posted on the WSB SubReddit r/wallstreetbets.
Think about who reads weekend financial news. Old people. The last time silver had a real short squeeze was in the 70s, and these people are now in their 70s. Who clicks on ads? Basically only old people. Dealers of gold and silver love to advertise, and media likes to make money through click-through revenue. Of course, they are going to post all these stories of small unit silver selling out at dealers, they will get higher click-through and sales kickbacks from the targeted ads on these articles.
If you are purchasing SLV thinking you are purchasing silver on the open market, you could not be more wrong. Purchasing SLV is the best way for an investor to shoot themselves directly in the face.
I have done some research on SLV and I have come to believe that it is essentially a vehicle for JPM and other banks to crush retail investors by manipulating the silver market.
So what are these games of manipulation that the banks have played?
The general theme could be described as this: If banks hold the silver, the price is allowed to rise, but if you hold the silver, the price is forced to fall.
Jeff Currie from Goldman had an interview on February 4th where he dismissed the idea of a silver short squeeze, and he had one line that was especially profound,
“In terms of thinking how are you going to create a squeeze, the shorts are the ETFs, the ETFs buy the physical, they turn around and sell on the COMEX.”– Jeff Currie of Goldman
This was shocking to holders of SLV, because SLV is a long-only silver ETF. They simply buy silver as inflows occur and keep that silver in a vault. They have no price risk, if the price of silver declines, it’s the investors who lose money, not the ETF itself, so there is no need to hedge by shorting on the COMEX. Further, their prospectus prohibits them from participating in the futures market at all. So how is the ETF shorting silver?
They aren’t. The iShares SLV ETF is not shorting silver, its custodian, JP Morgan is shorting silver. This is what Jeff Currie meant when he said the shorts are the ETFs. Moreover, he said it with a tone like this fact should be plainly obvious to all of the dumb retail investors. He truly meant what he said.
What is a custodian you ask? The custodian of the ETF is the entity that actually buys, sells, and stores the silver. All iShares does is market the ETF and collect the fees. When money comes in they notify their custodian and their custodian sends them an updated list of silver bars that are allocated to the ETF.
But no real open market purchases of silver are occurring. Instead, JPM (and a few sub custodian banks) accumulated a large amount of silver, segmented it off into LBMA vaults, and simply trade back and forth with the ETFs as they receive inflows. Thus, ensuring that ETF inflows never actually impact the true open market trade of silver. When the SLV receives inflows, JPM sells silver from the segmented off vaults, and then proceeds to short silver on the futures exchange. As the price drops, silver investors become disheartened and sell their SLV, thus selling the silver back to JPM at a lower price. It’s a continuous scalp trade that nets JPM and the banks billions in profits. Here’s a diagram to help you sort it out:
reduce, reuse, recycle
An even more clear admission that SLV doesn’t impact the real silver market came on February 3rd when it changed its prospectus to state that it might not be possible to acquire additional silver in the near future. What does this even mean? Why would it not be possible to acquire additional silver? As long as the ETF is willing to pay a higher price, more silver will be available to purchase. But if the ETF doesn’t participate in the real silver market, that’s actually not the case. What SLV was admitting here, was that the silver in the JPM segmented off vaults might run out, and that they refuse to bid up the price of silver in the open market. They will not purchase additional silver to accommodate inflows, beyond what JPM will allow them to.
The real issue here is that purchasing SLV doesn’t actually impact the market price of silver one bit. The price is determined completely separately on the futures exchange. SLV doesn’t purchase futures contracts and then take delivery of silver, it just uses JPM as a custodian who allocates more silver to their vault from an existing, controlled supply. This is an extremely strange phenomenon in markets, and its unnatural.
For example, when millions of people buy GME stock, it puts a direct bid under the price of the stock, causing the price to rise.
When millions of people put money into the USO oil ETF, that fund then purchases oil futures contracts directly, which puts a bid under the price of oil.
But when millions of people buy SLV, it does nothing at all to directly impact the price of silver. The price of silver is determined separately, and SLV is completely in the position of price taker.
So how do we know banks like JPM are shorting on the futures market whenever SLV experiences inflows? Well luckily for us the CFTC publishes the ‘bank participation report’ which shows exactly how banks are positioned on the futures market.
The chart below shows SLV YoY change in shares outstanding which are evidence of inflows and outflows to the ETF. The orange line is the net short position of all banks participating in the silver futures market. The series runs from April-2007 through February-2021. I use a 12M trailing avg of the banks’ net position to smooth out the awkward lumpiness caused by the fact that futures have 5 primary delivery months per year, and this causes cyclicality in the level of open interest depending on time of year.
It is evident that as SLV experiences inflows, banks add to short positions on the COMEX, and as SLV experiences outflows they reduce these short positions. What’s also evident is that the short interest of the banks has grown over time, which is also why silver is ripe for a potential short squeeze, just not by using SLV.
One other thing that is evident, is that the trend of banks shorting when SLV receives inflows, is starting to break down. Specifically, beginning in the summer of 2020, as deliveries began to surge, the net short interest among banks has actually declined as SLV has experienced inflows. It’s likely one or more banks see the risk, and the writing on the wall and is trying to exit before a potential squeeze happens (having seen what happened with GME).
For further evidence of this theme of, “If banks hold the silver, the price is allowed to rise, but if you hold the silver, the price is forced to fall” look no further than the deliveries data itself,
You’ll notice that as long as futures investors didn’t actually want the silver to be delivered, the price of silver was allowed to rise, but whenever deliveries showed an uptick, the price would begin to fall once again. This is because the shorts know that they can decrease the price of all silver in the world by shorting on the COMEX, and then secure real physical silver from primary dealers to actually make delivery. Why pay a higher price to the dealers when you can simply add to shorts on the COMEX and push the price down, and then acquire the silver you need?
But just like the graph of the bank net short position, you’ll notice that this relationship started to break down in 2020, and the price has started to rise alongside deliveries. The short squeeze is underway, and the dam is about to break.
And lest you think I’m reaching with my accusations of price manipulation by JPM, why not just listen to what the department of Justice concluded?
For JPM and the banks involved in the silver market, fines from regulators are just a cost of doing business. The only way to get banks to stop manipulating precious metals markets is to call the bluff, take delivery, and make them feel the losses of their short position.
SLV is by far the largest silver ETF in the world, with 600 million ounces of silver under its control, and its custodian was labeled a criminal enterprise for manipulation of silver markets. Why should silver investors ever put their money into a silver ETF where the entity that controls the silver is actively working against them, or at a minimum is a criminal enterprise?
And let me know if you see a trend in the custodial vaults of the other popular silver ETFs:
Further exacerbating the lack of trust one should have in these ETFs, is the fact that they store the metal at the LBMA in London. Unlike the COMEX that has regular independent audits, the LBMA isn’t required to have independent audits, nor do independent audits occur. I’m not saying the silver isn’t there, but why not allow independent auditors in to provide more confidence?
So what are investors to do in a rigged game like this?
Well, there is currently one ETF that is outside this system, and which actually purchases silver on the open market as it receives inflows. That ETF is PSLV, from Sprott. Founded by Eric Sprott, a billionaire precious metals investor with a stake in nearly ever silver mine in the world, so you know his interests are aligned with the longs of the PSLV ETF (in desiring higher prices for silver via real price discovery). Further, PSLV buys its silver directly, it doesn’t have a separate entity doing the purchasing, it stores its silver at the Royal Canadian Mint rather than the LBMA, and it is independently audited. By purchasing the PSLV ETF, retail investors can actually acquire 1000oz bars and put a bid under the price of silver in the primary dealer marketplace. And if a premium occurs among primary dealers, deliveries will occur in the futures market.
This is what is starting to happen right now, a premium has developed among primary dealers, and deliveries on the COMEX have started to surge, while COMEX inventories have begun to decline. And this is happening after PSLV has added just 30 million ounces over 7 weeks (once the small contingent of silver squeezers realized SLV was a scam and started switching). Imagine what will happen if investors create 100 million ounces of demand.
Even a small portion of SLV investors switching to PSLV because they realize the custodian of SLV is a criminal enterprise, would create a massive groundswell of demand in the real physical silver market.
After the original silver squeeze posts went viral on WSB on 1/27, silver rose massively over the first 3 trading days following it. But on 1/31 a post was made about citadel being long SLV which got 74k upvotes (compared to only 15k on the original silver post). This lead to a fizzling in the momentum for the silver squeeze movement on WSB. However, given what I’ve explained here about how SLV is a complete scam meant to screw over investors, is it really that much of a surprise?
Additionally, that post about citadel showed them with $130m in SLV. That’s only 0.04% of Citadel’s AUM. Do you really think they were pushing silver because 0.04% of their AUM was in SLV? This post also didn’t detail the fact that citadel also had short positions on SLV. That’s what a market maker does. They have long and short positions in just about everything.
There are plenty of banks talking about a commodities super cycle, and a ‘green’ commodity super cycle where they upgrade metals like copper, but they never mention silver. Likely because banks have a massive net short position in silver.
Lets dig into the potential for a silver squeeze, starting with the silver market itself.
Silver is priced in the futures market, and its price is based on 1000oz commercial bars. A futures market allows buyers and sellers of a commodity to come to agreement on a price for a specific amount of that commodity at a specific date in the future. Most buyers in the futures market are speculators rather than entities who actually want to take delivery of the commodity. So once their contract date nears, they close out their contracts and ‘roll’ them over to a future date. Historically, only a tiny percentage of the longs take delivery, but the existence of this ability to take delivery is what gives these markets their legitimacy. If the right to take delivery didn’t exist, then the market wouldn’t be a true market for silver. Delivery is what keeps the price anchored to reality.
Industrial players and large-scale investors who want to acquire large amounts of physical silver don’t typically do it through the futures market. They instead use primary dealers who operate outside of the futures market, because taking delivery of futures is actually a massive pain in the ass. They only do it if they really have to. Deliveries only surge in the futures market when supply is so tight that silver from the primary dealers starts to be priced at a large premium to the futures price, thus incentivizing taking delivery. Despite setting the index price for the entire silver market, the futures exchange is really more of a supplier of last resort than a main player in the physical market.
Most shorts (the sellers) in the futures market also source their silver from sources outside of exchange warehouses for the occasional times they are called to deliver. The COMEX has an inventory of ‘registered’ silver that is effectively a big pile of silver that exists as a last resort source to meet delivery demand if supply ever gets very tight. But even as deliveries are made each month, you will typically see next to no movement among the registered silver because silver is still available to source from primary dealers.
So how have deliveries and registered ounces been trending recently?
Let’s take a quick look at the first quarter deliveries in 2021 compared to the first quarter in previous years:
After adding in the 3.6 million ounces of open interest remaining in the current March contract (anyone holding this late in the month is taking delivery), 1Q 2021 would reach 78 million ounces delivered. This is a massive increase relative to previous years, and also an all-time record for Q1 from the data that I can find.
Even more stark, is the chart showing deliveries on a 12-month trailing basis (which I also showed earlier)
Note: You have to view this on an annual basis because the futures market has 5 main delivery months and 7 less active months, so using a shorter time frame would involve cutting out an unequal share of the 5 primary months depending on what time of year it is.
As you can see from the chart, starting in the month of April 2020, deliveries have gone completely parabolic. While silver doesn’t need deliveries to spike for a rally to occur, a spike in deliveries is the primary ingredient for a short squeeze. The 2001-2011 rally didn’t involve a short squeeze for example, so it ‘only’ caused silver to rise 10x. In the 2020s however, we have a fundamentals-based rally that is running headlong into a surge in deliveries that is extremely close to triggering a short squeeze.
In fact this is visible when looking at the chart of inventories at the COMEX.
As you can see from the graph and the chart above, COMEX inventories are beginning to decline at a rapid pace. To explain a bit further, the ‘eligible’ category of COMEX is silver that has moved from registered status to delivered. It is called ‘eligible’ because even though the ownership of the silver has transferred to the entity who requested delivery, they haven’t taken it out of the warehouse. It is technically eligible become ‘registered’ if the owner decided to sell it. However, the fact that it is in the eligible category means that it would likely require higher silver prices for the owner to decide to sell.
The current path of silver in the futures market is that registered ounces are being delivered, they then become eligible, and entities are actually taking their eligible stocks out of COMEX warehouses and into the real physical world. This is a sign that the futures market is currently the silver supplier of last resort. And there are only 127 million ounces left in the registered category. 1/3 of an ounce, or roughly $10 worth of silver is left in the supply of last resort for every American. If just 1% of Americans purchased $1,000 worth of the PSLV ETF, it would be equivalent to 127 million ounces of silver, the entire registered inventory of the COMEX. That’s how tight this market is.
Right now we are sending most Americans a $1,400 check. If 1% of them converted it to silver through PSLV, this market could truly explode higher.
And lest you think this surge in deliveries is going to stop any time soon, just take a look at how the April contract’s open interest is trending at a record high level:
It looks almost unreal. And keep in mind the other high points in this chart were records unto themselves. That light brown line was February 2021, and look how its deliveries compared to previous years:
12 million ounces were delivered in the month of February 2021. A month that is not a primary delivery month, and which exceeded previous year’s February totals by a multiple of 4x. Open interest for February peaked at 8 million ounces, which means that an additional 4 million ounces were opened and delivered within the delivery window itself.
April’s open interest is currently at a level of 15 million ounces and rising. If it followed a similar pattern to February of intra-month deliveries being added, it could potentially see deliveries of over 20 million ounces. 20 million ounces in a non-active month would be completely unheard of and is more than most primary delivery months used to see.
Here’s what 20 million ounces delivered in April would look like compared to previous years:
So just how tenuous is the situation that the shorts have put themselves in (yes CFTC, the shorts did this to themselves)? Well let’s look at the next active delivery month of May:
If a larger percentage than usual take delivery in May, there is easily enough open interest to cause a true run on silver. With 127 million ounces in the registered category, and 652 million ounces in the money, most of it from futures rather than options, the short interest as a % of the float is roughly 513%. Its simply a matter of whether the longs decide to call the bluff of the shorts.
No long contract holder wants to be left holding the last contract when the COMEX declares ‘force majeure’ and defaults on its delivery obligations. This means that they will be settled in cash rather than silver, and won’t get to participate in the further upside of the move right when its likely going parabolic. As registered inventories dwindle, longs are incentivized to take physical delivery just so that they can guarantee they will be able to remain long silver.
Of course, the COMEX could always prevent a default by simply allowing silver to continue trading higher. There is always silver available if the price is high enough. Like the situation with GameStop, the authorities have historically tended to interfere with the silver market during previous short squeezes where longs begin to take delivery in large quantities.
There were always shares of GME available to purchase, it’s just that the price had not reached what the longs were demanding quite yet. Given that it was the powerful connected elite of society who were short GME though, the trade was shut down and rigged against the millions of retail traders. The GME short squeeze may indeed continue, because in this situation it’s millions of small individuals holding GME. While they were able to temporarily prevent purchases of GME, they can’t force them to sell.
In the silver short squeeze of the 1970s, that’s exactly what the authorities forced the Hunt Brothers (the duo that orchestrated the squeeze) to do, they actually forced them to sell. The difference this time is that it’s not a squeeze orchestrated by a single entity, but rather millions of individuals who are purchasing a few ounces of silver each from around the globe. There is no collusion on the long side among a small group of actors like in the 70s with the Hunt brothers or when Warren Buffet squeezed silver in the late 90s, so there’s no basis to stop the squeeze.
In the squeeze of 1979-1980, the regulators literally pulled a ‘GameStop’ on the silver market. Or in reality, the more recent action with GameStop was regulators pulling a ‘silver’. The regulators will try everything in their power to prevent the squeeze from happening again, but this time it’s not two brothers and a couple of Saudi princes buying millions of ounces each (or just Warren Buffet on his own), but rather it’s millions of retail investors buying a few ounces each. There is no cornering the market going on. This is actual silver demand running headlong into a silver market that banks have irresponsibly shorted to such a level that they deserve the losses that hit them. They’ve been manipulating and toying with silver investors for decades and profiting off of illegal collusion. Bailing out the banks as their losses pile up would be truly reprehensible action by our government, and tacit admission that our government is ok with a few big banks on the short side stealing billions from small individual investors.
But what about beyond a short squeeze? Is there any logic to buying silver on a fundamentals basis?
There are two types of bull markets in silver. One is a fundamentals-based bull market, where silver is undervalued relative to industrial and monetary demand. The second type of silver bull market is a short squeeze. Both types of bull markets have occurred at different points in the past 60 years. However, the 1971-80 market in which the price of silver increased over 30x does was combination of both types of bull markets.
I believe we may be entering another silver bull market like the one that began in the fall of 1971, where both a short squeeze and fundamentals-based rally occur simultaneously.
Smoke alarms are ringing in the silver market, and are signaling another generational bull market.
So what are these ‘smoke alarms’?
I recently went digging through various data to try and quantify where we are in the silver bull/bear market cycle.
I ended up creating an indicator that I like to call SMOEC, pronounced ‘smoke’.
The components of the abbreviation come from the words Silver, Money supply, and Economy.
Lets look at the money supply relative to the economy, or GDP. More specifically, if you look at the chart below, you will see the ratio of M3 Money supply to nominal GDP, monthly, from 1960 through 2020.
When this ratio is rising, it means that the broad money supply (M3) is increasing faster than the economy, and when it is falling it means that the economy is growing faster than the money supply.
One thing that is very important when investing in any asset class, is the valuation that you enter the market at. Silver is no different, but being a commodity rather than cash-flow producing asset, how does one value silver? It might not produce cash flows or pay dividends, but it does have a long history of being used as both money and as a monetary hedge, so this is the correct lense through which to examine the ‘valuation’ level of silver.
Enter the SMOEC indicator. The SMOEC indicator tells you when silver is generationally undervalued and sets off a ‘smoke alarm’ that is the signal to start buying. In other words, SMOEC is a signal telling you when silver is about to smoke it up and get super high.
Below, you will see a chart of the SMOEC indicator. SMOEC is calculated by dividing the monthly price of silver by the ratio shown above (M3/GDP).
More specifically it is: LN(Silver Price / (M3/Nominal GDP))
Below you will see a chart of the SMOEC level from January 1965 through March 2021.
I want to bring your attention to the blue long-term trendline for SMOEC, and how it can be used to help indicate when investing in silver is likely a good idea. Essentially, when growth in money supply is faster than growth of the economy, AND silver has been underinvested in as an asset class long enough, the SMOEC alarm is triggered as it hits this blue line.
Since 1965, SMOEC has only touched this trendline three times.
The first occurrence was in October 1971, where SMOEC bottomed at 0.79 and proceeded to increase 3.41 points over the next eight years to peak at 4.20 in February of 1980 (literally 420, I told you it was a sign silver was about to get high). Silver rose from $1.31 to $36.13, or a 2,658% gain using the end of month values (the daily close trough to peak was even greater). Over this same period, the S&P 500 returned only 67% with dividends reinvested. Silver, a metal with no cash flows, outperformed equities by a multiple of 40x over this period of 8.5 years (neither return is adjusted for inflation). This is partially due to the fact that the Hunt Brothers took delivery of so many contracts that it caused a short squeeze on top of the fundamentals-based rally.
The second time the SMOEC alarm was triggered was when SMOEC dropped to a ratio of 2.10 in November of 2001 and proceeded to increase 2.32 points over the next decade to peak at 4.42 in April of 2011. Silver rose from $4.14 to $48.60, an increase of over 1000%, and this was during a ‘lost decade’ for equities. The S&P 500 with dividends reinvested, returned only 41% in this 9.5-year period. Silver outperformed equities by a multiple of 24x (neither figure adjusted for inflation). There was no short squeeze involved in this bull market.
Over the long term, it would be expected that cash flow producing assets would outperform silver, but over specific 8-10 year periods of time, silver can outperform other asset classes by many multiples. And in a true hyperinflationary environment where currency collapse is occurring, silver drastically outperforms. Just look at the Venezuelan stock market during their recent currency collapse. Investors received gains in the millions of percentage points, but in real terms (inflation adjusted) they actually lost 94%. This is an example of a situation where silver would be a far better asset to own than equities.
I in no way think this is coming to the United States. I do think inflation will rise, and the value of the dollar will fall, but it will be nothing even close to a currency collapse. Fortunately for silver investors, a currency collapse isn’t necessary for silver to outperform equity returns by over 10x during the next decade.
Back to SMOEC though:
The third time the SMOEC alarm was triggered was very recently in April of 2020 when it hit a level of 2.91. Silver was priced at $14.96, at a time the money supply was and still is increasing at a historically high rate, combined with the previous decade’s massive underinvestment in Silver (coming off of the 2011 highs). Starting in April 2020, silver has since risen to a SMOEC level of 3.37 as of March 2021. Silver is 0.46 points into a rally that I think could mirror the 1970s and push silver’s SMOEC level up by over 3.4 points once again.
Remember that this indicator is on a LN scale, where each point is actually an exponential increase in the price of silver. Here is a chart to help you mentally digest what the price of silver would be at various SMOEC level and M3/GDP combinations. (LN scale because silver is nature’s money, so it just felt right)
The yellow highlighted box is where silver was in April of 2020 and the blue highlighted box is close to where it is as of March 2021.
An increase of 3.4 points from the bottom in in April of 2020 would mean a silver price of over $500 an ounce before this decade is out. And there’s really no reason it must stop there.
The recent money supply growth has been extreme, and as the US government continues to implement modern monetary policy with massive debt driven deficits, it is expected that monetary expansion will continue. This is why bonds and have been selling off recently, and why yields are soaring. Long term treasuries just experienced their first bear market since 1980 (a drop of 20% or more). The 40-year bull market bond streak just ended. What was the situation like the last time bonds had a bear market? Massively higher inflation and precious metals prices.
This inflation expectation is showing up in surging breakeven inflation rates. And this trend is showing very little sign of letting up, just look at the 5-year expected inflation rate:
Inflation expectations are rising because we are actually starting to put money into the hands of real people rather than simply adding to bank reserves through QE. Stimulus checks, higher unemployment benefits, child tax credit expansion, PPP grants, deferral of loan payments, and likely some outright debt forgiveness soon as well. Whether or not you agree with these programs is irrelevant. They are not funded by increased taxes, they are funded through debt and money creation financed by the fed. As structural unemployment remains high (low unemployment is a fed mandate), I don’t see these programs letting up, and in fact I would be betting that further social safety net expansion is on the way. The $1.9 trillion bill was just passed, and it’s rumored the upcoming ‘infrastructure’ bill is going to be between $3-4 trillion.
This is the trap that the fed finds itself in. Inflation expectations are pushing yields higher, but the nation’s debt levels (public and private) have expanded so much that raising rates would crush the nation fiscally through higher interest payments. Raising rates would also likely increase unemployment in the short run, during a time that unemployment is already high. So they won’t raise rates to stop inflation because the costs of doing so are more unpalatable than the inflation itself. They will keep short term rates at 0%, and begin to implement yield curve control where they put a cap on long term yields (as was done in the 1940s, the only other time debt levels were this high). So where does the air come out of this bubble, if the fed can’t raise rates at a time of expanding inflation? The value of the dollar. We will see a much lower dollar in terms of the goods it can buy, and likely in terms of other currencies as well (depending on how much money creation they perform).
The other problem with the fed’s policy of keeping rates low for extended durations of time (like has been the case since 2008), is that it actually breeds higher structural unemployment. In the short term, unemployment is impacted by interest rate shifts, but in the longer-term lower interest rates decrease the number of jobs available. Every company would like to fire as many people as possible to cut costs, and when they brag about creating jobs, know that the decision was never about jobs, but rather that jobs are a byproduct of expansion and are used as a bargaining chip to secure favorable tax credits and subsidies. Recently, the best way to get rid of workers is through automation.
Robotics and AI are advancing rapidly and can increasingly be used to completely replace workers. The debate every company has is whether its worth paying a worker $40k every year or buying a robot that costs $200k up front and $5k a year to do that job. The reason they would buy the robot is because after so many years, there comes a point where the company will have saved money by doing so, because it is only paying $5k a year in up-keep versus $40k a year in salary and benefits. The cost of buying the robot is that it likely requires financing to pay that high of a price up front. In this situation, at 10% interest rates, the breakeven point for buying the robot versus employing a human is roughly 8 years. At 2% interest rates though, the breakeven investment timeline for purchasing the robot is only 4 years.
The business environment is uncertain, and deciding to purchase a robot with the thought that it will pay off starting 8 years from now is much riskier than making a decision that will pay off starting only 4 years from now. This trade off between employing people versus robots and AI is only becoming clearer too. Inflation puts natural upward pressure on wages, governments are mandating higher minimum wages are costlier benefits as well. There’s also the rising cost of healthcare that employers provide as well. Meanwhile the costs of robotics and AI are plummeting. The equation is tipped evermore towards capital versus labor, and the fed exacerbates this trend by ensuring the cost of capital is as low as possible via low interest rates.
On top of the automation trend, low interest rates drive mergers and acquisitions which also drive higher structural unemployment. In an industry with 3 competitors, the trend for the last 40 years has been for one massive corporation to simply purchase its competitor and fire half the workers (you don’t need 2 accounting departments after all). How can one $50 billion corporation afford to borrow $45 billion to purchase its massive competitor? Because long term low interest rates allow it to borrow the money in a way that the interest payments are affordable. Lacking competitive pressures, the industry now stagnates in terms of innovation which hurts long term growth in both wages and employment. Of course, our absolutely spineless anti-trust enforcement is partially to blame for this issue as well.
The fed is keeping interest rates low over long periods of time to help fix unemployment, when in reality low interest rates exacerbate unemployment and income inequality (execs get higher pay when they do layoffs and when they acquire competitors). The fed’s solution to the problem is contributing to making the problem larger, and they’ll keep giving us more of the solution until the problem is fixed. And as structural unemployment continues, universal basic income and other social safety net policies will expand, funded by debt. Excess debt then further encourages the fed to keep interest rates low, because who wants to cut off benefits to people in need? And then low long term interest rates create more unemployment and more need for the safety nets. It’s a vicious cycle, but one that is extremely positive for the price of precious metals, especially silver.
And guess what expensive robotics, electric vehicles, satellites, rockets, medical imaging tech, solar panels, and a bevy of other fast-growing technologies utilize as an input? Silver. Silver’s industrial demand is driven by the fact that compared to other elements it is the best conductor of electricity, its highly reflective, and it extremely durable. So, encouraging more capital investment in these industries via green government mandates and via low interest rates only drives demand for silver further.
One might wonder how with high unemployment we can actually get inflation. Well government is more than replacing lost income so far, just take a look at how disposable income has trended during this time of high unemployment. It’s also notable that all of the political momentum is in the direction of increasing incomes through government programs even further.
The spark of inflation is what ignites rallies in precious metals like silver, and these rallies typically extend far beyond what the inflation rates would justify on their own. This is because precious metals are insurance against fiat collapse. People don’t worry about fiat insurance when inflation is low, but when inflation rises it becomes very relevant at a time that there isn’t much capacity to satisfy the surge in demand for this insurance. Sure, inflation might only peak at 5% or 10% and while silver rises 100%, but if things spiral out of control its worth paying for silver even after a big rally, because the equities you hold aren’t going to be worth much in real terms if the wheels truly came off the wagon. The Venezuela example proves that fact, but even during the 1970s equities had negative real rates of return and the US never had hyperinflation, just high inflation.
During these times of higher inflation, holders of PMs aren’t necessarily expecting a fiat collapse, they just want 1%, 5%, or even 10% of their portfolio to be allocated to holding gold and silver as a hedge. During the 40-year bond bull market of decreasing inflation this portfolio allocation to precious metals lost favor, and virtually no one has it any longer. I can guarantee most people don’t even have the options of buying gold or silver in their 401ks, let alone actually owning any. A move back into having even a small precious metals allocation is what drives silver up by 30x or more.
TLDR: SLV is a scam, as are basically all of the silver ETFs.
If you do want to buy silver you’ll buy physical when premiums are low, or PSLV.
Disclaimer: I am a random guy on the internet and this entire post should be regarded as my personal opinion.
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