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January 4, 2021 | Silver History

No one has followed the silver market trading mechanics for as long or as closely as Ted Butler.

My involvement with silver began as a commodity broker in the early 1970’s, so I lived through the rise and fall of the Hunt brothers. Before the price peak of $50 in 1980, I brokered what was at the time, the largest retail transaction ever at Drexel Burnham – a tax straddle involving tens of thousands of silver contracts. At the time, I didn’t know much about silver. It wasn’t until a friend challenged me in 1985 as to why silver was so cheap that I tried to learn as much as I could about silver. I learned that silver has had a history as rich as that of mankind. From the dawn of civilization silver was money and an object of adornment. Wars were fought for the control of silver.

Shortly after the Civil War, largely as a result of the discovery of the Comstock Lode, the U.S. Government acquired massive amounts of silver. Enough silver was held by the government that it could serve as coinage. By the start of World War II, the U.S. Government held 6 billion of the total 10 billion ounces of silver thought to exist in the world. The discovery of modern day chemical qualities inherent in silver led to its industrial use. Foremost among these were its electrical applications. Silver conducts electricity better than any other element. After thousands of years of being a highly desired item, it turns out silver’s chemical properties were indispensable to modern life. Who would have ever imagined such a development – certainly not those shipping silver from Mexico and South America to Europe on small wooden ships hundreds of years ago.

So voracious was the appetite for silver as an industrial commodity, the world began consuming more silver than it was producing even though mining output steadily increased. For 65 years, from 1940 through 2005, the world consumed more silver each year than it produced. All told, the 10+ billion ounces of silver that existed above ground in 1940 were depleted to 1 billion ounces by 2005. The U.S. government, which held 6 billion ounces in 1940, ran out in 2000. Subsequently, an increase in mine production eliminated the deficit and the world inventory of silver has risen to around 2 billion ounces in the form of industry-standard 1,000 ounce bars.  Yes, there are other forms of silver in coins and small bars, most likely in amounts approaching one to two billion ounces, but converting those forms into bullion is no easy task. Plus, there have already been large melts in 1980 and 2011 in response to sharply higher prices.

In 1940, when there were more than 10 billion ounces of silver, the comparable amount of gold was less than 2 billion ounces (in all forms).  In other words, there was roughly five times as much silver than gold 80 years ago. Today, there are 6 billion ounces of gold and 2 billion ounces of silver, so silver is now rarer than gold. It’s not that gold doesn’t have many industrial applications, but what prevented it from being consumed was its high price. A reasonable person would conclude that the reversal of the amounts of silver and gold in the world would be reflected in the relative prices of each – with silver more highly valued relative to gold than it was 80 years ago. Such a reasonable person would be wrong, since silver is much cheaper today than it was relative to gold back then.  In 1985, when my friend first challenged me to uncover why silver was so cheap (around $5), the silver/gold price ratio was 50 to 1 and would hit over 100 to 1 five or six years later, further highlighting that silver was dirt cheap.

The next big development in silver was the emergence of JPMorgan as the head short in 2008 as a result of its government-assisted takeover of Bear Stearns. JPM quickly succeeded in rigging silver and gold prices sharply lower following the takeover and remained in control until the run-up in prices in 2011. At that time, JPMorgan took it on the chin temporarily, being out a couple of billion dollars. However, they didn’t blink and run to cover shorts. Rather, they succeeded in rigging prices lower for the next 9 years, but with a twist that I contend has been the biggest development in silver ever.

What JPMorgan conceived in 2011 was the criminally ingenious plan of all time. They took advantage of their ability to depress silver and gold prices to do something no one had ever dreamed of – buying untold quantities of physical metal as they depressed prices by paper short sales. It took me a couple of years to recognize what the crooks at JPM were up to, and then I marveled at the criminal genius of the solution to cover its paper short position. I always thought it would be impossible to buy back paper shorts on a plain vanilla basis and here comes JPM with a completely outside-the-box solution – buy physicals instead.

When it became apparent to me what JPMorgan was up to, I began trying to calculate when they would have enough physical silver and gold to offset completely its paper short positions on the COMEX. As early as 2014, it seemed that JPM had enough physical metal to cover its short positions. Still it didn’t allow prices to rise. It then dawned on me that JPMorgan realized what a great racket it had going for itself – continuing to profit from shorting and buying back from the managed-money traders on the COMEX, while accumulating physical silver and gold on the cheap. There was no reason for JPM to stop until it had to stop. And what would most likely make JPM have to stop was an inability to add more physical silver due to the metal not being available.  Thus, JPM turned a brilliant defensive solution, buying physical metal to cover paper short positions, into an even more perfect offensive maneuver – accumulating more physical silver than any entity had ever acquired.

JPMorgan made one blunder in finding itself on the short side of silver in the run up to $50 in April 2011. After dominating and controlling prices since taking over Bear Stearns, unexpected physical demand for silver drove prices higher and in early 2011 JPM was out $2 billion on its COMEX silver short position. However, it did not panic and buy back its short positions, but arranged for the price smash that sent prices lower. I’m convinced the brush with a crushing loss wasn’t lost on JPM and it realized it was only a matter of time before prices would ultimately explode for real. JPM decided to protect itself by buying as much physical metal as it could, while still able to suppress prices. The necessity of insuring itself against the inevitable advance in silver prices was JPM’s epiphany for accumulating physical silver and gold. And no one was better equipped and capable of doing what JPM did.

As it turned out, JPMorgan was more resourceful and criminally ingenious than I gave them credit for. In the end, not only did JPM buy and accumulate physical metal in a variety of methods in quantities way beyond what was required to offset its paper short positions, it succeeded in buying back enough paper short positions to leave the other big shorts holding the bag. Remember, I’m not sitting around dreaming up these things – I rely on public data, as I have chronicled on these pages for years. My imagination is not rich enough to invent any of this.

So, after 35 years of following silver intently, I am struck by the one constant that has prevailed since day one, namely, that the concentrated short position on the COMEX is what is responsible for silver’s suppressed price. Now the short position has been deftly passed along to other big commercial traders by JPMorgan, leaving those shorts at great risk of future financial harm, while JPM stands to profit mightily on its physical holdings. These developments only enhance the prospects for a more powerful price explosion than ever would have occurred in the past. With so many well-funded investors throughout the world, all scouring the globe for opportunities, it is only a matter of time before some of them discover silver and position themselves accordingly. I believe that process has already started and a sustained price rise will lift silver to levels that most thought impossible.

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January 4th, 2021

Posted In: Butler Research

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