Silver Prices and the Risk of Speculator Double Jeopardy

When the price of silver eventually explodes to the upside, the silver market and those who are responsible for regulating it will probably blame the speculators.

Specs, or those who trade in a market without having an underlying commercial interest, have become the modern day scapegoats for extreme market movements, even if such movements seem entirely justified by the underlying fundamentals.

When a Simmering Silver Market Begins to Boil Over

The silver market has been so notably dislocated from its real fundamental based pricing for so long. Indeed, one can only speculate at what will happen when the silver market is eventually freed to move closer toward its considerably higher fair value.

In fact, one could reasonably argue that last time silver traded based on fundamentals was just before then-President L. B. Johnson removed it from circulation as currency in the early 1960’s. At the time, he justified this drastic move by declaring silver to be in short supply.

Then consider how the price of silver ran up throughout the 1970’s and into 1980. Factors commonly cited include the removal of the U.S. Dollar from the gold standard, and the Hunt Brother’s alleged corner of the silver market.

Nevertheless, rumors swirled about why investment legend Warren Buffet was forced to sell his huge hoard of roughly 100 million ounces of silver in 2006, which he had very prudently accumulated throughout the low price environment of the late 1990’s.

Furthermore, today’s price discovery mechanism for silver allows the actual physical supply of 40 or 50 million ounces of silver metal to form the basis for daily trading in 100 times that amount. Silver is also perhaps the most volatile of all commodity markets and one that has the largest concentrated short positions in terms of days to deliver based on world production.

After 47 years of industrial, technological and medical innovation involving silver, the shortage of physical silver continues in spite of the widespread government dis-hoarding of precious metals seen over the same time frame.

The Eventual Silver Rally Will Probably be Blamed on Speculators

While speculators may ultimately be considered responsible for taking the silver market higher, the specs are not and will not be responsible for what ails the silver market.

Deep structural deficiencies were put in place long ago when bullion banks were allowed access to the commercial categories in the silver futures markets. These banks soon became the only big sellers, while the regulators watched but did nothing as these banks routinely fleeced speculative longs and the retail investor by proxy.

The resulting over-abundance of paper silver has resulted in a prolonged pricing disparity that has created the fuel for a future inferno in the silver market.

Regrettably, this manipulative process remains very much alive, and the real risk for the new money coming into silver via the derivatives markets will be that they either failed to take — or perhaps did not want to bother to take — actual physical possession of metallic silver.

In all likelihood, not only will the specs be blamed for the upcoming silver rally, but they will very probably be shut out from profiting from it in the process. The time to get well invested into the silver market is now, while prices remain relatively reasonable, not after the speculation in silver that will eventually take the market much higher starts in earnest.