In Ted Butler's Archive


Of all the perspectives I use to analyze silver, perhaps the most basic is its price relationship with gold. Gold is still an official monetary asset of the world’s central banks and is held by most world governments. Silver ceased being an official monetary asset over the past hundred years and is held by few, if any, world governments. Silver is not likely to be bought by governments, but neither can it be sold, since it is not held by governments. (Of course silver could be bought as a strategic asset by any country.) Aside from no longer being an official monetary asset, silver has evolved into a vital and indispensable industrial commodity. Most of its annual production is consumed in various fabrication demands. Meanwhile, gold is used as jewelry, as a monetary asset, and as an investment, none of which depletes the above ground supply.

It’s important to recognize that while there is more gold in existence today than ever before (due to the absence of industrial use), the amount of silver in existence today after decades of industrial consumption is a small fraction of what existed 75 years ago. This fact is widely unknown because the price of gold has rarely been higher relative to silver than it is currently. Because the price of silver is so cheap relative to gold, it is hard for investors to see there is more gold than silver in the world. But it is precisely this disbelief that presents the investment opportunity of a lifetime.

The real kicker here is that even if one favors gold over silver for the long term, the current mispricing of silver relative to gold offers the gold investor an unusual opportunity to increase one’s gold holdings in a very low risk manner. By switching some gold positions into silver on a temporary basis to take advantage of silver’s extremely depressed price and switching back into gold when the inevitable adjustment in the price occurs, a gold investor would end up with more gold without spending new investment dollars.

The main reason the price of silver didn’t permanently divorce gold in 2011 was the actions of JPMorgan. Having made the decision to accumulate as much physical silver as it could in early 2011, it was to JPMorgan’s advantage to suppress the price of silver ever since. Now there are signs that silver and gold may be headed for splitsville for good, thanks to JPMorgan.

Big changes in the silver/gold price ratio are strictly a function of what the price of silver does. Silver is the active ingredient in the silver/gold price ratio. Therefore, whenever signs emerge that silver could move sharply higher, it pays to investigate. I have come to the conclusion we may be on the cusp of a melt-up in silver prices, either with or without one final shakeout to the downside.

The big question in silver is did JPMorgan add significant numbers of additional silver shorts? If they didn’t, my silver melt-up premise is augmented, almost to the point of certainty. Silver is Morgan’s captive and the inevitable melt-up is entirely in its hands. The silver melt-up premise is compatible with every action JPMorgan has taken over the past five years. JPM didn’t buy a half a billion ounces of silver to have the price go down from here.

JPMorgan is prepared for a silver melt-up, even if it holds a significant paper short position, because its long physical position is so large. It is that large physical long position that guarantees that JPM will profit, no matter what happens. But the same can’t be said of any other COMEX silver shorts, large and small alike. Every other silver short stands to experience a fleecing and it seems most likely to me that the largest shorts will panic the most once they learn that JPMorgan will not be the short seller of last resort. The question is not whether JPMorgan will someday refuse to fill the role of silver short seller at the margin, but which day.

At least once a week for five years I have been reporting on the various signs of physical tightness in the wholesale silver market. From COMEX silver warehouse inventory turnover to JPMorgan’s accumulation of both COMEX inventories and futures deliveries; and to the unusual deposits, withdrawals and changes in the short positions in SLV, the big bank has steadily accumulated silver. I even claim the sales of Silver Eagles over the past five years has been primarily to them since retail demand has been lacking. In retrospect, silver is tight principally because JPMorgan is buying so much.
Any melt-up in silver prices must be connected to physical market conditions, as well as include no new shorting from JPMorgan. A melt-up will set off a rush by both silver investors and silver industrial users alike. We came close to an all-out physical silver shortage in 2011 driven by investment buying, but that developing physical shortage was nipped in the bud before industrial users began to panic and tried to build physical inventories. The next time a critical shortage takes hold, there will be no avoiding industrial users and fabricators joining in.

The key feature to the coming silver price melt-up and user inventory panic is how quickly it will commence, because once it begins in earnest, it must burn itself out. The only way the silver melt-up ends is at prices ridiculously high. It will involve a race between price and availability that probably won’t last long, but will be shocking in the extent of silver’s price rise.

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