In Ted Butler's Archive


Capitalization is a fancy word to measure what various markets are worth in total dollar terms. The computation itself is simple enough; just multiply the current price by how much exists. To get the market capitalization of a company’s stock, multiply the price times the shares that exist. Such total values are important for comparison purposes. The market capitalization of silver is a tiny speck compared to the total worth of other markets. The market cap of silver if we use one billion ounces of above-ground silver is $17 billion using a $17 spot price. Apple, the worlds’ largest public company has a market cap of $807 billion, 50 times larger than silver. Why is silver’s market capitalization so small relative to everything else?

Silver prices reflect the status of metal in the form of 1,000 ounce bars and not in other forms, like coins. Of the roughly one billion ounces that exists in the documented world inventory of 1,000 ounce bars, most are held in exchange traded funds. We know that more than ten percent is held by JPMorgan, in its own COMEX silver warehouse (115.8 million ounces). Some may argue that JPMorgan doesn’t necessarily own that silver itself and that it may be held for customers instead, but the fact that the bank took delivery of that metal in its own name points to it being the owner. I am aware of no other market where more than ten percent of the entire market is held by one entity, only silver. So in addition to silver having the smallest market capitalization of all, it is also more closely held than any other market. In reality, I am convinced that JPMorgan owns a total of 650 million ounces of physical silver, including its COMEX warehouse holdings. Even if we increase the world inventory of silver to 1.5 billion ounces, JPMorgan owns 40% of it.

Data published weekly by the CFTC reveals 50% of all the silver said to exist is held short in COMEX silver futures contracts by just 8 traders, the largest of which is JPMorgan. In many markets, including real estate and cryptocurrencies, no short position exists and even in stocks and bonds, the level of short selling is a fraction of what exists in silver. If anyone is looking for a reason why silver is so cheap and why its market capitalization is so tiny, look no further than the concentrated short position of the 8 largest traders on the COMEX who hold down the price with their short sales.

Gold’s market capitalization is $7.7 trillion, or 450 times larger than silver’s. Stated differently, silver’s market capitalization is barely more than 0.2% of gold’s market capitalization. Never in history has silver been so cheap relative to gold or gold more expensive relative to silver. I’m not suggesting that gold is vastly overpriced. I am stating that silver is way too cheap relative to gold and everything else. True, there is a concentrated short position held in COMEX gold futures by 8 traders, but at the equivalent of 25 million ounces, that short position is only one half of one percent of all the gold that exists and not the 50% of silver. That’s a mighty big difference and price effect between a concentrated short position of one half of one percent and fifty percent.

How did the physical amount of silver in existence come to be less than one-fifth the amount of all the gold that exists, that’s 1.5 billion ounces of silver versus 5.8 billion ounces of gold? One hundred years ago, there was twice as much physical silver in the world than gold. Where did all that silver go and how did it disappear? Silver was consumed industrially, befitting silver being the best conductor of electricity and heat and the best reflector of light, among other properties, making it vital in modern times. Gold has many fine properties as well, however, its relatively high price discourages widespread industrial consumption. That’s not a knock on gold, just a reflection of reality. There is a good reason why more gold exists than silver today, when the opposite was true throughout world history up until the past 50 to 100 years.

So what are the investment implications of silver’s microscopic relative market capitalization? I believe those implications are profound and point to silver being the investment star of stars in the future. Silver’s market capitalization is so small and price action has been so weak for so many years that it is virtually impossible for there to be widespread investor selling at this point. This is particularly true when one considers that the largest physical buyer over the past six and a half years has been JPMorgan. Because hardly anyone else has been buying silver for this long there is little selling pressure left, unlike virtually all other markets that have reached historically large market capitalization’s. The exact opposite circumstance exists in silver. There are two reasons for silver’s tiny market capitalization – the small amount of existing silver remaining in the world and the depressed price. Neither add up to silver’s low prices continuing much longer.

The only way for silver’s tiny market capitalization to increase is by the price of silver climbing. That’s because the industrial consumption that caused the world’s inventory of silver to fall more than 90% over the past half-century is still in force. With world silver inventories already vastly depleted, we can’t witness a similar depletion in the future. Industrial consumption of silver is hardly abating, particularly in new industries (like solar energy). That’s why it is virtually impossible for world inventories to climb meaningfully. Thus, silver’s market capitalization can only grow by virtue of price appreciation. In many ways, the tiny market capitalization of silver makes it a “sitting duck” for eventual investor flows from other markets that have extremely large and growing capitalization’s. Sooner or later, investors will look to exit richly valued markets in search of better opportunities elsewhere and a certain percentage will become interested in silver. It becomes hard to imagine what price silver could attain should its market capitalization become as truly overdone as it is underdone today.

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