|Ted Butler Commentary |
April 22, 2015
|ALMOST UNBELIEVABLE Quite unexpectedly, two brand new factors have emerged in silver that may be the most compelling yet in pointing to sharply higher prices. These two new factors are so supportive for higher prices as to verge on being almost unbelievable. Yet the evidence behind one factor is strong and the second factor can’t be disputed. Most incredibly all the existing reasons for silver to explode in price are still intact and the two new factors are in addition to the many reasons for buying silver now.|
The words of the late Bunker Hunt in the 1970’s when silver was $4 turned out to be prophetic – “Silver is an accident waiting to happen.” More true today than it was back then, an upside price accident in silver seems unavoidable. The emergence of two new factors only strengthens the case.
The first new factor is the aggressive accumulation by JPMorgan of hundreds of millions of ounces of physical silver. This is the largest accumulation of physical silver by a private entity in history and is three times the 100 million ounces acquired by the Hunt Brothers in 1980 or Warren Buffett in 1998. The flow of data over the past year, suggests the bank wants to buy even more actual silver.
One key difference between JPMorgan’s acquisition of silver and the Hunt Brothers or Buffett’s acquisitions, is that JPMorgan was the largest paper short seller on the COMEX over the time of its physical accumulation. This is manipulation on its face and just today the federal commodity regulator, the CFTC, brought charges against Kraft for manipulating wheat futures in the same manner.
JPMorgan is now in position to reap a fortune on sharply higher silver prices and that is almost tantamount to a personal invitation for investors to join in and reap a fortune along with them. When the most powerful and well-connected financial institution in the world sets itself up for a huge profit by buying an enormous hoard of silver, that is an invitation to all investors to buy silver. JPMorgan has been in the driver’s seat for silver for more than seven years (since acquiring Bear Stearns) and the unmistakable evidence that they have acquired a truly massive position in physical silver points to the bank driving silver prices higher. That’s as close to an insider investment invitation as it gets.
The second brand new factor in silver is an interest rate structure never witnessed before. Not only are interest rates the lowest in all of our collective lifetimes, negative interest rates are actually appearing around the world. Super-depressed interest rates have altered the investment landscape forcing investors to seek better returns in alternative investments. This factor has been at work in the stock, bond and real estate markets. Since zero interest rates have already elevated stock, bond and real estate assets, as well as art and collectible prices to record overvaluations, there is now a much greater risk of loss in those assets. Perhaps zero interest rates can cause a further increase in stock, bond and real estate prices, but the high risk embedded in those assets must be of concern to investors.
With many trillions of dollars and other currencies in bank deposits and money market accounts around the world, all “suffering” from extremely low interest rates, it is a certainty that some portion will continue to seek out better investment returns. Silver is a leading candidate. The amount of money held worldwide in banks and money market deposits is so extraordinarily large and the amount of silver available for purchase is so small, the tiniest percentage of assets flowing into silver should cause prices to explode. Once the flow starts it is likely to set off a virtuous cycle. Higher silver prices will beget additional investment flows – that’s the way of the investment world.
There is an incredibly tiny amount of industry standard silver bars in world inventories worth less than $20 billion total. Not only could that amount of money flow into silver in a heartbeat, the evidence suggests very little of that actual silver is available for sale. Compared to the trillions of dollars of gold in the world, the amount of silver available to investors is microscopic. And there is still less than $2 billion of newly produced silver available to world investors annually, after total fabrication demands are met. Such a small supply of actual metal versus the massive mountain of world investment buying power is guaranteed to create sharply higher silver prices in time.
Because of these two brand new factors in silver, I have to increase my potential target for the price. Since all the previous factors that I’ve considered in silver are still in place and have now been joined by two new factors that I never considered before, an upward revision in price expectations seems to be justified.
It wouldn’t take much to push silver into a genuine physical shortage, setting investors and industrial consumers of silver into a buying frenzy and panic to secure needed supplies. JPMorgan is better positioned for that kind of upside silver explosion than ever before. Furthermore, it’s only a matter of time before some of the trillions in low-interest deposits flow into silver and causes a price shock. These two factors suggest an ultimate price in the hundreds of dollars an ounce. That translates into a return of ten or twenty times invested capital. Look at the evidence supporting that JPMorgan has acquired a massive amount of physical silver and consider the low returns offered in the world for bank and money market deposits. Then consider how cheap and necessarily low risk silver has become. If you do, chances are you will buy silver. Just do it before the crowd does.