Why Does The Price of Silver Matter?

Those of us even tangentially interested in silver will no doubt be aware of Ted Butler’s incessant allegations that JP Morgan is the major manipulator of its price on the COMEX future’s market, which it purportedly accomplishes by selling huge amounts of short contracts while simultaneously, but often covertly, accumulating massive amounts of the physical metal in various forms.  In a recently published article on SilverSeek, http://www.silverseek.com/commentary/unavoidable-comparison-14284, he alleges that the bank took on that role at the behest of the US Government back in 2008 when Bear Sterns went under, being rewarded by the tidy profits they routinely make in the futures market and the immense gains they stand to make if/when they unload their silver hoard at significantly higher prices.

It seems to me that the really important question is not whether Butler is correct in arguing that JP Morgan is acting on behalf of the government, with CFTC complicacy, but rather why those in authority would even be interested in the price of silver?  After all, it is not actually a monetary metal anymore, and  officially in most countries hasn’t been one for around a century and a half.  Of course, silver coinage remained in common use in many parts of the world well into the 1960s, but since before WW II no country (possibly apart from Ethiopia) has been on a silver standard since the Republic of China went off of theirs in the mid-1930s.  Since the 1870s, under the ‘classical gold standard’, in most countries silver coins had monetary value only as tokens mainly representing fractions of gold-backed marks, dollars, pounds, and francs, etc., their actual silver content being of no consequence*.  Otherwise, their universal replacement with look-alike base metal tokens, virtually complete by 1970 worldwide, could not have been accomplished with so little fuss and bother.

Silver, as an element with some special metallic qualities, does have some continuing, and even increasing ‘industrial and other practical uses despite its virtually complete replacement in photography, as it is an excellent electrical conductor and is particularly suitable for switch contacts.  It also has increasing medical uses, as it has well-recognised antibacterial and other useful properties.  However, it is not rare, or even particularly scarce, although readily minable primary silver deposits are not abundant and many are depleting.  Approximately 70% or more of newly mined silver is a by product of copper, tin, zinc, and gold mining, so more production will continue to become available so long as that goes on.  At present, all-in average mining costs are said to now be approximately at or even a bit above current spot silver bullion prices.  Nonetheless, it is generally not an economic proposition to attempt to reclaim and recycle very much of the silver that ends up in disposable waste (unlike that which was used in photography.).  I have seen estimates that approximately half of the new silver being produced ultimately ends up in land-fill.  However, there are very large stocks of above ground silver in various forms, including actual silverware and silver plate, obsolete silver coinage, and even old photographs and negatives (including X=Rays) in addition to bullion in various forms.  The ratio of existing silver stock to new production may not be quite as high as it is for gold, but it is certainly in second place and far, far above that for any other mere commodity, amounting to years and years of potential supply.

So, why should the US or any other government have any particular interest in the price of silver, which is, after all, the key motive in Butler’s alleged official manipulation policy?  Frankly, I don’t know.  If anybody out there thinks that they do know the reason, or even possible reasons, hopefully they will post a comment.

However, I do have a suspicion that the reason could have to do with the price of gold, which certainly is a major concern of western governments and their central bankers because, despite their vociferous denials, gold is still the ultimate denominator of the relative values of their fiat currencies notwithstanding the abandonment of the Bretton Woods Agreement in 1970.  Or so it seems to me, anyway.  But what does that have to do with the price of silver?

I was around in the late 1970’s and even owned what was, for me anyway, a significant amount of silver at that time.  As I recall what was going on during the Hunt bothers fiasco and the then climax in silver and gold futures prices, which I think is backed up by published narratives of those events, the price of silver was driving gold prices at the time, both up and then down.  The same thing happened in the 2011 bubble in both metals’ prices, but with a significantly longer lag in the rising price of gold, which also did not appreciate nearly so much proportionally.  I cannot say why the large gains in silver prices in those periods had such a contagious effect on gold prices, but perhaps the first episode was enough to establish the fear of such contagion in the monetary authorities’ hearts and minds, so that they dare not leave silver alone lest it again leads gold to unmanageable price levels.

Slow Loris Larry

*The same was true for non-fractional coins such as US silver dollars, which circulated along with paper dollar notes of various kinds including ‘Silver Certificates’.  Under the pre-Civil War bimetallic monetary standard (or other such) it is impossible to define the correct long-term silver/gold ratio, as relative prices vary from country to country and over time, and any imbalance automatically produces destabilising international flows of the physical metals, due to Greshams law.

1 comment:

jdsquicktrader said...

The theory is that it's the canary in the coal mine. All it takes is $20B (a pittance) of physical to be taken out of the market in a short amount of time and the price screams higher.

I would guess that if your goal is to keep a house of cards together; then you don't want the canary to fly out of the mine at the speed of light.