Vainly Willing the Return of the 2011 Silver Bubble

Do you remember February to May 2011?

I do. I'd previously confined my trading to stocks: oil and resources, mostly. But I wanted to branch out and thought the gold and silver charts looked good for a solid bounce back. My thesis for gold was pretty clear: a nice solid investment to hedge the rest of my portfolio against inflation. And I figured I'd take a slight gamble with silver as I imagined it would provide me with a 'volatile version' of gold. So at the beginning of February 2011 I went in at 75% gold, and 25% silver.

Boy, did us newbie silver investors get lucky! The charts had pointed to a good rise in silver, but we hadn't imagined such a move in our wildest dreams. By the end of the month it had gone from $26 to $34, and I was scaling out of gold and in to silver. With this metal swap, the profits just kept rising. By the end of April, it had all gone stupid, and it was obvious to anyone with two neurons to rub together that we were in the grip of a mania. I got out at around $45 and never regretted the decision. A few days later silver started its plunge from $50 to (eventually) $26, and has barely recovered to this day (currently at $31 and change).

What I did regret, however, was what happened to everyone who had not ejected. It could easily have been me too, had I had a bit less trading experience and a bit less fear (yes, sharp moves higher always scare the absolute bejesus out of me, more so than the plunges - fact). And this burned my curiosity. What had actually taken place? How had such a mania developed? And why didn't most retail silver investors get out? They were still buying all the way up to $49, the poor bastards.

So I started to look more deeply into the 2011 Silver Bubble, and events since, and was rather shocked by what I found.

First the bit that didn't shock me. Essentially, the 2011 Silver Bubble was just another pump and dump, like so many others that have been seen over the years. I was certainly no stranger to them: one finds them in oil juniors all the time. And the growth of the internet has greatly facilitated the pumpers' trade. What shocked me was the scale of the manipulation of naive retail investors through social media. At the time I thought that such a move in price couldn't possibly be down to just a viral marketing campaign but, the more research I do, the clearer it becomes that that was actually the case.

Silver's fundamentals are pretty ropey. It (supposedly) costs $5 to dig it out of the ground, its use as an industrial metal is silver-bearish during economic slow-downs and credit crunches, the silver jewellery trade is in decline, and - worse of all - there is a massive above-ground surplus:

The gap between the blue and green lines must be filled by coin production (i.e. investment demand) if silver is to maintain a supply/demand equilibrium, let alone start work on creating a shortage..! This, I'm afraid is the proof, along with the insane price move in two months and the fact that gold did not move nearly as dramatically, that the 2011 Silver Bubble was indeed a silver bubble. The pumpers set about trying to fill the gap on that chart - or at least create the illusion of doing so - by generating the necessary investment, then speculative, demand.


Anatomy of an internet-age pump and dump

In fact perhaps not just 'an' internet-age pump and dump, but possibly the internet-age pump and dump by which all future internet-age pumps and dumps will be measured. It was very nearly an act of genius, and would have been admirable in its scale were it not for the effects it had on ordinary people.

It was a crazy time. Here are just a few notable elements:

1. Talking bears: These slick, funny, and convincing tales of silver conspiracies were claimed by the mendacious, fantasist and anti-semitic Mr SilverGoldSilver (SGS), a point repeatedly challenged by Screwtape. They were in fact produced by Omid Malekan and/or the NIA [UPDATE: link removed as the NIA site carries viruses. Thanks to reader AL for alerting me to this] and pumped through a pre-existing arrangement with ZeroHedge. Regardless, they were hugely popular, and were among the first media to bring an old story about large Wall Street shorts in silver to a new and pliant audience in late 2010 and early 2011.

2. PM 'fanzines': Too numerous to name, but all of a sudden they were everywhere. TFMR, SGS, and many more, even the Screwtape Files, all came into existence not long before the metal pump. They complemented perfectly the older, 'war horses', such as KWN and Harvey Organ. Collectively they became the cult-like silverogosphere.

3. Wynter Benton: Ah, good old WB. I think Warren is somewhere round the back of GM's orangery tipping the final bucket of slaked lime over WB's utterly dismembered corpse. Regular readers of Screwtape need no background, but if you're new take a look at this 'all you need to know about WB' guide followed by the most recent post and its comments. In brief, WB claimed to be a team of ex-JPM traders looking to get revenge by busting the silver price to unprecedented highs and force JPM's bankruptcy. Laughable now, but this story gripped the silverogosphere throughout the 2011 Silver Bubble, and even now has the ability to draw a crowd, although 24 October 2012 marks the official day of WB's death.

4. Meme development: Again, too numerous to mention them all, but all sorts of weird memes started to circulate: silver was in such short supply that Sprott had to wait months for his; the COMEX and/or JPM was paying out huge premiums to avoid delivery of physical silver; SLV had no silver in its vaults; a mysterious London Trader (= Andrew Maguire) was working against the system from the inside. These, and many other, memes were proven untrue by us: link, link, link.

5. Confirmation bias: as the price moved higher, each of the above four elements all gained in credibility. So, for example, WB's predictions appeared to be vindicated. More pumpee money pissed into the pumpers' pot. The bears seemed to know what they were talking about - ditto. At this point, the fact that the stories were utter nonsense no longer mattered: the ends were justifying the memes (people were making money), and almost nobody was asking the hard questions.


Who benefitted?

This is tricky to answer without getting sued. Many of the fanzine sites were relatively innocent 'useful idiots'. WB was a silver-fan kid in a basement who'd ingested too much of the on-line hype and got too turned on by the attention he was able to garner (and even now doesn't seem to be able to give it up). But the bears, and some of the sites (such as the infomercial KWN, and the self-aggrandising Max Keiser) were clearly promoting an agenda.

We all know who the big silver investors are, and many of the links between them, the miners and the silverogosphere are not even secret. TRE sponsors KWN; Sprott is an investor in GoldMoney, and has all his own derivative products to flog; Casey (another GoldMoney investor) is linked to numerous silverogosphere sites, sometimes via the egregious Tekoa da Silva. Turd laps up every word of Gonzalo Lira and 'Santa'. Harvey had Sprott's ear throughout the 2011 Silver Bubble. The NIA were pumping all over the place.

I can't go further on specifics. But it is one big incestuous mess, with the investors and some miners at the top of a pile of blogs: not necessarily bought and paid for (KWN being the avowed exception), but clearly heavily influenced. The 2011 Silver Bubble was a triumph of organically created mass marketing. A few 'seed sites' were able to lead to numerous others forming of their own accord - a viral process, in the modern parlance - to produce a large body of online pro-silver material and silver-conspiracy meme fountains, most of which was outside the direct control of anybody, but all of which was serving precisely the pumpers' aims.

Genius. All it took then was for the momentum traders to come in and just keep forcing price higher and higher. Sadly, even retail investors were widely encouraged by the silverogosphere to play the paper game (ironic, really): remember all those guys buying AGQ and options on their credit cards? Tragic. When the momentum stalled, the dump came and the big boys won big. Really big. And the pigs got slaughtered.


When will the silver magic come back?

All of the above was rather a diversion from the main point of this post. The rebirth (or re-re-rebirth) of Wynter Benton, and the increasingly desperate faith-based exhortations from certain sites that guarantee silver is still going to the moon, has made me realise that the silverogosphere is still trying to resurrect the conditions that led to the 2011 Silver Bubble. Like an out-of-control Hal, not realising that its job is done and that it's no longer welcome, we keep witnessing the desperate attempts to resuscitate the old 'magic'. The reason is obvious if we go back to the first graph: there's no less silver supply than there was before, and the only way for the bulls to break even is to get things moving to the upside again by stimulating huge amounts of investor demand (read 'speculation').

I submit that it won't work. Last year we had the perfect confluence of events. An organic, self-hyping silverogosphere, backed up by 'just-credible-enough' tales from insider knowledge and hedge fund traders bent on vengeance and viral You Tube videos. And the charts being in the right place in February 2011 for a move higher to provide confirmation. Once the cycle was entered it couldn't stop until there were only sellers left and the bubble burst - a classic mania.

I just can't see the same trick working twice, or at least not for a long time. Not only have many investors been well-educated by the experience, they've also been put off financially. No-one's going to believe a talking bear this time, or a kid in a basement. The scales fell from people's eyes in May 2011, and all that are left are a hard core of increasingly out-of-touch fanatics, desperately clinging to the hope that the magic will come back. This is borne out by how few believed the Third Coming of WB, and how sceptical sites (such as ours and Kid Dynamite's and the Fundamental View) are becoming ever more popular as people decide they prefer to be challenged in their views rather than spoon-fed what they want to hear. This is all extremely positive.

But it does mean that silver's not going back to $50 any time soon. Or even $40 for a long time.

I'm sorry, but it won't. The charts are awful, the fundamentals absent, and the retail investors (and speculators) way less gullible.