Silver Prices. Managed or Manipulated?
The silver market is a very interesting topic in my opinion at this time. There are a couple bull cases from several different vantage points around silver.
The first is the fact the printing press (i.e. monetary stimulus) from the US government and governments around the world are rapidly printing money and debasing their currencies due to the pandemic. This should lead other assets that act as stores of value such as sliver and gold to increase in value relative to most fiat currencies.
The second part of this is that because of the pandemic we're essentially having to adapt and go more digital and push forward our adaption of numerous technologies, and this is very interesting because in going more digital this will further provide strong demand for silver as an industrial metal. At this time approximately 60% of the global silver supply is used for industrial use.
This is also a very interesting dynamic because the pandemic will not only protect against inflation, but also promote a deflationary trend due to the fact silver is used in numerous technologies and technology stands us to make us more efficient, resulting in a decrease of the cost of production.
Silver is in a situation that if we head into a nightmare inflationary scenario silver wins, but if we have a technological renaissance which is deflationary silver could also win.
Given this situation I would have personally expected the price of silver to be much higher than where it is right now. Even though the price of silver has gone up almost 50% in 2020 it has been relatively flat thus far in 2021. It is only at $26 to $27 USD per ounce which is roughly half the peak that silver prices were in 2011.
There are several methods by which regulators can manipulate or manage the the price of silver. Firstly, they can change the margin requirements in the futures markets. During the reddit driven silver squeeze in early February which lasted less than 48 hours the CME or Chicago Mercantile Exchange increased the margin requirements for silver futures by 18 percent.
What this meant is that in order to trade silver futures contracts significantly more collateral was required by traders hence this decreased the demand. This is just a simple supply and demand dynamic working it's way in the system and technically this is no different than housing prices being very high because interest rates are being kept very low. Ultimately, whether this decision was made independently by the exchange or due to pressure by the CFTC is unknown, but it is not the first time that the CME has acted in such a fashion.
Secondly, the price of silver is also managed through the paper market. The paper market for certificates, ETF's, and other vehicles is over 100x greater than that of physical silver, and these synthetics siphon away the demand for physical silver for people looking to invest and keeps the pseudo supply up and hence the price suppressed.
A potentially disastrous scenario is that many of these synthetic silver alternatives allow you to redeem for the physical, so if there was ever a "run on the bank" there could really be a huge problem as financial institutions would be unable to deliver. This is why I would generally suggest holding physical silver if you are able. The pit falls of fractional reserve banking apply equally to the precious metals market.
Logically, it makes little to no sense that the price of silver is significantly lower now than in the 1980s. The current demand for silver is greater than it's ever been because of electronics (including EVs), and furthermore as previously mentioned the monetary stimulus from governments around the world has been unprecedented. In the United States a whopping 18% of the money supply was created in 2020, and it had already accelerated heavily since the 2008 crises.
This has in large part been one of the reasons behind the inflow of cash into vehicles like Bitcoin because by it's nature it can't be manipulated like gold and silver. That is another topic though, and a I will provide thoughts on this in the future.