Seven years ago, I wrote an article in which I anticipated a surge of investment buying in physical silver which would drive prices higher. At the time, January 2008, silver prices were close to where they are now. We were entering the most dramatic period in silver history. The largest silver short, Bear Stearns, was about to go bankrupt and was rescued by JPMorgan who then took over as the big COMEX silver short. A surge of investment buying accounted for a run up in silver prices to near $50 in early 2011. Investment buying of more than 300 million ounces in various silver ETFs was clearly the greatest influence along with retail coin and bar purchases. Without this buying, silver prices would never have increased as they did.
Conditions for another investment surge in silver may be more firmly in place today than they were seven years ago. When interest rates approach zero, investors are driven to assets that promise higher returns. Low interest rates further encourage borrowing money to increase returns. There is also much more buying power in the world today than there was seven years ago.
Furthermore, a shockingly tiny amount of physical silver is available for purchase. I’m assuming only the tiniest percentage of investment funds will gravitate towards silver. A tiny percentage of the many trillions of dollars of total world investment buying power attempting to flow into silver would explode the price.
Only 75 million ounces of silver are produced monthly. If anyone tried to buy 100 million ounces of physical silver within two or three months it would cause a price rise of 50% or more. 100 million ounces constitutes 10% of the silver bullion inventory in the world. When 100 million ounces of silver are converted into dollar terms that comes to less than $1.7 billion. In world investment buying, $1.7 billion is so small that it isn’t even a rounding error. Two billion dollars is only 0.2% of a trillion dollars and there are many tens of trillions of dollars of world investment buying power.
An equivalent $1.7 billion in gold amounts to less than 1.5 million physical ounces of gold, an amount that might move the gold price a percent or two if transacted on a single day. That amount of money flowing into physical silver on any one day would cause the price to double. My premise of the return of a silver investment boom is rooted in the absolute mountain of world investment buying power. An anthill of this money could flow into silver on a moment’s notice. When that anthill of money is converted into physical silver ounces it eats up an astoundingly large amount of silver. This is just another way of saying that the price of silver is way too low and is not likely to stay that way for long.
The Wall Street Journal reports this evening that “prosecutors in the Justice Department’s antitrust division are scrutinizing the price-setting process for gold, silver, platinum and palladium in London, while the Commodities Futures Trading Commission has opened civil litigation” (Wall Street Journal).
Ten of the biggest banks in the world are allegedly under “scrutiny:” HSBC, Bank of Nova Scotia , Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Société Générale, Standard Bank and UBS.
Will the Justice Department finally clean up the CFTC’s mess as Eric Holder attempts to play tough cop on his way out the door?