Locked and Loaded


by Ted Butler, Silver Seek:

We have now reached the point in silver (and gold) where it is difficult for me to see how prices don’t quickly explode. Everything I look at, from a physical supply/demand perspective to the paper positioning set up on the COMEX, tells me we are at the point where only an upward price surge makes any sense. Yes, I am well-aware of the thoroughly corrupt behavior of the collusive commercials on the COMEX and how their manipulative success over the past 40 years makes it nearly impossible to pinpoint in advance the exact moment such a long-term scam and fraud will come to an end – but recent developments scream out to me that the manipulation’s end is at hand.

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First, I would like to distinguish between silver and gold. While I have rarely seen gold in as bullish a physical supply/demand and COMEX positioning set up as it is now and fully expect it to momentarily surge higher, gold is a very different market from silver. For one thing, the amount of gold in the world and the gold market in general is vastly larger than in silver – almost to the point of making a legitimate comparison of the two metals unrealistic. In dollar terms, the amount of gold in the world is some hundred times larger than the amount of silver, and I’m not aware of any other comparison between any two items similarly mismatched in size being attempted to be measured. It would be like trying to compare the GDP of the US, close to $25 trillion, with the GDP of Portugal or New Zealand, each of which is around $250 billion. I fully understand the long history that invites the gold/silver comparison; it’s just that the actual circumstances of each metal have changed over the decades and last century.

While I do admit that gold’s actual supply/demand fundamentals are tighter than I’ve seen previously, that’s  a far cry from being in a deepening physical shortage brought about by industrial consumption overwhelming current physical supply, as is the case in silver. Simply put, gold is not an industrial commodity, while silver is. Only an industrial or consumable commodity can find itself in a genuine physical shortage. Plus, since there is a hundred times more gold in the world than silver in dollar terms, common sense would suggest in any serious upsurge in price, the smaller item (silver) would likely surge much more in percentage terms and that’s what past price surges in the two metals have indicated. Bottom line, I’m expecting gold to surge by hundreds of dollars per ounce, while I expect silver to surge by (many) tens of dollars per ounce.

One thing that does definitely unite gold and silver is that both are primary investment assets, in fact, gold is a pure investment asset. Silver, of course, is both an investment asset plus an industrial commodity – the only true commodity with such a dual demand profile. The fact that it has been silver’s industrial demand that has created the current physical shortage doesn’t mean silver’s investment demand won’t kick in. It means that when silver’s investment demand does kick in, it is bound to have an outsized impact on price – for the simple reason that silver’s industrial demand has already depleted much of the metal that investment demand would seek to buy. Plus, it’s a well-known fact that collective investment demand grows on higher, not lower prices. This can be readily observed in the extreme collective investment demand in a few high-tech stocks (the magnificent 7), and the historic concentration these stocks represent in overall stock ownership.

Further illustrating silver’s highly unusual dual demand profile is that several readers had sent me copies of a recent article on Zerohedge concerning the historic run up in cocoa prices being due to a deepening physical shortage between consumption and supply, which seemed to mirror the current circumstances in silver. Before I try to explain the difference between cocoa and silver, I must disclose a previous personal experience with cocoa more than 40 years ago, before I picked up the silver “bug”. Back in the day, I had arranged (as a commodity broker) to accept physical delivery of a large quantity of cocoa (more than 100 contracts, as I recall) on behalf of a client, as part of a “cash and carry” spread transaction, where the actual deliveries would be re-delivered the following delivery month. I did insure with the delivery department, many times, that there would be no problems in re-delivering the cocoa accepted for delivery and received such assurances and financing commitments. Then, a few days before re-delivery was to take place, I received a call from the re-delivery clerk that the client’s cocoa had worms and couldn’t be re-delivered. The whole thing became a mess, legal and otherwise and as a result, no pun intended, whenever the subject of cocoa comes up, it leaves me with a bad taste.

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