“Naked Shorting” is a commodities market term that means selling something today for something that you won’t have until later. A good example is with grains.
A farmer may not have any grain to sell you today, but he can sell you a whole bunch after the harvest. That’s great, but he needs money today, so what does he do? He might sell short, getting money today on the promise that he’ll deliver after the harvest. He sells a piece of paper promising to sell his grain, in other words he sells “paper grain.”
What happens if something happens and wipes out a chunk of his harvest so he can’t meet his obligations to sell?
In the market this is called a “fail to deliver” and it’s cancerous. Once one short seller can’t deliver, the price goes up, causing others who have to deliver to pay a higher price to “buy to cover” their shorts.
It happened recently in Oil and sent the price per barrel higher than we’ve ever seen it before. As soon as the naked shorts were over the market calmed down and it’s now half the price that it was last year.
We dodged a bullet on that one. But what if it was happening in another market?
It is happening in another market right now
Silver is that market.
Silver isn’t just for jewelry and con collectors anymore. Silver is in everything electronic. The computer that you’re running has silver in it. Your iPod or Zune, yup, silver in there, too. Your cell phone even has silver in it. You see, silver is a necessity for electronics manufacturing; integrated circuits need silver. Silver is also being used as a microbicide for killing all kinds of nasty, sometimes “resistant” strains of bacteria and viruses.
Here’s what’s shocking: there is less above-ground silver in the world than their is above-ground gold. Gold doesn’t have nearly as many industrial uses, it’s not a microbicide, and it’s mainly used in jewelry.
So why is something that is in higher demand with smaller supply than gold cost so much less than gold? The laws of basic supply and demand seem not to apply to silver… that is, until you take into consideration “paper silver.”
“Paper silver” is just like “paper grain.” It’s a promise to sell a certain amount of silver for a certain price at a future date. This is silver that doesn’t exist equates to almost a full year of silver production. That’s a lot of silver, but there’s a problem.
The going price of silver (the “spot” price) is around $12 and ounce. It costs more than $12/ounce to mine and refine silver. Why would silver mines operate at a loss to provide this silver to those that have sold naked shorts? It doesn’t make sense to work hard and lose money. The silver mines agree and are closing down production in record numbers.
But other kinds of mines are still in operation, mines that don’t mine for silver, but find some silver as a byproduct, which means some raw silver is still trickling into the market. That’s a good thing, except…
The price of other metals is dropping
I went to redeem a bunch of aluminum cans that the guys at the office and I have been collecting, only to realize the price of aluminum has dropped nearly in half.
Silver and aluminum aren’t alone in this price drop. Zinc, copper, gold, platinum, palladium: they’re all dropping in price, but the cost of producing them has held constant. Those mines are also shutting down, and the silver they produce as a byproduct is going away, too.
Manipulating the Market?
Looking at the COT report from COMEX two large US banks hold huge shorts on silver. They do this to keep the price of silver artificially low, at least that is what some are claiming.
The problem for these big banks is that eventually the contracts come due, and then they have to either produce the physical silver by buying it at spot, which would increase the demand substantially (without increasing the supply), thereby knocking the price up drastically. We saw that happen last year (end of 2008) when silver jumped to over $20/ounce.
The only way these big banks could fill their short contracts would be to buy the physical silver, and at those prices they’d have defaulted, which would have sent the price of silver higher.
How could they fulfill their obligations without breaking the bank? Supply had to increase to meet or exceed the demand. What’s ironic, it did! But the mines didn’t re-open. No one found a huge inventory of silver to draw from. So where did the silver come from?
It came from paper. Even more naked shorts were sold which added even more “pretend” silver to the market, this not only kept the price of silver from skyrocketing, it dropped like a stone. Today silver sells for about half the price that it did at its high.
This makes one wonder if the big banks aren’t manipulating the silver market with their huge purchases of “paper silver.”
Who are these big banks? How can they afford to do it?
The Office of the Comptroller of the Currency (OCC), a bureau of the U.S. Treasury Department was established in 1863. The OCC charters, regulates, and supervises all national banks. Their most recent report shows some very, very scary information.
Their report confirms that the U.S. Government, in partnership with JPMorgan Chase, staged this “paper silver” bailout, presumably to help keep some of the nation’s major banks solvent. According to the OCC’s latest data release, U.S. banks, led by JPMorgan Chase, caused to be liquidated, under intentional duress, as much as $9.5 billion of silver in Over The Counter (OTC) derivatives transactions during the fourth quarter of 2008.
Further, the OCC reports prove that JPMorgan Chase not only inherited from Bear Stearns the massive COMEX silver short position in March 2008, it also inherited from Bear Stearns a much larger OTC silver short position.
From December 31, 2007 to March 20, 2008, JPMorgan Chase’s OTC silver short position grew from $4.9 billion to $12.5 billion. That’s 735 million ounces of silver! And that’s not all! These numbers are separate from and in addition to their own COMEX silver short position!
How is the U.S. Government implicated?
Banks buy each other all the time, getting bigger and bigger, and arguably more and more corrupt. But how is the U.S. Government involved?
By now those of you that are still reading must be thinking I wear a tin-foil hat and have nightmares about black helicopters. Think what you will. This is the history that won’t go into the history books. This is the news that the mainstream media isn’t telling you. So think for yourself and you decide.
The Treasury Department and the Federal Reserve arranged for the JPMorgan/Bear Stearns takeover. How could they have done so without sanctioning this historic paper silver liquidation?
And what happened after the JPMorgan/Bear Stearns takeover? That’s right, the government bailed out JPMorgan Chase to the tune of $25 billion dollars. That sounds like more than enough to cover their gold and silver shorts, doesn’t it?
But why does it all matter?
You don’t own silver, or if you do, you don’t own much, so why does it matter to yo
The reason it matters is that silver inventories around the world are being depleted. People trying to buy Silver Eagles, the official U.S. 1-ounce silver coin have been unable to do so due to a retail shortage of the coins.
Some have brushed this off as simply a “retail shortage” and have argued that the bullion supply is still in-tact.
To counter that argument, the U.S. Mint for the first time in history couldn’t buy enough silver to make silver coins for the Treasury. Even today the price of a 1-ounce silver coin is $7 above spot.
Why is physical silver selling for $7/ounce above spot? Because the only silver that you can buy at spot price these days is “paper silver.” As soon as you want to take delivery of that silver things become more difficult.
Paper Silver is a Ponzi Scheme
Taking delivery of physical silver today is going to cost much more than buying “paper silver.”
Those that already hold “paper silver” are getting wise to this and are arranging to take physical delivery of their silver.
But what happens when more people holding “paper silver” want to take delivery? The people who bought in early will get their silver, but those that bought “paper silver” later in the game will be left holding empty promises. The silver doesn’t actually exist, it’s only a promise to deliver.
Once the inventories are used up, there won’t be enough annual production to meet annual demand. The “paper silver” bubble will burst, and the only way out of it is another massive bailout to flood the market with more pretend, “paper silver.” But if the physical supply doesn’t meet the physical demand it won’t matter. The price of physical silver will shoot through the roof and banks will scramble to try and fulfill their obligations, or face going bankrupt.
The bailout, this time, will come from the 350,000 or so small investors who have been buying up physical silver. They’ll be happy to sell it back to the banks at the physical fair market value. Some are saying this might be $500 to $1500 an ounce. Others are poo-pooing this as “crazy talk.”
You look at the numbers. You decide.
I’m not an investment analyst. I can’t predict the future. I’m not advising you to buy or sell anything. In fact, I’m not advising you at all.
Hopefully I’m making you think. And all good thinkers verify facts for themselves.
The statements and claims made in this article are my opinion, based on information that I’ve gathered and may or may not be correct.
It’s your job to do your own research and find out for yourself what’s going on.