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In Part I, I laid out for readers the extraordinary scenario which exists in the silver market today. The individuals/entities operating the silver market; compiling data on it; and reporting on it (at least from the mainstream) display no understanding of either the general principles of markets, nor of the specific fundamentals of their own sector.
In the first part of this series I focused on analysis provided by GFMS, one of two quasi-official consultants for the silver (and gold) sector who provide the data most widely relied upon for this market. Specifically I looked at GFMS’ reporting on the silver market for the year 2002. I noted that despite the price of silver hovering near its 600-year low; despite the fact inventories had plummeted by more than 75% in little more than a decade; and despite the fact that production was currently falling; GFMS saw neither any need nor any indication of higher prices for silver. Indeed, these “experts” even mused that the price might fall further.
How utterly flawed was what GFMS passed off as “analysis”? Even after the roughly ten-fold increase in the price of silver which immediately followed this, inventories have continued to decline. Meanwhile the silver sector itself remains so depressed that even after this massive surge in the price, silver miners have been unable to increase production by more than a percent or two each year. In short, GFMS has displayed zero comprehension of this market, and the fundamentals which comprise it.
This brings us to the official regulator of the ‘rigged casino’ known as the Comex silver futures market: the CFTC. As with GFMS, the CFTC claims unrivaled expertise but displays nothing but ignorance and ineptitude. In 2004, the CFTC dared a rare response to the ongoing accusations of “manipulation” in this market. To the CFTC’s credit, it almost managed to competently frame the issues:
The allegations that the CFTC has received can generally be summarized as follows. With silver consumption exceeding new production for many years, it is generally acknowledged that the production deficit has been primarily filled by a drawdown of stocks. Some argue that this decline in silver stocks cannot persist and, since stocks have fallen to low levels, silver prices should have been rising sharply. There is further conjecture that, over the past 20 years, a group of commercial traders (commercials) have held short positions that are so large they cannot serve legitimate hedging purposes because they cannot be backed by real silver.
Now let’s “translate” what the CFTC said back to the real world. The CFTC states:
…it is generally acknowledged that the production deficit has been filled primarily filled by a drawdown of stocks.
“Generally acknowledged…”? “Primarily filled…”? The only possible way to meet this supply deficit is for every ounce of this deficit to be taken directly out of current inventories. Yet here we have the CFTC treating the most elementary piece of arithmetic like some unproven theory.
Some argue that this decline in silver stocks cannot persist…
Inventories are finite. Inventories are declining every year. When inventories hit zero, the market goes ‘kaboom!’ “Some argue…this cannot persist”? Yes, and “some would argue” that if I drive my car long enough/far enough that it will run out of gas. Again we see the CFTC apparently completely oblivious to basic arithmetic functions – let alone demonstrating not a glimmer of comprehension with respect to the principles of supply and demand.
There is further conjecture that, over the past 20 years, a group of commercial traders (commercials) have held short positions that are so large that they cannot serve legitimate hedging purposes because they cannot be backed by real silver.
Let us first take a minute to place these “large” short positions into context. How large are they? The largest single position, belonging to JP Morgan, is always larger (in proportional terms) than the long position of the Hunt Brothers back in 1980 – and often close to double that size. Meanwhile, a small group of these “commercials” hold a massive, continuous short position more than four times as large as the Hunt Brothers.
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