Silver shenanigans

Alasdair Macleod – 4 February 2010

I have written about the short position in gold recently, but there has also been a big short position in silver for a considerable time. The principal markets are the London bullion market for physical, and Comex for futures and options. The major players are therefore the bullion banks. However, unlike gold, silver has industrial applications as well as jewellery, silverware and minting coins. There is therefore a significant element of demand that is actually being consumed, never to return to the market. The official supply and demand figures for 2008 in millions of ounces look like this[i]:

We know that demand for iShares Silver Trust (SLV) and other ETFs grew by about 70 million ounces in 2008 making nonsense of the implied investment demand figure, which together with other bullion demand not itemised must represent a significant draw-down from bullion inventories. The inventory position has indeed been declining rapidly from a high of over 2 billion ounces twenty years ago to only 140 million ounces in government hands today[ii]. The fundamental reason for this decline in reserves since is that production has been unable to keep up with demand, without even taking into account recent investment hoarding. This is even more remarkable when one factors in the collapse in photographic use, which has been replaced by new industrial, medical and electronic applications.

With an adverse supply and demand balance and a very low level of inventories, it would appear that the bullion price is firmly underwritten, and has the potential to move upwards strongly. Furthermore mine production is unlikely to increase easily on higher prices, because some 70% of global production is as a by-product of other non-ferrous metal extraction. So the last thing industrial users need is an escalation of hoarding activity.

It is therefore very interesting that there is a big short position in the Comex market, commonly attributed to JP Morgan. The commercial traders on Comex (mainly the bullion banks) are short a net 274 million ounces, the equivalent of twice total government holdings or over five years of the implied investment demand shown in the official figures. We do not know for certain the overall position of these dealers in London, but as with gold, they are unlikely to be sitting on a book of non-interest earning silver to cover their entire unallocated accounts. This view is confirmed by recent price action, when the commercials reduced their short position on falling prices, which they would have been reluctant to do if the Comex short position was hedging the London book.

There is also evidence that some of the silver ETFs may be leasing their bullion holdings, with the lease income serving to reduce custodians’ fees, rather than appearing as a controversial line in the Report and Accounts. This is evident in the case of Silver iShares Trust, where the custodian, the same JP Morgan rumoured to be short on Comex, only took 60% of their custody fees in a gesture of uncharacteristic generosity.

In conclusion, the combination of bullish factors is even more powerful potentially than that for gold. Not only does silver share the same market characteristics, with the major players apparently short up to their eyeballs, but industrial demand is consuming any reserves to the point of extinction. It is very difficult to imagine how they will close out these positions in the absence of accommodating central banks, without a substantial rise in the price to wholly new levels.


[i] Taken from the World Silver Survey 2009, the Silver Institute and GFMS Ltd

[ii] According to CPM Group, reported by David Morgan at

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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