Every conspiracy has a silver lining
19 May 2011
Sean Russo
I LOVE a good conspiracy as much as the next guy and we have plenty on the run at present. Osama bin Laden died years ago and president Obama chose now to stage the raid to save the USD and improve his chances of re-election; Dominique Strauss-Kahn (DSK to his mates) head of the IMF and presidential wannabe of France was framed in a “honey-pot sting” and didn't really try to assault a chambermaid; and my personal favourite … the world is running out of silver and so much so that it will be more scarce (and therefore logically more valuable) than gold.
On the first one it seems to me that bin Laden’s followers would quickly move to confirm he had been dead for ages, something they had a good reason to keep secret up to now, as it would severely undermine the credibility of the infidels that suggest he was only recently clubbed by a Seal.
On the second, could parties unknown – perhaps hoping to destabilise the IMF or undermine DSK’s tilt at the French presidency – pay someone to try and entrap him? Absolutely they could. Every time I go fishing I bait my hook but I only catch something when the fish takes the bait. I don't know about you but I have discovered that, my bait, placed in front of a disinterested fish, goes unmolested.
And that brings me to the world is running out of silver. I know this conspiracy is alive and well because I both read it and heard it last week. One source independent of the second clearly confirms the whole thing, doesn't it? Those folks (and everyone but me it seems) knew it to be true because it’s all over the internet that future demand will continue to outstrip future supply and silver will be increasingly scarce and therefore increasingly expensive. That's right, the basis for their extreme confidence in the “theory of increasingly rare silver” (I believe any conspiracy is really just a theory that some of the theorists then argue “they” are trying to keep secret from “us”) is the assumption that future demand, which cannot be known and surely reduces with increasing price, will exceed future supply, which cannot be known and will surely increase with increasing price.
Interestingly, dare I say amazingly, this "theory" seems to have actually increased in popularity after the extreme price action observed in the weeks that book-ended Easter. Disappearing silver's acolytes claim the price run up to the historically high price of $US50/oz in thin trade on Easter Monday is evidence of the long overdue process of cleaning out short positions held by major banks who are conspiring to control the silver market. They also claim the commodity/futures exchanges conspired to protect “them” by increasing margins.
In the coming years silver may well go up in price; only a fool would deny the possibility that those currently long (many who are now wrong) may yet sell to a greater fool. After all that’s how most markets work, much of the time. To those who give even the slightest sympathy to this conspiracy de jour, or worse have invested far too much of their capital at current prices, I would like to offer the following observations for their further consideration.
Don't you think it’s funny that the banks, signed up members of the evil empire and definitely usually forming part of “they”, are thought to be victims of what's coming? I suggest to you that when you look back in history and peek, with the benefit of perfect hindsight, behind the veil of the many supposed yellow brick roads to infinite riches, crowded by small time investors, the “evil empire” is almost always the one making money at the public’s expense. Oh how sweet it might feel to be part of people power, the investment equivalent of the guy confronting the tank in Tiananmen Square, but remember for every guy who stopped a tank like that there are millions that got crushed by one. Take heed of history and don't be surprised if we one day learn that large banks and traders, realising they needed substantial liquidity to exit the silver long positions they have accumulated in silver over the last few years, were actually the sponsors or at least the spruikers and spreaders of the research suggesting silver might become more scarce than gold. And they have form in this regard, don't they?
Please print out the silver chart below, 30 years of data, if you like but 30 weeks or 30 days is also okay. Stick it on a wall, stand back, take a deep breath and have a good look. Recognise the parabolic shape and think how rare it is that a market, a stock, a currency or an index ever rose like that and then just plateaued at those new high prices. Parabolic price explosions are generally keys to savvy investors to exit even the most cherished of investments. What they are almost never, is the starting point at which to enter into an investment. Right now silver looks just like every company that had developed the wonder drug that wasn't and every penny dreadful mining stock fervently and unashamedly ramped by insiders while they sold the whole way up. Even if silver is going up there will probably be a much better/safer time to buy it than now.
Silver Chart
Still not sure about parabolic rises? Drag out a chart of palladium covering the period from the mid-1990s to 2000.
The totally masterful way that market was manipulated by a few at the cost of many was well chronicled after it was over. While it was rising though the talk was all about scarcity and never ending riches for holders and producers. As palladium crested $US1000/oz I met representatives of car companies who wanted to buy palladium mines because they feared they wouldn’t otherwise have the material needed for their catalytic converters.
Scarcity, or just the fear of it, will drive away industrial demand for a commodity. Who wants to invest heavily in an industry or killer app that looks good on paper but can't actually be delivered upon because the raw materials crucial to the creation and delivery are uncertain?
The funny thing is silver doesn't actually have to become more scarce than it is for the price to rise (but it helps to turn a theory into a conspiracy). If governments print paper money the price of everything will likely rise against that measure. However, in that circumstance silver is only one asset to protect against that. If silver rallies so fast that an Indian peasant can sell the silver cache he was putting away for a rainy day, and buy a house that a few years ago he only dreamed about owning, he will likely sell the silver and buy the house. Silver has already outstripped lots of asset classes that offer good protection against inflation but also pay a reasonable yield along the way.
Those who don't believe DSK was framed argue he has form and he does. Those who are looking at silver in the “fresh light of scarcity” need to remember it also has form and it has broken many hearts, many times before.
For those who care not about silver, I suggest you be mindful of what has just happened and watch silver very closely to see what happens next. In this brave new world of commodity ETFs and commodities as an asset class, silver’s illiquidity and popularity with smaller investors qualifies it as a perfect equivalent to a canary in the coal mine. Just a bit more fragile, a bit more sensitive, than other markets and it may just have fallen off its perch.
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