Silver 2: Miners & Markets

Rebecca Ridolfo, July 2015
Mensa emblem

Contents

  1. Calculating the Spot Price
  2. Silver Prices & the Miners
  3. The Market Situation
  4. Market Manipulation
  5. Contributing Factors
  6. Who benefits & who loses?
  7. Sources

Calculating the Spot Price

The 2013 physical market for decorative & industrial uses was 77.3% and investment was 22.7%. On top of that 22.7% is built a vast pyramid of ETFs, futures & derivatives – the most often quoted estimates for 2015 are a 75 & 100 to 1 ratio of paper silver to underlying bullion. The spot price is an aggregate of both paper & physical supply & demand. Proportionately, using the conservative 36 to 1 ratio, paper silver's influence on the spot price is 91.4% & physical silver's influence is 8.6%. Using the 75 to 1 ratio, paper silver's influence on price is 95.7% & physical silver's influence is 4.3%.

Silver Prices & the Miners

In the middle of 2013, silver spot prices fell below mining costs. During the same period, costs have been at least USD20 or GBP13 per Troy ounce. For 2 whole years, the silver miners have been making a loss, depleting their reserves and unable to invest in future operations. The weaker mining companies started going bankrupt. The stronger mining companies started "high-grading", which means extracting ore with the highest silver content per tonne. Once a mine has been high-graded, it is not always possible to go back to extract lower-grade ore once prices have risen again, due to structural instabilities (potential or actual cave-ins). The ore may still be there, but it cannot be extracted.

In 2015, even the Big10 miners are struggling (though their accountants are good at making bad look better than it really is). Once a mine has been mothballed, it can take up to 2 years & a billion dollars to re-open it – pumping water, shoring up shafts, refurbishing machinery, re-hiring skilled workers. If the Big10 start going bust, it will take quite some time to reverse the situation & repair the supply-chain, however high market prices go. Casey Research

The Market Situation

A confusing & complex situation creates a huge array of contradictory opinion. However, there are still a few things we can consider facts as a basis for analysis.

  • As of 13/7/15, the average price so far in 2015 has been $16.76 or £10.81, with a high of £12.20 in January and a low of £9.69 on 8th July.
  • In demographics, the world's population is growing and all those people have needs & aspirations. More silver is being used in both old & new technologies. Demand for silver is constantly growing.
  • The Silver Institute's February 2015 newsletter: "Sales of U.S. American Eagle Silver Bullion coins soared last year beating the previous milestone established in 2014, according to U.S. Mint statistics. Other mints reported strong sales, too."
  • In July 2015, ZeroHedge reported: "US Mint Runs Out Of Silver On Same Day Price Of Silver Plunges To 2015 Lows". The US Mint is taking no new orders from bullion dealers (they do not sell directly to the public) until August, much less making any deliveries. ZeroHedge

 

The supply/demand curve is a fundamental of economics, yet it does not currently apply in the silver markets. Demand is up, supply is down and yet prices are falling. In the world of finance, the price of a commodity & its derivatives can fall & stay below production costs. In the world of the physical creation & processing of real things, it cannot. Something has gotta give.

Market Manipulation

The silver price hit a low just after the Greek referendum. The vote increased the likelihood of default & contagion, so why did the price of a traditional safe-haven commodity go down? Negative bond yields – rather than getting interest on the investment, the lender pays the borrower for a (hopefully) safe & stable place to put capital – are a direct contradiction of this. There is nothing more flight-to-quality than negative yields. How can those bonds be selling and the price of silver be going down?

The charts of mining equities say that there is something very wrong with the sector. Can markets be manipulated? To determine this, we first need to understand what the terms "short-selling" and "naked shorting" mean. Mike Maloney

Short-selling: "The sale of a security that is not owned by the seller, that the seller has borrowed. Short selling is motivated by the belief that a security's price will decline, enabling it to be bought back at a lower price to make a profit." It relies on the price going down between the time the borrowed securities were sold and the time the trader needs to buy some of those securities to repay the loan. Investopedia

Naked-shorting: "Traders must borrow a stock, or determine that it can be borrowed, before they sell it short. While no exact system of measurement exists, most point to the level of trades that fail to deliver from the seller to the buyer within the mandatory 3-day stock settlement period." The practice exploits "various loopholes in the rules and discrepancies between paper and electronic trading systems". "Naked shorting is illegal because it allows manipulators a chance to force stock prices down without regard for normal stock supply/demand patterns."

Sound familiar?

A lot of mining experts, bullion dealers & financial commentators are saying that markets are being manipulated. Miles Franklin's Andy Hoffman blames "capping & attacking paper algorithms" (High Frequency Trading software bots), for example "468 2:15am attacks in the past 534 trading days". On a frequent basis, large numbers of silver contracts are being offered (put, sold) during quiet periods outside normal trading hours – in the middle of the night & at weekends. It forces the price down more steeply, because there is no other trading to counterbalance it. This triggers automated trading stop-loss orders – the software sells if the price goes below XYZ – and they magnify the downwards trajectory. Andy Hoffman

Ed Steer offers one explanation that involves technical funds, which trade on percentages of price action – chart patterns – rather than fundamentals & value. Major banks like JP Morgan, HSBC & Citigroup "run the technical funds up & down pricewise, make a killing going short on the way up and then they engineer a price decline and they trick all these technical funds into selling out their long positions. The banks clean up for fun, profit & price management purposes". Casey Research

While it is not a new idea, having been around since at least the 1980s to my knowledge, they have made an artform of it. That's your investments & pension they're milking. If that doesn't explain rising demand, falling supply, bankrupt miners and lower prices, then what does?

Hoffman reports the outcome: "Look at the price of Barrick Gold, Kinross Gold, Goldfield – these companies are the biggest gold miners in the world. They are all about to go bankrupt. … The silver sector … they're gonna shut down all the mines." Andy Hoffman

Sounds insane, right? Just as insane as spot prices below production costs, but that's real too. Why is this happening?

Contributing Factors

How do we explain this situation?

  1. The amalgamation of the physical & derivatives markets to create the spot price and their relative weightings. Derivatives have so much influence that they are thwarting the underlying purpose of facilitating the trade in raw materials for industrial use.
  2. Quantitative Easing [QE] has given a lot of money (in the form of securities) to a very few market participants. It has done so at such low interest rates that there is little incentive to ensure investment goes to productive purposes. Easy come, easy go. The money is being used to speculate on other people's productivity, to the point that they are destroying the very productivity they are founded upon.
  3. Despite ample evidence, the law about naked-shorting (to name but one) is not enforced. The rule of law no longer applies throughout the markets. If a private individual commits fraud, they are punished. When Goldman, HSBC, UBS, RBS etc commit fraud (LIBOR, PPI etc), their fines are much lower than the profits of said fraud. If you make a million and are fined only 200,000, is that a deterrent or an incentive? Many just see it as a cost of doing business rather than a punishment, since nobody goes to jail. If you are then allowed to do the same again, is that a regulated market?
  4. Bank employees have not faced any negative consequences for this bad behaviour, indeed they have even been rewarded. Banks are receiving record fines, the costs of those fines are passed on to the shareholders and it has recently been announced, for example, that "JP Morgan CEO Jamie Dimon becomes a billionaire" CNBC. Even if a corporation's only responsibility is to its shareholders (I disagree), how can a CEO profit to that extent in a fair market? The Wall Street Journal reported "U.K. Regulator Drops Investigation of 'London Whale' Trader" (Bruno Iksil of JP Morgan) without giving any reason for the decision. In London, the BBC remained curiously silent on the subject.
  5. Would politicians try to influence market sentiment? Here is a representative example about a frequent poster on the Silver Doctors forum, going by the name of LionKid. "Very antagonistic of the metals and always predicting very low targets [for silver] … and all the metals experts are totally wrong. … So its rather interesting that a Silver Doctors moderator … traced back LionKid's IP address … and he's posting from No. 10 Downing Street." SD Metals & Markets
    If it were merely the private opinions of an individual who happens to work there, why would they regularly be able to use their work computer to post on forums? Most organizations frown on and monitor employees surfing the net during office hours.

Who benefits & who loses?

How do we navigate the thicket of sales patter, lies, mistakes, spin, estimates, guesstimates, speculation, hope & half-truths to get to the real truth? Two pieces of ancient and proverbial wisdom are helpful here. Roman lawyer Cicero (106–43BC) is credited with first asking the key question of "who benefits" – cui bono? Matthew points out in the Bible that "Ye shall know them by their fruits." This is restated in the proverb that "the proof of the pudding is in the eating" and in the concept of "outcome-based evaluation".

QE & derivatives benefit some market participants. Debtors get low interest rates. Big banks can make fees from selling more financial products and profit from proprietary trading. Corporations get cheap capital & raw materials to maximise short-term profits. Politicians can deficit-spend and 'kick the can down the road'. Central planners can bolster market sentiment far beyond the fundamentals. Though it's debatable whether that's to hide "policy failures" or looting the public purse, the net result is still impoverishment & misrule.

People & productivity suffer. The losers are savers, producers, small businesses, nations that don't engage in QE and small investors & their pensions. Falling & negative yields reduce pension income. In the short-term, rising prices may increase pension portfolio sizes, but that needs to be sustained for 50+ years to be fit for purpose (assuming one starts saving at age 30 & lives to 80). If rising prices turn out to be based on hope rather than value, a market correction would wipe out those increases. A panic could wipe out the underlying capital too.

The goose that laid the golden egg is dying and the signs of that are proliferating. Here are 3 illustrative headlines from that most conservative of mainstream news sources, the Financial Times, all from 15/7/15 – "US Treasuries: market evolution raises prospect of more frequent volatility." (risks are up) "ECB [European Central Bank] now holds fifth of [bond] market, pricing out investors." "US biotech bull run sets scorching pace. Eye-popping valuations spark caution among some investors."

Using distinctly non-partisan Asymmetric Language Trend Analysis, WebBot is tracking internet keywords and predicting a big hit to the credit market somewhere in the pipeline. Realist News

 

go to Part 3

 

Sources

The Silver Institute website home

Investopedia dictionary

Casey Research's Ed Steer on the mining industry video

ZeroHedge article

GoldSilver CEO Mike Maloney on the silver shortage video

Miles Franklin's Andy Hoffman on trading patterns video

Casey Research's Ed Steer on market manipulation video 0:38 to 1:25

Miles Franklin's Andy Hoffman on bankrupt miners video 21:49 to 22:38

CNBC article

Wall Street Journal article

Eric Dubin of News Doctors & the Doc of Silver Doctors at video 19:36 to 20:45

Jsnip4 of Realist News on WebBot ALTA video

Trend Following - how great traders make millions in up or down markets Michael Covel, 2004

The (Mis)Behaviour of Markets - a fractal view of risk, ruin and reward Benoit B Mandelbrot, 2004

 

Give feedback, make suggestions and report errors at rebeccaridolfo@gmail.com

Members can discuss this and other articles on the economics forum at International Mensa

About Us

Economania is the website of Mensa's internationally recognised Special Interest Group dedicated to economics, trade and finance.

Topics

 

Loading