A case for silver.Silver is currently under significant regulatory constraints, and its prevailing market price does not incentivize the allocation of capital toward ventures focused on increasing its supply. This creates a supply constraint for the asset.
Beyond its role as an inflation hedge, a characteristic shared by most commodities, silver possesses unique properties that are particularly valuable for industrial applications. As we stand on the brink of a new wave of industrial expansion, silver's conductivity and reflectivity make it indispensable in various technologies, such as solar panels (where China leads in production), antifreeze formulations, and numerous other applications.
Recently, President Putin announced that Russia will include silver in its strategic reserves. Meanwhile, China has been engaging in confidential agreements with miners and refiners to secure prices over extended periods. Due to China's relatively loose regulatory framework, these transactions are not publicly disclosed, and as a result, they are not reflected in silver's market price. This can be said for African, Latin-American, or other Asian countries with loose regulation for these kinds of markets. Silver pricing predominantly occurs on the futures market, which underscores cases where a disconnect arises between market prices and underlying realities, leading to potential distortions in valuation.
Case 1: JP Morgan commodities trading desk scandal.
" A federal jury in the Northern District of Illinois convicted a former trader at JPMorgan Chase and Credit Suisse today of fraud in connection with a spoofing scheme in the gold and silver futures markets.
According to court documents and evidence presented at trial, Christopher Jordan, 51, of Mountainside, New Jersey, was an executive director and trader on JPMorgan’s precious metals desk in New York from 2006 to 2009, and on Credit Suisse’s precious metals desk in New York in 2010. Between 2008 and 2010, Jordan placed thousands of spoof orders, i.e., orders that he intended to cancel before execution, to drive prices in a direction more favorable to orders he intended to execute on the opposite side of the market. Jordan engaged in this deceptive spoofing strategy while trading gold and silver futures contracts on the Commodity Exchange (COMEX), which is a commodities exchange operated by the CME Group. These deceptive orders were intended to inject false and misleading information about the genuine supply and demand for gold and silver futures contracts into the markets... Four other former JPMorgan precious metals traders were previously convicted in related cases. In August 2022, Gregg Smith and Michael Nowak... spoofing... In October 2018, John Edmonds pleaded guilty in the District of Connecticut... wire fraud, commodities fraud, price manipulation, and spoofing... In August 2019, Christian Trunz pleaded guilty in the Eastern District of New York to one count of conspiracy to engage in spoofing and one count of spoofing... "
This is the article if you'd like to read more: www.justice.gov
My thoughts; This type of practice is an example of how there always a disconnect with real life and markets. One must also remember how information travels and the infrastructure and systems in place that runs our financial system. I believe JP Morgan's swift settlement shows to me there was not much accountability addressed.
Case 2: Silver Thursday, Hunts Brothers, 1970s
" Nelson Bunker Hunt and William Herbert Hunt — oil company executives, investors and brothers — first began purchasing silver in the early 1970s at a price of less than $2 per ounce. The Hunt brothers’ fervor for silver accelerated dramatically following the death of their father in 1974, a Texas oil tycoon known as H.L. Hunt. His passing released a $5 billion fortune to members of the Hunt family.
Fueled by an enormous amount of capital, the Hunt brothers continued stockpiling silver and purchasing silver futures contracts. By early 1979, the price of silver had risen to about $6 per ounce. The Hunt brothers acquired roughly 195 million ounces of silver, about a third of the world’s total supply. They facilitated their silver purchases in part by investing in futures contracts through several brokers, including Bache Halsey Stuart Shields, Prudential-Bache Securities, and Prudential Securities. By December 1979, the market price for silver fluctuated between $20 and $25 per ounce.
Silver had become exorbitantly expensive even for practical uses. Doctors struggled to afford X-ray film for patients, families melted down their heirloom silver flatware, silver burglaries skyrocketed, and Tiffany’s & Co. was forced to drastically raise its jewelry prices. Tiffany’s even took out a full-page ad in the New York Times criticizing the Hunt brothers, writing, “We think it is unconscionable for anyone to hoard several billion, yes billion, dollars’ worth of silver and thus drive the price up so high that others must pay artificially high prices for articles made of silver.”
Silver reached a record high of $48.70 per ounce on Jan. 18, 1980. By some estimates, the Hunt brothers’ entire silver fortune peaked at a value of $10 billion.
Thursday, March 27, 1980
Facing out-of-control silver prices, COMEX (Commodity Exchange, Inc.), a division of the New York Mercantile Exchange (NYMEX), acted against the Hunt brothers. On Jan. 7, 1980, COMEX introduced Silver Rule 7, which placed heavy restrictions on the purchase of commodities on the margin.
Following its peak price of $48.70 per ounce, silver began its decline and the Hunt family’s silver fortune began to shrink.
On March 27, 1980, known as Silver Thursday, the price of silver dropped 50% in a single day, from $21.62 to $10.80 per ounce. The Hunt brothers failed to meet several margin calls and about $7 billion in paper assets suddenly turned into a $1.7 billion debt.
The sudden price drop threatened to collapse several investment firms and banks. To prevent widespread financial chaos, multiple banks joined together to issue the Hunt brothers a $1.1 billion line of credit..."
The original article: learn.apmex.com
My thoughts: Now you see that one entity can have huge influence on the market. Your once dusty silver mirror can become valuable enough for you to go and find it and clean it and sell it.
One actionable step you can take today is to capitalize on silver's current low valuation. There's clearly a lag between what's happening in the physical market and how that information gets reflected in exchange prices. Interestingly, we've seen noticeable price increases and premiums when buying physical silver, but there hasn’t been much movement in the more liquid instruments like the GLD or SLV ETFs—which, by the way, JPM vaults silver for. This disconnect exists because the market takes time to catch up to reality. What’s your take on this?
More articles:
marketsanity.com
www.justice.gov
www.reuters.com
www.investing.com
seekingalpha.com
investingnews.com
metalsedge.com
www.moneymetals.com
