The endgame for silver
How will the silver squeeze unfold?
Given the latest surge in the price of silver, there is renewed interest in the idea of a “silver squeeze” - a short squeeze on silver. However, it seems that most people don’t understand this concept, or how it may unfold. A regular short squeeze takes place when there is a large short position on a certain asset, whose supply is limited. If enough new buyers step into the market, they may overwhelm the short sellers and force them to exit their positions. Since the only way to get out of a short position is to buy the underlying asset, this often leads to a price spike.
But with silver the situation is different. The official price of silver is determined at the commodity exchange in New York. This market is dominated by a number of large banks, who effectively control the price. They buy unallocated silver at the London bullion market, and then turn around and sell long futures contracts at the COMEX. This way they are as though balanced. But since the LBMA operates on a fractional reserve basis, and the same silver can be sold over and over to multiple parties, there is no limit on the amount of silver they can sell, and the amount of long futures contracts that can be generated. And since most buyers settle in cash and don’t stand for physical delivery, this shell game can continue indefinitely.
The only way to truly squeeze silver is to take hold of physical silver. If enough people do that, the inventory both at the COMEX and the LBMA warehouses will eventually be depleted, and the banks will not be able to meet their delivery obligations. Technically, this will not constitute a default, since the COMEX has the power to force traders to settle in cash. But in practice, this will be an admission that there is a shortage of silver. Those traders who were unable to acquire physical silver at the COMEX will have no choice but to get it elsewhere, and I suspect that they will empty the shelves of every bullion dealer in the world, practically overnight.
Although these are big players, who normally only deal with commercial 1000 ounce bars, I suspect that they will grab whatever they can - 100 ounce bars, 10 ounce bars, and if they become desperate enough then perhaps also 1 ounce coins. This way the crisis will bleed from the wholesale market to the retail market. Since the authorities won’t want to attract attention to the situation, this will probably not be announced on the news. But experienced silver stackers will notice that their online dealers are unavailable, and that every coin shop in the country has been wiped clean. The official price of silver may remain unchanged, but the only silver which will be available for sale will be offered for multiples of that price.
This event will probably mark the beginning of a prolonged bull market in silver. Once the word spreads and the public becomes aware of silver’s huge potential, I expect investment demand to increase dramatically. But since the mining industry is largely insensitive to the price of silver, and the major refineries in Switzerland have a limited refining capacity, investment grade silver will be very hard to get. What little supply comes to the market will be instantly snatched by the highest bidder. This will generate a self-reinforcing loop, in which a higher price begets stronger investment demand, and stronger investment demand begets a higher price. This will continue until the price of silver is so high, that it is prohibitively expensive. The average person will no longer be able to buy ten ounces or a hundred ounces at a time, and will have to settle for one or two, like they do with gold.
I believe that this will effectively remonetize silver. Whether the governments of the world acknowledge it or not, people will once again use it as money. And since it will probably coincide with a decline in the purchasing power of the US dollar and a resurgence of inflation, this will bring an end to the current monetary system. In order to stabilize the system, the new currency will have to be backed by either gold or silver. As a result, banks will no longer be able to issue unlimited amounts of credit. Corporations will have to tighten their belts and adopt a more conservative way of doing business. They will no longer be able to fund unprofitable projects, and every unnecessary expense will need to be slashed. The greatest impact will be on our governments, who will no longer be able to run deficits, and will finally be forced to balance their budgets. They will no longer be able to hire so many employees, and shower them with generous benefits. Entitlements will need to be cut, and those living on welfare will be forced to find a job. This will no doubt lead to a massive backlash, as city centers across the world are paralyzed by protests.
As you can see, the economy post silversqueeze will look very different than it does today. For many people, especially those who hold all their wealth in digital assets, life may take a turn for the worse. Those who have marketable skills will probably land on their feet, and be able to adjust to the new reality. The only ones who will triumph in such a scenario will be the stackers, who were smart enough to invest in tangible assets such as gold and silver.
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Disclaimer
I am not a licensed financial advisor. This article is intended for general informational purposes only, and should not be regarded as investment advice. Before taking any investment decision, please consult with a professional financial advisor, who may assess your personal investment objectives and needs.