By no stretch of the imagination can the silver market be called free at any time since 1871. In that year two powers demonetized silver: Germany and the United States. The governments of both were cashing in on the war-booty from their respective victories. Prussia had just defeated France, and in the United States the North had just defeated the South. These governments were dumping silver in order to raise the gold needed to run a gold standard. The price of silver fell from $1.29 an oz and continued falling for more than 60 years to a low of 0.25 ¢, or less than one-fifth of the old official price (although there was a brief spike back to $1.29 at the end of World War I) as all other countries with the significant exception of China followed suit in abandoning silver and turning to gold. In the meantime the U.S. Treasury was made by law to purchase silver from the Western states at prices above market. The silver-purchasing program of the United States remained in effect for over 75 years, after which the Treasury initiated a silver-selling program at prices below market. All in all, 6 billion oz of Treasury silver was sold during the past fifty or so years and, by now, the U.S. is allegedly out of silver. Well, maybe out of silver, but not out of the silver business. Holding the line on the silver price, or at least yielding ground to higher prices only gradually, is considered the first line of defense by the U.S. government protecting the dollar. If silver were allowed to be cornered, then gold would follow and that would be the end of the dollar, and the financial domination of the world by the U.S. government.
Silver analysts have properly noticed the structural deficit for the past twenty years or longer, the draw-down of the visible supply deliverable against futures contracts, all in the face of stable or declining silver prices. They have also noticed what they took to be naked short position of traders that is increasing by leaps and bounds. The analysts say that behind it all there is illegal price manipulation. They contend that silver prices would be much higher by far if it wasn’t for the traders’ selling of unlimited amounts of silver futures naked illegally. The analysts claim that the naked short position of a few big traders amounts to several years of mine production. At any rate, it is a high multiple of the existing stores of deliverable cash silver in existence. It is a disaster waiting to happen. And happen it will before the last bar of deliverable silver is gone.
In trying to explain these anomalous developments the silver analysts charge that there is a conspiracy involving the “silver insiders” (namely, the four to eight largest traders), the exchange officials and, possibly, the government watchdog agencies. The insiders have made obscene profits at the expense of the outsider investors and the shareholders of the mines. They could do it as they enjoy special privileges and may get off scot-free with violating both the exchange rules and the laws of the land. Dark hints are dropped about the possibility of kickbacks to officials whose duty it is to enforce the rules and the law. It has also been suggested that silver mine executives have been bribed not to complain about low silver prices but to keep producing at a loss.
Without trying to refute these accusations I should point out that, before charges are made, one ought to make sure that all other possible explanations have been exhausted for the aberration that the price of silver declined significantly in the face of structural deficits and the draw-down of visible supplies. Even if there is no other explanation, the existence of a conspiracy does not logically follow. Without trying to refute the conspiracy theory I should point out that the market behavior of the shorts may find a spontaneous explanation. Speculators may be prompted to congregate on the same side of the market by the idiosyncrasies of the regime of irredeemable currency. It is not an outrageous assumption that all speculators read the mind of government and central bank manipulators in the same way. While uniform behavior would not be possible in the case of speculation in agricultural commodities where the risks are nature-given, it is quite possible in the case of speculation in monetary metals precisely because here the risks are man-made.
Whatever Happened to the Chinese Silver?
The most populous country, China has one of the oldest civilizations on earth. It had been on a silver standard since time immemorial before the Communists overran the mainland. Nobody knows how much silver was involved in running China’s monetary system, but the amount must be mind-boggling. In addition, China was forced to absorb enormous amounts of silver (both through legal channels and through smuggling) after silver was demonetized by the rest of the world and the price of silver collapsed. We do know that this addition to the Chinese money supply created an inflation horrible enough to cause the fall of the Kuo-min-tang regime and the ascension of the Communists to power in 1949. We do not know what proportion of the monetary silver the Communist government left in the hands of the people while confiscating the silver in the banks with characteristic ruthlessness. Finally, we do not know whether or not China was buying silver clandestinely during the twenty-year period between 1980 and 2000 when the price was falling.
Be that as it may, the silver left over from the silver-standard days, plus the silver subsequently flowing into China, is largely unaccounted for. The question is: where is this Chinese silver? It appears that China does have the silver wild card, and hasn’t played it yet. We cannot blithely assume that China will play it stupidly. The possibility exists that China will play it intelligently. For all we know, China may already be active, if only clandestinely, in the silver market and has been deriving handsome profits from it. The alleged naked short positions in silver may in fact be genuine hedges for Chinese-owned silver. In other words, China may have decided upon a strategy to derive a steady income from her silver treasure, at least for as long as prices remain low, in preference to the alternative strategy of driving up the price of silver and then cashing in. I haven’t examined the evidence and I am not suggesting that this is the case. All I am saying is that there is another possibility that could explain the anomalous market behavior for silver. One reason why I find the theory of inordinate and growing naked speculative short positions unattractive is because it assumes that the insiders are either stupid or suicidal or both. It is dangerous to underestimate one’s opponents.
Serial Crimes of 1871, 1933, and 1971
The right of the people to free and unlimited coinage of silver at the Mint is carved into the corner-stone of the U.S. Constitution. This right was abolished with a sleight of hand in 1871. “The Crime of 1871“, as William Jennings Brian called the unconstitutional demonetization of silver, may get its just punishment after a 130-year delay before our eyes.
It wasn’t an isolated crime. It was a serial crime through which politicians deprived the American people of all their Constitutional rights and prerogatives pertaining to money, that started even before 1871. The crime was repeated on a bigger scale in 1933 when a Democratic president tricked the American people out of their gold. The crime was crowned in 1971 when a Republican president tricked the rest of the world out of its gold, while inflicting a regime of irredeemable currency on the American people and everybody else. Although through the betrayal of the economists the people were left in darkness about what has happened to their money, these crimes cry to high heaven for justice.
While I am somewhat doubtful about the theory of conspiring private parties, I find the theory of a secret government plot to suppress the price of silver plausible, even persuasive. This plot may also include collusion between the governments of the United States and China to fend off a price explosion. According to this scenario China would supply cash silver to deliver against futures contracts, in return for the right to collect the income flowing from her short positions in silver.
Even the obvious delivery problems cannot serve as conclusive proof that the insiders (also called “silver managers”) have rigged the silver market in an effort to cap the price. After all, the silver to be delivered may have to be brought in from China. That takes time. Silver analysts would do well to compile intelligence as to what percentage of the delayed deliveries to the Central Fund of Canada and other longs has originated in China. If it was a large percentage, then we would have evidence that the silver managers were neither stupid nor suicidal. They merely acted as the agents of the government China.
