A Walkthrough of Silver Abuse from the 1990's Until Now


 Submitted by Vince Lanci and MarketSlant. "If you are bullish gold, buy silver" is an axiom I'm fond of repeating. This axiom is a positive one for Silver people, but actually has its roots in cynicism and manipulation years ago.

Silver is more volatile, which is why in the short term it over-reacts relative to Gold. We now believe that Silver is the better investment going forward because there are big forces with too much to lose if it does not keep a reliable ratio with Gold. You must stomach the higher volatility. We simply believe the "rule" no longer applies to Silver only as a function of its higher volatility. We believe it applies in the long term as an investment now. First let’s look at the phrase's cynical roots in the context of how Bullion Dealers used to (and some still) operate:

The 1990's: Buy Silver if you are Bullish Gold - and don't need your money: The root for this axiom is not in a love for Silver. It is how Bullion Banks herded clients into metals. In the 90's, Silver was a broken market. PM investors hated it. Every day we heard the demoralizing stories while Swiss Bank shoved Calls down our throats hedging their LATAM producer business.

Losers trade Silver:

  • Hunt Bros were robbed. The Comex will cry foul and the Gov't will force liquidation- no argument. they did it again to Buffet in 1997
  • Silver is a waste product of nickel production now- Yup, pour acid on mined nickel and out pops Silver. Leech mining
  • Film is dead- there is no use for Silver anymore.- Yup. I remember looking at potential Silver uses like it replacing chlorine in swimming pools, rationalizing my long call position.. not good

Silver Was a Roach Motel: The result is Silver had a wider bid-offer on a huge contract not suited for retail. And finally, it had non-continuous liquidity, aka markets that flaked from 1 cent wide to 10 cents wide for no apparent reason. This last part killed me.

Silver was indeed a roach motel in the 90's. If J. Aron (GS) owned the Gold mkt, Republic and HSBC owned the Silver market. And good luck getting an exit price when you needed one. For energy traders: Ever have to trade Heating Oil without Morgan Stanley or BP involved? Same idea.

But George Soros and PhiBro (based on info and evidence at the time) changed that in 1994. Even though their short squeeze was aborted, it became apparent that Silver shorts were too complacent. Then in 1997 Warren Buffet and PhiBro (Andy Hall) capitalized on the concept. More on that below.

The Mechanics of Silver Manipulation- Short Con

  1. When Gold rallies it did so from origin interest or from Banks releasing recommendations to its "special" clients
  2.  Silver could lag in early stages of any Gold rally, as it did often in the 90's.
  3.  Post a Gold rally, Bullion banks still had precious metals demand on its books, and they were likely short Gold
  4. The Banks would often say, " Silver is the better value here, we like it and are long"
  5. And that was the end of the rally

How Does Buying Silver Kill Gold Rallies? Think of Silver as the cheapest means at the time to get PM exposure. As hedge fund money allocated to Gold, Silver was left behind initially. What follows was witnessed almost monthly. We watched from our option trading pits as the real life events that determined RSI and stochastics played out in front of us. Here is how it used to play out typically:

  1. Big Money Funds Buy Gold
    • Origin Order Flow Buys Weakness: So the Paul Tudor Jones' of the world would get long Gold and some of that flow was handled by the Bullion arms of US Banks
    • Information would leak. Sometimes by the buyer, sometimes by the Bank, usually by both
    • Gold rallied before (Banks buy) during (Tudor buys), and after (see #2 below) the order is filled
  2. Tier 2 Funds Enter
    • Either  Banks would get a call from the tag-along funds or the banks would call them with a "tip"- "pssst, Tudor is buying"
    • The Chesapeakes would buy less than Tudor. And the execution was likely less than perfect- but they beat the vwap!
    • Banks also start to sell some of their own longs to the Tier 2 Players to lock in their flow trading profits
  3. Momo funds enter
    • At this point, momentum signals would go off and trend chasing funds would start to buy strength, enter Trout and others.
    • But during these days Gold priced supply, not demand. Which means there were no trends, just price discovery for readily available supply to hit the market
  4. The Kiss of Death- Buy Silver
    • Now you have all sorts of undercapitalized over-leveraged players looking to get in
    • They can't afford to buy Gold to get proper exposure for their capital
    • The Banks oblige them: "Buy silver, it is undervalued on a relative basis"
    • phone clerks used to snicker and announce to the floor "Trout is buying, game over"
    • And that was the top. For there was no retail to sell to.

Silver Educates a Reluctant Chartist: So when a colleague at JPM used to say, Buy Silver if you are bullish Gold, he was right. But he  always followed it with, "But it's a quick trade, don't take it home."  So I started watching the RSI and Stochastics as a non-believer in technical analysis. One of the traders I worked with, Gregg Salzman, was a big contributor to learning charts. The result was a begrudging respect for technical analysis as a confirmation of the monthly tragedy we witnessed in Silver.

And the JPM guy was right. In fact, Silver itself was an RSI non-confirmation signal of Gold's overbought status at the time. Less money invested, moved more than Gold that day. And a sign that any fund that had PM money to invest was done allocating. Next up, Banks gunned the stop-loss orders below left  by their clients. Tudor? He was long gone by then.

Short Silver becomes a crowded trade

At some point the pendulum had swung too far the other way. Miners were hedging production not yet mined to stay in business. They relied on the ability to borrow above ground Silver in HSBC, Republic etc vaults to make delivery if they had to. Funds did not take delivery, instead always rolling to the next month and getting killed on the contango. During this time I took delivery a few times  to see if the contango would snap. It usually didn't until after my FCM forced me to retender. It did start to work later on. But the Silver prophets were George Soros, and Warren Buffet.

Why Did Soros and Buffet Play Silver and not Gold?

  1. Central Banks did not own Silver
  2. In 1994, it was widely held that Soros started his accumulation in Gold and was told "stop" by the Fed- so he turned to Silver with PhiBro
  3. Warren Buffet after rescuing PhiBro and its parent company in 1994 makes his own play on Silver. Based from what we saw on Silver miners sloppy cash flow mgt. The Gov't requested he not take delivery. He obliged, lending the miners who did not have Silver to deliver back to them at a 40% cost for a year based on the bacwardation.

Today: Buy Silver if you are Bullish Gold

Because Gold will be:

  1. Confiscated where it can be.-When China Confiscates Gold- Get Silver like JPM
  2. Taxed where possible.- LATAM countries 
  3. So called Physical ETFs flaking on requests for bullion as in the Xetra-Gold fund case.- do you want a free toaster instead?
  4. Prohibited from being stored in JPM safety deposit boxes- a CYA in case a Gold count is taken?
    • as of April 2015, JPMorgan Chase sent a letter to all renters of safe deposit boxes, specifying a new agreement that they must sign if they wish to continue to rent a safe deposit box. It includes this key phrase:“Contents of the box: You agree not to store any cash or coins other than those found to have a collectible value.”
  5. Silver will not be Confiscated
    • And the major longs in Silver will do what they can to keep a stable ratio between the 2 metals so that if Gold ever becomes Gov't domain only, and a ratio is fixed for Silver at that time, (or not), the data will back it up.

Why not Platinum?

By all means, PGM's fit the bill. But they are very soft and actually lose mass overtime just by being handled. Hence they aren't used in coins.What's the exit strategy?

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