Over
the past decade, Silver has held the spot for the number one most shorted
commodity quite a few times, the price of spot physical ounces of silver has
been decreasing significantly since reaching an all-time high in 2011.
اضافة اعلان
Even
though silver is a unique precious metal that has an important and ever-growing
industrial use, as well as having a monetary purpose that is similar to that of
gold, its production has proportionately gone down relative to the increase of
global demand according to the Silver Institute Organization.
Demand for silver
has been rising year by year, according to the Silver Institute Organization’s
data.
The basic principles of economics dictate that demand and supply are two
countering factors; if demand exceeds supply then the supply side will benefit
from the availability of plenty of buyers and comfortably choose to sell to the
highest bidder and the opposite is true. So why might it be the case that the
demand for silver exceeds supply, but prices continue to drop?
One theory could be
that silver as a commodity that has a futures market (which we will address
shortly) is heavily shorted by banks, financial institutions, and central
banks, the biggest trading rooms of the world. “In short selling, a position is
opened by borrowing shares of a stock or other asset that the investor believes
will decrease in value. The investor then sells these borrowed shares to buyers
willing to pay the market price. Before the borrowed shares must be returned,
the trader is betting that the price will continue to decline and they can
purchase them at a lower cost. The risk of loss on a short sale is
theoretically unlimited since the price of any asset can climb to infinity,” as
per Investopedia.
Now, short selling is
done over a derivative of the asset. In the case of silver, to keep it brief, let’s
consider the silver’s futures contract. A derivative of physical silver is the
product being most shorted by banks today. To quote Investopedia: “A commodity
futures contract is an agreement to buy or sell a predetermined amount of
a commodity at a specific price on a specific date in the future.
Commodity futures can be used to hedge or protect an investment
position, or to bet on the directional move of the underlying asset. ... Most
commodity futures contracts are closed out or netted at their expiration
date. The price difference between the original trade and the closing trade
is cash-settled. Commodity futures are typically used to take a position
in an underlying asset.”
It is easy to tell that
when a commodity is heavily shorted, it is critical to maintain its downward
price movement for short sellers to stay in profit. Given the currency wars
that have been going on between the world’s superpowers, you can easily see the
intention of maintaining a rising currency that is backed from all sides both
by the country’s economy and precious metals and exports. In other words, it’s
logical for countries like China or the US to benefit from the continued
decrease in the price of silver and gold.
In conclusion, the fact
that there is more paper silver held in short positions than there is real
silver tilts the demand for silver financial markets from the physical
commodity to its paper form derivative, causing an imbalance in the real market
and a shortage of real silver as demand is skewed. You need to also note that
paper silver is always transacted using margin or leverage, a form of credit
that magnifies the size of the deal by borrowing money from a broker or a bank,
meaning the net real money invested into short positions is even less than the
actual amount of silver these contracts represent.
Silver future contracts
are a form of paper silver, meaning they are a tradable financial note and not
the physical commodity that is silver. What is really happening behind the
curtains can be uncovered when analyzing the volumes of silver traded in paper
form. One quick look at the numbers and you can tell that the total volume of
paper silver traded exceeds that of the physical silver! This puts more
pressure on the price whilst damaging the true demand/supply balance in the
real economy.
I think silver is
heavily and artificially suppressed due to the pressure caused by short selling
on silver’s futures contracts.
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Opinion and Analysis
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