These past few years have shown us how unfair investments have become.
With billion dollar Ponzi schemes and market manipulation plaguing our markets, it is becoming much harder to understand where the markets are heading. Goldman Sachs were just accused of securities fraud, adding more insult to injury (see SEC charges against Goldman Sachs).
This leads us to the next conspiracy theory that, if proven correct, could reap big rewards for those who are in the know.
For months we have been raving about precious metals such as gold and silver, with many past newslettersfocusing on gold. But this time around, we’re going to focus specifically on silver and why we are heavily favouring silver and silver miners right now.
Gold is great. But we think silver is better.
Silver historically trails gold in a precious metals bull market because everyone sees gold as an alternative to money. But a closer look will tell you that silver posts better percentage returns nearly every time there is a sustained gold rally.
If you like gold, you should love silver
For thousands of years, the gold/silver ratio price per ounce has remained relatively constant at 16 to 1-meaning one ounce of gold can buy 16 ounces of silver. Coincidently, that ratio remains relatively constant for the amount of silver versus gold in the world. For every ounce of gold in the ground, there is roughly 17.5 ounces of silver.
Right now, the gold and silver price spread is 60 to 1.
We think there is a good reason why. And this reason alone, if exposed, could send silver prices through the roof…
Even though there is far more silver on earth than gold, the silver market is much smaller than gold. This makes transactions much more visible and the market more susceptible to large fluctuations – and thus, manipulation. Silver is a less-active and lower-volume market than gold, which means that purchases even by individual investors can make an impact on silver prices.
That is exactly what the Commodity Futures Trading Commission (CFTC) is thinking.
The CFTC is currently investigating the manipulation of the silver market by the big banks, including J.P. Morgan. This isn’t the first time this has happened. The CFTC has done this many times before.
But this time, they had no choice.
The Consipracy Theory?
Andrew Maguire, a successful metals trader and whistleblower went to the CFTC with data that strongly suggested that a small number of short sellers had rigged the markets for both silver and gold. Maguire not only provided the regulators on how the manipulation generally worked, but also warned them of a specific scenario where the SPDR Gold Trust (NYSE:GLD) and iShares Silver Trust (NYSE:SLV) markets would be manipulated.
Not only that, he told the regulators that a massive crime was about to happen, and the crime happened precisely as he predicted it would, forcing the CFTC to take a closer look.
You can search the conspiracy theories all over the internet regarding the events that followed by searching the net for “Andrew Maguire” and “Silver Manipulation”. It’s actually quite entertaining.
However, we’re not here to tell right from wrong, nor accuse any one of any wrong doings. That’s the CFTC’s job. But certain things were revealed during the hearing that could have a significant upward impact on the price of both silver and gold.
It has now been revealed that most of the gold that is traded in the markets is not actually fully backed by the actual metal itself, as many believe. For years, most people have assumed that the London Bullion Market Association (LBMA), the world’s largest gold market, had actual gold to back up the massive “gold deposits” at the major LBMA banks.
This was confirmed during the CFTC hearings when Jeffrey Christian of the CPM Group said that the LBMA banks have approximately 100 times more gold deposits than actual gold bullion. This means that for every ounce of gold traded in these markets, 99 of them appear from thin air. Has gold and silver been converted into a fiat currency in these markets?
What happens if everyone decides that they want actual physical delivery of their gold? What about silver?
In fact, we may already be seeing some action in the markets from the information presented at the recent CFTC hearings. Silver prices are up almost 8% since the hearings and rumours are circulating that JPMorgan is already buying back some of its silver short positions.
If the CFTC announces that the silver markets have, in fact, been manipulated, the price of silver could easily skyrocket. Combine that with the fact that the silver traded in the today’s markets may not be 100% backed by physical metals, and we could have a signifcant supply shortage.
Therefore, as rare as silver is thought to be today, it will be even rarer than we once believed if the markets are being manipulated with excess futures.
It’s Only Just Begun
What makes this scenario even more scary, or should we say bullish, is the fact that silver inventories are drying up, while the demand of silver through ETF’s and investment purposes are rising.
In the last decade, silver has been readily consumed almost as quickly as it has been produced, with the largest driver of growth coming from the electronics sector such as new flat screen TV’s. The very TV or computer screen you are staring at right now probably contains several grams of silver – most of which will never be recovered or recycled.
Commodities research firm CPM Group says the current amount of above ground refined silver has fallen
from 2.2 billion ounces in 1990 to less than 1 billion today. The fact that total global inventories could completely collapse in just 15 years gives us some indication of how grossly-undervalued silver truly is.
Now Don’t Forget China
We all know that China has played a pivotal role in the price of gold increase (see Where the Billionaires Invest). As recently as 2002, the private ownership of gold was prohibited in China. But since 2009, the central Chinese government removed all restrictions and began to encourage their citizens to buy precious metals such as gold and silver.
Again, because not everyone can afford gold, many of their citizens will be rushing toward silver. Practically every bank in China now sells gold and silver bullion bars in different sizes. And with a savings rate of 30-40%, you can bet the Chinese are buying these up. Heck, there are even reports of mining employees that have been encouraged to convert some of their wages to gold on payday.
In addition to bullion alone, China also represents an ever-growing economy migrating from a developing nation to first world country. This means that millions upon millions of Chinese citizens will be buying new TV`s, cell phones and devices that require silver.
China’s silver consumption already accounts for 70% of the global total of industrial use, and its middle class is far from reaching its spending potential. This will undoubtedly send the silver supply further downward as global production slows.
Think about it. How many silver producers are there out there? Not many.
That’s why we have been aggressively meeting with the management teams of silver juniors recently and we may be on the brink of releasing our next featured silver company very soon.
Stay tuned…you won’t want to miss it.
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