A Silver Primer - Where Are We Now?

My wife killed one of our cars recently. It was a good car. Old, recycled, reliable, safe. 

We had a small coolant leak and the car had been overheating for some time. (Not all divisions of household labor and responsibilities are beneficial.)But we don’t drive much. When we do, it’s only for short distances. But not long enough to break down completely.

Eventually, my wife reported a “funny sound.” I walked outside to check the car, and I could feel it 20 feet away. By then it was too late. We tried to repair the leak, replace the broken hose. We flushed it, and then re-started. No luck. The oil was a coolant-muddied mix.

Cracked head gasket. Lesson learned. The gauges are there for a reason.

Same goes for financial markets. And the physical silver market.  Across the spectrum from futures positioning, the influx of SLV speculation, and the frantic in and out movement of physical silver from COMEX warehouse to warehouse are shining warning lights.

At some point the head gasket will break.

Perhaps Bunker Hunt will find retribution from the grave for what he saw from the very beginning of this decades long political financialization enmeshment.  The front and center catalyst is the price discovery at the core - the COMEX futures market.

The moment JP Morgan turns it back to save itself and turn a profit by breathing in the flames of the coming short covering rally, they will likely ignite.

Instead of spoof selling, they could buy. Injecting an HFT-driven head-fake, an impossible to fill order that settles long enough to trigger the spec trader algorithms to buy back their massive collective short. There would come one thousand rationalizations missing the point.

Most of them would be based on surface commentary. The rally would be "understood" as a spec-driven one - unnatural. The SLV will fill the spotlight.

They will say that we should have seen it coming all along, "Look at all the SLV buying relative to GLD that came in before the rally." ETF legitimacy will become a moot point.

Technically, the charts would suddenly be seen as technically bullish, just before the rally. Oversold and sparked by a high volume surge through whichever moving average works - on top a Fibonacci dream.

Or it was the ratio that drove it, blown far out from its historical norm.

But actually, it was coin demand. Yes. Eagle production had been off the scale for years, running at 83 times more ounces than Gold Eagles. The mint couldn't keep up.

Oh, but we can't forget jewelry demand. Coins and bars are one thing, but the silver is gold for Millennials, who also choose to wear silver in their shorts to electronically enhance their social media prowess.

According to the users (The Silver Institute), global demand for silver jewelry climbed from 181.4 million ounces in 2012 to 198.8 million ounces in 2013, a 10 percent increase.  By comparison, silver eagle sales were over 40 million.

Or they will blame the miners, who were threatening to become a cartel - holding back supply in order to pad profits. Forget that prices had fallen below production. Majestic's Neumeyer will be the new villain.

Suddenly, on the impending surge in price, everyone will totally 'get it'. The constraints of by product mining will be crystal clear to all, while the decades-long price controls will be missed or ignored.

Margin hikes will come, adding fuel to the fire of buy backs, while the CME swoons over the voluminous trade volume.

A new panic will overcome the retail investor. The polar opposite of loss, the pain of missing the rally. Greed is fueled by love and belief, fear of loss is based on avoidance and disgust.

No one will point to the obvious-the COMEX/futures positioning. COMEX is the most important factor for prices going forward.

While it’s easy to align the price suppressive actions of the big commercial banks as collusive with the government - the banks will ultimately follow their own path. In many ways they are more powerful than the government and since the late seventies have only “relied” on the governments for perpetual bailouts.

JPM will be resurrected as the new market maker. The trading in the pits is the only thing that really matters. As long as it is profitable and convenient to keep prices down, they will do it. Perhaps the day will come when it will be more profitable for the big shorts to exit their controlling positions. But the coolant leak that broke the physical silver market gasket will be missed by all attempts to fix the perception of the coming rally.

Silver analyst Ted Butler has been pounding the table over physical ware house movement for years. Here he is, shouting from the rooftops:

“A favorite theme of mine for the past three and a half years has been the extraordinary and unprecedented physical movement of metal into and out from the COMEX-approved silver warehouses. In 2008, it would be years before that turnover commenced. Yes, the world has mined more than 4 billion oz of silver over the past 6 years, but more than 90% of it has been consumed or put into forms not likely to return to the market. The frantic movement of physical silver today suggests an overall wholesale tightness that didn’t exist in 2008 (although there was very strong retail investment demand back then).”

- Ted Butler

He goes on to point out that the average weekly movement of silver inventory often amounts to 45% of annual world silver mine production and ten times U.S. mine production.

Pundits will shout "bubble" from the rooftops as new specs attempt to chase the move in the name of fear. But for all the mythical cash on the sidelines, there must also be mythical sellers reading and willing when the time comes.

For the retail investor, there will be nothing to trade. Nothing to short. Only capital investment, or accumulation of all things (hedges) personal.

It comes down to basics.

Are you prepared for the earthquake? Can you ride out the storm sitting out there on the horizon?

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