In this post, I want to discuss silver price manipulation. I think it’s generally understood and believed that the price of silver has been manipulated for some time. In this article, I want to highlight how it’s being done as well as the why.
To understand silver price manipulation, we have to first understand why it’s important.
First off, most of you are probably aware that there is a physical silver market and a paper silver market, which is primarily composed of derivatives. Unfortunately for silver stackers, the derivatives market absolutely dwarfs the physical silver market. And thus, silver price is determined by the paper market or paper contracts.
This is concerning because these contracts don’t actually possess the physical silver that they say they do.
The Commodity Futures Trading Commission (CFTC) provides a weekly Commitment of Traders report that shows the amount of open interest, which is the outstanding silver futures contracts, on any given day. As of March 26, 2024, there was open interest of 160,327, meaning there were 160,327 contracts being exchanged. Each contract stands at 5000 ounces of silver, so we see that on just this one day, on one exchange, 800 million ounces of silver(160,327*5000) are traded.
To put things in perspective of just how ludicrous things are, in 2023 about a billion ounces of silver were produced for the entire year! This means the same amount of silver is traded in one day than mined in an entire year.
For 2024, the Silver Institute predicts that 1.2 billion ounces of silver will be needed this year. That is the second highest demand for silver in history.
So, we have more silver trading in a day than produced in the entire calendar year. And no exaggeration, this is really an understatement as if we included other exchanges there would be more silver traded in a day than produced all year.
In my opinion, this is really troubling because these financial firms are able to artificially boost the supply of silver, which essentially reduces the price of silver.
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So, we see silver price is not being determined by supply and demand, which it should be.
This raises the question though how do these financial firms do it? And maybe more importantly, why?
There are multiple ways but the three most used I believe are extremely low margin contracts, Naked Shorts Selling and Spoofing.
With extremely low margin contracts traders can either go long or short, but the key thing here really is how little money is needed for the initial margin requirement. With futures contracts you only have to put a tiny amount of the contracts total value. It’s anywhere from 6-12% as of this writing.
For example, for a contract with a notional value of $5,000, the contract might only require a $500 initial margin requirement.
Naked Short Selling
In addition, and much worse, there might not be any upfront money needed at all. This is called naked short selling. In naked short selling, the seller does not actually borrow the asset or ensure that it can be borrowed before selling it. This means the seller is selling shares that don’t exist. With a naked short sale, an investor sells shares without first ensuring that they can be borrowed, effectively selling securities that they haven’t even arranged to borrow. This lowers the price of silver as traders see these sell orders and the market price goes down.
To put things in perspective, this is like me going into a neighborhood and selling a home I don’t own to lower all the prices of homes in the neighborhood.
Spoofing:
Now this is different than spoofing, but I believe there is a very thin line between the two.
Spoofing is illegal and is when traders place market orders and then cancel them before the order is ever fulfilled. Tt’s essentially initiating fake orders, to drive price up or down and manipulate the market. Of course there is no intention of ever seeing the orders executed.
So, this is really done to artificially boost demand or artificially lower demand for a commodity like silver. This is actually really prevalent in the futures market and stock market today. It usually is done through High frequency trading algorithms.
An example could be a trader wants to buy silver at $24 an ounce; its currently at $24.75 an ounce. He puts in a sell order to sell thousands of sell orders for silver. The orders are read by the market as a decrease in silver demand and price drops to $24. The trader is able to buy silver at a lower price, but he never had any intention of actually selling those shares. His algorithm would have cancelled the order before they were executed.
To me naked short selling and spoofing are both ways the market is being manipulated. One is legal though.
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So, we see there are multiple ways that silver price is being suppressed. Even if you don’t believe it, it has to be obvious that it seems a little odd to be pricing an asset based on the paper market.
This all raises the question of why it’s being done? After all the stock market and other markets don’t seem suppressed.
In my opinion, I’ve long held the belief that the reason silver price is manipulated is that it benefits governments and large financial institutions. I think it’s pretty obvious that financial institutions are given lax regulatory standards by the government, and this allows them to trade and profit huge with these derivative contracts. With algorithmic trading, financial institutions are able to really own the silver market and its price.
The reason government doesn’t want high silver and gold prices is not so obvious though. The main reason I believe is that governments, those that issue Fiat money, are threatened by precious metals. Precious metals allow people another store of value and also it allows people to keep something outside the system. In addition, while many governments don’t usually buy silver, they do buy gold. And gold and silver prices tend to move in tandem. As gold price increases, the government must spend more money per ounce to buy the asset. One other key thing too is the control factor, when people have money outside the system it doesn’t allow them to have the same degree of control.
All this said, I believe Silver is due to have a huge breakout in price the next decade. All the fundamentals are there. The price though needs to be able to be determined by the market, not large financial companies and their paper contracts.
