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October 24 2021 5:16 AM ˚

Is the price of silver artificially suppressed?

RASHED PIXABAY
“It’s logical for countries like China or the US to benefit from the continued decrease in the price of silver and gold,” writes Jordan News columnist Rashed Alkhzaie. (Photo: Pixabay)
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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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