A Silver Bullet Aimed at the Heart of Wall Street

Apes strong together.’ That’s what Caesar said in the 2011 film Rise of the Planet of the Apes. Caesar’s an ape whose cognitive abilities have been enhanced in a lab (the same kind of ‘gain-of-function’ work that was reportedly done on the coronavirus at the lab in Wuhan, China). Learning gives you a huge evolutionary advantage.

Puny capitalists on the internet — call them plebs, serfs, or proles — learned last week that pooled liquidity and leverage is a massive force multiplier on Wall Street. Wall Street didn’t like it. When the Reddit army decided to squeeze the shorts in GameStop, hedge funds and CNBC and the Securities and Exchange Commission all collectively whined how unfair and irregular the market action was.

And then they changed the rules (making it impossible for users of the Robinhood app to buy shares in GameStop and forcing some to sell ‘for their own good’). It was a remarkable moment in financial history. It reminded some people of the populist sentiment in politics that propelled Donald Trump the presidency in 2016, and some of his more rabid supporters to storm the Capitol in 2021.

Which brings me to silver. The Reddit army discovered something in silver last week. It’s the same thing they discovered in GameStop, AMC and other stocks. There was a massive institutional short position — a bet that the shares would approach zero or the company would go out of business. And this is what I’m looking at on Sunday morning in Colorado, a few hours before markets open up again.

Port Phillip Publishing

Source: APMEX

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Physical silver is currently not for sale at one of the US’ largest online silver retailers. Why? Because the price isn’t really the price. Using Friday’s close around $US27/oz, a retailer would normally add a premium of 4–5% and then agree to sell silver at the marked up price (delivering it a week to 10 days later). But that’s not happening right now. Why?

Because the middleman (the retailer) knows the underlying price is probably going to spike much higher when markets open up in Australia and Asia. It doesn’t make sense to sell something now if you know that in a few hours later, it will be selling for 5% more. Or MUCH more.

‘Dark Horse’ Investment for 2020?: Dan Denning believes that silver’s rally is far from over. In fact, now might be the best time to add the precious metal to your investment portfolio. Click here for the full details.

What price silver opens at depends on a lot of things

Of course, what price silver opens at depends on a lot of things. For one, the Reddit army is new and testing their own strength. Some of them are undoubtedly in it as speculators — wanting to make a quick buck on momentum trades, aided by the collective liquidity of small traders and investors acting in concert.

But the biggest variable in the silver price is the relationship between the futures market, the miners and the physical market. Redditors know there is a huge short position in silver. They may also know that the big shorts in silver are big money center banks. What they may not know is WHY banks are so short silver.

There are some rational explanations for that. And then there are some conjectures. The rational explanations are that being ‘short’ silver is a hedge — one side of a trader in which you’re long something else. In a ‘pair trade’ you pick two things you think are related in price (correlated, or perhaps negatively correlated) and you one side of each position.

For example, you could be ‘short’ sliver and ‘long’ the US dollar or Treasury bonds. Why you ‘long’ the US dollar and Treasury bonds is up to you. You think that other fiat currencies (the euro, the yen, the British pound) are going lower relative to the dollar. You think the US economy will grow quickly this spring as vaccines roll out and the COVID-19 pandemic recedes. It could be any of those things.

My point is, there are lots of rational reasons for banks to be ‘short’ silver. But there are also conjectures, the biggest of which is that banks (and Wall Street) cap the rise in precious metals prices (in dollar terms) because precious metals prices are a signal, or a pre-incident indicator, that there’s trouble in the paper money system.

Higher gold and silver prices are smoke

If you didn’t want people in the theatre to know the building was on fire, you’d disable all the smoke detectors. And you certainly wouldn’t want anyone who smelled smoke yelling ‘fire!’, ensuing panic and crowd behaviour would produce chaos and catastrophe.

Higher gold and silver prices are smoke. The ‘fire’ is in the paper money system, biased toward inflation, which has thus far produced mostly financial asset price inflation. That’s great for people who buy, sell and trade stocks for a living. They can borrow money cheaply, at scale. They get first use of it to drive asset prices up even higher, or short stocks, all of which funds an incredible increase in their net worth.

What you saw last week is that some people on the internet started to figure this out. What did you expect? When you eliminated commissions and the cost of trading, put a mobile phone with a trading app into millions of hands, lock everyone up in their homes and tell them their jobs are not essential, and then start sending them helicopter drops of free money, what did you THINK was going to happen?

When Bunker, Herbert and Lamar Hunt famously tried to corner the silver market in 1980, they were unable to meet a margin call. The sliver price collapsed (after having risen by over 800% in the previous two years). Several of the brothers were convinced of collusion in 1988 and forced into bankruptcy.

Will the SEC or the CFTC allege collusion against the Reddit army if it tries to squeeze the banks that are short silver in massive volume? If they did, it would be evidence that precious metals prices are a key indicator of the health of the monetary system. To prevent the wider public from knowing how sick the system is, it will be necessary to keep precious metals prices low.

To do THAT, you’d expect to see options trading on silver ETFs restricted or banned. Sliver ETFs and mining stocks might be ‘de-platformed’ from the more popular mobile-based trading apps. Or margin requirements could be increased in the futures markets, make it impossible for all but the largest firms to take positions (long or short).

So here we go. Let’s see how it plays out. ‘Apes strong together’ is a great rallying cry for the power of the internet as a decentralised, force multiplier. If several hundred thousand (or million) small traders and investors take the same side of the trade (against the banks and Wall Street) will the authorities designate it as collusion or simply ban the activity?

And if they do, what will the apes do next? If it becomes obvious to ordinary people that their vote doesn’t matter, that their money is no good on Wall Street and that rules are for little people, what will the apes do next? Remember in 2001, when the first ape to discover that a femur can be used as a weapon…uses it as a weapon?

More on that next week. Until then, keep in mind that silver is also a key component in the construction of solar panels. There’s a bullish argument for silver to be made as an industrial metal, key to the so-called ‘Energy Transition’ from fossil fuels (coal, oil and gas) to renewables (wind, hydro, solar).

In the latest issue of The Bonner-Denning Letter, due out later this week, I’ve made the argument that the Energy Transition is a kind of thermodynamic fraud. It will take so much electricity generated by coal and gas to power the factories that build the components for the renewable economy that it’s a net energy loser.

What should you do instead? I’ve unveiled Bill Bonner’s new Trade of the Decade. It’s not uranium. And it’s not silver, although both of THOSE might be very good trades for the next year. Stay tuned.

Discover why smart investors are quietly stockpiling silver…Click here to learn more.


Dan Denning Signature

Dan Denning,
Editor, The Rum Rebellion

Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.

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