Silver Questions and Answers Part 2

March 31, 2005

A question often asked is about silver manipulation; and it seems to take a stance on this issue is certain to put you into a category or a box. In other words, you will gain creditability with some people and lose with others. The word conspiracy is bantered about and all the connotations that word evokes come to be associated with the author.

Recently a Philip Gotthelf of Commodity Futures Forecast wrote a piece on the Gold-Eagle website and he mentioned silver manipulation. Before quoting Mr. Gotthelf, let me give him some well-deserved credit, Mr. Gotthelf was nearly alone when in his book he mentioned the investment opportunity in Palladium. He built his case and he was early enough for those that followed his analysis could have held this commodity for one wild ride and made a lot of money if they got out near the top, he certainly did call the bottom.

Palladium has moved up to over $1100 per ounce and now is trading below the $200 level. For those that have attended any of my last few seminars, know I use the Palladium chart as an aide to show how I expect the silver price to move in the future. The high I am looking for will most likely be on a spike and calling an exact high during frenzy is a very tall order.

Mr. Gotthelf does not care much for silver and in his book even suggested that the sheer amount available might permit it to be used in coinage. This is now somewhat of a possibility which Mr. Price's efforts in Mexico. Time will tell.

Moving on to the Silver Manipulation issue Mr. Gotthelf had this to say:

"A great deal of buzz on the Internet deals with a pending silver manipulation. Silver advocates insist that we are experiencing a huge deficit of consumption over production. Despite the rapid substitution of digital imaging for silver halide film, proponents of the white metal insist that demand is up and supply is down. I do not see the supply/demand equation as bullish, but there is a possibility that speculation can drive silver to new interim highs above $9. The problem with such an accumulation effort is that it tempts producers to sell inventory forward and expand output. This is more the case with copper over $1.25/lb. Simply put, the prices are too good to pass.

I do not like to see traders get caught in temporary price spikes that result from intentional manipulations. Although we may believe manipulations are illegal, the truth is that they take place all the time. Just look at palladium's price after Russia suspended exports. Do you think that was not a manipulation? In silver's case, any squeeze is not likely to endure more than a quarter...three months. So we can sell the options!" End of quote from Mr. Phillip Gotthelf Emphasis ours.

Another insight on silver manipulation, this was from a Comex floor trader and I shared this with my paid subscribers some time ago.

Mr. Morgan:

I enjoyed your newsletter excerpt of Feb 12, which I found on the Kitco website. You stated perfectly some key reasons for silver's problems in getting out of its own way, and your call for further weakness was prescient.

I guess I'm part of the problem. I've traded COMEX futures actively from the pit for over 15 years. Over the years, the amount of futures contracts that we've traded has surely dwarfed the actual physical market, making it difficult for silver to manifest its true fundamentals.

As you alluded, it's "Groundhog Day" again on the floor. Over the past month I watched one fund accumulate an eye-popping long position, and I followed its progress as best I could through the open interest and commitment figures. When prices started slipping away from last week's test of the $4.85-4.90 level, I could hardly believe my eyes when I saw early evidence that this fund was starting to sell. I went across the pit to a trader whom I knew was trying to stick with his longs and I said, "I've got bad news for you -- that selling you see over there may take three weeks."

The fund sold heavily all last week. The usual bank traders were sopping it up, secretly relieved, I think, that prices had failed to break into ground they could not control. Younger traders ask me how these funds can keep getting chopped up like this. They don't realize that a 30-cent chop in silver is a minor inconvenience compared to the strong positions most of these guys have in gold and crude.

As you know, the banks will continue to play puppet master as long as the silver game remains "closed." The banks know the upper parameters of the funds' buying power; the banks know when the funds have reversed themselves into an untenable short position. It will take new "players" to get the "Bill Murray" silver market out of this loop. Certainly investment demand is the wild card that banks and recurrent short sellers cannot control.

Silver will be called lower on Tuesday a.m. and, although I'm a bull, I'll be getting short on the bell. There is no short-term success in getting in the funds' way.

Thanks again for your insight -- A Comex Floor Trader

I now wish to turn the readers attention to an article entitled "Silver as an Investment" by J. Kent Willis of AGAPI Financial, LLC. Like Robert Prechter, Willis is an extremely well respected hard-money analyst and the points I make below are in no way intended to cast doubt on the larger thrust of his market analysis which in many cases I entirely agree with.


There are basically three points that Willis makes about silver and investment qualities, using an article by Ted Butler as a jumping off point. I share Willis' sentiments regarding Butler, by the way, as enumerated below.

(1) Willis writes: "Ted Butler at Investment Rarities is one of the most knowledgeable silver experts on the planet. … One of his recent editorials (4 January, 2005) was built around the extrapolated guess of just how much silver is remaining in the earth's crust. Based upon consumption trends, it will all be gone in about 14 to 29 years from now. … Here is my .0031 ounces of silver (two cents) worth: I would be EXTREMELY cautious about making statements (or relaying such statements born of extreme linear, one-dimensional guesswork, even from the respected mineralogical sources quoted) about how much of something is left in the earth and making investment decisions based upon such a guess. .."

(2) Willis then makes the point that modern society can survive without silver - as Butler makes the point that maybe we must - but in doing so provides an enumeration of silver's uses, both detailed and compact, which I would like to quote at length: "… We can still destroy bacteria without it. Sodium Hypo chlorite (bleach) is still cheap and is hard to beat. Ultraviolet light is still king for many bactericide applications. High quality mirrors can be made from electro-deposited aluminum coated glass. We can take digital and print hard-copy photographs without it as there are other (albeit more expensive) photosensitive chemical compounds with behavior like silver nitrates.

Copper conducts heat and electricity extremely efficiently and is less expensive at the present. Aluminum is also useful as an electrical conductor with limitations. We can build many electronic devices without it, but their performance would be inferior in some respects. … It should be noted that silver was innovatively incorporated in so many products because she was considered abundant and cheap. If she had not been plentiful and therefore inexpensive, she would have never been used so widely. The moral hazard of profligate waste exists for any commodity deemed common, inexpensive and for all practical purposes, inexhaustible. Silver may turn out to be a classic case of the consequences of devil-may-care consumption. The world may be a "poorer" place in many respects with her eventual demise, but life will go on. …

Finally, Willis makes the point that if silver supplies truly do dwindle, the government can act to secure the supply by force if necessary. " Silver is still listed as a strategic material in every US government database. It is therefore critical, by simple extension, to national security. This was an inevitable conclusion long before Patriot Act II or I was even conceived. … With such a premise firmly established, the US government can effectively argue, at the urging of the silver managers, that it is important to prevent our enemies from acquiring it in order to limit its use in enemy or "terrorist" applications.

The US can't control the world "free market" in silver outside her territories, but she can surely at least attempt to control the purchase, sale, distribution, trading and "hoarding" of it by very, very few of her voting citizens. … Of course many of the same arguments can be made for gold confiscation, but the national security issue in a paper based fiat economy is more dubious. Not impossible, just a more ridiculous stretch of logic…. With all of the manipulation past and present, silver even seems sometimes like "Court Jester". Good heavens, where in the world does that put paper currency?"

Points for Silver

Let me take the previous points in order. As far as Ted Butler is concerned, I find his analysis about silver in the earth's crust to be interesting and intellectually challenging - something I am used to from Butler, but let us examine a possible outcome. According to Say 's Law, scarcity stimulates supply. What seems logical today is illogical as soon as the free-market demands a different conclusion. Most of the anti-silver forces think silver should sell for $5.00 forever regardless of how scarce it becomes, and without ever adjusting the five dollars for inflation these past twenty-five years. Wouldn't we all like to buy a new car for $3500, using 1980 as a benchmark?

Willis' next point, that we could indeed do without silver, is an interesting one, but as hypothetical. Yes, we could do without silver - but will we have to? No, I don't think so. What I liked about that particular set of points by Butler was his enumeration of some of the uses of silver - as I already indicated.

Lastly, we get to Willis' point about confiscation - the most important point within the article in my opinion. I am very happy to deal with this issue here because I am going to advance a scenario that the reader should consider- it is one that I believe deeply. Before starting is might be prudent to point out silver has never been confiscated, gold was under the Roosevelt Administration. We are in uncharted territory, ladies and gents. THIS IS NOT 1933!

Today, we have something called the Internet. The Internet's influences is growing every day and try as they might, the opinion makers, the influencers and media magnates, those behind the scenes "pulling the strings" - they don't know what to do about it.

Commentators remark in astonishment that the Internet seems "right wing" or some will call it "left wing" when in truth the Internet is libertarian! The fabrications that have buttressed the establishment lo these last 100 years are cracking like ice on a thawing riverbed. The Internet came of age during the Clinton years and it was natural that some of the commentary in the United States at any rate was "right wing" because that was the loyal opposition. But now people have seen what has been done to the country, eight years of demos and four plus of republicans and seen that the only logical alternative to right and left in this country anyway is Libertarian.

Enough of politics, back to money, so this is what I say to you: Let the United States government try to confiscate silver under the pretext that it is a strategic metal and you will see the biggest meltdown on the Internet that there has ever been. Early in the 20th century, President Franklin Roosevelt confiscated gold and got on the radio and smoothed things over with a fireside chat. But folks, there is no "fireside" anymore. There's only the 'Net and the Internet is cold and drafty place indeed when it comes to propaganda.

Let them try this time! I say to you, it will not be so simple, or so easy. The word will spread - the truth will come out. It is a manipulation of silver, not an emergency. It might just be a grab by bankers and short-sellers, not a patriotic request. We live in an exciting age, my friends, on the cusp of a communications' enlightenment not seen since Gutenberg Press overthrew the ruling hierarchy 500 years ago.

Are we at a similar point again readers? If so, it will only take 10 or so - that is magic of technology which doubles in speed and impact and then doubles again, and again. And we are into the 10 years already. Look for the signs of the thaw - they are all about you. It is no accident that Mexico is considering a silver backed currency, or that the Soviet Union has collapsed or that China continues to privatize. People believe these are all dissonant events, unlinked. Only much later will it become clear that we are in the midst of a historical communications revolution that is shattering the most coercive regimes and completely reconfiguring the power structure as we go.

I say to you with absolute conviction that they cannot confiscate this time. The forces of liberty, unleashed by the power of the Internet are winning, and will continue to win in this most historic of all decades.

The 2000s will go down in history as the decade that shattered the iron grip of socialism and reconfigured the plans of world dominance that all-too-many harbored. Dan Rather is gone. It takes years to subvert liberty - generations in fact need to be "programmed" in a particular way. All that work, several generations worth in this country anyway - dating back at least to the Civil War - is going by the boards now. People are discovering liberty on their own and thinking for themselves.

No, confiscation in this environment will NOT be easy. It will not be clean. People will NOT line up to hand over their silver. Not this time. Not in this day. Not with this Internet!

David Morgan ( is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here

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