One of the major topics discussed in the precious metals community is the manipulation of the gold and silver prices by the large bullion banks. Many precious metals analysts point to the massive commercial short positions held by JP Morgan and Scotiabank as the root cause for the low silver price. While I agree that the bullion banks’ massive short contracts are controlling the silver price to a certain degree, there’s another factor that is overlooked by the majority of precious metals analysts.
According to Ed Steers’ recent article titled, JPMorgan’s Silver Short Position Now At 195 Million Ounces, he stated the following:
Ed Steer is making the point that two banks, JP Morgan and Scotiabank control approximately 53% of the 210 days worth of global silver production to cover these short positions. If we look at the chart above, we can clearly see that silver has the highest amount of short positions in days of a production compared to any other metal or commodity.
Furthermore, Ted Butler, well-known silver analyst, made the following remarks in his recent article, Life Under Manipulation:
Ted, like Ed Steer, is implying that the silver market price is being manipulated by the bullion banks massive short positions. While I agree with these analysts that silver does indeed have the largest concentration of short positions compared to any other metal or commodity, there is another factor that needs to be considered.
As I have mentioned in many articles and interviews, the prices of energy, metals, and commodities are based on their cost of production, rather than supply and demand forces. Yes, it is true that supply and demand forces impact the price, but on a short-term basis. If we take a look at the following two charts, we can plainly see that cost to produce gold and silver parallel the market price:
In the first chart, Barrick and Newmont’s cost of production was always lower than the gold market price. Even though these gold miners may have suffered net income losses during certain periods, I used “adjusted income,” rather than net income. The same was done for Pan American Silver. When the silver price was $ 35 in 2011, Pan American Silver enjoyed a $ 9 profit per ounce. However, as the price fell, so did its cost of production. The reason for the lower silver cost at Pan American Silver was due to falling energy prices and massive cutbacks in exploration and spending.
The following chart shows how Pan American Silver’s cost of production paralleled the change in the price of oil:
Regardless, the cost to produce silver has always been tied the market price. This is also true for gold and copper. I looked at the top gold, silver and copper miners’ Q1-Q3 2017 financials, and here were their profit margins:
According to Barrick and Newmont’s financial results, the average profit margin for these two gold miners was 9% versus 6% for Pan American Silver and Coeur Mining, and 5% for Chile’s Codelco and Freeport McMoRan. Thus, the cost to produce gold, silver, and copper by the top major companies was still less than the market price.
So, if we take the Concentration of Traders Short Positions in days of production and add the profit margin, we can see that there’s more to the story:
While it’s true that silver has the largest concentrated short position of any other metal or commodity, most of the silver miners are still making profits. Furthermore, it is also true for companies producing platinum:
Now, this is an older chart from 2015. However, we can see that even platinum’s production cost was very close to its market price. Even though platinum has the second largest concentration of short positions in days of production, the market price is still very close to its cost of production.
Unfortunately, Ted Butler and Ed Steer do not include the cost of production in their analysis of the silver market price. While I agree that the banks are controlling the silver price, the majority of manipulation is taking place by the propping up the STOCKS, BONDS & REAL ESTATE values. According to the Savills World Research, the value of global assets in 2015 equaled $ 372 trillion. With the majority of the world’s wealth invested in stocks, bonds, and real estate, the Central Banks’ manipulation is focused on keeping these values from falling.
The coming surge in the silver price will be due to the disintegration of the global oil industry and the negative impact on the value of stocks, bonds, and real estate, rather than the number of bullion banks silver short positions.