When the manipulated paper collapse began, I wondered whether the Chinese may themselves be behind it. I dropped the idea since I didn't know where to take such intuitive mistrust into the realm of ordinary logic.
Now that everyone has agreed that the bullion banks and the Western governments were/are behind the paper crash, I would like to offer an alternate picture that I consider possible, even as I support the popular scenarios in the arguments hereunder...particularly since the two scenarios are not necessarily mutually exclusive.
Imagine that the Chinese crashed the futures in order to collapse the prices of physical gold and silver, which they in turn bought in the East...where they were even prepared to buy at premiums that resulted in purchase prices that were still below the prices at which they shorted the paper gold.
Either way, the endgame was/is to acquire the gold that the Westerners sold, even more than negotiate the best net prices for the achievement of same.
After all, the crash occurred and continued during Asian hours as the Chinese (?) (or bullion bank manipulators, as popularly believed) collapsed prices in illiquid markets, thereby setting prices with little shorting, relative to the physical buying in which they were themselves engaging (inexplicable late night declines have occurred since, including last Thursday, as well).
That the bullion banks were the culprits surely is the popular version for good reason, but the Chinese alternative is striking me as quite reasonable, given how wildly popular that the "bullion bank version" of reality became immediately accepted, and without opposition. Hmm.
The preceding link explains what will squeeze the bullion banks, no doubt, but what if the Chinese have willingly placed themselves right into that squeeze? All is fair in love and financial war, and even communists figure money out fast.
The paper dump caused gold to be unloaded to the Chinese, and the hoarding by the latter means that there is no buying demand for paper gold that the bullion banks could otherwise short.
The Comex warehouses have dramatically emptied and the GLD has had to make large deliveries. The latter two sources have served to dump gold, so there is hardly an appetite for paper so as take delivery in the future. That's the phase that just ended and is ending.
However, I wish to focus on the hypothesis that the Chinese have willingly placed themselves into that very squeezable position.
The preceding is not about enjoying the role of Columbo. Rather, I strongly wish to underscore how easily the Chinese have (under such a hypothetical scenario) placed themselves in the position of igniting a multi-hundred dollar gold short squeeze.
Through sheer demand, they are potentially in that position anyway, but, in this scenario, they would be acting like someone who is in a position to start a fire in a night club by being in the club himself, except that he has the least to lose while the vast majority are trapped folks who are at the back of the club, and who are at his (the Chinese) not-timeliness-friendly mercy.
Simply, the Chinese would control the timing of such a fire because they have placed themselves in the night club, and would light the match when the effect would be maximal, like the evenings of late-night gold shorting since April.
The shortage of gold is a joke, but the pricing of silver is the most psychologically deranged of most anything that I have ever seen.
In ignoring the facts about what will cause (has caused?) the great gold shortage, there is utter denial regarding the silver pricing model.
The market is in denial due to the near-sighted wish to restrain precious metals prices. However, as in all cases of depressed or manic extremes, basic facts and value are ignored.
While the preceding link includes critical commentary regarding the silver shortage (latter half of article), the link below offers another example of how this planet of 8 billion can virtually cause this increasingly precious metal to nearly disappear altogether.
We've heard it before. All the world's gold ever mined still exists, but silver gets used. And, of course, silver is a much tinier market.
So we consider all the new applications again, such as solar panels and auto instrumentation, etc., but does health push it over the top, or, before that (chronologically-speaking), is it India?
I have often wondered what the effect on the tiny silver market would be if (when) even a very small fraction of what comes out of bonds and/or stocks were to (will) go into the metal.
Indian households own about as much gold as does the ECB and the US combined. Also, Indians have overtaken the Chinese as the world's biggest buyers of gold.
To deal with a crisis in their current account, the Indian government has taken such measures that makes further gold acquisition prohibitive for its citizens.
So, many of us have wondered what would happen if even a tiny fraction of what Indians have been investing in gold were to flow into silver, especially since this is a phenomenon that started a year ago or so, anyway.
(Plainly, there are plenty of "tiny" things that can cause an eruption in the price of silver.)
Hedge funds have become virtually alone in negatively affecting the price of paper gold, since the Commercial traders have switched sides, while the public is not a bearish threat at all.
As well, given the big premiums that Asians pay to own precious metals, the hedge funds will not dare take on the world. Indeed, they have recently been covering some of the record short interest that we have seen in the PMs.
With gold trading at the cost to mine it, the hedge funds will soon want NO part of taking on all of Asia, or anyone for that matter.
Added to the above compilation is a time cycle that I have not seen popularly covered. It is the indicator that today causes me to again contemplate the 200% long recommendation of silver at the 2008 lows today, in 2013.
Simply, for years now, silver has enjoyed a 6-month time cycle that lost credibility among many esoteric followers, due to what happened this year.
In other words, the bounce in January was a blip, but, in retrospect, that was consistent with the cycle low, given the horrendous year that silver has since suffered.
On the day of the recent April crash low, I wrote a piece that was published on Seeking Alpha. Gold eventually broke to put in its low two and a half months later, though it did not take much for it to rebound to the April 15 flush-out level.
I was also published a week earlier, prematurely attempting to identify a low in silver. To trace gold's rebound, silver would now have to bounce 30%, to a level that is itself obscenely trivial.
However, the bigger picture is more exciting, of course. Above, I refer to silver's pricing model as being the most deranged of anything that I have ever seen.
Firstly, silver may reasonably be valued at new inflation-adjusted highs over $125 (perhaps through 2015), once the next major leg commences. The cause of new nominal highs would likely be a recognition of truer levels of inflation, as opposed to what government would have the public believe.
Secondly, should the market thereafter smell possible hyper-inflation, then $250 through this decade is extremely plausible and is not a number to be discounted due to the implied returns. Such major per cent advances during secular bull markets has historical precedence.
Thirdly and finally, aiding these valuations could be silver finally being valued for its preciousness.
Until now, silver's valuation has not factored in its aspect of preciousness, as the gold:silver ratio suggests to me that it has outperformed gold during bull moves as a result of greater affordability.
Indeed, the arguments and links above suggest that its preciousness could take on fantastic levels, since its rarity is becoming increasingly matched by its necessity in the maintenance of higher and essential standards for human life, when considering health and energy requirements, above all.
Still, one may take pause:
Silver is being pressured as an industrial metal, witness the copper shorting that the bears place on the latter. These bears on the economy are not to be ignored since the patterns between the two metals are, directionally, very similar, historically speaking.
Copper is a purely economic barometer, while silver is also a precious metal. Now, along with any further decline in copper, if the stock market were to commence a decline which would be understandably seen as related to the economy, then that could add pressure on silver's price.
In fact, I do believe that the Dow has peaked, but I am of the view that the drag on silver would be temporary. A negative effect would be due to a desire by major manipulative players who do not wish to have precious metals perceived as enjoying safe haven status when equity prices fall.
Also, there could be investors seeking to raise cash from less dedicated investments in such a scenario. (Still, I believe that the PMs and equities have been trading asymmetrically in the big picture since last year, and that they will continue to do so.)
The main I point that I present here is that weakness could be caused by perceived weakness in the economy, as inferred by falling copper and/or equity prices.
Personally, I believe that the inflation story goes well beyond copper, and that the main influence on silver is gold and its preciousness, but copper and economic indicators such as the stock market are still factors.
Looking at the red metal, I wonder whether the removal of supply (due to price levels) won't drive those heavy copper shorts to cover, but that is another topic that merits its own coverage. Our interest as silver bulls is how to deal with the economic threats.
Insofar as the cash SLV component of a portfolio of SLV-related positions (including long term calendar or diagonal spreads, long and intermediate term straight longs, etc.), one could use a close-only stop 20 cents below the June low.
Since the risk is about $1.25, given the probabilities regarding the favourable and unfavourable scenarios, and in the context of the upside potential, "The Safest and Most Explosive" seems to be a reasonable description for silver.
However, given the cycle low, the relatively short term expectation of a 30% pop upward seems reasonable.
Still, that a bullish slow stochastic divergence on the (6-month) daily SLV chart (below) does not yet exist is itself a near term bearish concern (slow stochastic appears below price chart), though, again, I believe that the cycle will overpower other considerations, within the technical camp of bullish silver scenarios.
In the scenario where the cash SLV component would be stopped-out, to avoid a total whipsaw, one would use a subsequent buy-stop at $20, on condition that the chart above were to reflect a bullish slow stochastic divergence, by holding a higher level than its June bottom, even as the SLV would be making a new yearly low (in this short term bearish scenario).
Insofar as sentiment indicators are concerned, one of the better ones may be that hardly anyone read the aforementioned April 15 article. No one was in that mood.
When looking at a portfolio of long term strategies that offers a combination of safety and inordinate leverage (given today's inverted option premium curve), one's mood could well lend one to conclude:
Disclosure: I am long SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.