The Real Reason for Silver's Run

Mar. 4.11 | About: iShares Silver (SLV)

The New York Times recently published a blog post outlining the case for a price suppression ‘conspiracy’ in silver – and pointed to a nearly 80% run since in the last six months as circumstantial evidence.

As a former hedge fund manager, I find the article preposterous. A collection of circumstantial evidence does nothing to prove causation. The reality is that commodities go through huge boom and bust cycles all the time. Just because the price has moved higher after the emergence of allegations of a price suppression scheme, doesn't mean there was actually a conspiracy. An increase in investment demand for silver on the back of rumors is all that is needed to push the price up.

Remember, only 50% of silver is used industrially. The rest is used for jewelry, silverware and investment - and the incremental investment demand sets the price. A few extra buyers can move the price up dramatically. I find it much more likely that a large increase in demand moved the price up, rather than the end of a ‘price suppression conspiracy’.

So let’s look at two proxies of retail investment demand in the six months since silver moved up nearly 80%, and in the six months prior to the move and see what we find:

(Click charts to enlarge)

Click to enlarge


Click to enlarge


Click to enlarge

Since September 1st, these proxies for retail investment have increased substantially. The graphs more or less speak for themselves. Combined US Mint Sales and SLV purchases increased from 12.2mm ounces to 66.2mm ounces. An increase of 5.4 times in six months!

So ask yourself what is more likely to have caused nearly 80% move up in the last six months -- The end of a ‘price suppression conspiracy’ or a MASSIVE increase in retail demand caused by the rumor of a ‘price suppression conspiracy’?

My vote is on the demand side, and if the massive increase in retail demand doesn't continue, silver is going to be a much, much lower.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am long puts on SLV