In my long post about silver prices, I talked about a reversion to the mean. This is something that frequently happens in life: something overshoots the norm and then it swings back and overshoots the abnormal. Slowly but surely it finally settles smack in the middle of the bell curve, to use a shit metaphor.
This is what we’re seeing in silver right now. For 150 years silver has underpinned a great deal of US monetary decisions. Then, for the last 50 years the United States fostered and protected a rentiers silver market by turning a blind eye to manipulations in the paper markets at the Comex and simultaneously creating a rentier situation for the distributors of silver buillon in the country. If I went into detail how that happened this post would never end. Needless to say it was a very cozy arrangement that is unraveling every day and it’s something that has the large silver distributors very, very worried.
I’ll give you the short version: the US mint prints the coins, proofs, bars, etc. It then sells that silver to about five large national distributors for a little bit under the spot price of silver. Then those large distributors turn around and mark up the silver bulliion by about 25% and charge huge premiums for every coin, bar, proof, etc., Cozy! Like I said, and like all good rent markets it produces no value. N0w, sometimes this has been done to keep silver in a stable range for industrial purposes, but after the US wholesale deindustrialized beginning with Clinton but turbocharging under Bush–to fund our illegal wars–the justitication fell apart.
While we sold off all our capital stock to China, its demand for silver became unslakable. As I noted in a previous post one gigawatt [error corrected, mea culpa, SPK] hour of power from solar panels requires 1,000,000 ounces of silver and that’s just for solar panels. Silver goes into so many more things than we can possibly imagine. Pick someting electronic in your house; its got silver in it. Silver is the single most important industrial metal in the world because it is the most conductive and oxidizes less than only one other metal: gold.
But I’ve digressed from my argument.
For at least 150 years, starting with the opium wars, the balance of trade from East to west was very much skewed to the west: let’s call it what it was: economic pillage masquerading as lifting up all our little brown sisters and brothers. All of the wealth in the east, and that includes India, was over the course of 350 years, siphoned west. That’s economic fact, although people don’t teach economic history, which is a shame. They should.
I say all of this because the Comex has literally become a casino. For example, the total number of registered bars, registered meaning it’s in the vaults and it’s there for delivery has fallen under 100,000,000 ounces it’s now 98,000,000 ounces.
To make matters worse, there are 65,000 contracts of open interest on silver futures at the Comex right now, due in two weeks, that if optioned require the delivery of 325,000,000 ounces of physical silver. Where is that kind of silver going to come from? Pawn shops? Coin dealers? GTFO! Comex is in the grips of a slow, existential crisis, that it’s going to lose.
If those contracts are exercised at the end of February, because they’re March contracts, there is absolutely no telling what kind of chaos the US financial system might endure. Why do I say the entire financial system? The dreaded ‘D’ word.
Remember mortgage backed securities, CDOs, CDO2, synthetic CDOs etc. . .
There are similar derivatives in the silver market, but they exist in a black box, undisclosed so nobody really knows how much the open interest or notional value really is or who owns the risk—although the prevailing guess is about $1trillion USD notional. If the Comex implodes the cascade effects might well resemble what happened to those two Bear Stearns Hedge Funds in the summer of 2007 that set off the 2008 Financial Crisis.
Even if the Comex manages to extend contracts out a few more months, the physical supply of silver does not exist. I repeat there is no physical supply anywhere that can meet this year‘s demand for silver. Only two places comes close to the silver necessary for global demand: one is already fully allocated in the Canadian vaults in Ottawa in Toronto and that silver is not going to be let go of. The other is silver owned by retail investors. But as I have said before: silverbugs aren’t going to sell for $95, not $120, not $175. Not going to happen.
So in two weeks time, it looks like the Comex is going to implode.
How about over in the East? What’s China doing?
Chinese market regulators are actually doing their job. Here’s how, as I am quoting Dario at this link:
“What the Shanghai future exchange just did and what they did yesterday is effectively saying that starting from the last month of February that (it’s not a coincidence is the same day when the settlement for March 2026 futures contracts and the Comex begins starting) from that day any participant in the exchange that is not purchasing contracts for [physical] hedging purposes and even if purchased for hedging purposes they haven’t been allocated [a] physical delivery quota all their quota for silver in the front end contract is going to be brought down to zero.
So what the Shanghai future exchange here is saying is like okay game is over. We have to restrict the physical silver that we have left here for settlement for those that need it from an industrial perspective. So for hedging purposes and we need to keep the real purpose of the exchange going otherwise if things continue in this way we can effectively shut for business and that is going to be a huge mayhem not only across China but across Asia.
What’s China doing? Well, those communist bureaucrats that oversee the Shanghai Futures Exchange are doing something remarkable: they are working as hard as they can to preserve the sanctity of a free and fairly functioning market dedicated to true price discovery. Listen to the full podcast. You’ll listen in disbelief. The Chinese are better free-marketeers than the corrupt managers of the SEC. I’m dead serious. Chinese regulators make our SEC look like a collection of jackasses at a rodeo-clown show.
So, here is how this plays out: if Comex implodes—which is probable—but Shanghai muddles through, which given its bottom of the barrel minimum silver reserves is going to be extremely hard to pull off, but not impossible, massive amounts of wealth will accelerate their repatriation into the mainland. For over a thousand years silver formed the basis of Chinese monetary policy. They know what they are doing.
And the West? The West will reap what it sowed for near on 500 years. Our wealth is soon to be a multi-century river filling the current account surplus of the East.
Just watch.
IT SHOULD GO WITHOUT SAYING, EXCEPT IT MUST BE SAID: THIS IS NOT INVESTMENT ADVICE. THIS IS OPINION, FULL STOP. DYOR.
Nat Wilson Turner
This is the frontline in the war between pretend and hard reality. Gotta bet on reality but never underestimate the powers of the Lords of Delusion
Sean Paul Kelley
@Nat: Well said. So well said, I wish I’d written it.
spud
cuba/greenland/mexico and canada are coming to the rescue. this is why china and russia cannot hide behind their borders and expect to be left alone.
https://minedocs.com/23/Antilles-Gold-CP-09062022.pdf
Cuba – a new
mining frontier
https://www.mining.com/web/factbox-greenlands-rich-but-largely-untapped-mineral-resources/
Overview of Silver Mining in Mexico
Mexico is the world’s largest producer of silver, with a significant mining sector that contributes to the economy. In 2023, mining represented 2.4% of Mexico’s gross domestic product and employed around 350,000 people. The country is also a major producer of gold, copper, and zinc.
Overview of Silver Mining in Mexico
Mexico is the world’s largest producer of silver, with a significant mining sector that contributes to the economy. In 2023, mining represented 2.4% of Mexico’s gross domestic product and employed around 350,000 people. The country is also a major producer of gold, copper, and zinc.
———-
remember, Marx was a capitalist.
different clue
. . . ” remember, Marx was a capitalist. ” . . .
Wait, what? I thought Engels was the capitalist. I thought Marx depended on the kindness of patrons, mainly Engels. Was I wrong?
Fun story . . . many years ago at a used-stuff consignment store, I saw in the book department a big sumptuously-illustrated coffee-table book about Friedrich Engels. I still regret not having bought it. I of course have never seen another copy anywhere.
Purple Library Guy
depended on the kindness of patrons . . . Now I’m imagining the blockbuster movie, “A Streetcar Named Class Struggle” with ol’ Friedrich yelling “Karl!!!”
marku
But aren’t most of those contracts never expecting to take physical delivery? Just gambling, er excuse me, investment hedging?
Or is the problem that given that Comex price is under the real, that all those contracts *want* to be exercised in delivery so they can arbitrage to China (who has a real price?)
I’ve always found futures confusing, thanks for any help.
Feral Finster
Might add some standard disclaimers about this is not investment advice.
Consult with a lawyer.
spud
different clue:
https://academic.oup.com/edited-volume/38582/chapter-abstract/334611688?redirectedFrom=fulltext&login=false
https://www.jstor.org/stable/2662349
https://ideas.repec.org/a/spr/homoec/v41y2024i1d10.1007_s41412-024-00150-9.html
Adam Smith and Karl Marx are commonly viewed as opposites, both in terms of their approaches to political economy and their ideological outlooks: Smith as a champion of individual self-interest and unfettered capitalist development; Marx as the harsh critic of the injustice and irrationality of capitalist commodity production. Marx was, however, in many important methodological and theoretical dimensions, in fact, a “Smithian”. In this paper we explore Smith’s influence on Marx in several dimensions. The most important in our view is Marx’s adoption of Smith’s “long-period reasoning” as the framework for his theories of value, surplus value, allocation of labor and exploitation.
Marx instinctively shared many other Smithian views, including Smith’s rejection of diminishing returns to specialization as a limiting factor in capital accumulation, the factors underlying demographics, the role and potential of technical change, and the theory of money. Marx’s “vision” diverged sharply from Smith on the question of the universality of capitalist social relations of commodity production, and the possibility of socialist alternatives to capitalist commodity production as a framework for organizing the division of labor.
This paper surveys the areas where Marx found substantial common ground with Smith, as well as the questions on which Marx parted company with Smith through a careful exegesis of Marx’s own discussion and evaluation of Smith’s ideas. This clarifies the ways in which Marx worked from his understanding of Smith as a base to develop his critique of political economy.
————–
Smiths views,
adam smith was a socialist:Smith’s chief concern was for economic
policy to be secondary to moral and ethical concerns such as economic
equality, freedom of speech, and dignified and just labor conditions
http://bigpicture.typepad.com/comments/2008/10/adam-smith-was.html
Adam Smith Was a Socialist
Thursday, October 30, 2008 | 02:30 PM
in Politics | Taxes and Policy
I hate politics. I cannot stand the maneuvering to avoid discussing
issues, and instead focus on name calling. The latest idiocy is the
entire Socialist meme, which, having seen the banking industry
nationalized, is a bizarre charge to make these days.
It is especially odd, given the nature of wealth distribution in a
capitalist system that has any form of taxation. Most economists would
regard it as unexceptionable.
It can be traced to Adam Smith’s “Wealth of Nations” (1776), his
seminal treatise on capitalism. As Steve Coll pointed out in a The New
Yorker column:
“The necessaries of life occasion the great expense of the poor. . . .
The luxuries and vanities of life occasion the principal expense of
the rich, and a magnificent house embellishes and sets off to the best
advantage all the other luxuries and vanities which they
possess. . . . It is not very unreasonable that the rich should
contribute to the public expense, not only in proportion to their
revenue, but something more than in that proportion.” -Adam Smith,
quoted in the New Yorker, October 27 2008
————————————————————————————-
http://dailydoubt.blogspot.com/2008/10/communist-adam-smith-on-spreading.html
SUNDAY, OCTOBER 19, 2008
Communist Adam Smith on spreading the wealth
“Servants, labourers, and workmen of different kinds, make up the far
greater part of every political society. But what improves the
circumstances of the greater part can never be regarded as an
inconveniency to the whole. No society can surely be flourishing and
happy, of which the far greater part of the members are poor and
miserable. It is but equity, besides, that they who feed, clothe, and
lodge the whole body of the people, should have such a share of the
produce of their own labor as to be themselves tolerably well fed,
cloathed and lodged.” – Adam Smith, The Wealth of Nations Bk. 1, Ch. 8
—————————————————————————————
http://www.prosebeforehos.com/progressive-economics/07/13/the-myth-versus-the-reality-of-adam-smiths-political-economy/
.The Myth Versus the Reality of Adam Smith’s Political Economy
by Progressive Economics on July 13, 2009 | Trackback URI |
Email This Post | 79 Views
With the current economic climate, there has been much discussion
about the origins of the financial crisis and the future of
capitalism. In these typically hollow debates, Adam Smith is routinely
and thoughtlessly invoked as the founder of modern capitalist though,
based on unrestrained trade, limited government, and the mechanics of
market economies. To this day, The Wealth of Nations is held up as the
espousal tome for free-market ideology that decries government
regulation, excessive taxation, and wealth redistribution (in whatever
contrived shapes it may take).
But the myth of Adam Smith created by two centuries of advanced
industrialization and capitalism is very far from the reality of Adam
Smith. The majority of academics and pundits alike generalize on
Smith’s observations about the invisible hand, the benefits of
division of labor, and the growth of wealth through free trade.
Outside of these points, The Wealth of Nations serves as an of his
time reaction to the impact of corporations and mercantile interests
on economies and governments.
More specifically, Smith spent much of
his book reacting to the growth of the East India Company, whose
stockholders were to be found on every level of government decision
making in Great Britain and thought to be adversely effecting foreign
policy and internal financial systems. Smith was also appalled at the
exploitation under the reign of the East India Company, including the
starvation of over 30 million people in modern-day Bangladesh due to
British-imposed tariffs.
As Chomsky notes, Smith saw the East India Company and other
stockholding corporations as bending state policy towards the good of
the few at the expense of the many. Smith to this end was in favor of
heavy-handed government regulation to prevent financial and corporate
powers from manipulating government policy for their own ends. This
led him to conclude on the nefarious impulse of corporate
manipulation, that when “People of the same trade seldom meet
together, even for merriment and diversion, but the conversation ends
in a conspiracy against the public, or in some contrivance to raise
prices. It is impossible indeed to prevent such meetings, by any law
which either could be executed, or would be consistent with liberty
and justice. But though the law cannot hinder people of the same trade
from sometimes assembling together, it ought to do nothing to
facilitate such assemblies; much less to render them necessary.”
The legacy of Smith continues to diverge further and further from the
reality of Smiths principles which were heavily influenced by Rousseau
and other humanist figures of the Enlightenment. Smith advocated for a
system of progressive taxation and a political economy centered on the
freedom of creative pursuits but protective of the working class.
Considering how his legacy is enshrined today, it seems out of place
to realize that Smith’s chief concern was for economic policy to be
secondary to moral and ethical concerns such as economic equality,
freedom of speech, and dignified and just labor conditions.
See Also: Was Adam Smith a liberal?, Justin Fox’s new book: ‘Myth of
the Rational Market’, “The Hottest Places in Hell are Reserved for
Those Who, in Times of Moral Crisis, Maintain a Neutrality”, How the
financial crisis has killed the governance reform agenda, A Fleecing
Of The Sheeple, Another Comment on Bonuses and Benchmarks, Taking
Stock: Economy and Government, and Now Lemme Tell You A Story, The
Devil He Has a Plan.
————
Smith and Marx had much in common in their writings.
Carborundum
I like to think that I’m fairly up on my SI units, but what is a gigabyte hour? I assume this is an autocorrect artifact and you mean 1 GW of generating capacity, with 1 GWh being the amount of power said array can generate in an hour? Or was this indeed a period measure, based off an array with some other capacity?
Trying to run down estimates of the amount of silver required per PV watt capacity and they’re all over the map, like multiple orders of magnitude differences…
different clue
@spud,
Thank you for the seriously large amount of information and some further follow-up links. It will take some time to read and think about all that. The good thing about this blog is that it will stay up here for being able to come back to.
spud
different clue:
the smith information most people have received is the chicago school of economics version, that is the chicago school, milton friedman cranks, only included in smiths work, that which they agreed with.
they left out all of the stuff from smith, that they did not agree with.
so all you hear is the invisible hand crap. what they left out was all of the stuff to try to make capitalism work, only then can there be the invisible hand.
so that hand was to be very well regulated and taxed. and keep the rich and finance at bay.
Sean Paul Kelley
@Carorundum: Please see my correction in the post. I regret the error. Thank you for pointing it out.
anonone
It is ridiculous for you to predict that there will be a run on silver metal because the number of silver futures contracts.
After the last time you published your silver prognostications here ( “how high can the price of silver really go”) on January 27th, silver futures crashed by 30-31% only 3 days later.
Based on your actual track record, your investment advice should be roundly ignored.
Carborundum
No sweat – FWIW, the centroid of estimates does seem be around where you’ve placed it.
I’m seeing some mind boggling numbers here – like > 300GW installed last year. That would be equivalent to just under half of global industrial demand if the Silver Institute’s figures are accurate (I assume they are credible? – don’t know the space at all).
Penciled out at the spatial coverage of their largest solar farm (5 GW @ 200,000 acres) that works out to something like 12.5 *million* acres – like a square 140 miles on a side – installed in a year. The numbers are so big that I’m honestly wondering if something isn’t hinky because I’m seeing so relatively little signature in the overheads, even given image latency in public overheads and the pace of the buildout. The size of the total reported PV buildout (i.e., including prior years) at that density is a multiple of reported estimates of total urban building mass coverage for the entire country…
I mean exqueeze me? Whiskey, Tango, Foxtrot, over?