The Chinese Silver Fox...
I recently had a long and very interesting conversation with John Embry of Sprott Resources. It is always good to speak with him as I consider him one of the five sharpest economic/precious metals minds I know of and certainly value his opinion. John's name came up a couple of days ago when someone asked "where is all this silver coming from" to meet the outsized physical demand? I said "this is the number one question John Embry and Eric Sprott have been asking for about a year now".
Our conversation was quite broad but let's zero in on the "silver supply" aspect because I believe it is more important than anything else in our world today. That is a very big statement but stay with me as you will see toward the end why I believe this. John asked where IS all the silver coming from? Let me first say what follows was my best educated "guess" and I know of no one who has the firm and hard answer; I told him during the 80's and early 90's the amount of "scrap" could be a very logical explanation. Then during the 90's and early 2000's the silver deficit could be explained by the huge amount of silver recovered from the "Manhattan Project" estimated to be nearly 1 billion ounces. I also believe the Chinese lent somewhere around 300 million ounces of silver to the U.S. back in 2003 for a 10 year term which expired in that "magical year" 2013. If this was true, it would explain the massive paper takedown in May of 2013 because the lease was "up". I believe silver had to be taken down as the price was getting away and threatening $50. A collapsing price would allow the U.S. to say "don't worry, you will get your silver back as we have the price under control".
Here is where I believe the silver to meet delivery has come from, CHINA! But why? First and foremost, China was a "silver nation" and had used silver as money for longer and in greater quantity than any other nation. In other words, the silver has come from the only place it could have because China had it. OK, but even if China was the only large stockpile, why would they "throw good money after bad" if they were already defaulted on? I believe they wanted the crowned jewel of the West, Gold! They had silver but the West had the gold accumulated during the 1900's and especially after WWII. Yes the U.S. dishoarded in the 50's and 60's but we did still have 8,000 plus tons left and are (were?) custodian for other Western gold holdings. It is my contention a deal was made where silver has been supplied by China to prevent the Achilles heel (silver) from defaulting and blowing up everything. In other words, keeping the game going for longer would allow China to accumulate gold and drain what is left, had the game blown up in 2013, China would not have had the ability to accumulate what they have since then. Call this "dropping pennies to pick up dollars".
Getting back to what I said at the beginning where I said "silver is more important than anything else in the world", please follow this through. Silver is a very small market, some would say unimportant except for its various technological, medical, etc. uses. However, in no way could silver's price get away to the upside without dragging gold with it. Were the price of gold to get away to the upside, demand would explode (particularly in China where they are known as speculators and "chasers"). Were this to happen, the existing supply would be chewed up and the uncomfortable request "please deliver my gold" would become prevalent. At this point the game would be over as the scam of fractional reserve gold (and silver ...and everything else) would be public knowledge.
You see, "trust" is at the heart of it all. Our entire financial system is based on trust. Trust in government, trust in fiat currency, trust in cross trading partners, trust in your bank or your broker... it is ALL TRUST! What would happen to this trust if it turned out that a Ponzi scheme turned up somewhere? Not just any Ponzi scheme like Madoff but one where the exchange itself was running a fractional reserve fraud and could not deliver? Trust ...IN EVERYTHING would fail!
As usual I am sure I will be trolled for the above and called an idiot but I must ask you this- If global gold supply has not met demand for 20 years or more, where can the metal have come from to meet the deficit? The same goes for silver and even more so because the supply/demand deficit has been even more severe and longer in duration? The answer is most obvious, the metal had to come from the only place available, above ground supplies. For gold, that can only mean "official" stockpiles (vaults). For silver, I believe the only large above ground stockpile left was legacy silver in China.
Please do not point at the price and say "see, there are no shortages" as we have seen shortages, rationing and backwardation in both silver and gold over the last two years. If you gave me 100 billion counterfeit shares of IBM I could sell whenever I wanted, I am pretty sure I could make IBM look like a falling down drunk whenever I wanted and the price would certainly be depressed! Herein lies the fault, gold nor silver can be "printed" and when all is said and done investors holding receipts for same will be in for a very big and very bad surprise!
To finish, if I am correct about the silver for delivery coming from the most likely of all places, China, then I believe this will be looked back on by historians as "the Chinese silver fox in the West's golden hen house! Am I correct? I don't know but we will soon see as the global paper financial edifice is quaking on its own. John Embry told me, "of all the many theories I have heard so far, yours makes the most sense and is the most logical". I mentioned this topic to Jim yesterday and he told me when we first talked about it six months back he was skeptical but the more he has thought about it ...the silver can ONLY be coming from where it exists...Chinese legacy silver!
I think China has done some very intelligent maneuvering particularly since the 2008 crisis. They figured out our fractional reserve scheme was toast but they played along anyway. They even levered up as much or more than we did since then. However, with this increase in credit they have built infrastructure in the form of roads, bridges, cities, plant and equipment ...all for and with future uses. The West on the other hand has thrown a "standard of living party" and neglected infrastructure to the point of dilapidation. Yes China's financial system will implode with all the rest, they may even lead it! But, they will be left with new infrastructure and "money" (our gold) to get started again. President Xi has even said this to his people and to the world. He said the short term would be difficult but the long term beneficial. I think he is telling the truth!
Bill Holter for;
Bill Holter writes and is partnered with Jim Sinclair at the newly formed Holter/Sinclair collaboration.
Prior, he wrote for Miles Franklin from 2012-15. Bill worked as a retail stockbroker for 23 years, including 12 as a branch manager at A.G. Edwards. He left Wall Street in late 2006 to avoid potential liabilities related to management of paper assets. In retirement he and his family moved to Costa Rica where he lived until 2011 when he moved back to the United States. Bill was a well-known contributor to the Gold Anti-Trust Action Committee (GATA) commentaries from 2007-present.