Bulls vs. Bears: Who Will Win the Silver Battle?

Silver is unique among assets in many ways. Its cousin, gold, is widely recognized as an “immutable store of value,” and has been for millennia. Although some fiat-money enthusiasts in academia might turn their noses up at gold. By and large, gold gets its due respect. Silver, on the other hand, is sort of like the Rodney Dangerfield of precious metals; No one knows what’s going to happen next.

Most people are at least somewhat familiar with the Hunt brothers and their attempts to “corner the market” in silver in the 1970s and 1980s. During this time, the price of silver went from $1.50 an ounce in 1974, all the way to $50 an ounce just six years later, before falling precipitously to $4, where it stayed for many years. Perhaps this wild roller-coaster ride is one of the reasons mainstream financial analysts and economists tend to give silver less respect than others think silver deserves. Regardless, silver certainly does have its cheerleaders, and to these individuals, silver’s future is very bright indeed.

Bullish: Manipulation, Industrial Demand, and Central Banks

Chief among the perpetual bulls on silver is Ted Butler, an independent commodity analyst who writes for his own Web site, butlerresearch.com. Mr. Butler has been consistent in his assertion the silver market is being illegally manipulated, and he cites voluminous data to back up this contention.

One thing is a matter of record is silver has an enormously large concentrated short position. Four or fewer traders hold a net short position of 228 million ounces of silver — the equivalent of more than 130 days worth of global silver production. Butler says this “paper selling” of silver has kept prices artificially low. And, eventually, the realities of supply and demand will drown out the “shorts” who have been suppressing the real price of silver. This is the key to his bullish thinking.

After all, Mr. Butler and other silver bulls point out that industrial demand for silver has never been higher, and this alone should be bullish for the commodity. Israel Friedman, another silver bull, says that “silver has come to be used so much by industry over the past fifty or sixty years that most of the inventories in silver have been used up,” and he points out the world now has more gold above ground than silver. “We have sixty-two years of gold production above ground,” Mr. Friedman says, but “in silver, we have less than two years of mining production.”

Gold currently trades for around $650 and silver for just $13 an ounce — but Mr. Israel thinks the two will reverse in time. “The rarer and more industrially needed item should be $650 and the more plentiful and less used item should be $13.”

Another element supporting the bullish case is the decreasing role that central banks play in the silver market. Analysts like Ted Butler point out that, in the past, many central banks held vast amounts of silver and they “leased” it to investment banks to meet industrial and investment demand.

Years ago, supplies ran low enough that, for all intents and purposes, silver leasing came to an end. This should have resulted in an immediate spike in the silver price, but Butler and others like him insist — the spike in price didn’t — only because of the “manipulation” being perpetrated by the concentrated shorts.

But even disregarding the leasing issue, the fact remains central banks hold an enormous amount of gold, and the threat of these institutions dumping the banks holdings on the market always looms on the horizon. Silver, on the other hand, is largely absent from the vaults of central banks and government treasuries, and thus, this threat does not exist.

Bearish: Lower Procurement Costs, The Shorts Aren’t Stupid

Despite all of this evidence, most analysts from the major Wall Street investment houses remain bearish on silver. For example, in a recent report on Silver Wheaton Corp., Merrill Lynch analyst, Michael Jalonen, was bullish on the silver mining company, but not silver as a commodity. He saw the price of silver going lower, predicting it would be $13 an ounce in 2008, and $12 an ounce in 2009. His long-term price target for silver was just $10 an ounce. Could it be the shorts are right?

Mr. Jalonen’s reasoning is, thanks to technological advancements, the mining of silver is becoming less expensive by the day. Silver Wheaton, for example, has a procurement cost of just $4 per ounce. To silver bulls like Ted Butler, the concentrated short position has to resolve itself at some point, and when it does, the price of silver will skyrocket. But if the shorts are right, and silver becomes less expensive due to more cost-effective mining methods, then supply and demand may intersect much lower than the $650 price target cited by Israel Friedman.

David Morgan, a pseudo-bull on silver, has this to say: “I just do not see silver prices rising until the actual physical bullion supplies reach critically low levels.” This is not happening now, and thus, the shorts are able to re-initiate their positions with relatively minor losses. Bearish investors bet procurement costs will dip to a level at which demand can be met for less than the current $12-13 per ounce — say, Michael Jalonen’s price target of $10, in which case, bearish investors will have the last laugh.

So, Who Wins — Bulls or Bears?

At first glance, there certainly seems to be an overwhelmingly strong case for being bullish on silver. Industrial demand is growing, central banks are not a threat, and a high short ratio is traditionally a bullish sign in all financial markets. But there is certainly a case to be made for the bears, as well. After all, these four large short sellers are not likely to be stupid people — the traders shorting, are undoubtedly well aware of all the bullish signs and yet they go against the grain; so this should give all bulls at least some pause.

Ultimately, owning physical silver is probably a safe and intelligent investment. As the recent study from Ibbotson Associates suggested, holding at least a portion of your assets in precious metals enhances returns while limiting risk. After weighing the evidence, it seems more likely that silver is poised for a bullish future — small groups of even the most intelligent investors can only rarely outsmart the “wisdom of crowds.” But, silver bulls shouldn’t get too carried away. There are always two sides to every coin, especially when that coin is made of the surprisingly volatile precious metal, silver.

Do Bull Markets in Gold and Silver Always Portend Recession or Depression?

Throughout the history of civilization, gold has been the most stable and truest store of value. Currencies, cities, governments, empires, and even entire nations of people have all fallen, but gold has remained. It is this property of gold that led to the Wall Street adage, “Put 10% in gold and hope it doesn’t work.” But do rising price levels in gold, or for that matter silver, always predict an oncoming economic collapse, or can gold and silver be bullish while the rest of economy prospers?

The Fiat Currency Problem

Hndreds of times throughout history, governments have debased their currencies and ultimately given in to the temptation of printing paper “fiat money” — money that’s backed by nothing but the “full faith and credit” of the issuer. And each and every time, thus far, the fiat money has ultimately collapsed and become worthless.

Why should the U.S. government’s Federal Reserve Notes, which went off the gold standard in 1971, be any different? This, at least, is the case made by hard-core goldbugs and silver bulls. They believe that holding precious metals is the only hedge against an impending and inevitable “Financial Armageddon.”

One thing is indisputable gold and silver have traditionally increased in value as the supply of fiat money expands. This is a natural function of supply and demand: as more and more fiat dollars are put into circulation, the supply of gold and silver, which is relatively “fixed” by comparison — fails to grow at the same speed, and thus, the number of dollars needed to buy one ounce of gold or silver becomes greater and greater.

Whether this actually produces more purchasing power for the precious metal is another story, as this is only the case if the total number of goods and services produced expands faster than the supply of newly mined gold or silver, which, in the case of severe economic downturns, is not always the case. Regardless, the relative buying power of gold and silver has held up better than paper money throughout most periods of time, even in the modern era.

Gold and Silver: A Historic Review

The main problem with measuring the historic performance of gold and silver against the U.S. dollar or most other currencies is that, historically, most money has been pegged to specific weights of gold, silver, or both. Prior to the modern era, purely fiat currencies failed rather quickly. It’s impossible to measure the buying power of gold versus the dollar when, for most of the twentieth century, the dollar was redeemable in gold at the ratio of $20.67 or $35 per ounce.

This leaves historical analysts a relatively brief window of time — 1972 through the present — to examine. During this time, the value of gold relative to the dollar has been allowed to float. As monetary inflation has accelerated, the price of gold in dollars has risen. As inflation — or more importantly, inflation expectations has abated, and gold has had at least one rather precipitous crash.

For example, when President Nixon “closed the gold window” in 1971, the price of gold immediately spiked from the $35 an ounce at which it had been pegged. By the early eighties, inflation was raging in the double digits per annum, and gold eventually hit an all-time high of $850 an ounce. ($2,100 in inflation-adjusted dollars). But when Paul Volker effectively hit the reset button on the economy, dramatically hiking interest rates and intentionally causing a recession, gold plummeted, and as the Federal Reserve had a better handle on fiat-money management, gold eventually fell to just $272 per ounce by the year 2000.

This is a strong empirical case for gold as a hedge against economic collapse. Theoretically, the price of gold reached $850 an ounce because investors anticipated perpetual inflation and the potential collapse of the U.S. economic system, but when the truly unexpected happened — the government became more responsible with the money supply — the per-ounce price of gold fell. Crisis averted. But can gold and silver see significant price movements to the plus side even if the U.S. economy remains strong?

Gold and Silver: 2001 and Beyond

The horrific events of September 11th — though emotionally devastating to all — resulted in substantial gains for gold investors. Although most who profited in the aftermath of 9/11 would trade it all away to save even one life lost on that fateful day. The fact is, it’s quite likely gold would have turned bullish even in the absence of the terror attacks.

In the years following 9/11, even in the face of an expensive war and an extravagant new Medicare prescription-drug benefit, the U.S. economy has hummed along, with inflation relatively under control and the stock-market indexes all hitting new highs — and yet gold has also been tremendously bullish. Some goldbugs argue because the market is smart enough to realize that the U.S. fiat-money system is ultimately unsustainable, but others point to a real increase in the demand for gold.

After all, non-inflationary economic growth — the kind of growth in which extra dollars compete for even more goods and services produced by the booming economy can still produce a greater demand for gold, and if the supply of gold cannot keep up with demand; then clearly, the price of gold is going to rise. Since 2001, gold has nearly tripled — a feat which, in the absence of near-hyper inflation, has never happened so quickly.

Silver, on the other hand, has forged a different path. Many silver bulls allege that the price of the commodity has been artificially suppressed by a cabal of concentrated short sellers. They cite increased industrial demand for silver, which is used in many high-tech applications, as an ultimately bullish indicator for silver, and this particular trend is amplified by economic growth, not the potential of recession.

Thus, while gold and silver have historically fared best in the face of impending economic doom, it appears things have changed in this new millennium. Now it looks as though gold and silver will perform well in the case of recession or depression, or in the case of continued economic strength. Although, there is a bearish side to every investment story, gold and silver seem uniquely poised to be solid investments under all economic scenarios in the foreseeable future.

Government Confiscation of Gold: It Happened Before — Could It Happen Again?

Our nation was founded with the sacred words, “We hold these truths to be self-evident, that all men are created equal; that they are endowed by their Creator with certain unalienable rights; that among these are life, liberty and the pursuit of happiness.” But in 1933, all that was shattered if by “pursuing happiness,” you chose to pursue gold.

The Foundations of the Great Confiscation

Confiscation all dates back to the Trading with the Enemy Act of 1917. That year, President Woodrow Wilson signed the “TWEA” into law, forbidding American individuals and businesses from engaging in trade with “enemy nations.” The world’s functional gold standard, which had overseen tremendous global economic growth in the early years of the twentieth century, was effectively halted by the outbreak of World War I, and the stage was thus set for the Great Depression and World War II.

Shortly after taking office sixteen years later, Franklin Delano Roosevelt signed Executive Order 6102 into law, prohibiting the “hoarding” of gold. Under this executive order, Americans were prohibited from owning more than $100 worth of gold coins, and all “hoarders” (i.e. people who owned more than $100 worth of gold) were forced, by law, to sell their “excess” gold to the government at the prevailing price of $20.67 per ounce.

Then, once the government had all the gold, FDR revalued the dollar relative to gold so that gold was now worth $35 an ounce. By simple decree, the government had thereby robbed millions of American citizens at a rate of $14.33 per ounce of confiscated gold, which is why most historians agree that the Gold Confiscation of 1933 is the single most draconian economic act in the history of the United States.

The Utilitarian Rationale Behind Confiscation

The reasoning behind the Great Gold Confiscation was, of course, the Great Depression, which had begun several years prior. After an inflationary run-up in prices and asset values, the stock market crashed in 1929, and the economy soon went with the crash.

Rather than responding to the situation with laissez-fair wisdom, President Herbert Hoover, often accused of being a proponent of laissez fair by those to whom the term is considered an epithet — instead raised taxes and erected new trade barriers, intensifying the misery. When FDR was elected, the people were willing to go along with nearly anything to try to alleviate the deflation that had gripped the country and strangled economic activity.

The boom of the 1920s was largely an illusory creature of the still-new Federal Reserve’s gross ineptitude, and by the thirties when reality had caught up to the loose-money standards of the prior decade, the money supply quickly contracted, causing deflation.

Like inflation, deflation also begets more of itself, and as prices dropped, it became wiser for the possessors of money to hold it rather than spend it, since prices would be lower the next day — and even lower the day after that — ad infinitum.

Since no one was spending money, businesses went under and people were out of the work, thus making the situation worse. In response, FDR knew what needed to be done — prices needed to be stabilized. On this, few would disagree. The exception economists take is with the implementation the president chose to pursue.

First, as discussed, private ownership of gold was effectively barred. The only exceptions were coinage worth $100 or less, or collectible coins, industrial uses, and jewelry. Gold could not be “hoarded” as a significant investment, and all “hoarders” were made to sell their gold to the government.

The Federal Reserve itself — a private banking cartel more so than an arm of government — was not excluded from this requirement either, as made clear by the Gold Reserve Act of 1934. That legislation required the Fed to surrender all gold and gold certificates held, to the United States Treasury.

Finally, the dollar was revalued, and U.S. Dollars was then redeemable at a rate of $35 an ounce, as opposed to the old gold standard of $20.67. However, it’s important to note that only foreign bankers and international governments could redeem their dollars for gold — private gold ownership was still illegal in the U.S. until the end of 1974.

The effect revaluation had on the U.S. dollar was an instant depreciation of 41%. Thus, prices were pushed back up again, in nominal terms, at least. What the long-term effects of this action would have been in the absence of World War II will never be known, but within a few years, the U.S. war economy was humming.

Following the end of the second great war, the U.S. stood alone as an economic super power, virtually untouched by the Axis or Allies, while most of Europe lay in ruins. It all made Roosevelt’s coercive and unconstitutional acts look ingenious, but scholars from the left and right continue to debate whether they were truly wise or if the New Deal was bailed out by global externalities.

Gold Confiscation: Could it Happen Again?

Although the U.S. dollar is constantly under pressure, the U.S. government continues to stockpile debt, and impossible-to-fulfill entitlement commitments loom on the horizon, the idea that the U.S. government would try to confiscate citizens’ gold today or anytime in the foreseeable future certainly seems spurious at best. After all, the government did so in the past in order to recalibrate the gold standard, which we have not been on since 1972.

However, our government has become increasingly bold in its refusal to be restrained by the Constitution, and following the return to limited government (at least in rhetoric) by the Reagan administration in the eighties, the Constitution has been all but ignored by subsequent administrations and congresses.

The government might want to reenact gold confiscation, and most congressmen would feel no moral compunction about doing so, but logistically, it would seem virtually impossible in today’s globally interdependent and well-connected economy.

Investors might need to beware, however, if certain interest groups on the left and right get their way and begin building walls, both literally and figuratively, around the country in an effort to block that global interdependence. Protectionism and higher taxes led to the greatest depression in U.S. history, and along with it came gold confiscation. It would probably take a similar impetus for such a sequence of events to happen again.

Enhance Returns and Reduce Risk by Diversifying Your Portfolio with Precious Metals

As the old Wall Street saying goes, “Put 10% in gold and hope it doesn’t work.” A recent study by Ibbotson Associates, commissioned by Bullion Management Services Inc., confirms that might not be such a bad idea. And, historically, that has worked just fine — even in the absence of economic calamity.

The Theory of Diversification

Te idea behind asset allocation is asset classes are diverse. Historically, stocks and bonds tended to appreciate and depreciate in opposite directions. Therefore, a portfolio was sufficiently diverse if it held both stocks and bonds, with maybe a little cash on the side. Gold, so long as the dollar was still tied to it via the gold standard, and other precious metals were rarely given much consideration, since most world currencies were backed by hard assets.

But once President Nixon “closed the gold window” in 1971, an interesting thing began to happen: Stocks and bonds started trading relatively in tandem. For example, from 1926 to 1969, the correlation between stocks and bonds was -0.02; meaning that if stocks as a whole went up by 10%, you could expect bonds to go down by 0.2%, and vice versa.

But since 1970, the correlation between stocks and bonds has ranged anywhere from -0.03 to +0.80. At the far end, this meant when stocks, as an asset class, went up by 10%, bonds went up by 8 % — and if stocks went down by 10%, bonds lost 8% of their value. What good is such “diversification?”

But what of gold and other precious metals? Using the SPMI (Spot Precious Metals Index), which consists of equal parts gold, silver, and platinum bullion, precious metals have had a -0.10 correlation with U.S. large-cap stocks in the years 1972 (the first year gold was detached from the U.S. dollar) through 2004, and a -0.18 correlation with long-term U.S. government bonds. Thus, precious metals proved to be a legitimate diversifying hedge.

Hedging Against Inflation

Another important finding from the study was the SPMI’s validity as a hedge against inflation. U.S. large-cap stocks (-0.22), U.S. small-cap stocks (-0.06), international equities (-0.19), long-term U.S. government bonds (-0.39), and intermediate-term U.S. government bonds (-0.22) all had negative correlations to inflation.

Only 90-day Treasury bills (+0.63) and the SPMI (+0.43) moved in the same direction as inflation. But of course, the rate of return on 90-day T-bills was not as high as gold, silver, and bullion over the thirty-two-year period, making the SPMI the superior investment.

In fact, the SPMI was the best hedge, not only against inflation, but against all other asset classes. U.S. large-cap stocks, for example, had an average correlation of +0.26 to the six other asset classes. U.S. small-cap stocks’ average correlation was +0.22. International equities (+0.15), long-term U.S. government bonds (+0.18), intermediate-term U.S. government bonds (+0.19), and even 90-day T-bills (+0.03) all had positive correlations, but not the SPMI — its average correlation was -0.06, proving to be the only asset class that legitimately diversified investors from 1972 to 2004.

Putting it All Together

Obviously, most financial planners would advise clients against putting all of their eggs into one basket — even if the basket were made of gold, silver, and platinum. Over the course of the thirty-two years examined in the Ibbotson study, the three equity classes (U.S. large-cap stocks, U.S. small-cap stocks, and international equities) outperformed all other asset classes.

However, it is important to note that during the high-inflation years of 1973 through 1984, the SPMI was the best-performing asset class, giving it the longest run of any of the asset classes.

Every investor knows that there is no one “best” asset class, and winning portfolios contain the best of many, if not all, asset classes. This hunch, which most investors have, was proven empirically by the Ibbotson study.

Ibbotson made three portfolios based on risk tolerance. The conservative portfolio consisted of 4.5% U.S. large-cap stocks, 10.3% U.S. small-cap stocks, 9.6% international equities, 2.4% long-term U.S. government bonds, 30% intermediate-term U.S. government bonds, and 43.2% 90-day Treasury bills.

Given this asset-class mix, the portfolio would have had a 6% annual rate of return from 1972 to 2004. But if 7.1% were invested in the SPMI, the expected return would be boosted to 6.2% while simultaneously minimizing risk (a Sharpe Ratio of 0.464 vs. 0.426 without precious metals — the higher the Sharpe Ratio, the better the risk-adjusted rate of return).

Even more striking were the results of the moderate model portfolios. The moderate model portfolio without precious metals (15.5% large cap, 17.6% small cap, 21.5% international, 8.3% long-term bonds, 25.4% intermediate-term bonds, and 11.8% 90-day bills) had an 8.6% expected return and a 0.437 Sharpe ratio. But by allocating 12.5% of assets into the SPMI, the expected return was increased to 9% and the Sharpe Ratio was boosted to 0.472.

Finally, there was an aggressive model portfolio, which performed best of all. It allocated 19.2% into large-cap stocks, 32.5% into small-cap, 31.6% into international stocks, 7.9% into long-term bonds, 5.3% into intermediate-term bonds, and 3.6% into 90-day T-bills. Without precious metals, this portfolio had an expected return of 11.1% and a Sharpe Ratio of 0.428. But with a 15.7% SPMI allocation, the expected return was boosted to 11.6% and the Sharpe Ratio to 0.453.

The Future of Precious-Metal Investing

Since at least the 1970s, “goldbugs” have been predicting an imminent economic collapse in the U.S. (if not the world) and citing this as the reason everyone should buy gold (or silver or platinum). While there are numerous signs pointing to a potential “Financial Armageddon” in the decades ahead, Ibbotson’s study proved that, even in the absence of a global economic implosion, precious metals help diversify, hedge, and improve the performance of your portfolio while limiting risk.

Every investor might think about putting between 7.1% and 15.7% of his or her portfolio into hard assets, but there’s no need to “hope it doesn’t work” — it will work. The only question is, how well?

The Long and Short of Silver - Cabal of Traders Manipulating the Price of Silver?

In the 1970s, the Hunt brothers infamously manipulated the silver market, causing prices to climb from $1.50 an ounce all the way to $50, before finally crashing in the early 1980s. Now many silver investors believe the silver market is being manipulated again, but this time, the manipulators are said to be on the short side, artificially depressing the price of silver. Is there evidence to support these allegations?

The Short History of Silver Leasing

Following the precipitous crash of silver in the 1980s, prices stabilized at around $4 to $5 an ounce. These low prices enticed demand, and didn’t take long before the world’s appetite for silver outpaced global production, thus necessitating the draw down of silver inventories.

Normally, such a scenario leads to price appreciation, since individuals and institutions holding stockpiles of silver need an incentive —higher prices—to part with it. But in this particular case, silver did not appreciate to the extent that the laws of supply and demand indicated that it should. Why?

One answer was the new practice of silver leasing. Government central banks throughout the world held stockpiles of silver (as well as gold), but selling it to meet global demand would have invited unwanted scrutiny from various government watchdogs. So instead, central bankers “lent” or leased the silver, effectively dumping it on the market, through private investment-bank intermediaries, in exchange for an annual interest rate and a promise the silver would be returned at a later date.

Leasing made a lot of sense to central bankers. After all, stockpiles of precious metals earned no interest in government vaults, so loaning it out—even at ultra-low interest rates of 1% or less — produced income which otherwise would never have come into being.

Thus, central bankers were willing to supply silver irrespective of the price it was fetching on the open market, and this led to relative price stability even as demand soared and inventories were being depleted.

This lasted for almost twenty years, but eventually, the jig was up. Central banks had finally leased all of the silver they could, and they began demanding interest rates as high as 8%. At these rates, private investment bankers could not hope to sell the leased silver, invest the proceeds elsewhere, pay the central bankers interest, and still hope to out pace the rate of return on silver — so the practice of silver leasing essentially came to an end.

The Concentrated Short Position

With the end of silver leasing, the price of silver was expected to rise. It did, but not to the extent that most silver bulls anticipated it would. A new culprit — a cabal of silver short sellers — was fingered for blame.

That there is a concentration of silver short sellers is no “theory” — it’s fact. As of July 10, just four or fewer traders hold a net short position of nearly 228 million ounces of silver — the equivalent of more than 130 days worth of global silver production. By contrast, the concentrated short position in gold is equal to just forty-five days of global production, and the concentrated short position in crude oil just 1.4 days.

To be clear, what this means is four or fewer traders are selling over 35% of all contracts on the silver futures market. A futures contract is an obligation to deliver a stated amount of a commodity at a stated price and on a stated date. Typically, the sellers of futures contracts “cancel out” their positions by buying offsetting contracts, and vice versa, but occasionally, buyers may take delivery or sellers may make delivery of the underlying commodity.

The price of silver has nearly doubled in the past two years, but this price appreciation has not been met with a reduction in the concentrated short position. This means the four or fewer largest sellers of silver futures are not making delivery of the silver they’re selling — presumably because sellers don’t actually own the silver — but instead, shorts are constantly renewing.

Many silver traders believe the very existence of the concentrated short position is proof positive of manipulation. After all, if this group of four or fewer traders was not constantly renewing their positions, then clearly the price of silver would be higher. In the absence of their persistent sales, other sellers would have to be drawn to the market in order to meet the demand of silver futures buyers (and real silver buyers), and the only way to lure these new sellers in would be higher prices.

But what end are the concentrated shorts serving? One theory is holding down prices for industrial use, but if this was the case, the money the short sellers (presumably large industrial consumers of silver) saved via lower production costs would seem to be mostly eclipsed by the money they lost in the futures market.

Regardless, believers in the theory of silver manipulation say that the Commodities Futures Trading Association (a government agency) publishes concentration data each week precisely because large concentrated positions are tantamount to manipulation. And, if the manipulation is persistent, as has been in this case, then clearly the manipulators must be profiting from it. But how will the story end?

Is the End in Sight?

Regardless of whether the price of silver is being “manipulated,” the fact is the concentrated short position cannot last forever, and most experts believe that when the shorts are finally unwound, the price of silver will appreciate.

For example, one scenario is short sellers will ultimately throw in the towel — much like the Hunt brothers were forced to do back in 1980. Some people fear this could cause such a disruption in the market that chaos would ensue — the market might even need to be shut down. If this were to happen, then the holders of silver futures may not receive their just rewards, but the holders of actual silver most certainly would.

After all, a market shutdown would, by definition, disable the mechanism that has allowed the short sellers to suppress the price of silver. Demand would presumably remain the same, and thus the price of silver would likely appreciate.

Another potential end to the scenario is the concentrated shorts may make delivery of silver — all 228 million ounces. If this were to occur, then short selling would obviously come to an end, and as a result, the price of silver would likely increase.

The final potential end is the fall of silver. After all, it should be assumed that the four or fewer traders taking the short positions are not stupid — they undoubtedly believe that the price is silver is going lower, and they have been remarkably patient thus far. Perhaps production will outstrip demand and the price of silver will go lower. Then perhaps the short sellers will cancel out their positions once and for all, reaping eight-figure profits in the process.

The wisdom of crowds says this is the least likely scenario, but silver traders shouldn’t become overzealous in the certainty that the shorts have to eventually give in and the price of silver has to eventually rise. There are never truly “sure things” in the world of commodities investing, and all positions are to be taken with due caution.

Investing in Silver: Steps to a Healthier Portfolio

Silver coins are relatively inexpensive and liquid; the coins are, also, easy to store and insure. The price of each 1 oz. coin will usually follow the price of silver spot price.

However, silver coins do not provide any interest, and should be insured and stored safely. Investing in silver coins also does not provide leverage like other silver investing methods. Usually buyers must pay a premium over spot to cover the cost of minting the coins.

Silver bullion is generally the lest expensive because the costs associated with minting isn’t a part of producing bullion bars. The price of certified bars will closely follow the spot price of silver.

However, like many silver investments, bullion yields no interest and follows the volatile market of silver — where huge price movements can wipe out a portfolio’s value. There is also the possibility of proving the authenticity, and purity of the silver.

Silver ETF like iShares silver ETF or an ETF of silver mining companies provides investors with an exposure to the silver market without the costs of storage, insurance, and liquidity gaps. ETFs provide the investor with a security representing a trust holding silver bullion.

Although — there is an on-going debate about the iShares Silver ETF actual stock of silver bullion. Some investors believe the iShares Silver ETF does not hold any silver, therefore is nothing more than a ‘worthless’ security.

A true, dedicated silver investor wants to hold as little paper money as possible because of the historic decline of paper money.

Holding stock in silver mining companies will give investors an exposure to the silver market, and the possibility of company growth, which may lead to a dividend.

And yet, the companies future depends almost entirely on the management of the company. So, if poor management runs the company into the ground, the investors eat dirt — even if the price of silver soars.

Stocks also include holdings in mutual funds invested in silver mining companies. Much of the time, stocks and mutual funds will require a larger investment than small physical bullion purchases.

And even if the mutual fund is diversified among different mining companies, the fund is concentrated in one market.

This category includes investments in medallions, certificates or storage accounts, and futures contracts.

Medallions are very similar to coins because both medallions and coins are the least expensive option, are easy to store, and sometimes are harder to liquidate the investment.

Certificates or storage accounts are as liquid as mining stocks, but the silver bullion isn’t physically held by the investor.

And futures contracts are most likely the largest capital investment, requiring an upwards of $5,000 per contract. And, along with the high risk, a futures contract can have unlimited loss potential.� Futures contracts aren’t for most investors.