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Investing in the Next Silver Bull Market

Silver Short Selling: Manipulation or Opportunity?

Written by Geoffrey Pike
Posted July 1, 2015

silverbullThere was a recent article on the SilverSeek website. It states that the paper market for silver futures is now over one billion ounces, most of which represents a naked short position in silver.

The article says that the Comex silver market is the most corrupt in history, which is obviously quite subjective and a pretty tough accusation to prove.

As with many websites and articles that specialize in silver, it says that there is extreme manipulation in the silver market. The interesting part about this article was its case that the big banks are orchestrating something that will end up in a Comex default.

When there is naked short selling, it means that an asset (in this case silver) is being sold short without that asset first being borrowed or making sure that the asset can be borrowed. If a naked short seller gets things really wrong, then it may not be able to make good on its contract promises because it doesn’t actually own the asset.

The prediction of a possible Comex default needs to be explained better before I can believe it. If the big banks are manipulating the price of silver and shorting the market, why should we expect to see a default? More often than not, the big financial institutions are on the right side of the trade.

Also, if there is manipulation in the market aside from just regular buying and selling in the futures market, then why would we also not expect a bailout by the Fed with the threat of a default? Would the Fed really allow this to happen?

I am a long-term bull on silver. I like it almost as much as gold. In a precious metals mania, I will like silver even more because of its volatility and huge potential gains.

Silver Bullets to Remember

With that said, I do need to point out a few obvious things when it comes to accusations of manipulation in the silver market.

  1. Why do we hear about these stories of manipulation mostly when we are in a bear market? When silver was going parabolic in 2011, skyrocketing to about $50 per ounce, there were few stories to be found about manipulation.
  2. When I see these stories about the silver price being manipulated, I would like to see more information and detail. It is easy for anyone to make a general accusation of manipulation.
  3. I would like more detail on why these types of articles say that most of the futures market is made up of naked short sellers. Doesn’t every contract need a short and long position to offset each other? It is like any other market. Sometimes we will say that there are more buyers or sellers in the stock market, but there are really always an equal number of buyers and sellers per unit sold. There may be more buyers or more sellers at a particular price, but every trade has a buyer and seller.
  4. What does manipulation mean? If you buy or sell a financial asset, it generally moves the price in a marginal way, even if insignificant. Are these banks that are supposedly manipulating the price of silver just guilty of shorting the market at the right time? What specifically are they doing wrong?

I am not saying that some of these accusations are necessarily wrong. What I am saying is that I need more proof in order to base any investment decisions off of them.

The big banks operate in a crony system with special advantages coming from the government and the Fed. But it doesn’t mean that the big banks are necessarily responsible every time the price of silver falls.

The last important point here is that even if there is “manipulation” – whatever that means – the physical market ultimately has the final call. You can get all of the big players in the world to short silver in the futures market. But if there are enough buyers of physical silver, it will force the big players out of their short positions at some point. There is almost never a big disparity between the price of the physical metal and the price in the paper market.

Manipulation or not, I am still bullish on silver in the longer term. The price could take another hit if we see another recession or some kind of economic downturn. But since the central bank is not going out of business any time soon, we can expect more monetary inflation in the future. We can expect higher silver prices at some point.

If the so-called manipulators want to drive the price down a little further, then the silver bulls should just see this as a gift of a buying opportunity.

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