The Real Silver 101 for r/WallStreetBets, Robinhood, folk

If you've been following silver for a while (like a decade, not a week), you're probably familiar with my site. It looks funny and out of date -- but is completely fact based. And while I love the outlook for silver, I am honest: I'm not going to hype some bogus theory. And I don't profit off this website (the expenses exceed any ad/affiliate revenue).

With a bunch of newbies piling into silver, and the rampant misinformation out there, I thought I should write something. I have a long term outlook on silver (sorry!), but have played "fast and loose" with silver options. Yeah, I once had a massive paper profit in silver options that expired worthless (May 1, 2011 -- a Sunday night when the markets opened, silver went from $48 to under $43 in a couple minutes, if that -- take a look at Kitco's silver price for May 1, 2011).

Is the Perth Mint Defaulting?

[added March 22, 2021] No, it is not -- there are no problems with the Perth Mint!

The Perth Mint, which creates bullion coins for Australia, like most mints, has been unable to keep up with the demand. That's because of a high demand for retail silver in the past two months. This has affected all mints and dealers.

There are some people, though, that are getting all worked up saying that people with pool or unallocated accounts won't be able to get silver for 6-12 months, despite the contract saying the Perth Mint must ship it within 10 days.

First, "allocated" metal is metal in your name -- actual chunks of metal that are legally yours. Many people go with pool metal (sharing big bars with other people) or unallocated (where no actual metal is assigned to you), to save costs, at higher risk (e.g. you could lose it all if the company goes bankrupt). Allocated holders, as far as I know, are getting their metal if they want it.

So the pool and unallocated customers can't just ask for their metal. They can either ask for cash (the normal method for pool/unallocated accounts), or for the Perth Mint to send them actual metal. The big "gotcha" is that the Perth Mint can't supply retail silver right now (1 ounce coins, for example). But they can (as far as I know) send 1,000oz Good Delivery bars. That does sound like a problem, except that the contract for pool/unallocated holders says that the metal "shall always be collectible in the form of London good delivery bars" and "may also be collectible in the form of Precious Metal products manufactured by us, subject to availability and at our sole discretion." That is crystal clear language: if you want metal (rather than cash), you're guaranteed to get good delivery (1,000oz) bars unless the Perth Mint says it is OK. With very little inventory, the Perth Mint is saying "sorry, no, you have to wait."

So pool/unallocated holders with less than about USD$25,000 of silver are stuck getting cash or waiting a long time. Those with more money can get good delivery bars (and cash for the remainder), or wait the 6-12 months.

Given how pool/unallocated works, this is 100% normal. Annoying for some customers, yes, but it's what they bargained for when they bought.

UPDATE (15 Apr 2021): Some bozos are hyping that the Perth Mint is somehow in default or out of silver, based on the country the silver it delivers is coming from. This is, as you hopefully can understand, ludicrous. The LBMA (London Bullion Market Association) is probably the most respected gold and silver market. The reports are that the Perth Mint is giving LBMA "Good Delivery" (approved) 1,000 ounce bars to people who are requesting 1,000 ounce bars. Not once in the past have I heard any investment bankers, bullion dealers, wholesalers, etc. complain about the company and/or country their 1,000 ounce bars came from.

How COMEX Long and Short Positions Work

The big players buy and sell future contacts on COMEX. For full details,see my page here.

If you are a long, you are buying silver for delivery at some date in the future; if you are a short, you are selling silver to that long. If you are a short, you might have physical silver backing your position -- or you might not.

If you are a long, usually you are just paper trading, and don't really want silver. So you sell your contract before the contract expires. If you are short, you probably don't want to deliver the metal, so you buy a contract from a long, which cancels out your short position.

How Silver Spot and GameStop Compare

With GameStop, they may have 100 million shares. If you are long, you own shares of GameStop (and would get paid cash if the company shut down). If you are short, you borrow a share from a long, and sell it. Only GameStop can add new shares (not counting shares that are shorted).

With silver, a long on COMEX pays a $16,500 margin to buy a contract of 5,000 ounces of silver (worth perhaps $150K). If they sell it before it expires, they don't have to take delivery -- but if they keep it until expiration, they will take delivery of the silver. Longs buy from shorts. Shorts *might* have silver, or might not (if not, they are still required to deliver it if they don't sell the contract before it expires). A short with no silver is a "naked short".

There are also options on COMEX, which work pretty much the same way as they would with GameStop (the right to buy or sell at a specific price at a specific time in the future). Options on the SLV ETF work pretty much the same way (except it doesn't immediately affect the spot price).

Buying physical silver (or shares of SLV/PSLV) is kind of like buying a membership to GameStop (perhaps a "video game of the month" club). If you bought such a membership at GameStop, it would help boost the share price -- but only after the financial results were delivered. Buying physical retail silver (anything smaller than a 1,000 ounce bar) is kind of like that: it doesn't immediately affect the spot price. But as enough people buy physical silver (which just happened!), producers need to buy more silver to make more product, which then does affect the silver market (but it could take days/weeks/months for that to happen).

How Would a Short Squeeze Work?

One way would be with SLV ETF options. As I write this (it will change!), for every 10 shares of SLV there is 1 share sold short, for about $1.5B worth of shares sold short. However, most of those shares were sold short in the past few days. If the price of silver (and therefore SLV) goes up, they will have to eventually buy those shares back. Shorts could either buy SLV shares, or certain large organizations can add a "basket" of silver to SLV (roughly $1M of silver at a time). NOTE: Those short shares could be authorized participants getting ready to add silver to SLV (in which case they *have* the silver, and would not be affected if the price of silver went up).

The other way is to buy long contracts on COMEX, where the big players play. COMEX is sometimes used to obtain physical metal (a jewelry company, for example, might buy metal through COMEX), sometimes used for legitimate hedging (such as a mine that knows it will get silver out of the ground in the upcoming months, but needs cash to pay their employees), and often for speculation. By buying a long contract, you are increasing demand for silver, causing the price to go up a bit, encouraging shorts to sell. But, for many years many silver investors have dreamed of a day where enough longs would stand for delivery (take possession of the metal) that stockpiles of silver would dwindle, potentially causing the price to explode.

What to Buy?

I always tell people to buy physical silver for the long term if they can (never, ever stored with the dealer you bought it from). But if you're reading this, that's going to be a hard sell!

That said, if you're looking for the potential of big paper profits, the best option would be options on the COMEX market (assuming, of course, you know the risks!!!). Or, standard long options on COMEX (if you have $16.5K to plunk down), which lets you play with margin. SLV (the ETF) options is another good bet. Again, if you're reading this, please understand that options often expire worth $0, and longs can get margin calls!

Never, ever buy: unallocated metal, "pool" metal, or physical metal you have never seen (e.g. stored with your retail dealer, or shipped from them to a separate storage facility). Unallocated/pool metal is just an "IOU" -- and if the company goes bankrupt, you get nothing. And 2 of the once most well known bullion dealers went bankrupt with millions of dollars of "stored" metal -- that did not exist. Despite legally belonging to the customers, the owners sold the metal to fund their businesses (and/or vacations).

Is SLV Safe?

I haven't paid much attention to SLV for quite a few years now. But I bought some shares the day it opened for trading, and followed it very closely for 5 years. Many people said it wasn't backed by real silver. But for the 5 years I closely monitored it, I checked the list of silver bars they had, the serial numbers, and found almost no funny business. A few "Hmmm?" moments, but the metal was almost certainly there. From the brands, I could see what countries the silver was coming from, and I could see when the same bars were removed and later re-deposited.

Since SLV is backed with real silver, buying shares of SLV takes silver off the market, and makes it unavailable for COMEX games. While buying physical silver from a retail dealer helps deplete the retail market, buying SLV helps deplete the wholesale market.

What Was the Highest Price of Silver?

The highest price in 1980 was around $50 (yes, "around" is correct).

In 2011, the price came very close to that, but did not exceed it (despite misinformation to the contrary!).

FWIW, $50 in 1980, adjusted for inflation, is around $157 in 2021 dollars.

Do Retail Dealers Normally Run Out of Silver?

Yes, it is fairly rare, but does happen every few years or so.

There are only a handful of large online dealers, and they have a limited supply. There are wholesalers that they buy from, but they, too, have a limited supply. When dealers run out, the premium (price over spot) rises to encourage people to sell their silver to retailers (or wholesalers). Companies supplying new product work hard to make more (the higher premiums encourage them, too) -- but they can't just print silver the way you can print money. They can only make so much per week. Eventually, however, things get back to normal (or at least have so far!).

What's This About 100:1 Paper Silver?

There are a lot of unallocated metal options out there -- you can typically buy unallocated metal at spot price (but it is just an IOU). And when you buy a long contract on COMEX, someone (a short) is agreeing to sell it to you -- but they know you probably aren't going to have the metal delivered to you. So it may not actually exist. That's paper silver: someone owns silver that may or may not exist.

There are often claims about how much of the silver that is traded is paper silver, and there is 100 times as much paper silver as real silver. So if COMEX and dealers have 500 million ounces of silver, that would be 50 billion ounces of silver trading. But, that doesn't take a lot of things into account: if I buy 100 million ounces of silver in the morning every day and sell it at night for a month, at the end of the month I own no silver, but there were trades for about 2 billion ounces. So ounces traded in a month cannot be compared to the amount of physical backing it.

The reality is that nobody really knows how much paper silver there is compared to physical silver. For more details, you can read my page about it.

How Much Silver is in Stockpiles?

The U.S. Treasury used to have over 3 billion ounces of silver stockpiled. But, it sold that, and is down to around 16 million ounces.

As I write this, COMEX holds about 400 million ounces of silver (150 million registered, 250 million eligible).

ETFs like SLV and PSLV were holding around 728 million ounces at the end of 2019. But those belong to lots and lots of people, who may or may not be willing to sell.

Beyond that, there aren't really any big stockpiles that are known to exist.

What Is the 16:1 Silver:Gold Ratio?

Some people talk about how there are 16 ounces of silver mined for every ounce of gold, so the silver price should be 1/16th the price of gold (much higher!). I have a page about this you can read.

Part of this theory is historic; in much of the 1800s, for example, silver was valued at about 16:1 compared to gold. That just happens to be about the same the amount of silver mined compared to gold. There is no magic monetary theory that says that the price of gold should be 16 times the price of silver. Platinum, for example, often sells for less than gold, but is much rarer than gold.

The Silver:Gold ratio dipped to about 16:1 around 1967 and 1980.

How Has the Price of Silver Jumped in the Past?

One point to look at is when Warren Buffet's Berkshire Hathaway purchased silver. They bought 129M ounces starting on July 25, 1997, and ending on January 12, 1998. The price of silver went from $4.31/oz to $5.52/oz during that time, going up 28% with nobody knowing that they were hoarding silver. Within 3 days of Buffet announcing the purchase, the price of silver went up 22%.

From March 5, 1987 to April 27 1987 (35 days), the price of silver went from $5.51 to $10.93 (98%).

From November 24, 2003 to April 6, 2004 (93 days), the price of silver went from $5.25 to $8.14 (55%).

From August 25, 2010 to April 28, 2011 (170 days), the price of silver went from $18.63 to $48.70 (160%).

Why is Retail Silver $5/oz More Than Spot?

Some people feel that the spot price of silver is a fraud because you have to pay a dealer $5 or more per ounce of silver above the spot price.

What is happening here is strong retail demand causing shortages among the major dealers (and the wholesalers that supply them). They either have to run out of metal at the current premiums, or raise the premiums. Any sound business will choose the latter.

So yes, individuals are willing to pay $5 over spot price for silver, so why doesn't the spot price go up? Because those same people willing to pay $350 for 10 1-ounce bars ($35/oz) aren't willing to pay $30,000 for a 1,000 ounce bar ($30/oz). Whether they don't know they can buy at $30/oz, or can't afford to, or prefer the smaller chunks of metal doesn't matter. They are two different things.

However, what does happen is that strong retail demand encourages producers (like the U.S. Mint) to create more product, and they do buy 1,000 ounce bars. So their extra demand will, over a bit of time, help the spot price go up... and at the same time help the retail price go down, getting things back into equilibrium.

The short version: If it costs $35/ounce to buy 1 ounce of silver but only $30/ounce to buy a 1,000 ounce bar, the spot price likely WILL go up, but it will take some time. Producers need to buy those 1,000oz bars at $30 and create more retail silver (like 1oz bars/coins).

How Gold Will React

This is an interesting piece that gets little attention.

The prices of gold and silver tend to move together: If one goes up, the other does, and vice-versa.

That, combined with the Silver:Gold ratio, suggest that the silver price could go even higher. If gold goes up with silver, then that gives silver a bit of an extra boost.

How High Can Silver Go?

This is, of course, impossible to say.

However, there are a few key factors to consider. First, the all-time high of roughly $50/oz would be equivalent of about $157 in today's dollars. The Silver:Gold ratio got down to around 15:1 at that time; with today's gold price of about $1,780, that the 15:1 would work out to be $118 or so (but if gold went up to, say, $2,500/oz with silver, 16:1 would have silver at $166).

That said, things are very different today than in 1980 (e.g. computers making trades automatically!). What if everyone in the world wanted a single ounce of silver? There just isn't enough available silver for that to happen. What if a short squeeze caused companies to fail to deliver and go bankrupt?

The total value of all the gold in the world today is around $10 trillion. Let's say there are 5 billion ounces of available silver out there (which probably is much more than there really is). At a whopping $500/ounce, that silver would be valued at about $2.5 trillion. A huge amount of money, but still much less than gold. But that can't happen without $2.5 trillion invested in silver (that's like 5 million people each putting in $500,000). Or, for silver to be depleted at a faster rate.

Misconceptions About COMEX/bars

[04 Feb 2021] I've just heard a few misconceptions about COMEX, and thought I would point them out here.

First, someone said that contracts can be settled in paper (cash). Chapter 7 of the COMEX Rulebook technically allows [1] COMEX to declare "force majeure" to prevent settlement (section 701), and [2] if a short cannot deliver, COMEX has limited liability and COMEX can get away with paying "reasonable damages" (e.g. value of the silver when it should have been delivered) (per section 714). But, if that starts to happen, then nobody will use COMEX anymore (as people needing the metal, like jewelers, industry uses, and investors would no longer be assured of getting metal).

Someone also said that a "regular Joe" can't take delivery from COMEX. That is incorrect. There are hoops to jump through (and some fees), but you can (that's the whole point of the contract!).

It was also said that bars removed from COMEX have to be assayed at a huge expense (they do have to be re-assayed to get back in, but retail dealers just run a regular test against a bar at almost no cost). And it was said that armoured cars are required for transport (COMEX might require that to get the bars to you, but you can send them via USPS/UPS/FedEx if they allow such heavy packages to be sent and do not prohibit bullion shipments).

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