Portrait of a Rig Job

March 24, 1999

If you have read any of my previous articles, you know I'm pretty consistent with my theme - the gold and silver markets have been manipulated for the past decade and a half by the twin forces of the lending of precious metals and the abnormally large short position. By this time, you should either believe it's wrong to lend what can't be returned and short what can't be covered, or you don't believe anything is wrong. I don't want to bore you with a repetitive article.

So instead, I thought I would approach my theme from a different angle - a visual one. Here is a twenty-year monthly chart of COMEX silver. It's a picture that saves a thousand words.

If this were an EKG, the patient would be in bad shape. As it is, the silver market is in bad shape. (I'm highlighting silver, but the gold chart is also instructive). It's in bad shape in the sense of continuing to live as a normal economically functioning market, just as if this were an EKG. If this were a test of a heart patient, the pattern would require immediate action to save the life of the patient - otherwise certain death would follow. The same applies to the silver and gold markets. The pricing pattern depicted above shows the silver market as dying. The only difference is when a human dies, all activity ceases. When a market dies, price violence is the usual result.

Just to extend the medical analogy for a moment longer, if it were an EKG, such a pattern as seen above would undoubtedly be accompanied by real underlying causes that would explain the condition of the patient. So it is in the silver chart. Instead of giving you my opinion, I would ask you to be the doctor and to make your own diagnosis of the silver patient, based on the chart.

At the outset, I would ask you to assume nothing, except a grounding in common sense and the rudimentary economics of the supply/demand equation (like the kind used to balance checkbooks). Just for a moment, forget everything you think you know about silver, and look at the chart and let it tell you what the real state of the market is in. One way to do this is to imagine that the chart is of another commodity, one that you have no knowledge of, in a practical sense. For some it might be barley or flaxseed. For others, it might be burlap or tallow. I'm not trying to be cute; I'm just trying to emphasize that you should base your conclusions on the "health" of the market on what the chart says and not what you may know already. It is important that it is another commodity and not another asset class (like stocks or currencies) in order to narrow your interpretation.

Since this exercise is obviously not interactive, I'm forced to imagine how the average reader would interpret this patient, based on the chart alone. Here's what I would imagine you noting and concluding:

"This commodity had a huge price spike in 1979-80, in which prices rose 6-7 times in a year, collapsed 80% in two months, doubled over the next 4 months, dropped 80% again over the next two years, then tripled over the next 8 months into 1983. It then declined by two thirds over the next four years and doubled in price in one month in 1987. From there, it declined by 50% or more, and basically stayed flat at that level over the next 12 years. It is easy to conclude that this commodity was in an extremely tight supply/demand situation, certainly from 1979 to 1983, and that after 1987, this commodity entered into a severe surplus situation, or was at the very least, evenly balanced from a production/consumption basis. There were four separate occasions where prices at least doubled in a short time frame, the last being in 1987. Looking at the last ten years, all things being equal, I would imagine that while there could have been surges in production, consumption never spiked. Furthermore, total inventories were likely much higher in 1999 than in 1990, but certainly no lower. This is the chart of a commodity that currently, is in pure long term equilibrium or a surplus as regards supply and demand."

If I've misrepresented what you would have said yourself, that was not my intention. The point is that silver was exceedingly volatile 1979 to at least 1983 (and 1971 to 1979, not depicted) and flat-lined sometime after 1987 through today. A reasonable person would conclude that there was nothing in the price pattern indicating anything remotely concerning a shortage for the past ten years. That's what this chart shows.

Our chart analysis is over. Now let's see how close a reading of the chart compares to what we know about silver from available facts and everyday observation. Numerous independent sources tell us that silver has been in a severe supply/demand shortfall for the last ten years. This cumulative deficit amounts to almost a billion and a half ounces of silver, resulting in the drawdown of total inventories by that amount - leaving no more than half a billion ounces left. (See the supply/demand section on the silver page). The fundamentals say that we are running out of silver completely, and the price should be screaming higher to ration demand. The chart tells a completely different picture than what we know to be the fundamentals. Oh, one other thing - the world's most successful investor bought close to 35% of the remaining world inventories in 1997-98, an amount greater than the amount bought in 1979-80 by the Hunt Bros. Something is wrong. Either there has been a massive miscalculation on the part of those who compile the facts about silver, or there is some obvious set of circumstances that is over riding the fundamentals. And if there is something overwhelming the fundamentals, that something must be macro in nature, i.e., it's got to be big and obvious.

If you're expecting me to launch into a discourse on leasing and the short position - it's not going to happen here. I've written enough articles explaining my opinion on why gold and silver have flat-lined over the past decade. Instead, I challenge you to come up with a plausible explanation for the pricing pattern above.

There is however, one new thought that I would like to raise. I have noticed a recurring pattern on the various internet discussion sites related to gold and silver that is nothing short of extraordinary. More and more regular people are consistently referring to these markets as manipulated. Whether it's the leasing or short position, or government attempts to sell gold, people are becoming intuitively aware that these markets are not functioning right. We even have a group formed to fight the manipulation on a class action basis. Think about it - this has never, ever happened before. This goes to the very heart of the market system - trust in our institutions. Increasing numbers of people are looking at the chart above and comparing it to what they see happening in the real world, and are concluding that the market is rigged. None of us has ever witnessed that phenomenon before. And I must say I have been flabbergasted that claims by others, and myself that these markets are rigged, has been avoided by the institutions and regulators involved.

What is really interesting is that the past big manipulations (the Hunts in silver, Salomon Bros. in bonds, and the Sumitomo copper scandal) were discussed only in hindsight as far as the public was concerned. The public in advance of any watchdog action is discussing this current manipulation in silver and gold. While the regulators and industry leaders are portraying an "everything is fine" attitude, the public is becoming more and more aware that these markets are rigged. After all, how hard is it to read the charts?

One cubic foot of gold weighs more than half a ton (1,306 pounds).