It is well known that the Chinese have been accumulating gold for at least a decade, and presumably silver as well, gold primarily for its monetary value, and silver for both its monetary and industrial value. In April of 2009, the Chinese Central Bank announced that it had secretly acquired 454 tons of gold bullion over the previous six years, supposedly all from Chinese domestic production, increasing their total stock from 600 metric tons to 1054 metric tons, and making them the fifth largest holder of gold bullion in the world. Quoting Dow Jones Newswire, April 24, 2009:
"The new figure leaves China as the fifth biggest holder of gold after the U.S, Germany, France and Italy. Including Switzerland's 1,040 tons, six countries and the IMF now have gold holdings of more than 1,000 tons."
I find these numbers most curious and suspicious. The reputed 454 tons that the Chinese central bank claims to have acquired between 2003 and mid 2009 is just enough to put the Chinese ahead of the Swiss, (1054 tons to 1040 tons) making China the world's fifth largest holder of gold bullion by just 14 tons. I would wager they have a lot more gold stockpiled than that.
This also begs several other questions: Why would the Chinese make this announcement at that particular point in time if their aim was secrecy in gold accumulation? If they admitted publically to holding 1054 tons, how much more do they really have? Was this alleged 454 tons all actually acquired from domestic sources or were they also buying through straw buyers on the Hong Kong exchange? And if they are secretly accumulating gold, are they also accumulating silver on the sly?
Since China has been continually accumulating dollars for years as the unintended consequence of its large continual trade deficit with the US, they are always looking for new outlets to unload or invest them other than buying more US Treasuries and Agencies, with which they are already overloaded.
Using their excess dollar reserves to stockpile strategic, monetary, and industrial commodities as a hedge against dollar inflation is clearly a wise strategy, even before the advent of QE1 and QE2. We can already see the effects of this stockpiling on commodity prices, most notably copper and rare earths, which are at record levels. The Chinese have also offered to bail out failing European economies with their excess dollars, among them Greece and Portugal.
As reported by Bloomberg on October 19, 2010, Chinese silver exports declined 60% in the first eight months of this year. There could be several reasons for this: increased investment demand by the Chinese public, hoarding for industrial use by Chinese businesses, and accumulation by the Chinese Central Bank. China is now the world's third largest silver miner after Mexico and Peru, and the world's largest refiner of silver. There have been rumors that Chinese silver exports may be reduced to zero in 2011. Although they are now the world's biggest gold producer, China exports no gold, and increased their gold imports by nearly 500% in the first ten months of 2010, according to Bloomberg.
Silver is a crucial material input for many high tech goods produced in China, and the Chinese government economists are surely wise enough to see that it will continue to get scarcer and more expensive in the coming years. They will be needing a ready supply of silver to dominate the world market in flat panel TV's, cell phones, computers, hybrid car batteries, solar collectors, and many more products too numerous to mention.
The respected silver authority, Ted Butler, speculates in his recent December 21st article, "A Show Stopper," that the Chinese are behind the big concentrated short position in COMEX silver, which is currently about 300 million ounces among the eight largest commercial traders (and 500 million ounces total). The biggest single short position in COMEX silver in 2010, presumably held by JP Morgan, has been as high as 35% to 40% of total short interest according to CFTC commissioner Bart Chilton. This is a staggering concentration, obviously intended to suppress the price of silver, and has gone on continuously for several years at similar levels.
Butler goes on to say "that would not appear to make sense" and "It will go down as the single dumbest trade in history." But I believe that Butler has underestimated the Chinese.
What if the Chinese were going long buying silver on the COMEX and taking delivery, draining silver inventories, while simultaneously shorting silver on the COMEX and settling those contracts in cash or rolling them forward?
Even if they took a loss on all their shorts, they would still be steadily accumulating physical metal, and the net result would be that they would be steadily and covertly acquiring physical silver at a higher than market price, but still keeping the market price suppressed to their own industrial producers, while at the same time propping up the weak currencies of the world's buyers of Chinese exports in developed countries.
Only about 2% of COMEX silver contracts are actually settled by physical delivery, and the rest are settled for cash or rolled over. All the Chinese would have to do is take delivery on a greater quantity of physical metal from their longs than was demanded to close out their short positions, and they would be constantly accumulating physical silver without ever spiking the COMEX silver price.
Ted Butler also says in his article that he was "rocked" to discover at the recent December CFTC hearing on silver position limits that the CME/COMEX, not the CFTC, has, up until now been making all the decisions on whether short positions in excess of the current very high position limits on the COMEX qualified for the exemption as true production hedges. Basically, the COMEX has been self regulating, a clear conflict of interest. This apparently will be changing soon.
It has been suggested that the Chinese could simply use their massive buying power to go long COMEX silver and accumulate all they want by spiking the price (cornering the market), shutting out most other buyers. They certainly have sufficient dollar reserves to do this, but this would drive up the price of silver to Chinese domestic industry as well, thus raising the price of Chinese exports and cutting profits of Chinese producers and exporters.
Also, if the Chinese were to drive up the price of silver by directly buying large quantities on world markets, they would crash the dollar, the euro, etc, reducing their own exports in the process.
So far, the US government and their pawn, the CFTC, have been happy to look the other way on these manipulative, concentrated silver positions since they prop up the dollar and prevent the price of silver going to the stratosphere, but have completely neglected the consequences: a worldwide silver shortage, and allowing the Chinese to dominate the future market in high tech goods. So don't be expecting anything substantive to come out of next month's CFTC hearings as far as putting into place a realistic, enforceable limit on concentrated silver positions.
What does this mean for silver investors?
Get yourself some physical silver and take possession if you want any certainty of cashing in before the paper silver derivatives become worthless.
If the Chinese are playing both the long and short sides of COMEX futures as I theorize, then it explains:
- Why the massive silver price suppression scheme has been able to go on for years
- Where the rapidly vanishing silver inventory is going
- Who is taking the big losses on the short side if not JP Morgan and the bullion shorting banks
- How much higher the true unmanipulated price of silver should be compared to the current market price
December 25, 2010
Very well written and concise article. Keep up the good work. Post the sites and blogs you visit if you can.
ReplyDeleteExcellent analysis. Superbly written.
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