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Silver: Will Its Price Boom Again Or Continue To Crash?! 


The price of silver will boom again, and it's not because of the rumors of a short squeeze nor the hype around GameStop and the WallStreetBets on Reddit. It is definitely fueled by the economic distortions the Fed has created: Money printing, insane central planners, and MMT.

What is the back story?

When there is so much emotion or mania around a certain stock, people tend to enter the stock market at the wrong time.

And, of course, when they don't get what they want, they end up frustrated.

This is especially true for retailer investors who don't have a complete understanding of macroeconomics.

The recent GameStop madness triggered rumors of a short squeeze, and as a result, silver went up by 15% between January 26 and 31, as you can see in the chart below.

Yet, it is important to mention that the difference between GameStop and silver, in terms of volatility and mechanics, is huge. 

Silver prices from January 26 to 31, 2021

How do silver prices work?

It is critical you understand how the commodities futures market works so you can determine the probabilities of silver prices booming or crashing.  

The first thing to keep in mind is the produced commodities in the real economy.

For example, say a farmer named Fred grows wheat to later sell to baker Bob. Fred has eight bushels of wheat to be sold in the future, but prices fluctuate. So Bob and Fred agree on a future price. That's a futures contract. 

Farmer Fred and Baker Bob

Within the next month, baker Bob will buy three bushels for $10 each. Regardless of what happens to the price of wheat, both are happy, as they have already established mutually beneficial terms. 

How does the futures market work?

Futures contracts have a limited lifespan. When trading futures, the expiration date is important. Before the contract expires, the trader has three options: 

  • Offset (or postpone) the position to fully close out the trade.
  • Rollover the contract to a future expiration date. 
  • Let the contract expire and take delivery (receive the respective asset).

Offsetting is the most common way to exit a contract. The price difference between the initial position and the offset proposition represents all profits or losses associated with that contract, but they are calculated without taking the deliveries into account (physical or cash delivery). 

Since the financial economy is bigger than the real economy, the commercial paper market is also larger for all commodities as well, not just silver. 

Physical and financial market size of major commodities 2009/10

It is also possible to see discrepancies between the futures market and the price of a physical commodity. This happens when a buyer can’t take delivery or the seller can’t make it. 

Moreover, price in the futures market is a zero-sum game. The majority of people buying those contracts are Wall Street traders or firms like Goldman Sachs or J.P Morgan. 

If you were to hurt one of the companies, you would be helping the counterparty at the same time.  

In a commodity market as large as the silver market, it would be very difficult to keep a sustained price spike that has a direct influence on the contract once it expires. 

Prices can vary substantially when buying call options for futures contracts, as the market makers charge higher prices due to additional implied volatility. So it is very unlikely that silver will ever be in a short squeeze.

The Bigger Picture

George created the graphic below to illustrate the Dot Com bubble, the GFC, and the Everything bubble. The graph goes from 2000 to 2021.

Dot Com bubble – GFC – Everything bubble timeline

During the Dot Com bubble, the Fed dropped interest rates to create a speculative bubble and fill in the gap of aggregate demand, which is the total amount of goods and services in an economy at any given time.

Then, right before the GFC, they raised interest rates slightly and that resulted in a housing bust.

In addition to this, politicians were pushing for the reinvestment act, as they believed everyone should be granted loans to fulfill the American dream of owning a house.

The banks, pressured by the government, took the loans to Fannie Mae and Freddie Mac and they turned them into mortgage-backed securities.

Later, the banks went to Wall Street and bundled these loans into a collectivized debt obligation, as some kind of security.

This resulted in a daisy chain full of bad actors. And it started with the Fed artificially dropping rates.

So, would the housing bubble in 2008 have occurred without politicians, the Fed, and central planners?

As usual, the arsonist is also the firefighter. The Fed dropped rates to zero due to ZIRP(zero interest rate policy), which brought down the yield curve.

They took away any yield on safe assets like treasuries, which pension funds would buy. And from 2000 to 2008 the Fed was pushing investors, banks, average Joes, and hedge funds further out the risk curve. This is what caused the Everything bubble.

The amount of risk-taking is exponential and results in things like SPACs, GameStop, and Hertz, an already bankrupt company, yet people still buy its stock. 

George's Thought Experiment

If the Fed hadn’t reduced interest rates and tried to micromanage the economy with their Keynesian principles, and we used a market rate of 5%, mortgages would’ve been at 7%, and car loans and treasuries at 6% (as shown in the image below). 

5% interest rate environment for the Dot Com bubble, GFC and the Everything bubble

Would the GFC had happened with a 5% interest rate as well? What about the Everything bubble and the S/P 500 that went from 1,000 to 4,000?

What about the bond prices that reached a five-thousand-year high? Did the U.S financial economy get bigger while the real one shrunk?

One has to ask oneself if the rise of SPACs or the frenzy with GameStop could have been avoided if the Fed hadn’t dropped interest rates, used quantitative easing, ZIRP, bailed out the repo market, or printed bank reserves. 

Even pension funds have been affected negatively by the Fed’s policies. Despite going further out the risk curve, these funds can’t reach their 7% requirement to meet the liabilities of policemen, firefighters, teachers, and average Joes. 

George thinks we no longer have a risk-free yield or safe assets. He states that in this situation, combined with a higher CPI, we would have to take more risks that can lead us into a growing financial economy. 

As its frequent, George's conclusion regarding the future is: There are no certainties, only probabilities. But he certainly thinks the price of silver, in the long run, (5 to 10 years from now) will boom, not because of a short squeeze but because of the economic distortions the Fed, central planners, and the government created.