-- Posted 23 June, 2005 | |

Guest Author: Stephen Kovaka

Bonds may be a conundrum to Sir Greenspan, but silver is the more interesting conundrum to me.  How can long bond interest rates continue lower when the Chairman has been steadily jacking up the short rates?  Simple: there is so much money and credit (same thing today) in circulation that people do not need to pay high interest rates to borrow it.  Feddie, Freddie and Fannie are almost giving it away to keep the party going.

Silver, by contrast, is getting scarcer all the time, but its price increases are barely keeping pace with the increased costs of mining due to inflation.  During this decades-long price depression, the US government has sold all the billions of ounces it once held of We the People’s silver at giveaway prices.  This is one of the few things the feds have ever been willing to divest themselves of.  Other governments have done the same, and now even China is dumping what remains of their silver stockpile at prices below the average cost of production.

Meantime we have what amounts to a New York bucket shop setting the price of silver, to the detriment of miners and investors.  For those not familiar with the term, bucket shops were neighborhood betting parlors of the early 20^th century where one could speculate on the prices of stocks.  Unlike the real stock markets, no shares actually changed hands in these establishments, only bets on the prices.  Today, the COMEX keeps a modest amount of silver on hand as window dressing while taking bets equal to large multiples of the silver actually available for sale, and doing all in their power to prevent any large deliveries from taking place.  But in this upside down world, it is the New York bucket shop that establishes the price of the metal, rather than the marketplace where the producers and users of real silver buy and sell.

Many silver miners have gone broke, and other would-be mining companies are buying up silver properties as an investment against that distant day when mining silver will again be a profitable business.  Yet no Silver Producers Association has ever been organized to object to the blatant price suppression at the COMEX or the decades long dumping of silver belonging to We the People, at prices below the cost of production.  No Silver Investor’s Association has ever been organized to protest the punitive taxation of investments in silver.  Instead, a politically powerful Silver User’s Association calls all the shots.

The Conundrum is, why have these things been happening for so many years?  Is it all just a random accident of commerce, signifying nothing?  As Ted Butler never tires of pointing out, when a commodity market remains in deficit for decades on end, it is no accident.  When a freezer stays cold even on a hot day, it is not a natural or an accidental condition; it is due to thoughtful design and a constant power supply.  Is it because the Silver Managers at the COMEX have just gotten in the habit of making money by rigging the market, and no one has yet noticed or cared?  No, because Ted Butler and many others have complained loudly and long to the CFTC about the coordinated selling of naked silver shorts by well-heeled bankers, and the CFTC has kept its eyes firmly shut.  This should be our clue that the silver price-freezer has plenty of power at the highest levels to assure its continued operation.

The silver conundrum involves a firmly capped price and steadily diminishing stockpiles, which do not normally go together.  What’s the reason?  Logic tells us that there is a well-organized plan to liquidate available supplies of silver, while using them to suppress the price.  Hardly an economic motivation, except in the case of the COMEX dealers who are allowed to operate the price-setting mechanism!  But there is more to it than that. 

Until 1965, silver was the standard money of the United States.  Legally speaking, it still is, a dollar being defined even today as 371.25 grains of fine silver.  Only silver is both plentiful enough and valuable enough – but not too valuable - to serve as the bulk of a real money supply.  Brian Bloom remarked in a recent article:

“Can we really envisage a situation where we walk into a grocery store and pay for a loaf of bread with a minute fraction of an ounce of gold? Clearly not! Gold in and of itself will never be a generally accepted currency again. That is a matter of objective impossibility.”

We may not entirely agree with Mr. Bloom’s opinions about commodity money, but it is clear that silver would be a far more logical choice for bread purchases.  It represents the lower end of the coinage spectrum, the money of common everyday use.  If Mr. Bloom had used a new car as his illustration, many more of us would have been able to envisage the purchase with gold.

Does this begin to shed a little light on the situation in the silver market?  The silver market has been structured, very deliberately, not just to keep prices low, but also to liquidate the monetary stocks of silver in the hands of governments.  In this way, the door is barred against any return to an honest money system. 

Of course low prices are also a key factor.  It is well understood that controlling the price of gold is important to maintain confidence in the Fed’s fiat money.  Silver is a much smaller market than gold, and therefore easier to control.  The bulk of it originates as a by-product of base metal mining, without much regard to price.  At the same time, prices of silver and gold have a strong historic connection because they were both used as money.  This fact allows silver to act as a sort of “choke collar” on the price of gold.  When the price of silver is depressed, this exerts a similar indirect effect on the price of gold, but requiring much less effort and expense (especially if government is willing to sell We the People’s silver at bargain prices).  Silver is unique in that it straddles the gap between an entirely monetary metal (gold) and entirely industrial metals such as copper and nickel, both in production and in use.  Silver can be circulated as coin, but it can also be consumed in large amounts by industrial processes.

If honest, Constitutional coinage were to be restored, silver would be nearly indispensable as its foundation.  It is not just a historical accident that the dollar was defined in silver rather than in gold. Coins, and especially silver coins in the hands of the people is the essential means of replacing our fiat money system and closing the doors of the Fed forever.  It is not enough for the gold or silver to exist in some secret government vault, “guaranteeing” the value of paper; we’ve already been there and found that this was merely the first step in eliminating silver and gold from use altogether.  He who has possession of the gold (and silver) makes the rules.  Should it be the Federal Reserve, or We the People?

Stephen Kovaka

Corydon, IN

stevek@dewater.com