-- Posted 14 April, 2010 | | Discuss This Article - Comments:

As the CFTC begins to investigate claims by a whistle blower that the precious metals markets have been manipulated by several large US banks, investors are left to ponder: “What will happen to silver if manipulation is found?”  Can you say, payday?

Silver’s Current Price

At just over $18 per ounce, silver is heavily underpriced considering both its historical prices, as well as the amount of inflation in the years since.  Since 1913 and the creation of the third US central bank, the Federal Reserve, the price of silver has advanced at a small discount to the actual rate of inflation.  The monetary base has grown from a few billion dollars to more than $1.6 trillion since 1913, all while silver has only increased by 3000%.  Though 3000% has been enough to accurately track the change in prices, it has done little to keep up with real inflation, that is, changes in the money supply.

Silver Consumption

Another factor in the price of silver is how much the metal is actually consumed in processes such as manufacturing electronic devices, creating silver jewelry, or processing film. 

In the last decade, silver has been readily consumed almost as quickly as it has been produced, with the largest driver of growth coming from the electronics sector.  In the same computer you're using to read this article, there are several grams of silver, most of which will never be recovered due to the economic costs of removing precious metals from electronics.  Some many years later, your computer will be thrown away, the silver will be hidden in a landfill, and it will never come back to the surface.  For all intents and purposes, it will remain unrecoverable, never to be used again.

What Happens When Manipulation is Found?

If the CFTC declares that the silver markets have, in fact, been manipulated, it is certain that the price of silver will skyrocket.  Most silver analysts think that the price of silver isn't being manipulated by pure trading.  Instead, they're convinced that the amount of silver being traded on the futures market is not 100% represented by physical metals.  This means there is more electronic silver being traded in the form of futures than what actually physically exists.  Therefore, as rare as silver is thought to be today, it will be even rarer than we once believed if the markets are being manipulated with excess futures.

Grab a Calculator

If you were to extrapolate the amount of currency in circulation in 1913 (roughly $10 billion) to today's figure of $1.6 trillion, you would find that the amount of money has actually grown by a figure of 160 times, or 16,000%.  Silver, by contrast, has earned 30 times its 1913 price, or 3000%. 

Clearly, there is a huge discrepancy in the numbers, opening up the possibility that should the markets be found to be manipulated by excess futures supplies, the price of silver could rocket from $18 per ounce to $90 per ounce – just by calculating the differential in the change of the amount of money and the performance of silver over time.  Take these figures to the bank.  If the silver markets are manipulated, silver will sky rocket.  If they aren't (by some miracle), you lose nothing.  Now that's a bet worth taking!

Dr. Jeffrey Lewis