I believe that silver prices are artificially low due to a large concentrated naked short position. It’s not a coincidence that the day silver reached its multi-decade high of over $21 per ounce in March of 2008, was the same day Bear Stearns failed. Bear Stearns was a holder of a massive short position in silver. In our opinion, this was likely a naked short position because there is nobody in the world who owns such a large amount of silver for Bear Stearns to have borrowed.

The reason why I believe the Federal Reserve was so eager to orchestrate a bailout of Bear Stearns, is because Bear Stearns was on the verge of being forced to cover their silver short position. Because the silver market is so small and tightly held, if Bear Stearns was forced to cover their short position, silver prices could’ve potentially rose to $50 per ounce or higher overnight. The world would’ve seen how economically unstable our country is and confidence in the U.S. dollar would’ve rapidly deteriorated.

JP Morgan still holds the silver short position they inherited from Bear Stearns. The concentrated naked short position in silver today is the largest short position in the history of all commodities, as a percentage of its market size. Eventually, JP Morgan will have to cover this short position or it could jeopardize their existence.

The best evidence that the short position in silver is naked and not backed by real silver, is the differential between what silver trades for on the Comex and what real people are willing to pay for physical silver on eBay. Every hour on eBay, there are dozens of one ounce silver coins selling for approximately $25. That’s about a 43% premium over the current spot price of silver. With so much demand for physical silver, we doubt the silver shorts in the paper market will be able to manipulate prices downward for much longer. A major short squeeze could be right around the corner and silver could take off in a way that shocks even those who are most bullish.

Growth in Money Supply, Shrink in Silver Supply

Since 1980, the supply of currency, bank deposits and other cash-like financial assets that the US government calculates as M2 has grown between five and six times. Zero-maturity money has grown by over nine times. The St. Louis Fed website offers wonderful charts outlining the spiraling growth in these monetary aggregates.

In lock-step with this increase in money supply, salaries, house prices (even now), stock market indices and many other assets have risen in sympathy. Some factors have risen more quickly (baseball salaries, for instance, are up 22X), while others have risen more slowly (a brand new Pontiac is only up about 5X). However, silver prices are actually lower in 2009 than they were in 1980, when the metal traded hands at an average price of US$20 per oz. Adjusting the start point of this analysis can offer somewhat different results, but it is very difficult to conclude other than silver has lost considerable value share over the past few decades.

In stark contrast to the growth in money supply, the “silver supply” has been shrinking. In 1975 silver inventories were 5 billion ounces, currently they are down to about one billion ounces. Mine production has not kept pace with silver consumption.

Full article at

http://marketdepth.typepad.com/marketdepth/2009/06/the-value-in-silver-1.html