Exposing Silver Mythology: Opinion, Part 2

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Bullion Bulls Canada ) -- In Part 1, I laid out for readers the extraordinary scenario which exists in the current silver market today. The individuals and entities that operate the silver market, compile data on it and report on it (at least from the mainstream) display no understanding of either the general principles of markets, nor of the specific fundamentals of their own sector.

In the first part of this series I focused on analysis provided by GFMS, one of two quasi-official consultants for the silver and gold sectors who provide the data most widely relied upon for this market.

Specifically I looked at GFMS' reporting on the silver market for 2002. I noted that despite the price of silver hovering near its 600-year low; despite the fact inventories had plummeted by more than 75% in little more than a decade; and despite the fact that production was currently falling; GFMS saw neither any need nor any indication of higher prices for silver. Indeed, these "experts" even mused that the price might fall further.

How utterly flawed was what GFMS passed off as "analysis?" Even after the roughly 10-fold increase in the price of silver which immediately followed this, inventories have continued to decline. Meanwhile the silver sector itself remains so depressed that even after this massive surge in the price, silver miners have been unable to increase production by more than a percent or two each year. In short, GFMS has displayed zero comprehension of this market, and the fundamentals which comprise it.

This brings us to the official regulator of the 'rigged casino' known as the Comex silver futures market: the CFTC. As with GFMS, the CFTC claims unrivaled expertise but displays nothing but ignorance and ineptitude. In 2004, the CFTC dared a rare response to the ongoing accusations of "manipulation" in this market. To the CFTC's credit, it almost managed to competently frame the issues.

The allegations that the CFTC has received can generally be summarized as follows. With silver consumption exceeding new production for many years, it is generally acknowledged that the production deficit has been primarily filled by a drawdown of stocks. Some argue that this decline in silver stocks cannot persist and, since stocks have fallen to low levels, silver prices should have been rising sharply. There is further conjecture that, over the past 20 years, a group of commercial traders (commercials) have held short positions that are so large they cannot serve legitimate hedging purposes because they cannot be backed by real silver.