Like our discussion on silver price manipulation, this one begins at the same point, the OTC market.

This is a financial space which is relatively loosely regulated, and extremely opaque in terms of transactional reporting. This naturally puts the most power in the hands of those with the most information, which are the largest market making banks in the space.

It is this group of banks that have been accused of colluding to manipulate the price of silver lower. Why lower?

The theory runs that the price of silver should be much higher than what it has traded for, and obviously higher than current levels. It should be much higher because of a host of factors, all of which hold the common theme of being extremely anti-fiat.

We already know that the silver price is unlikely to be manipulated in a manner that can lead to it being drastically and consistently undervalued against the USD.  

In a very interesting reversal of the metal-as-money crowd’s thinking, silver (and gold) are used as collateral for USD repo.

What does this mean?

It means that when parties such as financial institutions, governments, producers, and institutional investors require dollars to meet collateral requirements, fund foreign business operations, or simply to be able to pay their dollar denominated liabilities, they can choose to use silver to borrow dollars.

This happens because precious metals markets are very liquid, and very international.

Put another way, if you had USDs and were looking to lend them out for some yield, would you rather take silver as collateral, or something like Emerging Market corporate debt?

Most people would answer silver.

Why? Because if the person you lent your USDs to cannot pay you back, it is a lot quicker, simpler, and easier to sell off silver than it is EM corporate paper and recover some amount close to the fair value of the now defaulted loan.

This is due to the depth and breadth of the silver market, with buyers and sellers from all over the world willing to trade the metal at all hours. There simply aren’t many markets which offer the same amount of liquidity and international availability. 

Even so, silver is still  used as collateral for  US dollars.

Not the other way round.

This means that the US dollar, as the world’s reserve currency, is even more liquid and international. In times of financial stress, like the Great Financial Crisis of ‘08 and March of Pandemic 2020, people were selling, and/or pledging their silver in order to get USD liquidity.

While it is true that fiat has a very poor historical track record, the reality is that neither silver nor gold are used as currencies these days. In fact, they are clearly subordinate to fiat currencies within the financial system, since they are among the first assets liquidated or pledged to raise fiat currency liquidity.

The metal-as-money crowd, and now the Redditors too, will come along and say that how today’s system works does not matter, because they are buying silver (and gold) in anticipation of, or as a hedge against, the failure of the current USD based system.

The leading reason they give for this will be the Fed’s QE led debasement, but that thinking does not hold, because none of the Reserves printed by the Fed make it out of the banking system.  

Regardless of one’s view on the soundness of money and which fiat replacements are best, one cannot avoid the reality that the market for silver is very, very large; and the market for USD even bigger.

If all of Reddit’s efforts could only bring about a short-lived spike in silver, perhaps they should really pause and think about what they really do and do not understand about the global financial system before taking a bet whose success is contingent on supplanting the USD. 

To be continued…