Home Precious Metals

Physical Silver vs. Paper Silver (SLV or $SILVER)

August 15, 2008

The Silver "Reverse" Bubble of 2008
by Paul Mladjenovic

As an investor, speculator and researcher in the silver market for over 5 years, I have to say that I am (temporarily) stunned at the extraordinary recent events in the silver market this summer. It is an incredible contrast...

In Physical silver....there are shortages and delays everywhere. The U.S. Mint even made the recent announcement that they would essentially ration the issuance of Silver Eagles. I think that Jason Hommel has done an excellent job documenting the problems with physical silver supplies and delivery at the retail level. Check out his recent article at www.SilverStockReport.com.
In "paper" silver (such as in silver futures and silver-related investments such as mining stocks and ETFs) the extreme opposite seems apparent. The price of silver in the futures market has in recent weeks been decimated.
It is a incredibly stark contrast...physical silver has growing demand and shrinking supply while paper silver's price gives you the opposite impression. Silver hit a recent high (March 2008) of about $21 yet is being pummeled today (the morning of 8/15/08) to the $12.90 level (a pullback of almost 40%). What is behind this extreme anomaly? What is the reality? Why the apparent madness in the silver market?

Yes...it is the summer slow season. Traditionally it is a thinly traded market and silver typically corrects at this time of year. Usually, the corrections are sharp and it is not uncommon for silver to pull back 20-30 and even 40%. Silver has had pull-backs in price of about 40% several times in recent years. The most prominent corrections have been Summer 2006 (during an election year) and now (again during an election year). Winter and summer are typically weak seasons for silver while Spring and Summer are typically strong.

Silver has been zig-zagging upward since the beginning of the decade and has rewarded patient, disciplined investors. Even after this extreme correction, silver has still tripled since 2000. It is important to put things in perspective. Think about what has happened from January 2000 to August 2008 (calculating from highs & lows in 2000 to today):

Gold - UP OVER 200%
Silver- UP OVER 210%
Oil- UP OVER 600%
General commodities- UP OVER 200% (that's a minimum)
Meanwhile (after a full 8 ½ years)...

The Dow- DOWN about 1%
Nasdaq- DOWN 51%
S&p 500- DOWN 13%
The Dollar- DOWN 40%
I think the last 8 and a half years give you a strong indication about the coming years since nothing has fundamentally changed with these markets. If anything, the fundamentals have strengthened. So what explains the recent pounding that silver (as well as gold, oil and other commodities, etc.) has experienced? It seems very unusual and quite suspicious. First let's remember something very important...

The short-term can be irrational while the long-term is much more rational.
Stay focused on the long-term because the short-term can fool you.

Everyone is stampeding out of commodities in general because they think (wrongly) that the "commodities bubble has popped". The extreme selling is coming from two sources:

1. Investors and traders selling off their positions for various reasons (they are bearish, etc.). "More sellers" than buyers will make prices go down and this is a natural market event. This is coupled with...

2. Artificial intervention. Either the government or large private entities (that government either sanctions or allows) or both intervene to exact certain outcomes. It is no coincidence that this happens during an election season as well as during thinly traded markets (such as the summer time).

I understand (and embrace) reason #1 but I strongly condemn reason #2. Frequently, reason #2 is a catalyst for reason #1. The unfortunate reality of today's markets is that government (and entities that it works with) are players in the financial markets in both obvious and subtle ways. It used to be a "referee" but know it is both "referee" and participant.

Look at the "recent strength" of the U.S. dollar (which is a major reason given by the financial media for plunging commodities & precious metals prices). A few weeks ago the U.S. Treasury Secretary essentially admitted that the government would intervene to protect the dollar's decline. Then...amid many headlines about a bad economy...the dollar rallies tremendously for apparently no fundamental reason. This scenario is best explained in James Turk's recent essay at www.goldmoney.com entitled "Mystery Solved." Of course, it is no coincidence that a "strong dollar rally" is the catalyst for falling prices in oil, gold, etc.

In recent years, a host of government officials (starting with Alan Greenspan) have indicated that the government can (and will) intervene to exact outcomes that they feel are beneficial for the economy and financial markets. These interventions work in the short-term but they tend to fail in the long-term. Let's keep this in mind...

In the short-term, government intervention can usually "win" over the market.
But over the longer term, it is the market that usually wins.
5,000 years of economic history bear this out.

During this summer, government action has worked and helped to (temporarily) influence the market to get the prices of commodities (especially precious metals and energy) down. Sometimes a government action is not necessary; just the threat of government action is enough to influence the market. This leads us to understanding how the government can have a major, short-term impact on prices. The impact can be purposeful or accidental. IN any case, it is time to understand what a bubble is (then you will see what a "reverse bubble" is).

In recent years, there has been a lot of talk about BUBBLES. There has been plenty about the Internet & Tech stock bubble of 2000-2002 and the Housing Bubble of 2005-07. Then there was the talk earlier this year about the "oil bubble" and the "commodities bubble". People that never noticed the bubbles in stocks and housing all of a sudden saw one in commodities. LET'S GET THIS STRAIGHT. You should know the difference between what is a "bull market" and a "bubble". Then please explain it to the politicos and pundits out there confusing the investing public. Here is the major, simple difference between a bull market and a bubble:

A bull market is a NATURAL event. A bubble is an ARTIFICIAL event.

A bull market occurs when there are more buyers than sellers of a particular asset (stocks, metals, etc.). This is a healthy and natural event driven by demand and supply. Bull markets can last a long time; years or decades. There is nothing wrong with a bull market. A bear market is when demand & supply manifests itself as a market where there are more sellers than buyers. Got it?

A bubble is an artificial event in that the market is injected with an oversupply of currency and/or credit. Currency and credit in our current economy originates from the Federal Reserve (America's central bank; a governmental entity). Since 1995, The Federal Reserve has been expanding the money supply at double-digit annual rates. Since the middle of this decade, most of the world's central banks (translation: governments!) have been increasing their respective money supply at double-digit rates. The more you produce of something then the less each individual unit of it is worth. This is why things of more limited supply (food, energy, precious metals and other commodities) have seen their prices more than triple since the beginning of the decade.

Therefore, a bubble is an artificial event where there is intervention (more credit, etc.) in that particular market which then dramatically warps demand and supply as the price of that particular asset is driven higher (inflating the bubble; also called a "boom"). Usually, what punctures the bubble is that the artificial demand over-stimulates supply which is when the bubble finally pops. The oversupply results in a recessionary condition in that particular market. This is exactly what happened in recent bubbles, especially the housing market. That market is still experiencing an excess inventory of homes along with record levels of foreclosures and defaults. Many homeowners now have mortgages that are greater in value that the property itself. Then you have seen the wave of defaults on mortgages which became the "sub-prime fiasco" which in turn harmed the holders of these demolished debt instruments such as banks and brokerage firms. Now...how about "reverse" bubbles?

As you can guess by now, the "reverse" bubble is an artificial event similar to the typical bubble but it is the direct opposite. In the bubble, the price of the asset in question is driven artificially higher. In the reverse bubble, the price of the asset in question is driven artificially lower.

This is what is happening...right now...with silver (and to a lesser extent, gold). Even though there are acute supply problems (delays and shortages) with physical silver.

There is artificial selling (extreme "shorting" by a few, large entities) coupled with panic selling which is forcing prices of silver down dramatically. In the past few weeks, silver fell through its 200-day moving average (DMA). To get a feel about how the huge short position in silver has been extreme, check out the recent essays by Ted Butler at www.investmentrarities.com. He has done a fantastic job in painstakingly documenting the major forces affecting the silver market in recent years.

This summer, silver's correction became more extreme than usual. Silver was forced past its 200 DMA and it went under $16. I was a buyer at this level. Then it went to $15 and I was still a buyer. The next "line in the sand" for silver after the 200 DMA was the 50-week DMA and silver fell through that. Again, I was a buyer. The next level was silver's cost to produce it (for silver miners) which is about $14 per ounce (given today's mining costs). It then fell below that! In other words, silver's price is at this moment cheaper than it costs to mine it (you got it....I was buying again). Gee...why mine silver at all if it is cheaper to simply buy it at the futures exchange for much less?! THE PRICE OF SILVER HAS BEEN FORCED TO BELOW COST.

The SILVER "REVERSE" BUBBLE is here and now in the summer of 2008. In the same way that a bubble deflates and the asset price comes tumbling down, a "reverse" bubble is like forcing a huge balloon under water. Sooner or later, the artificially low price can't hold and the market will ultimately force the price up to its natural level. Most silver experts (such as David Morgan at www.silver-investor.com and Roger Wiegand of www.tradertracks.com) agree that the near-term natural price of silver is north of $20 and that the long-term price is much, much higher than that. Just for silver to reach its old high of $50 (January 1980) on an inflation-adjusted level alone means that its natural long-term price is in triple digits.

Unfortunately, many folks are panicking or depressed about silver, gold and other commodities. I think that we need to remind ourselves about the legendary Jesse Livermore when he said to be "right and sit tight." Silver, gold, oil and other commodities are on a long, zig-zag upward march that can't be stopped by any firm or government agency. The commodities super-bull market is alive and well because the fundamentals are too powerful to suppress. Don't get fooled or spooked by the irrational and ill-conceived short-term gyrations. Stick with the fundamentals and stay focused on the long-term. I know that I am.


I love SafeHaven!

Comments

  • storm888storm888 Posts: 11,701 ✭✭✭
    Folks Who Bite Get Bitten. Folks Who Don't Bite Get Eaten.
  • The next level was silver's cost to produce it (for silver miners) which is about $14 per ounce (given today's mining costs). It then fell below that! In other words, silver's price is at this moment cheaper than it costs to mine it (you got it....I was buying again). Gee...why mine silver at all if it is cheaper to simply buy it at the futures exchange for much less?! THE PRICE OF SILVER HAS BEEN FORCED TO BELOW COST.

    This is NOT fact.

    Here is Fact:

    Pan American is now forecasting silver production of 18.8 million ounces in 2008, at an average cash cost of US$5.10 per ounce of silver. That's above previous estimated annual cash cost for this year was US$4.27 per ounce. In the second quarter, the company's cash cost per ounce — an important metric for precious metals producers — was $5.28 per ounce of silver. Pan American attributed the higher number to higher energy and labour costs at the company's Peruvian operations as well as lower-than-expected credits for by-products.

    Compare it to History: The New York Times stated on January 18th, 1893! that the Government was paying 84 Cents for an Ounce of Silver, its cost to produce was 20 cents.

    1893

    In 2008, Newmont Mining (NEM) expects to produce about 5.2 million ounces of gold at a cash cost of about $US450 an ounce.
  • Looks like a bad case of Diarrhea of the Word Processor to me.
    Successful BST purchases from: WaterSport, commoncents123, Hyperion, mozeppa, Mar327, coinlieutenant, Placid, MFH, fishteeth, FilthyBroke, SilverEagles92, illini420, barberman55, pcgs69 (2x) & 123cents

    History of the US Constitution Coin Set
  • The Wallace Street Journal

    By David Bond, Editor

    The Silver Valley Mining Journal

    Wallace, Idaho – We received a missive yesterday from the American Precious Metals Exchange, an Oklahoma-based company that retails silver and gold bullion – American Eagles, Canadian Maple Leafs, Krugerrands, bars, coin bags and the like, that immediately raised alarums in our cranial area.

    The gist of their missive was: There's a silver shortage because the price ($14.35/oz at this writing) is too low. Particularly hard to find are the 2008 American Silver Eagle 1-ounce coins. Here's what APMEX said yesterday:

    “You may have noticed a significant number of products on the APMEX.com website are listed as 'Out of Stock' right now. This stock shortage coincides with a low price for the precious metals we provide investors and collectors across the nation. Most, if not all, dealers are experiencing temporary shortages right now. . .

    “When the price of silver, or other precious metals, drops to a low position, everyone who has been waiting to purchase comes in and buys. Whatever silver or gold is in inventory is quickly depleted – not just in our reserves, but also in those of our suppliers. Ultimately, this reduction in supply increases demand, and will eventually increase prices.

    “This is basic supply and demand. This effect is felt across the marketplace, from suppliers to dealers to the investors.”

    Well, we appreciate the lesson in Economics 101. But it had an eerily familiar quality to it, this particular lesson in Econ 101, a deja vu feeling. Had we not heard this same stuff about five months ago, only in reverse? So we dug through our Platts Metals Week archives, and low and behold, found that we were writing about a silver shortage back in March – under entirely different circumstances.

    Here were the same folks, only this time, they were saying there was a silver shortage because the price was too high! Said Metals Week:

    “Silver buyers overwhelmed retailers during the third week of March, when silver was trading above $20/oz. (Retailers) stopped taking orders over the Internet, limiting business to telephone orders of no more than $5,000 -- if buyers could get through. 'Demand is incredible; it seems like there are 5 to 10 times as many people wanting to buy [silver] as opposed to selling,'” said one dealer.

    Said another: “'We're running out of metals, and silver in small quantities is extremely difficult to find right now. The largest demand is for silver rounds and for small (100 oz or less) silver bars." The early-year price run from $17/oz to $22/oz sucked outfits like APMEX, Northwest Territorial and others dry.

    We find this quite curious. It seems that when the price of silver is low, there is a shortage of silver, because people can't get enough of the white metal. When the price of silver is high, there is a shortage of silver, because folks can't get enough of it. Would it be too much of a reach to surmise that there's just a plain shortage of silver?

    -- Posted 15 August, 2008 | Digg This Article | Discuss This Article - Comments: 1
  • percybpercyb Posts: 3,328 ✭✭✭✭
    Jewelry sales are way off--about 25% lower than last year. Demand is down considerably, which accounts for the wicked sell off. Don't look for demand to pick up anytime soon, either.
    "Poets are the unacknowledged legislators of the world." PBShelley
  • jmski52jmski52 Posts: 22,897 ✭✭✭✭✭
    storm888
    Master Collector


    Enough about Paul. Tell us about yourself, storm888. You seem to know things in advance, so I'd like to know how you do it! Have you written any books (like Paul has) lately? I'd be tempted to buy one.

    image
    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
  • cohodkcohodk Posts: 19,184 ✭✭✭✭✭
    8 1/2 years is a hell of a long time for anything to remain in a leadership position.

    Average returns are probably the best you will get with a "buy and hold" strategy over the next several years. You will make much more trading it. Just as trading the equities has been much better than buy and hold.
    Excuses are tools of the ignorant

    Knowledge is the enemy of fear

  • <<Compare it to History: The New York Times stated on January 18th, 1893! that the Government was paying 84 Cents for an Ounce of Silver, its cost to produce was 20 cents.>>

    That was an interesting bit of early 1893 history. It implied that the government purchased ALL newly mined silver. I was going to object and point out that the Sherman Act limited it to 4 1/2 million ounces of silver per month times 12 months equals 56 million ounces per year. The article stated two mines produced 8 million ounces a year or 1/7 the total US production. Guess what? 8 times 7 equals 56 million ounces of silver again. Silver users must have been importing it from abroad. Yet another reason for the 1893 gold drain.
  • What is amazing to me is that the SLV and GLD shares are backed by physical Silver/Gold.

    Now, they are both being shorted shares that are no doubt comprised of millions of naked shares sold for barrowed for cash against non-exsistent shares.

    This is the anthesis of the whole concept of these ETF's backed by wharehoused metal.

    Paper has decoupled from physical.
  • jmski52jmski52 Posts: 22,897 ✭✭✭✭✭
    What is amazing to me is that the SLV and GLD shares are backed by physical Silver/Gold.

    Now, they are both being shorted shares that are no doubt comprised of millions of naked shares sold for barrowed for cash against non-exsistent shares.

    This is the anthesis of the whole concept of these ETF's backed by wharehoused metal.


    Bingo! I couldn't have said it better, Coinboy.

    Paper has decoupled from physical.

    That would be my assessment, also.
    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
  • storm888storm888 Posts: 11,701 ✭✭✭
    "...Now, they are both being shorted shares that are no doubt comprised of millions of naked shares sold for borrowed for cash against non-exsistent shares...."

    /////////////////////////////////////////////

    If you have info, report it:

    enforcement@sec.gov

    The brokers I have spoken with have LOTS of legit-borrowed shares.

    ....................


    NOT everything that goes into the toilet is a result of "naked shorts."
    Sometimes, LONGS simply get on the wrong side of the bet that the
    most powerful government in history wants to win.
    Folks Who Bite Get Bitten. Folks Who Don't Bite Get Eaten.
  • jmski52jmski52 Posts: 22,897 ✭✭✭✭✭
    storm, what are the margin requirements for shorting the silver ETF?
    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
  • storm888storm888 Posts: 11,701 ✭✭✭


    << <i>storm, what are the margin requirements for shorting the silver ETF? >>




    //////////////////////////////////////

    You need a minimum of $25K - cash or securities - in the account to play.

    BUT, it is SUPER-Risky to do it too close to that $25K. You can end up with
    both a routine maintenance call and a trading call, which often results in
    the bad guys closing the position if you don't shoot them more money quickly.

    The $25K merely secures the SEC requirement to trade on margin.

    SHORTING large numbers on margin is just too risky. I would NOT do it. Unless
    a downtrend is CLEARLY established, (like financials in the past), I keep enough
    cash ready to feed the alligator on a moments notice. (The brokers are all
    desperate for cash and they will negotiate HIGH interest rates on their MM
    accounts. They will also rent your paid for shares in their "borrowed to lend"
    programs; these are among the legit shares they make available to SHORT.)

    I maintain SHORT positions LONG TERM.......... just like I do LONG positions.

    If one SHORTS against the box - their own physical metals - the risk is obviously
    lessened. You have to have confidence in the trend to safely SHORT anything.

    When a player gets a message online that says, "We were unable to borrow
    these securities and cannot fill your SHORT," simply call the broker and get
    a supervisor to solve the problem. They ALWAYS can.

    //////////////////////////

    JUST for clarity: I would NOT SHORT the ETFs on anything other than nice BIG
    upticks. I get spooked when I SHORT into a falling number. Hammering a
    falling price is fine for a VERY brief trade, but scares me when I plan on holding
    the positions.

    Folks Who Bite Get Bitten. Folks Who Don't Bite Get Eaten.
  • For being decoupled, these look close to me for some reason:

    SLV: 12.70 (SLV ETF close)
    Kitco Ag Spot: 12.70 (Kitco 24 hour spot mkt close)

    Local market shortages - big deal - dealers not stocking enough goods to meet the demand. Happens with steaks in my supermarket on Fridays.

    Edited to add: What am I missing?
    Edited to fix link
    Successful BST purchases from: WaterSport, commoncents123, Hyperion, mozeppa, Mar327, coinlieutenant, Placid, MFH, fishteeth, FilthyBroke, SilverEagles92, illini420, barberman55, pcgs69 (2x) & 123cents

    History of the US Constitution Coin Set
  • roadrunnerroadrunner Posts: 28,303 ✭✭✭✭✭
    If you have info, report it:

    enforcement@sec.gov


    You really think the SEC would give 2 hoots about illegal short selling of gold or silver shares? They condone such action as would congress, Senate Banking committee and about everyone else involved in the fiat Ponzi scheme called the FRN.

    The SEC is an intricate cog in the PPT's and FED's handiwork. Of course the SEC cares deeply about naked short selling of 19 selected financial company stocks.

    roadrunner



    Barbarous Relic No More, LSCC -GoldSeek--shadow stats--SafeHaven--321gold
  • If you have info, report it:

    LOL!

    Please don't be use such a babe in the woods comeback. That's the Pap answer, "Oh yeah? Report it". My mother was an Institutional Broker at a big Banking house, its done all of the time.

    We live in the world of fractional reserve lending, i.e. electronic credits where with a keystroke, allow a million dollars to to be lent out 9 additional times.

    Do you actually believe the shorted Bear Stearns shares ever got delivered?

    As long as short settlement is nothing more than moving share credits electronically within the DTCC, Failure to Delivers (FTDs) are like the invisible quarks in an particle accelerator, they exsist on paper, but that's about it. Its gamed, because there is NO enforcement.

    The DTCC is a place that makes the sausage and no one ever can stomach watching sausage getting made. Its the backroom operations run by the short sellers themselves (as members that fund the DTCC) that allow it to be done.

    Watch and Learn - The Dark Side of the Looking Glass
  • storm, what are the margin requirements for shorting the silver ETF?

    You can buy GLD Puts with 2,000 in an Ameritrade Account, never going out on Margin and never ever actuakky shorting on share. Just buying a right to sell at an actual strike.

    SLV has no options.
  • storm888storm888 Posts: 11,701 ✭✭✭

    For folks who are not familiar with "naked shorting" or FTDs,
    this is an excellent presentation:


    Counterfeiting Is Illegal
    Folks Who Bite Get Bitten. Folks Who Don't Bite Get Eaten.
  • storm888storm888 Posts: 11,701 ✭✭✭

    You can buy GLD Puts with 2,000 in an Ameritrade Account, never going out on Margin and never ever actuakky shorting on share. Just buying a right to sell at an actual strike.

    //////////////////////////////////////
    /////////////////////////////////////


    For those who are not familiar, this is a "guide" ONLY.

    This is NOT super reliable all the time. Sometimes it is a little reliable.
    Just enter your dates and symbols, and look for Max-Pain.

    Example: GLD August 2008


    Max Pain
    Folks Who Bite Get Bitten. Folks Who Don't Bite Get Eaten.
  • Why did you re-post my link?

    Max Pain?!, why not give them Schaafer's Option website so they can lose money even faster?!! LOL
  • storm888storm888 Posts: 11,701 ✭✭✭


    << <i>Why did you re-post my link?

    Max Pain?!, why not give them Schaafer's Option website so they can lose money even faster?!! LOL >>




    /////////////////////////////////////////////////////

    I posted "your link" in response to rr's post, before I looked at your post.

    Folks Who Bite Get Bitten. Folks Who Don't Bite Get Eaten.
  • Ok, NP.

    Look I think what we are seeing in the last week or so is that someone(s) is trying to unwind some complicated derivatives and trying to do it as quickly as possibile. The Gold ETF holds about as much Gold (600 Tons +/-) as a single Central Bank is allowed to sell per year (500 Tons) per the agreement. So when the GLD ETF sells gold to match redemptions the supply added to the market may or may not help prime the sell pump.

    I don't see that everyone (Central Banks that have Gold) are playing along. The CBs are NOT selling. Maybe they leased it all out to Goldman and the PM Bank Boys and they can't sell it with out placing a HUGE margin calls on the likes of Goldman?

    That said, Goldman knows they won't be called on the Gold they have leased out from the CBs.....

    Please add plausibile conspiracy from here.

    The PM Banks have crossed the Rubicon and all roads point to Rome and manipulation.......
  • mhammermanmhammerman Posts: 3,769 ✭✭✭
    "What am I missing?" Well, go out Monday and see if you can snag a wrapped 10 oz englehard or j&m for kitco spot + 10% or so, in your hands. Please let us know how you did.

    "I get spooked when I SHORT into a falling number." Welcome, Storm 888!

    Very nice articles, all...thanks for the contributions.
  • tincuptincup Posts: 5,186 ✭✭✭✭✭


    << <i>For being decoupled, these look close to me for some reason:

    SLV: 12.70 (SLV ETF close)
    Kitco Ag Spot: 12.70 (Kitco 24 hour spot mkt close)

    Local market shortages - big deal - dealers not stocking enough goods to meet the demand. Happens with steaks in my supermarket on Fridays.

    Edited to add: What am I missing?
    Edited to fix link >>




    Yes, they are both nearly the same. That is because they are BOTH tracking the paper market on silver. Even though SLV is supposedly backed by silver, it is now well known that there are many loopholes in the fine print (read the Statement of Additional Information, etc., for the fund) that allows MANY games to be played. Go out and try to buy physical silver, that you can place into your hands, and you will find the other prices..... IF you can find the silver at all.
    ----- kj
Sign In or Register to comment.