When physical silver dictates price


Analyst Bill Holter has just summarised something we’ve thought (and spoken about at our seminars) for some time.  To give the quote below context consider that it is not unusual on the COMEX futures exchange for the equivalent of half of global silver production to be dumped on to the market in a day and often a large portion of that in minutes (you know, how you always do when you don’t want to realise a big loss by spooking the market…).  Naked shorting is when you sell something you don’t own (in a futures contract) with a view to buying it later at the lower price you just spooked the market into before delivery.  Only on the COMEX real silver is rarely delivered, rather ‘paper’ trades just recycled.  Which is just as well as no one or few have that much real silver to sell in one hit.  The downside is that the COMEX largely dictates the Spot price.  But as we saw as recently as last April when the price was hit for six, demand for physical metal skyrocketed and up went premiums as refiners and then dealers were scrambling to buy to meet demand.  Holter talks of an arbitrage situation where in theory you could buy and actually take delivery at the low COMEX price and then sell your metal at the higher real market price, hence quickly draining what is left in COMEX or an ETF for instance.  This is why we stress the saying “better a year too early than a day too late” has never been more relevant as supply just may not keep up to the current surge in demand and that could happen very quickly.  Anyway, that quote….

“I will leave you with a comment sent to me by a reader with a little of my own tweaking.  He said ..."I buy silver with fake money for 20% less fake money than they can mine it for. Will I win? Ask any child able to grasp the concept and they can answer that!"  Think about what he is saying here?  He is describing COMEX to a tee, they trade nonexistent silver back and forth maybe 100 times or more than is actually produced globally ...and THEY set the price.  What will happen when one day the premium to purchase real silver rises $2 or $3 while the COMEX contract drops $1 or more?  What will a 2 tier market do?  It certainly will not create confidence in paper pricing versus cash and carry.  The danger as I see it is COMEX may now be pushing their hand too hard and too far ...as the Shanghai exchange now exists as a potential check and balance to paper pricing.  If COMEX moves the price too far from where the cash price trades, they will effectively arbitrage themselves out of inventory, out business and out of confidence.  Time will tell. “