Silver Quandary

During the past few days, including at the Sunday coin show, frequent discussions occurred among coin dealers about the availability, or lack thereof, of physical silver.

Several dealers who buy bullion silver from customers are not getting as much silver offered to them. Sure, part of that reason could be the high prices seen in late April and the more recent drop back from those high values.  Unless they have to sell, people want the higher values and are willing to wait to see if silver prices go back up. But, at the same time, these bullion dealers are selling what they buy almost immediately.

People are still looking for silver to buy as a hedge against inflation and are finding it difficult to obtain.

On the dealer web discussions, the major bullion dealers who deal in thousands and hundreds of thousands of silver ounces are finding it difficult to replace their inventory when they sell. Some of their products include bags of 90% silver coins ($1000 in face value) or 40% silver coins. There are more buyers for these products than sellers.

The supply and demand rules of business would indicate the price of silver should not have dropped if the physical product is so difficult to obtain.

Here’s where the market gets convoluted.

The silver prices are driven by the paper, nowadays – electronic, trading on the commodities market.

Among the silver investment community there’s talk of collusion between Comex (the commodities market), large banks (e.g., JP Morgan Chase) and the government regarding the price of silver. A common belief is the groups are working together, actively suppressing the market prices.

Some of the pundits claim the physical silver does not exist to cover all of the electronic commodity trades. They put forth a convincing argument with various charts showing the physical inventory versus contracts versus ETFs (electronic traded funds).

Being one who wants to find the original details behind their charts, I haven’t been successful yet in finding the raw details.

But, their arguments along with the difficulty within the coin dealer market to find physical silver to meet demand certainly makes one begin to wonder.

There’s even discussion to have a two tiered marketplace. One tier would be the electronic commodity trading with the second tier being the buys and sells among the coin dealers and their customers.

Changing the silver business model within the dealer community would not be simple. On the other hand, it may become necessary if the overall silver market prices go down while physical supplies become more and more difficult to obtain.

There’s a lesson here, too. Be very careful with electronic trading of silver. If it’s true the electronic silver contracts are larger than the warehoused physical silver that supposedly backs the trades, what will happen to the value people’s electronic silver if the silver does not exist? In all likelihood, the electronic silver trades will not be worth the computer bits and bytes used to transmit the information much less have any investment value.