Let’s begin with a definition. Investopedia defines the Law of Supply and Demand as follows:
“The effect that the availability of a particular product and the desire (or demand) for that product has on price. Generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.”
How then can we possibly explain what has been happening recently with the price of silver? In a little over two months, silver has declined from its mid-December price of $33.50 per ounce to its current price of $28.56 as of today’s close (2/28/13). That’s a drop of $4.94, which equates to a decline of over 14% in just sixty days. Any trained economist having a solid grounding in the supply and demand theory, when viewing this decline would have to conclude one of two things. Either the supply of silver had recently rapidly expanded or the demand for the precious metal had substantially decreased over the same period. These could be the only two possible logical explanations for this situation.
However, in the alternate universe of manipulated markets, insane derivatives, massive criminal fraud in both the banking and commodities markets, central bank machinations with currency handouts, and complete dereliction of duty on the part of regulatory bodies, it seems that the basic laws of economic price discovery somehow no longer apply.
We need to ask ourselves at this juncture how it is possible for the price of silver to undergo a substantial draw down in price while simultaneously experiencing extremely tight supplies in addition to burgeoning demand. In order to be able to make a professional inquiry regarding this conundrum, we will have to dispel all the blather from the CNBC crowd that keeps ranting about the precious metals being in a bubble (they are NOT; both gold and silver remain firmly in a ten year upward channel of growth) and adopt an attitude like Dragnet’s Sergeant Friday, “Just the facts, ma’am, just the facts.”
Here are those facts:
In 2012, silver sales soared. The US Mint reported that the sale of American Eagle silver bullion coins topped off at the third highest annual total in the twenty-seven year history of the series. Just past mid-December, the US Mint told its distributors that it had “sold all remaining inventories of 2012 American Eagle Bullion Coins,” adding that “no additional coins will be struck.” Until the sell-out, Silver Eagles were easily on pace to eclipse the second best annual sales in history. Even more amazing was the ratio of sales of Silver versus Gold Eagles – over fifty to one. In total dollar amounts, the sale of Silver Eagles almost matched that of Gold Eagles, nearly 98%.
In January of this year, the sale of Silver Eagles was tremendous. So strong was the demand that the US Mint notified all its distributors shortly past mid-month that it had halted all new orders because it had run out of bullion supply. Despite two production shutdowns in January, the US Mint sold a record breaking 7.13 million Silver Eagles in ONLY TEN BUSINESS DAYS, shattering the previous monthly record set in 2011. Currently, the US Mint is on allocation rationing to its distributors – and we’re into this year only eight weeks!
Another instance of extreme silver shortage that has seen little to no reporting is the near total annihilation of the availability “junk silver” (pre-1965 US silver coins). As of the beginning of this week, almost none could be found anywhere in the country, except in extremely tiny amounts. Nearly every wholesaler and retailer in the nation was completely sold out. Waiting time for orders is at least a month out at best, with six weeks being quoted as a reliable delivery date.
Just a week ago, it was reported that Apple will be delaying its new 21.5 iMacs because of a shortage of silver in China. Silver is used extensively in iMacs. The production delays are already up to three months and counting.
On the demand side of this equation, wholesale premiums over the silver spot price have risen as much as six-fold in the past two months. Retail mark-ups for these coins have never been greater since the 1980 high, when silver topped $50.
What is one to conclude with this incredible contradiction of drum-tight silver supply and record breaking demand weighed against a silver price decline of nearly 15% in the last seven weeks? It is difficult not to conclude that there must be some type of market intervention and/or price manipulation occurring.
As we’ve reported several times over the last few years, the spot price of precious metals is set almost entirely by the bid-ask trading action in the world’s commodity pits, principally the COMEX in New York and the London Bullion Market Association. These exchanges have been notorious for allowing massive short selling by large investment banks such as JPMorgan Chase and Goldman Sachs without these firms having to post either the normally required margin deposits or having adequate silver on deposit with these exchanges to satisfy delivery requirements for those traders who might wish to take physical delivery of the silver upon contract expiration. Both of these activities are violations of the rules of the futures exchanges involved as well as federal requirements that are supposed to be enforced in the US by the Commodities Futures Trading Commission (CFTC). The CFTC itself has been repeatedly accused by the Gold Anti-Trust Action Committee (GATA), and many others, of being derelict, if not outright complicit, in allowing these trading violations to continue. (source:www.zerohedge.com/
In addition, silver prices, to a lesser degree, are also influenced by activity in various exchange traded funds (ETFs). For some time now, rumors have been circulating that these funds may be severely short the billions of dollars of physical silver upon which their share value is based.
What we’re seeing here is a big disconnect from silver’s physical paper price and its actual availability. It is not inconceivable to us that what is actually occurring is similar to what happened to markets in the old Soviet Union. The communist ruled markets quoted cheap prices for products that were chronically in short supply. The real market, the “black market,” was where you could purchase real goods with fair price discovery. When this dichotomy completely broke down, so did the Soviet Union. In the same fashion, it is not too hard to foresee that a breakdown and growing distrust in the paper silver markets could well cause a price explosion in physical silver.
We have been warning for years that paper markets in general, and paper precious metals markets specifically, should be viewed with suspicion, as they all contain counter party risk, which cannot be honored. The only sure way to fully protect oneself is to own physical coins and bullion. Do it today while the “paper price” is still low.
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Written For: Liberty Gold and Silver News Blog