Random Thoughts on Fundamentals in the Silver Market

The recent wild swings in the market have been amazing and I can only guess at the causes. It has blown a lot of dealer’s pricing models, I can imagine.

Here are some random insights into the silver market that I compiled recently for a friend that I thought may be of general interest. In no particular order:

1. The silver market is very small relative to other financial and commodity markets which makes it extremely sensitive to any large transactions.

2. For over 30 years now, a combination of factors have led to lower precious metals prices. These price decreases have served to shut down a number of producers, refiners, and dealers. The industry is now having life breathed into it by investment demand which it is largely ill equipped to supply.

3. Silver has the largest short position of any commodity traded. This is both a byproduct of and cause of the price of silver falling.

4. Silver was last used as money in India and when they scrapped it in favor of fiat there was no country on the planet that used silver as money (one of the factors in point 2).

5. Using anything as money causes an extremely high premium to be attached to it. Therefore, any “parabolic” rise in the price can mean two things in the case of silver. One, it is scarce and two, it is assuming a natural role as money either as a savings vehicle or as a medium for indirect exchange.

6. The cure for high prices is high prices. Once the money price rises to a certain level, it becomes more attractive for producers and hoarders to sell their stock of goods. This is what has happened to silver. Its price shoot up brought a lot of supply to the market. Some of it real and some (probably most) of it phantom (paper silver).

7. The squelching of the speculative element in the market via the increased margin requirements is counterproductive to anyone trying to suppress the price over the long-term. Following the previous point about the effect of higher prices, any artificial attempt to lower prices artificially lowers production and creates shortages which is where we are today in the physical silver market.

In an attempt to summarize these random thoughts, nothing has fundamentally changed in the physical market and will not for as long as it takes to get silver mines permitted and/or operating. This is still a long ways off. The raising of margin requirements in a tiny market like silver would easily explain the selloff and makes the case of future higher prices only more compelling.