Silver Prices Defy the “Law of Supply and Demand”

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Guest Post from Mike McGill of Liberty Gold and Silver

Let’s begin with a definition. 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.

A solid definition, agreed? The Law of Supply and Demand should be the core premise of all economic studies as it has proved itself to be historically true.

How can we explain what has happened recently with the price of silver? In about three months, silver has declined from its late-November price of about $34 per ounce to its current price of about $28.50 as of today’s close (February 28, 2013). That’s a drop of about $5.50, which equates to a decline of over 16% in about 90 days. An economist with 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 would appear to be the only 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 no longer apply.

We need to ask ourselves how is it possible for the price of silver to undergo a substantial drop in price while simultaneously experiencing extremely tight supplies and burgeoning demand. In order to make a professional inquiry regarding this conundrum, we will dispel all the blather from the CNBC crowd that precious metals are 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 Silver Eagle 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 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 dollars, 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 in the availability of “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 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 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 16% in the last three months? It is difficult not to conclude that there has been 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 naked 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. Link is here.

What we’re seeing is a big disconnect between silver’s paper price and its actual physical availability. It is not inconceivable that what is 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. It is not difficult to foresee that a breakdown and growing distrust of 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 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.

Thank you Mike McGill of Liberty Gold and Silver.

Regarding those physical coins and bullion:

Why Buy Gold?

Why Buy Silver?

Posted by the Deviant Investor

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20 thoughts on “Silver Prices Defy the “Law of Supply and Demand”

  1. I couldn’t agree more Plvnet and with the Author’s assertions. We all know why the government is enabling the banks and investment houses to manipulate the system. They don’t want precious metals moving against their sacred paper dollar. Ironically this was part of the platform that Obama ran on. We all remember how we were told about how the Republicans were responsible for allowing unscrupulous banking practices to go on during their watch. Look who’s making a deal with the devil now. I believe in the eye test and if Europe wasn’t in such disarray I believe we would be feeling the effects of Bernanke printing press. I believe this so much that I have poured 60% of my income into tangible investments. Of course I haven’t figured out the end game. When Prices rise to record levels, Do I trade it in for a truck load of worthless dollars? 😉

    • All good points. And when prices rise to record levels – as in really high – due to the serious devaluation of the dollar – sell out some and convert to some other fixed asset. The problem is when – we have to trust we will see and know the top when it happens – fundamentals, technical analysis, and news stories should give many hints.

      GE Christenson
      aka Deviant Investor

  2. What I see is that when the prices are low, everyone looks to buy. The dealers don’t like to sell low, so they put on insane premiums. Demand goes up, so does price. When prices are high and no one is buying the premiums are nothing to low. I would also expect dealers to just not sell when prices are low, giving the appearance of a dwindling supply.

    The spot price of physical silver is determined solely by idiots trading paper for stuff that doesn’t exist. The premiums are added by dealers to try to apply real laws of economics onto a physical good.

    • I mostly agree. Dealers have to run a business and they must adjust premiums according to supply and demand.

      And the futures markets often get out of touch with the physical markets.

      GE Christenson
      aka Deviant Investor

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  4. I’ve been buying for 2 years and watching the price fluctuate. “Paper price” and retail buying have moved together. I could always expect $2 per oz premium on bullion and $4 p/o premium on mint issue coins. However, about 6 months ago silver had just gone from around $35 to $32 and I decided to this was an opportunity to buy. When I went to one of my dealers, they informed me that the new premiums were $4 for generic and $6 for mint issues almost like the dip hadn’t even occurred. This past weekend I went to a coin show ( silver has been riding $28.50 p/o) and was astounded to find dealers from across the nation were all charging like they don’t even heed market price anymore. Generic bullion was $34 p/0 and Eagles, Maples, Pandas, Libertads were all in the $39 to $50 per oz range. I feel like the physical market is clearly separating from the Comex paper fairy tale. The stock market, it would seem, is losing it’s grip on the real world.

    • …Unfortunately, All of my PM’s recently sunk to the bottom of a lake in a tragic fishing accident, so I will have to start over at these higher premiums.

    • Thank you for your comments. It adds perspective to what it happening in the real physical market, and not the paper market. I have watched the paper markets for years and the physical markets for the past seven or either years. I have seen this before – paper prices plunge, buyers show up in the physical markets, sellers are discouraged, premiums rise. Then months later the paper price is much higher and the premiums stabilize.

      It will happen again.

      GE Christenson
      aka Deviant Investor

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  7. Or…… those distributors have pulled their stock and are claiming shortages because they don’t want to take a beating selling their inventories at much less than they bought them for. They are hoping that the price of silver increases again at which point they will suddenly have new stock available for sale. This happens all the time. Sellers wait to see where the price is going to stabilize. In the meantime, they sit on inventory rather than selling it. My LCS does the exact same thing. He just told me last week that he had plenty of silver but wasn’t selling any at that time.

    By the way…. APMEX has plenty of bulk generic silver available.

    • Businesses must make a profit to stay in business. I do not doubt that what you are describing does happen to some extent. But I do believe that low prices bring out buyers and discourage sellers and consequently the premiums rise. I think premiums will gradually rise even further over the next several years as there is increased investment demand for silver.

      GE Christenson
      aka Deviant Investor

  8. is silver really worth 30.00 an ounce, no. over the last 10 years, sure a lot of silver eagles have been sold, and a lot of other newly silver items have been minted. but most of the silver being bought and sold is only changing hands among silver buyers. like when someone buys a new car, then over a 10 year period that same car is bought and sold 5 different times. it is all relitive. is there a silver shortage? let me answer that with another question, is there a car shortage? good luck, think outside the box, stay grounded.

    • I cannot agree with you, but thank you for your comments.

      1) Silver premiums are rising. That tells me it is more difficult to find supply. Yes, it is there but less available. That sounds like the beginnings of a shortage.

      2) I think (I have no proof) that most of the silver being purchased for investment is held long term and is seldom resold.

      3) Is silver worth $30.00? I say yes and more.

      We’ll see.

      GE Christenson
      aka Deviant Investor

    • You are correct, but perhaps not in the way you might think. No, silver is not worth $30. It’s not even worth $28.50 like the comex is dictating. It’s worth what people will pay for it. As I stated in an earlier post, at the coin show I attended over the weekend, one could not purchase even generic bullion for less than $34 an oz. Premium rounds were averaging $38-40. Pandas were more like $45 or $50 depending on the dealer. The crowds were buying it by the fistful at those prices and I’m not talking about “silver peddlers”. Construction workers, police, school teachers; people of modest means forking over $200-$300 in FRN’s for physical bullion. They didn’t look like coin collectors to me.

      Your point is valid. I don’t think there is a “shortage” necessarily. There was plenty of silver to be had. Here’s why your used car argument doesn’t hold up for me: the used car market hasn’t experienced a surge of new interest like physical metals have in just the last 5 years. Many people (more than even I previously thought) are beginning to see the flaws of fractional reserve banking. People the world over are losing faith in paper money. The internet hive is making people aware of places they can turn: Silver, gold , platinum, etc.

      Business as usual is over. It will never return, because ALL fiat money systems have a shelf life. Ours has already passed the “sell by” date and we are now in that questionable 2 week period after where everyone is smelling the product before they consume it. Pretty soon it will be time to toss it in the trash.

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