Generally, the price of a commodity falls when there is a surplus of supply relative to demand. For the past three weeks gold and silver prices have been falling. This is the longest and largest decline for many months.
However, the declines have nothing to do with any surplus of physical metals. If anything, inventories are getting even tighter. Dropping gold and silver prices have not been caused by the trading activity of physical precious metals.
Even before the latest drop in prices, physical gold and silver supplies were so thin that Far East buyers were purchasing paper contracts as a means to unload US dollars at current exchange rates. As any physical quantities might appear in the future, the owners of these paper contracts could buy them and sell off their paper assets.
In the silver markets, though, far more severe physical shortages are developing quickly. Premiums are rising across the board, even more than the increase caused by the falling spot price.
Primary distributors of US Silver Eagles are paying the US Mint $2.00 above the London spot to purchase each coin, which roughly works out to $2.05 above US spot prices. When silver closed near $31.00 three weeks ago, that $2.05 premium was about 6.6% above silver value. Now that the silver spot price has dipped under $27.00, that $2.05 premium is about 7.6% over silver value.
However, demand for Silver Eagles has been so strong, despite the US Mint having sold a record 4.7 million coins this month through last week, that the Mint has instituted rationing. Silver Eagles now cost about 10-20 cents more above spot on the wholesale market than they did three weeks ago, pushing the retail premiums up even higher. Further, it was possible to obtain Silver Eagles almost immediately at the start of January. Now large orders will take 1-2 weeks to be filled. This delay could get worse before it gets better.
The story is similar with Canada Silver Maple Leafs. These were available for immediate delivery at the start of January. Now, Canadian dealers report that the Royal Canadian Mint has notified them of delays in delivery.
After returning to almost normal deliveries earlier this month, 1 oz silver ingots and rounds are again back to 1-2 weeks delayed shipment. At the moment, you can obtain 10 and 100 Oz ingots almost immediately, but I would not be surprised to see all ingot delivery times slide by the end of this week.
Other silver coins are such as Australia Kookaburras and China Pandas are struck in comparatively limited quantities and marketed at such high premiums that they are not much affected by the current physical supply squeeze. The 2011 Kookaburras have been issued but are almost impossible to find right now, while the 2011 Pandas are expected in the US sometime in February.
So why are prices falling if there is so much demand for physical metals? The obvious answer is that prices are being driven down by trading paper contracts and derivatives. One way or another, traders are making commitments to deliver physical metal that they do not own. Even if the trader owns a derivative to hedge their short position, there is no guarantee that the counter party to the derivative has either the physical metal or the financial stability to make good should the short-seller default.
It is possible for the paper markets to overwhelm pricing of physical products for a time. In fact, the paper markets can be used to suppress gold and silver prices for much longer than most anyone would think was possible. However, the physical market will eventually dominate pricing. It might take outright defaults on the COMEX and London Bullion Market contracts before this comes to pass, but I expect it to eventually occur.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His bimonthly columns on collectibles can also be read at http://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.
I think you meant “…that they do NOT own”. Not “that they NOW own”.
DEAR SIR: IS IT POSSIBLE THAT THE REASON FOR THE DELAY IS THAT THERE IS NO DEMAND AND IF EVERYONE AND THEIR BROTHER CAN MANIPULATE THE PRICE OF SILVER THE WAY YOU SAY AND NEVER GET CALLED TO THE CARPET FOR IT …..IS IT NOT ENTIRELY REALISTIC TO BELIEVE THIS WILL CONTINUE UNABATED….BECAUSE APPARENTLY LIVING IN A WORLD WHERE SOMEDAY THINGS WILL HAPPEN BUT NEVER SEEM TOO…..I HAVE 1300 OUNCES OF SILVER AND I AM DEPRESSED AND PISSED. ALL I EVER HEAR IS ABOUT THE SHORTAGE TO DRIVE PRICES UP WHICH NEVER HAPPPENS..AND PROBABLY NEVER WILL. TIM
We are a large silver wholesale company at Europe, and now because this price rises we have stopped buying from our supliers since september 2010, and now only selling our own stock and thinking seriusly moving to silver plated imitation jewellry. And as we there are many other companies in the same way.
Specullators are damaging the industry and prices will sink again to 5 dollars an ounce soon, because the lack of demand for jewellry and other industries like electronic, that can easily replace silver by other cheaper materials. Time is running.
As I stated before, the perception that the economy is getting better is driving bullion prices down. Whether or not the economy is actually improving is beside the point. Market forces that influence the price of bullion, like stocks and bonds, are many and one of them is psychological.
If it is generally perceived that the economy is finally getting back on its feet, that sentiment spells doom for gold and silver prices. If you hold bullion now… sell. Sell before it’s too late. I predicted this scenario several weeks ago and I’m saying it again. Those of you who see nothing but an endless up market will suffer incur results that the housing industry has suffered.
Mark my words.
I will not sell my silver until I see fundamental reasons to sell it. For example, where are the jobs? Anyone? Just because job numbers are not falling as quickly does not mean we are recovering.
If your car has an oil leak, and the leak starts to slow down, does that mean the leak has been fixed, or that your car is getting more oil? Personally, I’m keeping an eye on that oil pressure indicator in the instrumentation panel for my car.
Just because your car didn’t used to leak oil, does not mean that things will be fine in the future. The leak must be fixed. That isn’t happening. More oil is getting put into the car, but not enough, and even if it was enough, the car still has a leak.
Timothy,
The manipulation can continue. It will continue. But it will also end. However, it will not end until JP Morgan shakes people out of the market who are not confident int their choice. JP Morgan will eat this mentality for breakfast, then they will pay for the breakfast with your money.
Thanks for the good work Mr. Heller.
I have question for the commentor at 6.22am, if you are so confident that prices will fall more due to the fact that silver can be easily replaced then please let me know which materials replace silver easily and in what industry.
Mr. Steven…Have you heard of the term inflation? if yes then how can US service its’ debt if they HAVE to increase their interest rates? DO you know $14 T is a lot of debt. Economy can be SHOWN to be doing well to an extent. US economy getting better soon is a joke. It will, probably in 5 years or more when all the bad apples are removed.
I just bought more, it’s on sale you know. If it falls further I will buy more. I’m not in this for quick trades.
Show me one thing that governments or banks have done to fix the monetary crises. Given the bet between real money and paper, I will take metals every time, and I demand delivery every time.
Silver and Gold prices have already been adjusted for inflation. They always increase right before or right at the start of an inflationary period….which we are now in. The other markets have just not caught up yet and the data from the government always drags 2 to 3 quarters behind. By the end of the year, they’ll be saying that inflation gripped the nation starting in the 4th quarter of 2010. Gold and Silver runs are finished for now. I would unload everything and move to the next bubble.
Doug.. Where do you get this type of information from?
“Silver and Gold prices have already been adjusted for inflation. They always increase right before or right at the start of an inflationary period….which we are now in. The other markets have just not caught up yet and the data from the government always drags 2 to 3 quarters behind. By the end of the year, they’ll be saying that inflation gripped the nation starting in the 4th quarter of 2010. Gold and Silver runs are finished for now. I would unload everything and move to the next bubble.”
Kind of a confusing post…
Gold has been increasing for the past 10 years, but your post says that gold and silver “always increase right before or at the start of an inflationary period.” Does that mean we’ve been in an inflationary period for 10 years?
Your message also states that gold and silver runs “are finished for now” because we now in the grips of an inflationary period. Does that mean that once inflation is recognized gold and silver prices either drop are stay even (based on your recommendation to sell)?
I wonder if those who held gold in silver in Germany during the 1920s were saying “let’s unload everything and move to the next bubble.”
Hmmm…..
Hey Doug,
Silver is also an industrial metal as well as a hedge against inflation. Sure it may dip for awhile but IF and WHEN the economy comes back then the demand for silver will be huge. Maybe you are talking about gold which has limited uses. Platinum use to be a fairly unused metal but now is more valuable than gold. I will hold my silver and leave it to my kids if I have to. I really think you don’t have a clue Doug. I expect you are having a difficult time covering your silver shorts so are just trying to get ppl to dump theirs so you don’t lose your shorts. Unpump and buy I guess (reverse of pump and dump. Nice try. Us longs are in for the long run and unless we get desperate we won’t sell our silver. When they quit printing money willy nilly whether electronically or otherwise then I will sell but I don’t see it happening because there is no choice for them anymore. Can I buy your silver Doug? Since it is going down really fast can I buy it for like 15 bucks an ounce? Okay, I’ll give you 16 just because you have a nice face and look like a nice kid. I’m givin’ you a break here. Whatta ya think?
Nothing predicts future events as much as history. Both the silver and gold runs in the late 70’s predated the massive inflation of the early 80’s.
The first rule of investing is to never, ever buy or sell on news. By the time new information hits, you can rest assured that institutional investors (mutual funds and the big dogs) have long gone home.
Inflation is here, look at oil futures, food prices, etc. The feds QE2 is already creating inflation and interest rates are rising. Mortgage rates area already up a full point since Jan. 1st. The bond bubble is deflating quick and the DOW is around 12,000. Manufacturing is at a 10 year high now in the US and Obama already told the Chinese that the dollar will not be undersold by the Yuan, so it’ll get propped up to increase our export $$.
The money will flow to the greatest returns, i.e equities, long term treasuries, blue chips/dividends. The only commodity futures that would increase would be items like FCOJ and other perishables as food costs increase.
Few questions in response to your post, Doug:
1) Gold is an crisis hedge. Yes or No?
2) Propping up the $ will make exports less competitive. Yes or No?
3) Increase in interest rates (due to inflation) will increase debt servicing of $14 Trillion. Yes or No?
4) Inflation will cause less disposable income towards buying equities or treasuries. Yes or No?
5) DOW at 12000 is unreal in an 10% unemployment environment. Yes or No?
6) Buy on the rumour, less on the news is for Day Traders only. Yes or No?
7) Massive printing of fiat currencies is unsustainable. Yes or No?
8) A huge number of municipalities are unable to fund their obligations. Yes or No?
9) There has not been a single driver to spur job creation by the Congress or Senate yet. Yes or No?
10) The housing market is still in a slump. Yes or No?
It is good to read history, but believe in reality.
1) Gold is an crisis hedge. Yes or No?
NO. Gold is not a crisis hedge. Diversification is.
2) Propping up the $ will make exports less competitive. Yes or No?
Not at all. Exports will always be competitive. Propping up the dollar will give us a chance overseas.
3) Increase in interest rates (due to inflation) will increase debt servicing of $14 Trillion. Yes or No?
Inflation will increase the GDP. If debt was to remain the same, the % of the debt to GDP would fall. This is a good thing.
4) Inflation will cause less disposable income towards buying equities or treasuries. Yes or No?
Of course not, with inflation comes wage increases. The only thing that would change would be P/E ratios.
5) DOW at 12000 is unreal in an 10% unemployment environment. Yes or No?
Like all recessions, unemployment is the last economic sector to recover, so to answer your question 12k is fine. Remember the DOW was at 14K 3 years ago and is on a tear the past two years. Corporate profits are up.
6) Buy on the rumour, less on the news is for Day Traders only. Yes or No?
Never buy on the news or rumour. Buy or sell based on sound fundamentals.
7) Massive printing of fiat currencies is unsustainable. Yes or No?
We’ve been printing for years.
A huge number of municipalities are unable to fund their obligations. Yes or No?
They’ll have no problem. Most muncipalities and states have laws that require them to meet their obligations, i.e. tax increases.
9) There has not been a single driver to spur job creation by the Congress or Senate yet. Yes or No?
Of course not, nor will there ever be. The government does not create jobs and never has. It produces no product, provides no service and takes in no profits.
10) The housing market is still in a slump. Yes or No?
Depends on the area of the country of course. Housing is irrelevent to this topic. The bubble burst long ago, there isn’t another.
And for what it’s worth, I’m not shorting silver or any other precious metals, I sold the small amount that I owned last week. I was surprised that so many people asked if I had more to sell, I thought I’d check out the forums and perhaps shed some light for others.
What does stagflation mean for PMs? I believe right now we are entering this environment. Inflation high and unemployment high.
Kind of double whammy!
Good comments on diversification. PM’s are speculative investments and should be treated as such in a portfolio, meaning never owning more than 5 or 10% of total holdings in speculation. There are really no fundamentals from which to draw data. To use it as a crisis hedge is simply silly. Too much G. Gordon Liddy.
Doug, Inflation of the early 80s? Inflation was at it’s worst in the mid-to-late70s and wiped down to nothing by the early 80s with Paul Volcker’s “take your medicine” high interest rates. You really are ignorant of history.
Doug, You confuse monetary inflation with price inflation. When the time comes that we’re paying $10 for a loaf of bread, how much will an ounce of silver be selling for? Less than it is now? More than it is now? When “price inflation” kicks in would you rather have paper money or silver? What will happen when the dollar is no longer the world reserve currency? Is your stock in American companies that hold their assets in dollars going to be worth more, or less? You say diversification is important but shun metals? You act like you know the “big picture” of economics, but you don’t even understand basic household economics. Your knowledge of economics (and history, as noted previously) is severely lacking.
Bruce, I’m more than happy to assist people gain insight by providing information, but I’m not sure if it helps to make personal attacks. If you have data and structural information, please provide your source. FYI, inflationary rates in 1980 and 1981 were 13.91 and 11.83% respectively. Inflation didn’t break below 6% until the 4th quarter of 1982. It even spiked again in 1984. Not sure if you lived through it or not, but if you did you’d remember 18% interest rates, full credit card interest deductions on your schedule A and massive wage increases.
Here is an example of silver and inflation that may assist you in understanding.
In 1950, a Silver dollar would buy about 8 to 10 gallons of gas.(gas was about 15 to 18 cents per gallon)
Today, that same silver dollar will still buy about 8 to 10 gallons of gas. In essense, the silver dollar has not become worth anymore money due to inflation.
I hope this helps you to understand. Please let me know if you need more information or another example.
Oh, here is the data on inflation
http://inflationdata.com/inflation/inflation_rate/HistoricalInflation.aspx?dsInflation_currentPage=2
I remember those days. I started an entry level job in ’84 and received two 7% raises in about 4 months time. I thought, “man, I must be doing a good job”. When in fact, they HAD to give me the raises in order to keep the entry level pay competitive with the market. I had about 25% increase in pay in less than 2 years. It wasn’t until the mid to late 80’s that inflation got under control with rates and stuff.
My first mortgage was over 14% in 1986. And then housing collapsed in 1988. The house I bought for 86K in 1986 sold for 77K in 1996. People think this housing collapse was bad, but 1988 was just as bad.
All of the things happening now, happened before, gold and silver included. They are just speculation and can go down just as fast as they went up. Silver is down 15-20% over the past few weeks, that takes a long time to make up…if ever. And even if it does, it loses it’s value to inflation.
I could not get an order filled from NWT mint after almost 4 months.They said the demand was high for preceous metals. If deman is so high why are the prices falling? Thank God I got my cash back. The metals market is completely unregulated and therefore prone to minpulation. Going by the numbers gold and silver should have hit highs by now.not happening. I am staying out of any and all markets until we have a clear picture of whats going on. It seems as if the United States is doing what ever it can to conyinue to prop up the paper money system. But what do I know.I’m just an old cowboy from wyoming and not nearly as smart as Bernacke and Geitner.