Seeking Alpha

March 26, 2008

Worried by the steep correction in silver? Don’t worry, just reduce your leverage.

Silver has always corrected by roughly a third after its sharp ascents in the past 5 years. This is due to the extreme tightness of this market where a billion of whatever fiat currency still can do a lot of damage. At one point the short sellers will be run over by the very real freight train of exploding physical demand that has led to what looks like a worldwide shortage in bullion.

GRAPH: Silver always corrected by a third in the runups of the past 5 years. I would not rule out a similar development this time before silver will attack the $30 mark on its way to the old high at $50. Chart courtesy of Kitco.com

The US Mint has been out of the gold sale business for almost half a year now, filling orders on very few days since September. Currently only the new 2008 gold proof Eagles are on offer. All uncirculated bullion coins are not available. Platinum coins have not been available in a while too.

Now the physical delivery problems spread to silver as well. The US Mint says it will ship silver eagles again after April 9. But taking it from past experience, this schedule may be delayed again.

Jason Hommel, probably the most outspoken silver bull for a lot of reasons -but not all – I agree with, has compiled a story of real life experiences when trying to buy silver bullion.

From his report:

Three more major silver dealers are reported to be out of silver today: The U.S. Mint, Kitco, and Monex. This, on top of the major dealers yesterday, Amark, Perth Mint, CNI Numismatics, and APMEX, all reported sold out. Further, nearly all of Canada is reported to be out of silver, from Vancouver to Toronto.

Hommel concludes that the latest correction is a matter of price fixing.

This is unprecedented, and is a perfect case of market manipulation in the paper market at COMEX and other futures exchanges to see silver prices continue to drop down to below $17/oz. today. Paper promises can be created endlessly, but real silver cannot. This is NOT a case of the dealers getting spooked, and selling out to the refiners just in time, at peak prices. This is a case of the public buying up the stock at coin shops across the world ever since gold hit $1000/oz.. That event finally sparked a little of the public’s buying of silver and gold. Thus, the typical coin shop flow of silver to the refiners just stopped in the last few weeks, and especially the last two days. This is NOT a case of the public creating a top with ‘everyone’ in silver, because nobody’s in silver yet. In 2006, only $1 billion was spent on investment silver, which is 0.007% of the $13.5 trillion of money in the banks. As I have long reported, the silver market is so small, there is no room for new investor demand, not even 0.1% of money could be spent on silver, because that would be $13 billion, which would push silver prices to $200/oz., and we are seeing only the tiniest beginnings of that. $13 billion would be almost enough to buy all the silver produced by the mines in one year, which would leave nothing for industry. It would essentially double demand, but supply would remain the same. Furthermore, this is not a top because the public continues to get to the coin shops, and is now getting on waiting lists for silver. The public is not yet in, so how can the price drop? This is a case of price fixing and manipulation, like communism. Sausage is reported to cost 1 ruble per link (editor: corrected), but there is no sausage. Silver price is quoted, but there is little to no silver. Shortages are evidence of price fixing. Price fixing results in shortages. They are price fixing silver at a below market price over on the paper exchanges in New York and around the world.

Also check out the highly interesting comments on his story.

This blog reported last September that silver and gold bullion trade 10% to 15% higher in China.

To add my 2 cents on silver shortages I can fill in a little from the German speaking parts of Europe. ebay has offered the most liquid market for silver here, whose investment appeal is greatly diminished by 19% (Germany) and 20% (Austria) VAT and high mark ups of 16% for kilo bars from professional dealers.

1 kilo, worth €354 at a "global" spot price of $17, would sell for €481 including all punitive taxes, not considering shipping.

Nevertheless the 3 highest bids on ebay are €516, €491 and €490 for a 1 kilo bar at the time of writing.

I also note that all multi-kilo offers from professional sellers have entirely disappeared for several weeks/months and that there are many new offering hands in this market which I consider the true silver market as these are actual exchanges of fiat money against bullion.

At the same time the new 1 oz silver Philharmonic has seen huge demand in Austria, despite even higher markups.

I also remember very well that prices on ebay stayed up when silver traded to $15 in early 2006 and then crashed to $10 in a similarly brutal move as we have experienced it this week. This correction was not entirely reflected in ebay prices then.

And here some more facts about delays in silver shipments:

Kitco states on its website,

IMPORTANT: Due to the volatility of the market, we are experiencing a significant increase in the volume of shipments going out. Although Kitco and our depositories are working hard to stay on top of this, you may experience a delay in your order being processed by our vault, and sent out to you. We apologize for any inconvenience this may cause, and appreciate your patience and understanding.

If you are impatient for more silver bullion, Apmex cannot help you either, reports Boom2Bust.com:

Due to the OVERWHELMING demand for precious metals, our online ordering system has been unable to keep up with our customers’ needs. We have had to disable the APMEX ordering system to allow us ample time to upgrade our site to accommodate the increased demand. We apologize for this temporary problem. In the mean time, we will be accepting telephone orders for the following items only as we have them available:

• 1 ounce Gold American Eagles

• 1 ounce Gold Canadian Maple Leafs

• 1 Ounce Gold Krugerrands

• 100 oz Silver Bars

• Misc Generic .999 Fine Silver

• 90% Coin Silver

During this time, we will have a minimum order of $5,000. We regret we have had to make this drastic change to our ordering process and rest assured, we are working expeditiously to correct the problem.

I conclude to buy more silver. Having to overcome a premium of 36% in Austria, I am anyway in for the very long term. The inflation-adjusted record high for silver now stands at more than $135 per ounce. Meet you there.

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