Saturday, October 18, 2008

A Disconnect

Something interesting is happening right now in the Gold and Silver market. The paper price has now disconnected with the physical price. The has happened because the paper market can be manipulated in the short term by large investment banks who have the ability to take massive short positions to drive down the price. It has also happened because institutions are selling everything they can right now to try to cover their losses on the assets they cannot sell(mortgage securities) because there is no market for them.

The spot paper price of silver right now is about $9.50. If you were to call a dealer and make a purchase to buy physical metal there would most likely be a delay because of the recent investment demand around the world. Although this is still just the early stages, people have begun rushing into the metals over the past three months as they began to understand and feel the debasement of their currencies.

Normally when the paper market has been manipulated over the past few years it has caused the speculators to get shaken off in fear and sell back their recent purchase. This time it has been very different. As the price has been driven down from about $19.50 in mid July, investors have purchased more and more each step of the way down. The only thing slowing the buying from being even more intense is that people cannot find silver right now. (Gold is in a similar position but not quite as intense as silver)

As people began to enter the market they will also do some research into what they are buying and they will discover how low worldwide above ground silver supplies are right now. (Currently hovering around 500 million oz., or about 1 year of suppy) Silver serves two roles, the first as an investment, and the second as an industrial good. It is used in thousands of different products and its industrial demand will continue to explode as China and India continue to develop.

If you can find physical silver right now you can sell it on ebay for about $20 an oz. If one were so inclined, they could establish a relationship with a commodities broker on the COMEX and purchase a mini contract (1000 oz) for about $9,500. ($9,600 with commissions) You could then take delivery of the metals and sell them into the market at double what you paid for it.

***I am not a financial advisor, I'm just talking hypothetical here***** : )

So one of two things will happen from here. China and India may decide that they do not want to continue to grow and become the center of the global economy and their demand will shut down. The demand from the public may stop due to the stronger value they feel in their currencies. (The Fed has now increased the size of its balance sheet by about 1 Trillion dollars over the past 6 weeks. Up until that point it was a total of $897 Billion.)

Or, the paper price is going to catch up with the physical price being set in the real market and possibly blow through it. Most contracts are rolled over month after month on the COMEX (Commodities Stock Market). What if someone wanted to take delivery and they found out that there was no silver supply? A few weeks ago two banks shorted an ENTIRE year's supply of silver. What if they had to cover those positions?

The COMEX would default on their contracts, and then you'd see some serious fireworks. Is that possible? It could happen at any moment. Remember though, we're still in the skepticism stage of this bull market so its going to continue to be a very bumpy ride for a while.

I ultimately see the price of gold going to around $5,000 and the price of silver at $200 during the euphoria stage. I think we'll see those prices sometime around 2011 or 2012, unless we have an early run on the dollar which, like the COMEX defaults, could happen any time. I think the true run on our currency will begin sometime during 2010 as both foreigners significantly slow their purchases of our debt, and the money being printed now starts to make its way into the cost of living. The public will begin buying gold first, but as the price of that begins to get very expensive ($2000-$4,000) they will turn their eyes toward silver as something they can afford. This is when silver will explode, and due to its much more limited supply than gold, (something people will begin to understand) $200 may be a very low target.

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