Is There a Real Shortage of Physical Gold and Silver?
Every time the price of gold and silver go down in a big way, the manipulation/conspiracy crowd come creeping out of their rat holes to start preaching about naked short selling and a disconnect between physical metals and paper markets. As you will see, both issues tend to reveal how little these guys understand about how markets and people work in the real world. And an utter display of their basic ability to think for themselves.
A little Econ 101 first.
Commodity markets go down because of an excess of motivated sellers. Anyone who actually knows how commodity markets work understands that for every contract there is one buyer and one seller. That’s why it is impossible for there to be anyone doing “naked short selling.” You can sell first or you can buy first but you will do both eventually. If somehow someone managed to dump trillions of dollars worth of commodity contracts “naked” on the market, at some point they would have to buy those contracts back.
A lot of people like to believe that commodity prices go down because there are more sellers than buyers but since every contract requires an equal and opposite party on the other side, if ten contracts are sold, someone has to buy ten contracts. There is never any other alternative. One buyer, one seller. Both margined or having the ability to fulfill the contract either as a supplier or a consumer.
So if the prices of gold and silver have plummeted, and they have, why are people reporting shortages of the physical metals? And let me remind my readers, there were people predicting this crash with great accuracy.
I’ll give you a hint; none of the manipulation/conspiracy crowd got it right. They never do call anything correctly but are always forgiven because they tell people what they want to hear, just like TV preachers and successful politicians.
To understand why there is an apparent shortage of physical metals, you have to try thinking for yourself if only this once.
Pretend you want to go into the business of buying and selling silver bars. You have rented a shop, hired an assistant, set up an accounting program. On the 6th of March a customer walked in, your first. He wanted to sell this nice shiny 100-ounce silver bar. You looked at either Kitco or the futures market to see what you should pay, there being zero difference between the physical and paper market at the time.
For the 6th of March the spot silver price varied between a low of $17.08 and a high of $17.55. Since as a businessman you have to make money you pay him $1700 for the bar. He’s thrilled; you’re thrilled with your first purchase.
Time passes and since you are new to the game you don’t do any business. After all it takes time to build a customer base. But the bell rings and another potential customer walks in. Lucky for you, he wants to buy a 100-ounce silver bar, shiny if possible, and you just happen to have one in stock.
The two of you go to Kitco or look at the spot price of silver on the futures market and it shows $12.27. What do you do? Do you sell it for $12.27 and a small premium or do you tell him you are out of stock? At this point, the price of physical and paper is the same.
Or alternatively do you point out that the "Experts" are saying customers are willing to pay a 50% premium. So you tell him that the price is $1800 for the bar. If you quote him $1800, just how likely do you think it is that he will bite?
If you charge him $12.27 an ounce, you go out of business. If he is willing to pay a 50% premium, give him my contact details because I have all the silver in the world at a 50% premium.
The price of silver went down because the sellers were more interested in dumping than buyers were in scarping it up. There is no shortage of silver and there is no disconnect between the price of physical and paper. If you really believe dealers are short of silver, take in a 100-ounce bar and see just how much the physical price varies from the paper price.
I can tell you. It’s zero. If you own gold or silver you paid for it with paper and if you sell gold or silver you are going to be paid based on the paper price.
Supply and demand really does work. If the price of silver bars stays low, all the people who rushed to buy at the top will be just thrilled to sell at the bottom. They always do.