Little Silver Markets and the Big Box Warehouses

What the precious metals market has seen over the last week in both silver and gold is a worldwide surge in physical demand as prices fell. This is what happens when the management of perception backfires.

It seems poetic justice that a drive by smash-down of precious metal prices would actually trigger the beginning of the last phase of this bull market. Nevertheless, these are exactly the kinds of consequences that occur when a market has been prevented from discovering its true value.

While the market drama seems intense at the moment, the timeline for this convergence can be found using decades as the scale.

Funds, Futures and Central Banks

Although SLV, the big silver exchange traded fund or ETF, has not reported significant investment fund outflow, the big Gold ETF (GLD) has seen major drawdown of shares. This is another indication of a developing split between paper and physical demand for precious metals.

Of course, the other divergence arises between the paper price discovered on the futures market and the retail price for precious metals after premiums and the cost of shipping are added.

All of this is taking place against the backdrop of a worldwide currency war, as currencies devalue in response to enormous sovereign debt burdens and unfathomable future liabilities.

Central banks and their subsidiaries have become ever more powerful and able to infiltrate practically any paper market they choose with little regard to ethics. Furthermore, if the law threatens to obstruct the agenda, it is changed or regulatory authorities are captured.

Wholesale Shortages?

The concern seems not so much whether the underlying physical demand is real, but if wholesale shortages are a reality?

Delays in precious metal deliveries now seem to be commonplace. That, in and of itself, constitutes an effective shortage.

Still, how much of this is due to dealers hanging on to inventory, given that many would be underwater on their positions?  Also, perhaps the extent to which premiums can be utilized has some psychological limit?

Distributors and the U.S. Mint

Of course, the small physical precious metals dealer will probably lose money selling their current inventory at post-crash pricing, but they would usually simply replace that inventory at the lower price.

The problem remains that their distributors have four to five week delays — where they could lock in the price, but at the risk of the paper price going lower. The dealer is choosing not to take that risk and now is typically completely out of conventional, non-numismatic Eagles and rounds. They probablyhave a very low junk silver inventory as well.

This situation arises in conjunction with the U.S. Mint rationing the supply of coins provided to the wholesale distributors.  The Mint recently sent out just 15,000 coins of an 115,000 coin order to distributors. That sure looks like a shortage.

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