Sell Your Paper Silver and Get Your Hands On Some Silver Bars And Silver Coins
JANUARY 23, 2012
The price action of silver is one of the most volatile within the commodity markets. Several factors contribute to this volatility and have actively dissuaded some investors from participating through this initial phase of one of the strongest, ongoing, asset revaluations in decades.
As we begin to move into phase two of this silver bull market, continuing increases in industrial demand and applications, the growing crowds of new investors, and the diminishing rate of silver extraction from the earth (alongside several other factors) continue to produce a set of fundamentals which are unique to this essential, monetary precious metal.
Today, there are notable distinctions between the paper silver and physical silver markets. Understanding the distinctions between paper and physical silver is critical to any serious precious metals investor.
The overabundance of paper silver has brought about a new dynamic in both the trading and physical delivery of investment grade, production ready, .999+ fine silver.
The advent of electronic and over-the-counter derivative trading has provided large financial institutions broad avenues for potential short-term price manipulation and chicanery. Government and regulatory agencies have often overlooked the disproportionate grasp several large commercial bank participants currently have on the short-term silver market.
The bulk of today’s paper silver markets are centered around the trading of futures contracts mostly at the COMEX, ETFs or exchange traded funds in the equity/stock markets, and the over-the-counter derivatives traded amongst financial institutions. These paper vehicles and ETF’s simply give investors paper silver price exposure, but they fail to provide any further insulation from broader economic risks such a currency collapse, a liquidity crisis, or a systemic failure. Furthermore, the actual physical silver ownership for many ETFs is questionable, as many times exchange traded fund prospectuses are laden with exhaustive and vague legal terminology and loopholes.
The ownership of silver via the traditional paper silver markets such as the ETFs, options, and futures poses additional counter-party exposure to investors. While counter-party risks may have at one point seemed minimal, incidents like the recent MF Global debacle prove otherwise. In the case of MF Global, it appears that segregated customer account funds were used by MF Global, to place losing speculative bets using derivatives on European credit markets. Many former clients of MF Global may never see their capital again, while derivatives have again helped produce a destabilizing effect on our financial system.
These financial derivative instruments, referred to by Mike Maloney as “financial voodoo” and by Warren Buffett as “financial weapons of mass destruction”, were initially created to limit risk. But, instead of limiting risk, they have simply spread risk to the entire world!
Much of the paper silver markets now function like our current, hyper-levered, fiat currency system. Many paper silver market makers hold merely a fraction of the underlying reserves they trade, yet they continually issue IOUs for potentially nonexistent amounts of underlying metals. Meanwhile, additional participants are then allowed to build leverage upon the aforementioned fraction of silver reserves held, similar to banks in today’s fractional reserve lending scheme.
If a great number of big silver market participants overwhelmingly demand delivery in silver bars and silver coins, the fragility of today’s overly-leveraged paper silver market could be exposed for the world to see, driving physical silver prices to astronomical levels.
We believe a gigantic divergence in the price of paper vs. physical silver bars and silver coins is almost inevitable, as the illusive pricing of paper trading is overcome by the true market forces of, real world, supply and demand. Understanding the importance of physical ownership is critical. We aim to lead by example as we continue to acquire physical investment grade silver bars and silver coins, while avoiding paper vehicles.
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What’s your view on paper silver vs silver bars and silver coins – You comments are welcome.