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| 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 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.
To learn more
about ETFs click here
The ownership of silver via the traditional paper 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, 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 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,
while avoiding paper vehicles.
Mike
Maloney
GoldSilver.com
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