Sunday, August 17, 2008

Silver Shortage Causes Price Disconnect

(Manipulation begins to fail, paper prices fall.)
Silver Stock Report
by Jason Hommel, August 17, 2008
Franklin Sanders understands, and explains that physical silver and gold are selling for higher prices than paper silver and gold.

James Turk reveals in his article today, "A Fabrication Bottleneck or Something More":

Turk acknowledges, "In other words, there is presently a huge disconnect between the paper market and the physical market."

But Turk says goldmoney is not yet having trouble finding large, 1000 oz. LBMA bars.

Here are several points to keep in mind about 1000 oz. bars:

First, there are position limits! This means there are silver shortages for the super rich, ever since the days of the Hunt Brothers in 1980. The limit is 1500 contracts in a given month; a limit of 7.5 million ounces. I believe Turk is not noticing any shortage, because he has never needed to order more than that in a given month.

Second, just because people own bars, or that bars are listed in inventory at the NYMEX exchange, does not mean they are available for purchase at today's prices! The total ounces at the NYMEX seem to remain at about 130 million ounces. That's not just "unwanted" silver; it's owned by funds, speculators and investors, who may actually understand silver, who might not be willing to let it go except at much higher prices, especially as they come to understand the facts about the shortage of silver.

Third, David at Wexford Coin notes that he's "not a fan of 1000 oz. bars for the average client since shipping them back to distributors is a nightmare if the bar packs higher than 75 pounds in a Flat Rate Priority Mail box using Registered Mail. Just about the only method for retail customer to ship WITH INSURANCE unless they have such a large quantity that distributor will arrange a carrier pickup at a business address." Wexford, one of my favorite and most trusted and highly recommended dealers, now has a minimum order size of $10,000.

David at Wexford is extremely busy with buyers, and emails me to say he cannot return all of his phone messages.

But there is a shortage of 100 oz. bars!

Producing more 100 oz. bars should be easy. They can pour 100 oz. bars nearly as easily as 1000 oz. bars. I know for a fact that the machines to make them are not running at capacity!

Why is it that people think that pouring silver bars is a difficult or skillful or time consuming activity? Men have been pouring silver bars since Biblical times.

There is, indeed, a "production bottleneck".

But that's happening because demand has greatly increased, and years of old supply has run out!

Most silver purchased by investors is NOT recently manufactured. Only a little is "made fresh".

See, it's a fundamental attribute of silver that it does not spoil. It lasts 1000's of years!

Therefore, most silver that used to be available for purchase, when you could buy it, was manufactured sometime within the last 30-40 years. (Perhaps 1/2 of all silver was mined in the last 50 years.) It is not uncommon to find 1 ounce rounds that say they were made in 1970 or earlier! Those are cool to hold in your hand, because you know from prior price history that that very coin burned some hands as the price collapsed from 1980. Silver, itself, is usually a form of history in your hands.

As another example, Englehard 100 oz. bars are no longer manufactured, but they are a "staple" or "standard form" of silver for the industry, right along with the currently manufactured Johnson Matthey bars.

Therefore, in order for retail investor forms of silver to develop a shortage, then all or most of the inventory that was manufactured in the last 30-40 years has been purchased and is no longer available at present prices.

Or, new product is mis-priced at below market prices, which thwarts the free-market clearing process.

That's called a shortage when years and years of stockpiled & produced product runs out! What else would or could you call it, or how else could it be described?

It used to be that the old silver products were sold by the coin dealers to the refiners, but that's no longer happening. The flow is reversed, and it changed around January/February, 2008, when demand from the public increased by about a factor of 10 at many coin shops.

So, the "production bottleneck" isn't because some machines broke down and need to be fixed.

It's at least partly because pre-existing old manufactured silver is no longer being sold to the refiners that would melt it down to be manufactured into new silver products in the first place!

It's at least partly because newly manufactured silver is among the only supply left!

Here's the next big misunderstanding people have:

Dealers are not just "withholding inventory" they bought at higher prices. Proof? They will take your money now, to lock in a price now, and they will hedge by buying paper futures contracts, until they can find product to buy.

The other key here is that if they do have product, they won't want to sell it, unless they can get more, and they can't get more, because the public is no longer selling, and there is a pronounced production bottleneck! Why should they sell out, if they can't restock?

Many major dealers will hedge with futures.

But a futures contract is not the type of silver they want, as David Wexford explains above, so they have to sell that contract for real 100 oz. bar or 1 oz. round silver, eventually.

The honest dealers sell only what they have. If they don't have it, they don't sell it. Tulving, CNI, Wexford, Miles Franklin, etc.

Many major dealers are reporting no silver in "the dealer network". If I'm hearing lies, prove it. People who say there is no shortage should put up, or shut up. Sell it to Tulving, Franklin Sanders, Miles Franklin, etc., they will buy your silver.

Other dealers will take your order now, for inventory that will take 8-10 weeks to deliver.

Who has such crazy policies as that? Perth, Kitco, Northwest Territorial Mint, Johnson Matthey, and others. You should avoid them, in my opinion.

And if you have to wait 30-60-90 days for silver from any seller, it means they are selling what they do not have, and hope to get it from someone else that does not have it today either! That means they are short, (they owe you silver) that they do not have!

And if there is a "regular" 60 day delay, where they have you pay for it all up front, instead of a tiny 5% deposit down payment, then they are "floating" on your money, like you gave them an operating loan!

Proof that they sell what they don't have:
SOLD OUT, with a warning:

IMPORTANT NEW NOTICE: Due to market volatility and higher demand in the entire industry, we are anticipating delays in supply of all bullion products. Please note that you can continue to place orders and prices will be guaranteed; however, cancellation fees will still be applicable regardless of the length of the delay. Consequently once inventory is received there may also be delays in processing and shipping by our vaults.

I find Kitco's notice hilarious, and sad. Kitco is essentially saying they will lock you in on price, for silver that they don't have, and cannot find, and their disclaimer seems to indicate that they can delay you indefinitely, and if you want your money back, you have to pay a fee!!!

That smells like a default in the making, to me.

How can Kitco sponsor Nadler's editorials saying there is no shortage, and then put up a big disclaimer about a shortage? Yeah, I'm the ignorant one who doesn't get that.

Where can you find silver to buy? I'm trying my best to find sources of physical silver for you.


Tulving received some silver inventory. I continue to hear great things about APMEX, and their online order system is the best; it shows inventory in stock, put 9999 in the "order" box. They have over 5000 silver Philharmonics. This week, I bought 2000 oz. of silver from them.

APMEX is GREAT for small, retail buyers, as the minimum order size is $50.

Original comments from here.

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