Physical Silver Investors Are Being Hoodwinked by the Futures Market

asiablues's picture

By Dian L. Chu, EconMatters

The Silver market is in a bubble stage right now. No one really knows how long this will last, whether Silver goes up another $5, 10, 20 doesn`t really matter for investors who are buying the physical metal in the form of coins because when the bubble ends they are going to be sitting on a depreciating asset.

Sure, long term, Silver will be worth more sometime in the future compared with the average price of the last 30 years in the next 30 year segment. But Silver prices have risen far too fast in to short of a time for this to be sustainable longer term.

Silver's QE2 Juicing Cycle

For example, wasn`t Silver just $18 an ounce last August 2010? Guess what also corresponded to this same time period, you guessed it--QE2 (See Chart).  What happens to Silver prices when QE2 ends? Physical Silver investors have been tricked into buying the physical because of what the speculators are doing in the futures market.

Hot Money - Easy Come, Easy Go 

I have news for you, physical buyers, those are not buy and hold investors, and they can go just as quickly as they came. Remember, the futures market is determined by fund flows, and right now there has been a lot of money to be made in a hot commodity market. But markets and especially commodities are very cyclical in nature, and money flows into these instruments during parts of investing cycles, and out during others.

Physcial Buyers Holding The Bag

However, the physical buyers of coins are not looking to flip these investments; they are going to hang onto the physical coins for 5 years or more. Guess what, you have seen how fast Silver can rise, and you probably know that it can fall just as fast. But the one element that physical buyers of Silver are missing is that they are buying at the top of the market at many standard deviations above the average price of the past 30 years.

Miami Condos & Silver

This is a recipe for disaster, and no different than buying Miami condos at the height of the housing bubble. If you’re flipping the condo, and are lucky enough to not get stuck holding the bag is one thing, but to have bought a Miami condo just before prices fell off a cliff is another matter entirely.

Whenever prices of any asset go up this high in such a short time span, it is a bubble, and unsustainable. And no, I am not calling for a top in Silver prices, but what I am saying is that the Silver market is in a bubble, and unsustainable unless a couple of doomsday scenarios happen. Which is always a clue for your investing outcomes, if you need a doomsday scenario to have a long term profitable trade that you’re going to hold for five years, then you really are putting on a low probability trade.

Bought at The Top of The Market

The bigger problem with buying at or near the top of the Physical Silver market is that the US is in an unprecedented low interest rate environment. What happens when interest rates go back to their historical averages? They were just 5.25% less than 5 years ago, what happens in the next 5 years when interest rates go back up? What do you think is going to happen to the value of your physical Silver coins? They are going to depreciate in a steady but sure fashion.

Worse Than the Housing Bubble

In short, because you bought so much above the 30 year average price for the physical market, your asset will depreciate, and be heavily under water once the next rate tightening cycle begins. And we are not talking about a little under water. Your under water will make Miami condos look good by comparison.

You think there was a housing bubble? Compare your asset to a house, and look at the precipitous drop to those assets. You cannot even live in your depreciating asset. My advice to any purchasers of the Physical metal is to sell while prices are still going up, before the futures market busts.

Remember The Past Bubbles

Don`t get tricked by Wall Street momentum traders who will bid up any kind of asset if they think they can profit from it. Remember, how hot housing stocks were? Remember those Nasdaq Dot Com stocks, where every day another new internet company was doing an IPO even though they had no proven revenue streams? Does that sports streaming venture that Mark Cuban sold yahoo come to mind?

Bubbles exist in markets; traders take advantage of them, while bag holders pay the price. I bet yahoo wishes they could undo that trade, Time Warner wishes they could have a “do-over” on that AOL partnership.

US Is No Greece or Japan

Yes, there are a couple of scenarios where holding the physical Silver might be profitable 5 years from now. If the US goes into default, a very unlikely scenario, given our incredible resources, and the fact that when we get serious about cutting the budget, with even a modicum of discipline we will be fine. We spend like drunken sailors, and that can be fixed.

The real problem is if you can`t produce revenue, and the US has only scratched the surface of producing technological innovation, which means we have a lot of revenue generating capabilities. A lot of countries cannot say the same, the US isn`t Greece. The US doesn`t have an aging demographics problem like Japan either.

The US has a spending problem, if worse comes to worse the US will just have to cut back on military spending, and with how far we are ahead of every other country in terms of military spending and expertise, there is a lot of budget tightening room to spare in that area and many other areas. When push comes to shove the US will get their fiscal house in order.

Dollar Devaluation Will Be Limited

Now, on to the other commonly referred to doomsday reason for holding physical Silver. The age old Dollar devaluation argument. Well, I have news for you Silver bugs, all currencies around the world are devalued with time. But the US Dollar is not going to be any more devalued than it was last year when QE1 ended, and the Dollar Index was in the 80s.

US Is No Zimbabwe Eithter

The currency fluctuates depending upon several factors, but Silver investors are taking a very low period in the dollar, and extrapolating this level of detioration pace forward for the next 5 years. It doesn`t work that way, unless you are Zimbabwe. The US may be a lot of things, but it isn`t Zimbabwe, and you shouldn`t base investment decisions comparing the most successful Business Country in the world to a country the size of Zimbabwe.

Carry Trade Unwind

Remember, the US Dollar is temporarily being used by the "Risk On" Carry Traders to go long assets, and short the dollar, thus artificially making the dollar weaker than it really is.  When they unwind this trade guess what the US Dollar will start rising again. Remember last summer, what do you think will happen to Silver prices when Gold starts selling off because the US Dollar is getting stronger?

Yes, the US Dollar will lose its value to some degree, this is why a coke used to cost 35 cents at one time, and now it is over a dollar. But this is a normal rate of depreciation over several decades. And not the rate of depreciation being currently priced into the physical Silver market.

Physical Silver - Pros & Cons  

Just remember the pressures pro and con for the physical Silver trade:

  • A low interest rate environment – Not going to be this way in 5 years 
  • The 30 year average price of Silver versus the current price of Silver
  • Investment fund flows now versus a portion of these same funds being applied to different markets, say real estate in 5 years 
  • The US Fed versus Global Monetary Policies: What happens when the US starts tightening, and China and India are done tightening? The monetary policy gap starts to narrow.  
  • These high Silver prices will bring a lot of the “precious metal” online; will there be a glut of physical Silver on the market once prices start to drop? 
  • Do assets that have this meteoric rise in price? Is it usually sustainable longer term?  
  • Do our financial markets have a long and storied history of unsustainable prices, i.e., bubbles? 
  • Are there more attractive markets for value at this point then buying Physical Silver from a valuation standpoint?

There's Time To Buys

It makes no rational investing sense to buy Physical Silver during a low rate environment, because the investor will be stuck with a well under water investment in a 5% rate environment. The time to buy Physical Silver was when the Fed Funds Rate was 5.25%, and the time to sell Physical Silver is now during the last vestiges of an equivalent Zero Fed Funds Rate.

QE2 Induced Irrational Investing 

This irrational investing in the Silver Market, based upon concerns regarding the long term stability and security of the US Dollar, is one of the unintended consequences of the QE2 Initiative. And much of this irrational investing in the Silver Market will reverse itself once QE2 is finished, and the US Dollar strengthens.

Silver & Subprime - No Difference To Wall Street

I am not trying to rain on anybody`s Silver parade. And who knows where the top is in Silver. But don`t get caught up in the hysteria of another Wall Street trade. Remember, the Silver market is just another trade for Wall Street. They don`t have any special affinity for this shiny metal, any more than they had for subprime mortgages, and when the writing was on the wall, they packaged these assets up, and pawned them off to other bag holders.

The Silver market will be no different, when they are done with this trade, they will run from this market faster than they came. And if you bought physical Silver based upon the meteoric price rise occurring in the futures market, you may end up having an asset that declines in value by more than half what you originally bought it for. So you can buy a Silver American Eagle for over $50 today, and have it be worth less than $20 in the future.

This is the epitome of a bad investment. You’re supposed to buy low and sell high, not the other way around. Remember, you are an investor not a trader if you’re buying the Physical Silver Coins. Thus you have to be a “Value Investor”. And I am here to tell you there are no ‘Values’ in the Physical Silver Market, or any other Silver Market for that matter.

EconMatters, April 25, 2011 | Facebook Page | Post Alert | Kindle

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Youri Carma's picture

Gold, Gresham's Law and the Dong, 28 April 2011, by Ben Traynor (Safe Haven)


But you can hardly blame the Vietnamese people for buying and hoarding gold. Not when the official base interest rate is 9%...high by the near-zero standards of the West, but even worse when you remember that Viet inflation is running at 17.5%.

That means a real rate of return on Dongs of minus 8.5%. By spooky coincidence the exact same percentage by which the Dong was recently devalued.

In this regard, gold ownership is a direct consequence of economic conditions. The only way the SBV could provide Vietnamese with an incentive to save in Dong would be to raise the nominal interest higher than inflation, and thus provide a decent real rate of return. But this would mean rates of around 20% at least. Not only would this hit the domestic economy hard, it would almost certainly cause the Dong to appreciate, which would make the trade deficit even worse.

Unable, therefore, to directly incentivize people the hold paper money, the authorities have resorted instead to marginally disrupting gold's monetary function. But this won't work. People will still prefer to hold gold because the Dong is failing to fulfill one of the core functions of money. It is a terrible store of value.

That is why the Vietnamese continue to hoard "good" money (gold) while passing the bad stuff around. Just as Gresham's Law predicts.


Somtin Dian L. Chu somehow doesn’t seem to understand.

Or maybe the one dimensional approach of silver and gold merely as a commodity like all the others like iron or allumium clouded clear judgement.

the misanthrope's picture

ok here you go. i remembered an article by her some time ago.

looked through her archives.   Oct.4/2010

it was a comment on a jim rogers interview, when she got to silver.

it's about all you need to know of her 'knowledge' with this form of money.

prepare to laugh out loud. especially about the "history". gee what happened after this Dian?

My Contrarian Take on Silver

Rogers has been quite consistently long on agriculture, gold and silver for the past year or so. I generally tend to agree that gold and commodities could head higher driven by the fear factors like currency debase and inflation arising out of the global monetary QE1 and incoming QE 2.

However, with regards to silver, I am going to be a contrarian this time around.

Gold has had a spectacular 20% run-up this year hitting new all time highs, but it pales in comparison to silver. On Monday, spot silver prices shot up to $22.13 an ounce, a fresh 30-year high, up a staggering 31% this year.

On the surface, Rogers has a point that silver is still a long off its all time high, which was reached in 1980 when the Hunt brothers decided to buy up almost a third world’s deliverable supply of silver as a hedge against inflation. Within one year, silver went from $5 to peaking at $54 in 1980. Ultimately, COMEX and Federal Reserve intervened resulting in the collapse of the silver market.

Now that we've had a crash course on the history of sliver, it should not take long for one to realize that, in contrast to gold, there’s very little chance for silver to touch, let along surpass that all-time-high mark.

Furthermore, since both gold and silver are part of the precious metals family, silver has been attracting interest of fund managers as a cheaper alternative to gold. But unlike gold, silver is also a base metal, since around 40% of the silver supply in 2009 was used in industrial applications such as electronics manufacturing.

So, silver, more base metal than precious metal, has essentially been piggyback on gold as an investment metal based on attractive valuation relative to gold.  However, silver is called “’Poor Man’s Gold” for a reason, as it has by no means the similar stature and glitter of gold in terms of wealth preservation and being the ultimate safe haven.

And as the current price level seems to suggest quite a bit of "faux" fear premium has built in, the white metal appears overbought and could be heading towards a bubble stage

MrBoompi's picture

OK. Silver is in a bubble. So fucking what. When it busts I'll back up the pickup. I can't wait.

So try as you might, a drop in the price won't improve the physical supply, it'll make it even worse.

Instead of threatening those of us who own physical metal, you really should be warning those who own paper metal. They are really the ones at risk here.

Jack Sheet's picture

2 questions

- sell the physical silver for what?

- buy what with the proceeds - or buy what with the $$ I would have continued to accumulate silver with ?


downrodeo's picture

Wow, there were so many switchbacks there I got whiplash. He keeps hedging his statements by saying 'i'm not calling a top', but then tells you 'silver is in a bubble'.

For some, buying silver is the easiest way to say that you don't approve of the Fed.


This piece is drivel.

Stuppy's picture

Going Long Silver is going Long Government Insanity

If the government decides to grow up or people finally decide to stand up, then the silver bubble will burst.

rcmullins's picture

Fantastic Link!  I like it!  Thanks for digging this one out.  I needed to show to my anti-silver buddies.  Ya, ya, I know, why would I have buddies who are anti silver....*sigh*

kinik77's picture

Kudos to ZH for having the guts to be fair and publishing different points of view even if they are absolute nonsense.  I will not argue against the majority of Dian's points, since some of the comments have addressed these opinions already.  I will, however, take a few moments to address the main point of whether Silver is in a bubble or not and whether people will be "holding the bag" in a few year's time in what I consider an unorthodox manner.


kinik77: Hello pension fund managers, the top 300 of you currently manage $6 trillion as of 2008 according to The Economist in assets and worldwide you manage $20 trillion according to Morgan Stanley how many of you have anywhere near 5% of your assets in gold, silver or related mining stocks?

Manager: ****silence****

kinik77: Well, that is well and good since in 2008 investment demand for silver was only 1 billion and that at $6 trillion a shift of 0.000167% of your assets in silver would double the 2008 figure, not including small investor/large investor retail demand, industrial demand, hedge fund, sovereign wealth fund, and central bank demand AND I would like to get a little more on the cheap at $50/oz. Sorry, I forgot to ask, how many of you hold any of your assets in mining stocks?

Managers: ****silence****

kinik77: Again, that's awesome for the moment because I'd like to raise a bit more cash and buy some more of the miners that I've been looking at.  After all, the market cap of the top 100 mining companies on the TSX is roughly that of Apple Computer and a tiny shift of your assets into the miners would raise the market cap of these guys by multiples.  One last question, how many of your friends and family are currently buying gold/silver or mining stocks as even a small part of their portfolio, more than 5%?

Managers: Yo kinik77, are you done yet?  We're getting bored and we have a round of golf to get to. We don't REALLY give a crap about the teacher/firemen/civil servants/etc that we represent and if/when gold hits $2000 and silver hits $100 then we'll talk.  Until then we have REAL investments that we have to manage.

kinik77: So sorry , but I think that we will be talking soon, and I will be sell.




Marty Rothbard's picture

Clearly the writer believes the dollar will retain it's reserve status.  I'm curious as to why.  The world has been watching these last ten years, and has not liked what it has seen.  The endless pointless wars of agression.  The inability, and/or unwillingness to deal with middle class entitlements.  The stupidity, and hypocracy of warning Japan not to bail out it's banks, after it's real estate bubble collapse, our prophetic prediction of the consequences, and then doing the same thing.  The lack of any meaningful "change" by the Nobel "war prize" recipient.

   Perhaps he has not noticed the Chinese, and Russians abandoning the dollar, in their mutual trade.  Perhaps he hasn't read about the buying of gold by central banks around the world.  Maybe the anouncements from China about rebalancing their foreign reserves didn't register.  Maybe he isn't a student of history, or he believes that "this time it's different".

   For what ever reason, I appreciate his warning, but then I bought in at about $15, and never plan to exchange my rounds for dollars.  Maybe I will for food, gasoline, medications, or ammunition, but never for dollars.

   SILVER BITCHEZ!!!  (gold too)

southsea13's picture

I`m not going to listen to the so-called `pundits`. I`m going to hold on to my silver and if it drops in value - well, it`ll go back up again in my lifetime I`m sure. If anything, I regret not having bought more when it was still at around $26 per ounce (and should the price drop back to that level then I`ll buy a shed load more). 

Bastiat's picture

Just re-read Sprott's recent piece on silver and see who makes more sense.

firefighter302's picture

I swear I told my wife on Thursday night, after last weeks run... "Every goon, stooge and idiot, will be out next week screaming about the silver bubble."

Without any consideration for facts, but soley based on the per ounce price.

And here is Ms. Chu !!!!   Entitled to her opinion, regardless how inaccurate and foolish it is.

I'm not even wasting my time with a retort.

Another genius who didn't buy silver at $16.  Follow her advice to your own disregard.

famousamos's picture

Madam Chu, what you've just said is one of the most insanely idiotic things I've ever heard. At no point in your rambling, incoherent analysis was there anything that could even be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.

famousamos's picture

Silver is money. That paradigm shift has occurred. The 'paper to physical ratio cat' is out of the bag. While gold was making it's historic run-up, silver bounced around $5 an ounce - the reason for that is now well known. Silver will catch back up. Yes, a devalued dollar helps all commodities - but silver has some unique circumstances that the writer is either unaware of - or unwilling to consider. TPTB would love for everyone to believe that the silver runup was strictly due to the devaluation of the dollar. Not true.

monopoly's picture

I see what is running this govt. and I think of selling... 0. Yup, moves to 35 buying a shit pot more of silver.

Watauga's picture

(1) Can you explain why gold and silver miners are lagging so badly? 

(2) Where is Turd Ferguson?

Bastiat's picture

1) Because hedge funds are allowed to sell near infinite amounts of phantom shares.  It would be fun to find out how many shares people think they own vs how many are actually ooutstanding on a company's books. DTC knows the answer but you won't. 

IIRC, part of the Blanchard case was the allegation that the suppression of gold and trashing of shares allowed ABX to grow by scooping up juniors who couldn't raise capital due to the depressed share prices.  ABX then hedge production massively -- ie. provided the bullion banks with futture supply to cover their shorts.  Eventually the gold market got away from them and ABX had to cover at least the pure speculative portion of their forward sales.  ABX has had some interesting board members over the years, too.

Don't expect any help from the regulators especially as precious metals become more obviously important.  Cash flow and/or dividends will get things going. I've heard from inside the industry that M&A is getting hot - ie. talks are taking place. This should draw some spec investor interest.  Also there may, at some gold/silver prices, be some broad based, fundamentals-driven investing in the sector beyond the specialist funds.


luk427's picture

Dian L Chu and ASIABLUES  go fuck yourself.

LawsofPhysics's picture

"The US doesn`t have an aging demographics problem like Japan either. "


Oh really?  Are we going to start exporting all those baby boomers?  This article is total bullshit.

g speed's picture

I don't play with penny stocks cause the volume and the number of shares is low--so they can be manipulated. I don't play with silver or other PMs cause the volume is low and the number of OZs world wide is low and can be manipulated or cornered.

Pemaquid's picture
I remember vividly the changeover from 90% coinage to copper clad in 1965 and the demise of silver certificates.  It didn't take long for the 90% coinage to disappear from circulation.  Perhaps others here remember the long lines of people waiting to sell silver certificates for bags of raw silver?  Then, in the late 70's when the silver price spiked, much of the hoarded coinage and raw silver was turned in for FRN.  In my home town several silver buyers set up shop with long lines of people waiting to sell their hoarded coins and family silver flatware.  A local service station ran an add offering gas at a silver dime per gallon.   Just about every night there was a news item about the panic selling.     That was a bubble!   This time around the sheeple do not have any silver to trade for cash and many of us who have faith in tradition money will not sell unless it becomes absolutely necessary.  Physical silver is our ace-in-the-hole.  What's yours, Dian?  netflix?  HAHAHA
g speed's picture

silver dimes were used along with turquois to make fake american indian jewelry in the late 70s-- I had a girl friend who wanted a $5000 dollar necklace-- she didn't get it--- however the same type of necklace sold for $150 dollars in pawn shops 5 years later-- (then she didn't want one--go figure)

Stares straight ahead's picture

The title of the article had nothing to do with the body.

Can you rewrite it?

1troyoz's picture

I will sell my gold and silver when Jim Rogers, Dr. Marc Faber, and the despised George Soros sells theirs.  After all, they are smart extremely successful investors, two of them are billionairs.  Additionally, when the US congress presents the president with a balanced budget that is approved, the US national debt is extinguished, the Federal Reserve no longer exist, & the TSA is removed from all airports, this will be a sign that the US is serious about correcting its financial & political mess & returning government control to the people.   Also when slavery is illiminated (a 21st century slave is anybody living off government subsidies).  Damn, I guess I will have to keep my gold & silver and keep a-buying.

70% of America's GDP was consumption which is falling off a cliff.  Most of the GDP that remains is QE, so it is QE to infinity.  Remember, gold and silver are not increasing in value, it never has, it has stayed the same through out history.  There are so many dollars floating around the world that it is taking more dollars to buy ALL goods and services which includes gold.

I hope there will not be a crash in the US.  If there is a crash what will happen?  In Zimbabwe when their currency collapsed they had a back up currency, a little gold and the dollar.  In the US there is no back up currency except Gold & Silver.  If the dollar crashes and most of your assets are in paper - GOOD LUCK!  George Soros has stated he wants an orderly decline of the dollar.  That means - NO BUBBLE, for now.  The math is simple, they print more dollars - gold goes up.  Ole George can't control gold but he sure can control the man made dollar, he puts a gun to Ben Benenke's head.  George tells Ben:  "Fire up  your computer and send the US Treasury extra money & please include 9, or 12 extra ZEROS".  Notice I did not mention 'o'bama.  The president is only an illegal allien puppet of the elite.

Today you have a choice.  There will come a time  when you don't.

Jack Sheet's picture

"...when Jim Rogers, Dr. Marc Faber, and the despised George Soros sells theirs. "

Good point. I would add Eric Sprott to that list.

Jack Sheet's picture

"...when Jim Rogers, Dr. Marc Faber, and the despised George Soros sells theirs. "

Good point. I would add Eric Sprott to that list.

rcmullins's picture

Hrrmm, pretty crappy analysis based on opinion.

1.  QE2 Juicing:  Of course this is correct, but QE is never going to end in one way shape or form, and QE3 is coming.  So, buy?

2.  Hot Money:  WHAT?  This makes no sense.  Silver is NOT  a Chia Pet or a Beany baby, don't be a moron.

3.  Holding the Bag:  Hrmm, I bought silver when it was $14, so looks like silver could give up 50% of it's yields and I'll still be sitting pretty, so what are the odds with more QE and dollar poundage are suddenly going to stop and the government pull dollars back OUT of the system?

4.  Miami Condos:  The housing market was driven by cheap money not demand.  Silver is being driven by demand.

5.  Bought at the Top:  Historical rates?  You mean since the eighties?  Given inflation and the devaluing dollar silver hasn't come CLOSE to hitting it's top.

6.  Worse than the Housing Bubble:  Umm,,,whatever.

7.  Remember Past Bubbles:  Oh ya, I guess he means the artificially pumped up non-things like services, and houses no-one wants and....

8.  US Is No Greece or Japan:  I love this, it's my favorite dummy-argument.  I love it when someone starts bragging about the innovation of the U.S. and the technological wonderland blah, blah, blah.  I guess he's never been to a Wal-Mart recently with the empty-carb guzzling swill sucking mouth breathers. Suck, Suck, SUCKKKKK!

9.  Dollar Devaluation Will Be limited:  Hrmm, QE1, QE2, QE3, or how about QEn?  Keep pumping Fed!  We will buy our way out.  Unless the government has a stockpile of Iraqi Dinars that go BOOM on reval, the government isn't buying their way out of shit.

10.  US Is no Zimbabwe.....The only thing between us and them other than climate is that the dollar is the RESERVE currency....that's coming to an end, and we all damn well know it.

11.  Carry Trade Unwind:  Umm,,,ok, interesting.  I guess the Fed printing gazillions of dollars have nothing to do with the dollar value.  So Adam SMith in reverse, the more plentiful something is the MORE valuable it becomes.  I need to get my hands on some sand and air cause theres a LOT of that stuff!

12.  blah, blah, investment advice, blah, blah, blah, investment advice, the dude is ignoring irrational exuberance on Wall Street, blah, blah, blah, ad infinitum.  When QE2 is done the Silver is dead, blah, blah, blah.

13.  Conclusion:  I hope you are right dude!  If the bottom fell out of Silver that would be awesome!  THat way I could stock up on a whole shit-ton more.  I would be eating Silver faster and with more gusto than Kirstie Ally at an all-you-can-eat burrito bucket buffet!  So keep printing the dollars and artificially sell paper silver, that would make me extremely happy!



drom's picture

Sounds like all the people caling for a bubble at $28 and then at $38 again, oh no here comes the selloff!  Get real, you think anytime soon America will have its fiscal house in order, btw Im not so sure the dollar would benefit on a selloff this time.  Everyone is looking for a selloff just like 08, but I highly doubt it would exactly the same.  I am willing to sell a little of my silver to diversify into RMB and a little gold, but this price will not get me to sell my stash thats for sure.

Silver the same as subprime, that gave me a good laugh.  While margin requirments go up, the amount of leverage between the two markets are not even on the same planet.

"US doesn`t have an aging demographics problem like Japan either." Is that why we are paying out more in SS than incoming for the first time ever, in case you haven't heard of the baby boomers, they are aging and about to retire into the SS system.

Just cut military, even if we cut military 100% it would solve the problem, in addition to that you didn't consider all the jobs that would be lost at Lockheed Martin, Boeing, possible soliders loosing jobs.  Our GDP is over 25% dependent on gov spending, just about any cut you make cuts jobs and cuts into GDP growth, its one of those catch 22s ov got us stuck in.

Iam_Silverman's picture

"What happens when interest rates go back to their historical averages? They were just 5.25% less than 5 years ago, what happens in the next 5 years when interest rates go back up?"

1.) Uhmmm, the economy tanks? (think housing, big-ticket financed durable goods)

2.) I make more on my savings accounts! (and "safe money" flees the bond/equity markets - bad for Mr. Wall Street, so not very likely to happen)

3.) My ASE's and CML's will still be worth more than I paid for them.  Silver is still a commodity.  If interest rates go up, will the price of oil or corn lower accordingly?

Imminent Crucible's picture

" what happens in the next 5 years when interest rates go back up?"

To answer that question, ask yourself why the Fed has been rolling over the 3s/5s/7s into super-low yields as fast as they can? Answer: Because more than half of outstanding Treasury debt rolls over in the next few years.

To keep debt service costs manageable as the Geithner administration adds debt at $2 trillion per year, the yields must get chainsawed.

When interest rates normalize, the U.S. govt goes bankrupt and collapses.  Unless the Fed can make water run uphill.

falak pema's picture

One question to both Asia and TD :  There is no mention on ZH postings of the upcoming IPO of Glencore. This is the Mining & M cum commodity trading giant that will go public, I believe in May 2011. This will have a huge expected capitalization according to the Underwriter PDs. Some say in 600 B USD range.... This is Mark Rich's ancient trading operation bought out by his SA investor friends...This should have a huge impact in coming months on BIG commodity trades (not just silver bullion) as it will be of the size of the current big four : Rio Tinto, BHB etc. Love to have your comments on this.

The Rogue Trader's picture

Amazing how many writers are being bribed to write this tripe....

overmedicatedundersexed's picture

silver is supported by forces much larger than comex and traders.

ben and tim will have to be removed before silver falls

senators and congress will have to be removed before silver falls

mega banks and fed will have to be BK'd before silver falls

when the above changes let me know, then I will sell silver

other wise it is borrow and spend and pretend as it has been. the fear of fiat paper in the end is what must change . at this very moment more of the sleeping people are waking to the fact paper money is not what they thought.

so few of us so far have seen the fiat scam and acted so many more yet to do so.

PM's are supported by the very elites who are trying to take yours away..we have a long way down in paper to go a very long way..let's hope it is orderly and slow.

silvertrain's picture

Silver will NOT BE PRICED IN DOLLARS in the next couple of years, thus this whole ball of wax is bs..Would it be in a bubble if it were 60 bancors or 32 sdr's bla bl bla...Nobody knows but one fact remains, it will sit beside gold on the top of the hill when the dust settles as it has for thousands of years...

Bartanist's picture

To state the obvious, there are two precious metal plays:

1. Short term bubble appreciation against the dollar. If the dollar survives then the trick will be determining when to get out because silver is an f'n lump of metal, not an investment.

2. A bridge from the dollar to the new currency. If and when the dollar is replaced by SDRs, RMB or whatever, silver and gold will have some value/price in whatever fiat currency replaces it. You can sell it then in the new currency ... along with everyone else who wants to exit from holding lumps of metal. My guess is that the exit will be uggggglllyyy -

- those not holding actual physical silver in their hands "may" get zilch

- those who want to sell physical will need to find someone who needs the silver for industrial or other productive purposes

While I believe that the dollar is in trouble thanks to planned actions by banks, government (owned by banks) and big business (owned by banks), I have never been through a scenario where the global reserve currency simple goes away and is replaced by another (has anyone? I think we are all guessing). What are the steps that actually take place? Maybe people just lose confidence in one currency and start using another, such as gold or silver for transactions.

But to get to that point everything financial would have to be completely destroyed. Gold and silver for transactions is not currently allowed. Maybe it would have to start on a less than orderly black market before it could be mainstream. How would global commerce exist? How would you buy your "mark of the beast" satanic iPod tracer?

Iam_Silverman's picture

"Gold and silver for transactions is not currently allowed."

Except in Utah, where it can be used to pay your taxes.  I think Georgia was also contemplating the same thing.

I also thought that the United States mint recognized their coinage as legal tender - after all, it has a "value" printed on it.

I think that you really can use any PM for transactions, providing the counterparty will accept that as a medium of exchange.  Maybe what you are alluding to is finding a sufficient pool of counterparties that are willing to exchange (barter) PM's for goods and services.  The issue is that here in America, most people are not educated in the use of barter, and in order to determine the value of the proposed exchange, each side has to convert the relative worth of the proffered item to a known standard (i.e. spot price of the PM compared to the blue book value of a used car).


Other than that one point - a very concise and relevant post!

Al Gorerhythm's picture

This is a dump and run; or just a dump.

Old Poor Richard's picture

This article is a warning to be prudent.  If you're a physical metal religionist then sell your guns and food stores to buy more "real" money.  If you're trying to profit from irrational exhuberance in metals, then trade futures or paper ETFs.  So you can get out when the getting is good. 

I think silver is awesome: mostly it's awesome because I've got paper silver which I can sell with a click of a mouse.

I thought the other recent analysis from Dian was full of crap, but this one seems reasonable.

Dangertime's picture

The article as absolutely wrong for the long-term.  Silver will power much, much higher.

Short-term however, she is right on the money.  Silver to the low $30's this summer.  Pass of your bag while you can.

digalert's picture

Dian, Your comparing dollars to silver, what happens if your dollar becomes worthless or worth-less? hmmm? A fiat currency is based on trust and that trust has been broken.

johny2's picture

The interest rates are 0-0.25% and there is 0-0.25% chance of them going to 5.25% any time in next 5 years. 

All the rest of the article is a noise, the reason why the dollar is collapsing is the negative interest rate. 

Silver is not in the bubble, it is US dollar that is with one leg in the grave.

steve from virginia's picture

I don't agree w/ Dian Chu a lot of times but she is acute w/ this article.

Silver/gold prices are supported by short- squeeze and large paper derivative positions. The rising prices are self- reinforcing as they create the incentive to hoard and take supply off the market (Hotelling's Rule). The costs of the paper positions/margin are added to the 'hard' cost of producing the metals. Add to this the decline in PM extraction due to lower ore quality and higher fuel costs and the outcome is a perfect bubble/storm.

Once the demand for cash is made, the paper positions will evaporate. The smart money is likely already out of the market w/ a good profit. The rest are suckers to be taken to the cleaners.

True, the cash won't 'disappear' in that it will always be around until the liability of its creation is extinguished ... it will disappear out of your account into that of J.P.Morgan- Chase or Goldman- Sachs. They will use 'your' cash to puff up another bubble in some other market.

The hysteria about the dollar is also indicative. When the revulsion comes (right about now) and folks dump their dollars (for what, exactly? Euros?) the big banks will happily take them. Theirs is a longer perspective: they know that currencies as well as markets fluctuate. They also know when everyone is on one side of a particular trade, the price direction is going to change. The more one- sided the trade, the more powerful the move. With 'everyone' knowing the (dollar) future and how it is going to unwind, the market is certain to prove everyone wrong.

It's going to hurt, too.




Iam_Silverman's picture

You bring up good points yourself, but I am not sure that really understand the point you are trying to make.  I wish Ms. Chu had done more than make an impassioned plea to save silver investors from certain doom.  I would have liked to have been shown charts depicting how silver production will outpace demand and cause the postulated sharp drop in price.  I would have loved to see charts or other projections on the demand for industrial silver will wane and cause a glut in the market.

I would also like to hear more detailed reasoning on how the USD will suddenly become a powerhouse currency given the current direction of our Federal Reserve Bank.  How exactly would a rise in interest rates drive down the price of any commodity (reduced speculation as players become "savers"?).

I don't have a degree in economics, so the various forces acting on commodities and investments sometimes overwhelms me.  Sigma, alpha, beta?  Elliot waves and Fibonacci or whatever curves?  Explain to me why this or that will make the value of the target commodity decrease.

Disclosure:  I am not a commodities or equities trader.  I do hold some physical PM's as a hedge.  I consider them to be a part of my FEMA recommended disaster plan, along with my canned/dried food, seeds, ammunition (and reloading supplies), medical kits and arable land/cattle.  While the daily gyrations of silver prices catch my eye, I would not be terribly worried if the price dropped back to $20 (still higher than when I got in) as that would be a sign of USD stability.  Just show me some charts and research to back your position.  I see enough emotion here as it is.  Just the facts, Ma'am.

DJ13Francis's picture

That sounded like the carefully crafted words of a VP over at APMEX trying to encourage people to sell their silver at 3$ over spot because they've got none to deliver...  Either that or the propaganda of some other similarly motivated entity.

smartknowledgeu's picture

@ diane,  we are still in the middle of a monetary crisis. Most people that understand this and have understood this, started buying silver around $9 or $10 an ounce or so (of if you were really brilliant, at $5 or $6 an ounce - I'm not one of the brilliant ones that bought silver at these levels but I do know a few people that bought around this level). That means we can weather a massive correction in silver of 30% to $31.50 an ounce and still be sitting on a couple hundred percent profits. So no, we're not worried about silver being anywhere close to a bubble right now. And speculators responsible for the bulk of the silver price movement for the last year? Please. Bullion banks have used the paper silver futures markets and the SLV to suppress the price of silver, not drive it higher.




falak pema's picture

+1000. Your friends got in when silver was still showing its bare bottoms in the nude!

You got in when it was in it's underwear...still very sexy!

Youri Carma's picture

I don’t think silver is in a bubble but if it is it has a long way to go to hit the real inflation adjusted Silver Hunt brow high of $140.

I think it’s rather the size of the market which makes great up and down swings possible just be dumping silver on the market in smaller packages can send the silver market down and ……

…. vice versa :)