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Physical Silver Investors Are Being Hoodwinked by the Futures Market
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.
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$140 is BS. Why do we inflation adjust the inflation hedge?
I mean if you hear Paul Craig Roberts which is ‘The Man, the man’ and has been on par with the situation all the time. I’ve been following this man for three years now and I can tell you he doesn’t say the things that he says lightely.
Paul Craig Roberts: Further Collapse of America’s Empire May Lead to Global Nuclear War – 1/2 http://youtu.be/nAUDvsjcHWY
Paul Craig Roberts: Further Collapse of America’s Empire May Lead to Global Nuclear War – 2/2 http://youtu.be/lml3-ayEFTM
Pure bull shit and hot air, souds like sour bro missed the boat.
This bitch is nothing more than a pawn of the banksters regurgitating talking point memos directly from the FED/Treas or even Jamie Dimon. If you review her posts either here or on BI, she always takes the gubermint propaganda position.
Folks, the shortage of silver is real; don't be swayed like a sheeple.
@TimmyM
"This is not some Wall Street sponsored commodity fad. This is mom an pop worldwide deciding what is money."
So BTFD eh!! and $45.45 sounds like a dip fueled bargain to me!!
i bought 700 canadian maples at $28 each. if they goto $2.80 each i will buy 7,000 more.
I didn't see anything about the facts of silver being used in industry and how the above ground supplies have been deleted. I didn't see in the article how the mints around the world are having a problem getting silver.
If an article is written as this was, why wasn't the facts of how silver is used and needed besides investment wise?
Why did ZH even put this obvious tool article on the site? This should be under Jon Nadler or such label.
But I bet Jon Nadler will refer to this article at some point and say it was on ZH too.
Let me say this and I would appreciate comments on this thought.
If someone offered me a silver 64 US quarter at spot prices, I would take it in exchange for goods or services.
Would you?
Say hello to our new currency.
BTW I love that heading, The US Is No Greece or Japan.
I don't know whether to take the gyro, the sushi or the burger. Do you accept silver?
You keep your paper, I'll keep my goods and metals.
You trust man, men who aspire and scheme to enslave you. Have fun with that.
Yeah, well, that's just like, you opinion man. http://www.youtube.com/watch?v=pWdd6_ZxX8c
Dian says: ‘there’s a low rate environment’. I say there’s a negative rate environment which drives Silver and Gold up.
This shrill shill is short...
The article seems to assume that there will be no decoupling of the physical price from the Comex price. During a bubble hysteria people demand product and price becomes irrelevant, before it inevitably crashes. Since Comex can print paper silver to meet short term demand the price and hysteria are suppressed, until they cannot meet physical demand...
Incidentally, I would rather be down 50% on a Miami condo owned free and clear than down 85% on a CDS paper backed by Miami condos.
interesting CV Dian Chu, there is hope for you yet, in the PR department at the Morgue. it might be a good idea to bring this article to their attention so they can see what a good person you are
Don't forget kneepads and lubricant as I hear Blythe likes it regular and rough from her ladies.
Sounds like somebody has some sour grapes because they are missing the ride. A very sophomoric article with weak arguments. Did you write the original in crayon? It's never a bubble until everybody is doing it. And right now the "common" man is still selling whatever silver they can get their fingers on.
Have you ever been to Zimbabwe?
According to Aristotle the characteristics of good money are :1)Portability 2)Divisibility 3)Durability and 4)INTRINSIC VALUE,mainly through RARITY. Printing money out of thin air and then borrowing it,with interest,to fund wars while running a deficit of 1.5 trillion with projected spending cuts,from social services,of roughly 80 to 100 billion,is the perfect recipe for further commodities appreciation.You cannot eat Gold but you can always count on it to buy you the things you eat as it has value of its own.Fiat on the other hand is only backed by the "good faith" and law of the state while its intrinsic value is that of the cotton-paper it is printed on.To me this is not just another crisis that will go away but the end of an era, with precious metals being reinstated to the rightful place they held for millenia.The only thing that can solve most of America's problems is another major,like world,war.But if that happened where would gold and silver price go?
...
Wars = Resource destruction.
wars = expression of second law of thermodynamics. Maximising entropy flow in fast mode. That allows restructuring and rebuilding of newer empires...i.e. reduction of entropy through forced discipline....before next explosion...as entropy increases once again.
So man goes up and down the entropy hill like Sisyphus; good icon for the average man, Humanitas personified. "Pork chop hill" or any other torrid place on war plain is the ENTROPY HILL...ultimate horizon of each renewable human endeavor/despair cycle.
Ha! Brave new cyclical world!
You might be interested in reading "Babylon's Banksters: The Alchemy of Deep Physics, High Finance and Ancient Religion" by Joseph P. Farrell.
It discusses, among other things, the similarities between privately issued and state issued money and closed systems and open system ('free energy'). Great read. :)
"Product Description:
In this latest installment of his remarkable series of books of alternative science and history, Joseph P. Farrell outlines the consistent pattern and strategy of bankers in ancient and modern times, and their desire to suppress the public development of alternative physics and energy technologies, usurp the money creating and issuing power of the state, and substitute a facsimile of money-as-debt. Here, Farrell peels back the layers of deception to reveal the possible deep physics that the “banksters” have used to aid them in their financial policies."
http://www.amazon.com/Babylons-Banksters-Alchemy-Physics-Religion/dp/193...
Dian L. Chu The Infinite Analytical
CPSM, C.P.M., Chartered Economist, with an MBA from University of Houston. I'm a market analyst, bilingual in Mandarin Chinese, with extensive cross-industry experience at Fortune 500 companies. Currently based in the U.S., I'm also the accidental blogger, editor at EconMatters, and maintain a column at NASDAQ.com, and Houston Chronicle's FuelFix.
http://about.me/Dian.L.Chu
dian chu is potential nobel prize winner for economics and we all know how clever they are
cut the bullshit propaganda, get a proper job
Sell me June $20 silver, Dian, as much as you can afford, I'll buy it.
It puzzles me how people can get so emotionally cranked up because other people who are disgusted decide to buy silver coins instead of Ponzi paper.
The people of the Ponzi are getting concerned, as they should be.
QE
TP
DP
Wait for them to start the inquisition as to why as a hoarder, you undermined the system with your silver coins. If they are a depreciating asset and such a stupid idea to put your faith in, why are they appreciating against every other financial offering. Mom's and dads of the world are going to be labeled in a witch hunt. Looking at the hyperbole in this article shows that the tar and feather campaign has begun.
Good point, WB! You really hit the nail on the head there.
Indeed, I believe that buying and holding (NOT trading) the precious metals during this time of financial and monetary chaos is a very wise choice, but I hardly go around screaming at everyone doing differently to repent and change their ways, nor do I troll into any pro-Fed, pro-central banking, "mainstream" financial forums to harangue all the clueless pro-Establishment, center-thinking sheep on why they are idiots and how they need to listen to my wisdom. So just what motivates those who do the opposite towards the small minority of us who condemn the sociopathic power elite, and who believe in or hold precious metals?
Akak - the author enjoys writing and building an argument.
Anytime prices go up to the % extent we are seeing now, there is a possibility that it can V.
That is normal. Then again, there is a possibility it will hold value and continue upward. So what else is new?
Anyway, it all helps keep our saws sharpened. All good.
In the meantime, Ron Paul will be hammering the message of the money cartel Federal Reserve and plutocracy we live in. So more will awaken. And Fed policy will continue to be crazed, one way or the other.
It takes time to change perception. Medium and long term, silver up. Short term is always anybody;s guess.
If we see a V, it is just a buy opportunity. Keep it simple.
Fear of the PM meme
The top callers are out in force today as expected, and they will all be proved wrong. At some point silver will correct but the fundamentals are simply mind blowing, investment demand is flowing in to silver at a 1x to 1x or 1x 5x ratio to gold depending on the investment vehicle (coins, ETFs etc)
Silver has come a long way but there is still a long way to go for it to catch up with gold.
We are seeing the end of the USD as a reserve currency playing out before our eyes a historic moment. It may take 5 years but the events of just the past few days have been monumental including S&P downgrading US credit outlook and China stating its intention to sell 2/3 of its reserves
There is a reason why EURUSD is at 1.46 despite PIGS problems. The world is awash in USD and no one wants it. Watch for a waterfall decline into historic lows at some point
With gold and silver surfing the wave of volatility, today King World News interviewed James Turk out of Spain. When asked about the reason for the increased volatility Turk stated, “There are some earthshaking events coming, that’s what the precious metals are telling us. That’s what the dollar chart has also been telling us and that is why I am expecting a waterfall decline in the dollar index. The dollar has a unique position as the world’s reserve currency and as people lose confidence in it they will go to other moneys they consider safer.”
April 26, 2011
Turk continues:
“During times of trouble the natural reaction is to bring assets home. So as confidence in the dollar declines you might see an emotional knee-jerk reaction with people buying the euro even though that currency has serious problems as well.
But people who buy the euro will soon learn it is only a stepping stone to the only real safe haven which is gold and silver.”
When asked about silver Turk remarked, “The important point Eric is that silver is still in backwardation. I mentioned to you previously in the KWN blog piece on April 1st of this year that if silver remained in backwardation when we neared the $50 area it would be a truly extraordinary event. Here we are with silver touching $49 in Asian trading this morning, yet it remains in a 63 cent backwardation from spot to December 2015.
I can’t stress enough how significant that event is. Over the past three months the price of silver has nearly doubled, yet the backwardation has not disappeared. Markets are not designed to work that way, the higher price is supposed to entice people to sell their physical and hold dollars instead. I think the market is quite clearly sending the signal that people would rather hold silver instead of paper money.
The bottom line is that as long as silver remains in backwardation, price declines will be short-lived, it’s also telling us that silver has not yet reached a top on this move.”
When asked about gold specifically Turk replied, “We have taken out $1,500 and we look ready to move higher. Often times when you take out a century mark it brings in a lot of new buying and that is what I expect to happen this time. I had not expected the gold/silver ratio to move in silver’s favor as fast as it has below the 35 level.
At on point in early trading today the ratio was below 31. That is telling me that silver is still leading the way, but when I look at the gold chart and the huge base that it has built under $1,500, I still conclude that gold is ready to rocket higher.”
Thanks for the key points.
Sitting on a depreceating asset- not for a long time, at most 1 year:
http://www.saposjoint.net/Forum/viewtopic.php?f=14&t=2626&st=0&sk=t&sd=a...
This correction or even crash (price down to 30) will end in 2012 q2 with prices back to 50ties, and than one way up.
As long as the total global debt burden continues to grow PMs will follow.
Only when the debt is destroyed, and responsible governance backs paper fiat will PMs go into a structural decline.
Problem is even if the US decides to go all responsible on everyone, the Chinese wont, not with masses of educated unemployed and starry eyed rurals looking to go capitalist, China will PRINT.
With the curbs on property in the middle kingdom, and rampant fraud in the securities markets, its extremely likely a significant portion of Chinese liquidity will find a home in an unencumbered asset like the PMs.
he sure hoodwinked me with that poor delivery...
Dian Chu is caustic in this article. Not sure what his real intention was, but he sure got some people fooled.
Last might was just a breather. CAD and AUD are up. Metals should follow suit.
To the moon, but not too fast please.
I understand why this guy wants silver to stop. However, one isn't a "doomsdayer" just because they can rationalize the notion that this whole culture stops when the electricity goes out.
As we get deeper into the crisis of overpopulation and resource depletion, there is only room for the wealthy to concentrate their riches.
There will be no social security, there will be no grand social safety net in the future.
Why? Because there isn't enough oil on the planet to repay the current American Debt.
Physical will be harder to find in a month. And month after month there after.
Don't expect to be taken care of. No interest rate or policy can block the inevitable. The inevitable being that paper is paper and that is just someone's empty promise. If you believe in paper than what exactly is the 'end case for credulity" for you?
Inflation will kill this dollar and it will kill many more currencies to come. It's a natural cycle.
This is such a load of shit I have to go ad hominem. Dian - your a fucking moron.
"fuckable" is a nicer way of putting it as she is a woman ...and not bad to look at!
Besides, she is only giving her own sweet honey bun's opinion and it is a free world...to fuck in, as well as "be fucked by the market" in...
+1
moron's (excuse me)
Morons, not moron is. You're excused.
KRAMMER SAID buy gold? OMG, a major sell signal, that guy's one of the biggest fucking moron alive.
I doubt people are getting $200k loans to buy their silver or is the whole silver market is founded on massive borrowings. People are putting in their own cash, their equity in their asset is near 100% , not like condo or house financing. There is no similarity between the rise of silver and the housing bubble. Credit dried up, housing crashed(ing) the balloon stopped expanding and went into a deflationary spiral.
Silver/gold has gone up as a safe haven, a place to escape other assets and fiat.
So how is the dollar going to gain strength? Expansion of the economy is the only way out and that would require trade agreements with Venus and Mars.