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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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I doubt people are getting $200k loans to buy their silver or is the whole silver market is founded on massive borrowings.
there are people that got a 2cd mortgage in the spring '08 to load up on silver, then it crashed what, 55%? from over $20 to $9 something
if they managed to hang onto it then they came out pretty well if they sold in the last few months
Kina, well said.
It's mostly just taking their surplus cash, and converting it to an alternative currency - silver.
The sheople haven't really caught on, yet. This is not the big bubble. The housing situation got out of hand because every moron and retard with zero down could get a loan to buy a McMansion.
We don;t have that now - not by a long shot.
Silver medium and long term up. Short term is always anybody's guess. Except the momentum players with their greater fool charts. They believe they are always right.
Silver is and always will be the common man's gold. It has been used as currency for many generations. Just like we had in the good ole days, pre '65.
Who says they haven't leveraged where's your proof?
Silver wasn''t the poor mans gold till last month when all the fish jumped in.
Where were you in 2001.
Buying pets.com as a value play
So hypocritical to ask for proof when you have none yourself. Where is your "proof" that people are all jumping in now? There is none and you are talking shit. Who is leveraged when they buy physical? Who takes out loans to get silver into their hands? Who is in a bidding war with their neighbor over silver like they did with RE? And I'd bet that 90% of those still buying have been buying from the $30s or lower and will continue to buy through $100. Silver will be the poor mans gold until poor people are priced out, just like happened with gold, and they will turn to nickle, copper, brass, lead because they know their purchasing power is fading but they don't know how fast it can truly disappear.
Looks like you missed the boat and are probably pretty used to being wrong and getting bitter about it.
How the fuck can all the fish have jumped in when worldwide total silver investment dollar flow last year was a measely $5.6 billion? Christ, that's the annual hooker and booze bill for a couple dozen Russian oligarchs or half a dozen sheikhs. Less than 2% of the market cap of Apple. I don't know how anyone can say a commodity that is known worldwide to rich and poor alike can be in a bubble with an investment total of $5.6 billion, and only a retard would compare it to tech or housing bubbles that were in the ten's or hundreds of trillions.
There is a 300 Moz silver production shortfall right now that has to be made up with dwindling gov't stockpiles and scrap supply, and you can only sell the family silverware once. And guess what, finding and starting up a new silver mine is a lot harder than adding another shift at GM.
The silver story has at least another 2-3 years to run, but I'm hoping there will be some pullbacks.
Look at the fundamentals:
Inelastic demand and Inelastic supply = when there is a surplus, price gets killed, and when there is a shortage price skyrockets. It's basic economics.
Come on guys, this is just more purposely antagonistic crap posted by Tyler to rile up the PM bugs, and to generate debate and site hits --- much like Leo's nonsense. Don't let yourselves get too worked up over it. Dian Chu probably does not even believe this crap him/herself.
Akak - I agree. You are skeptical, maybe even cyncical - so am I.
But it is good to keep our saw sharpened. So give him good credit for doing just that.
Regardless, the shorters are praying for a V to get out of their positions. It will be quite a yo-yo should we get a near term sell-off.
Life is fun if you so choose.
Every article that goes against the groupthink of ZH is nonsense?
Can't believe you got junked there. (?? why ??)
I find articles like this very helpful, in that there's a discussion, and debate over why the author is wrong (or right) on some issues. It redefines the arguments pro or contra investing in PMs.
And it's a useful reminder of what the rest of the world looks like. (suffering from delusion??)
Sell your silver, short it, buy your FRNs, and shut up. Put your money where your mouth is.
I view this article more as a statement that, in the very near term, the spot silver price in futures has to have a mini-crash to correct itself. How can you claim its actually healthy for their to be a parabolic increase in price, without any conslidation? Consilidation is HEALTHY. Ironic since i can safely say we're both for the higher price of Ag in the longer term, except i refuse to add to my holdings after such a run, and perhaps thats why this is why i feel im more rational than saying "ya buy the dip at $46!"
I have May puts as a way to play this ridiculous move. If im wrong, im not broke or upset, though i do look forward to having a real correction to add to silver. But not at these illogical manipulated prices, as we've read on here were solely due to the long weekend illiquidity.
just go with what Jim Rogers said and you should be fine
if silver hits $100-150 by this fall and the US dollar ISN'T crashing then sell because it's a parabola
if it IS crashing then there's your explanation
then another comment by JR- "DON'T SELL YOUR SILVER"
Actually, I am in fundamental agreement with you on all points. However, you must admit that the article was a gratuitous silver-bashing hit piece with very little in the way of substantive argument, fact or logic behind it. I would be profoundly embarrassed if I were this Dian Chu --- it is almost as if he/she were commissioned to write a Nadleresque, anti-silver diatribe which was designed to be as outrageous and intellectually insulting as possible.
I am NOT a silver trader. Never will be. Consider myself an investor who will ONLY touch PM as small- medium hedge over five year periods. Having said that, I find this current discussion on Silver hedge play interesting. I basically believe in the scenario that IVAR has charted for us on his blog. His predictions tend to show that the real silver high is two years from now. That 2011-2012 will be a roller coaster as US power basically withers away as the USD crisis matures both economically and geo-politically. I feel INTUiTIVELY there is much sense in that scenario. I don't expect the US economy to CAVE in before at least two to three years. The Oligarchs will fight tooth and nail to avoid seeing their current pile of WS assets and leveraged commodity/derivatives plays wither away. I would thus caution any one who believes that its a straight line upward gradient all the way from now on, on physical silver play. It is a very small commodity market, is Silver, and the Oligarchs have big bucks to manipulate roller coaster rides and quick in-out profit takings on A basket of commodities which can squash individual ones. This is not good for people who buy for short time horizons (<2-3 years) on NARROW MARKETS. Just IMHO. Muchas volatilitas!
I agree with you, Falak. I suspect, sadly, that there are a lot of relative newbies in silver right now who are going to get seriously burned by the violent whipsawing for which the silver market is (in)famous. To me, it is all just a sideshow, and almost a form of entertainment, as I stand aside and let the various participants battle it out while I sit back, nibble on popcorn, and await the inevitable outcome.
Yup, tbh i didnt click on the links - scanned the article some, looked at the graph. This did make me chuckle
as i dont think any article with this posted actually makes for serious one (Captn Obvious). I can understand where the author was trying to go with it, but poor delivery.
No, but this intellectually insulting, hysterically shallow and egregiously illogical article certainly was one such piece of nonsense. It is so irrational and poorly argued that the ONLY reason Tyler could have had to post it was as a gratuitously idiotic debate generator.
And by the way, just what is the "ZeroHedge groupthink" anyway? If you were to answer "opposition to the massively corrupt and sociopathic financial-political elite", or something to that effect, then I might agree. Otherwise, the diversity of opinion here is wide enough to make any such suggestion an insult to this entire forum.
The diversity of opinion is precisely why i post here and not on yhoo or cnbc message boards. And why this place is my go-to source for financial news.
But remember why you came here in the first place, to be shielded from BS and sheeple think. Would it be wrong to say every single dissenting comment on ZH is blasted upon by the ZH Groupthink fanboys? I dont think so. I have no problem ridiculing posters that say to buy NFLX or SPYs and that the economy is "fine", but similarly there should be disrespect to those who say $100oz silver by June 2011 with no corrections or ridicule people merely for having other opinions.
I understand the inherent bias that will always exist at ZH - this is the bias we belong to (whether you admit it or not) and have to come to enjoy here; but when a bias clouds one's judgment is when fallacious arguments and disinformation is posted.
Thnaks ZP
The silver boat is so full it's listing to port. Man, the fish are gonna get eaten. Diversity of opinion keeps the many schills away. Right now there isn't any diversity.
It is a fucking bubble people. Pick your stops and get out. This isn't a safe haven protection any longer - it is a spec trade nothing more.
Why is it? Cause every one of you are fish and none of you had any 3 years ago. That's why. Smart money left the building yesterday and you are the last ones in.
Get real. Nothing parabolic stays parabolic, get your head out of your ass. Now to be fair your need new fish to come into the pool to keep it going. If they come you'll get soem extra points but why bother.
I moved my silver profits to gold yesterday. Nobody is there which is the way I like it.
How is that.
"none of you had any silver 3 years ago. That's why."
Been in physical silver for more than 12 years. You know jack about us.
Check for colon polyps while you're in there.
double whammy
Did no one see that gold closed at a new all time high and silver a new 30yr high on spot????
Every one was bamboozled by taking everything else but NY and the end of the day into account.
I sold at the open and bought back in at the close. I call it reverse day-trading, sell high and by back low.
bubble schmubble ;-P
I look to my right, the investors/daytraders still hear the american housing market is pulling itself out of the swamp. I look to my left and there's rocksolid trust in houses that are 70% overvalued (compared to Germany) and backed by euros, in banks with massive exposure. The ppl. I talked to didn't see the value of silver go up a year ago, and now argue it's too expensive. They're stuck in thinking the euro is going to be around forever, in this form (strong currency). I try to tell them gold didn't go up in value, but euro and dollar down, and the ratios are now being adjusted (finally). To no avail.
Most ignorance is vincible ignorance. We don’t know because we don’t want to know. Aldous Huxley
It's a short squeeze, of the paper silver trade. Paper is leveraged, overvalued. The idea that for each SLV contract there's an equal amount of silver available is sketchy at best (double and invalid sn in those lists?!) Check it out yourself; is NO ONE responsible for the real stock??
http://seekingalpha.com/article/265085-does-ishares-slv-etf-really-hold-...
And that is level headed reasonable thinking. Not panic buying. IMO that will come later.
The masses are still completely unaware what money is, and how big of a problem they have.
Everyone chooses their own path. Good luck
Smells definitely like a disinformation article. The author seems infamiliar to me...
dutch this is the 3rd article like this that the ZH poster has put up in as many days
Oh, he is regular contributor and the synopsis at the top of the page normally makes sense except for this time. Today he sounds like Hamy Wanger in drag. Damn, that is a disgusting mental picture.
"Silver is a depreciating asset"
And the USDollar is an appreciating asset!!!!
I guess you dont have the blues. You have the lunes , as in loony
I don't have the force to answer to this article. There's just so much bullshit, so much false conceptions, so much chutzpah... it would be pointless.
Agreed. Just contemplating responding point-by-point to this absurd, pro-Establishment tripe is exhausting and insulting to the intellect. When a dog shits on your lawn, you don't try to track it down and reason with it, you just throw away the mess and move on.
Or you can shoot it...
+ 10 ^ 100
Silver was down to 44,7 overnight (10% below top) when all billions of Indians and Chinese paused in buying silver for some abnormal reason, now is at 46. Still 8% below the intraday peak of 49,8.
Not so far to go to 30.
So join J P Morgan wagon and go short.
Put your money where your mouth is.
I think he forgot the <sarcasm> tag.
Mr Chu
You have just bitten more more than you can chew. Your knowledge appears to be that of a freshman writing a thesis with no understanding or background knowledge.
I would suggest that you load yourself with US$ and wallow in what will be left of them.
Or are you a Chinese planted disinfo specialist meant to lower prices so you can corner the silver market in addition to the rare earths market?
Madam Chu
http://about.me/Dian.L.Chu
You got the Madam part right.
Ah many thanks for the clarification
I see from her site
"The Infinite Analytical"I think she should take an Infinite Sabbatical from her writings.
"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"
If you can predict, predict. If you can't, shut up.
There is so much wrong with this article I don't know where to start.
1. When silver drops below the natural occurrence ratio of 16:1 with gold, you might make an argument that it is in a bubble. Until then, this is just reversion to mean (we are talking a few thousand years here, not the last 30). It has dropped from around 70:1 to a current 30:1. 16:1 is currently just north of $93.
2. The Miami condo analogy is laughable. Miami has always been a boom/bust type of town driven by fast-talking shark wannabes living off their gold cards. Vegas and So-cal are probably the same but I lived in Miami for three years. My current city of residence did not have the rocket-ride price appreciation in real estate that those areas experienced and the four houses sold in my neighborhood so far this year went for about 6-9% off the 2007 highs.
3. "What happens when interest rates go back to their historical averages?". The US goes broke in short order. With a current outstanding debt of 14.25 TRILLION, 5.25% is three quarters of a trillion dollars a year just for interest. We can't auction bonds that fast.
4. "when we get serious about cutting the budget" Don't make me laugh more; it hurts.
5. "The US doesn't have an aging demographics problem like Japan either." What color is grass on your planet and do you twist it or use a Toker II? Worse still, these people expect their money, which was impounded for the fictitious 'Social Security Trust Fund', to start producing benefits over the next 15 years. That trust fund is no more than a promise to borrow more money by those same idiots you keep electing.
6. "But this is a normal rate of depreciation over several decades." US currency didn't depreciate until, in contravention of the Constitution, US currency creation was abandoned to the federal reserve system and they made it debt based.
Did you wake up with a hangover and just copy some Krugman shit for today's column?
double hot damn..."I have news for you, physical buyers, those are not buy and hold investors, and they can go just as quickly as they came."
7. I have great news for you, asiablues. China-man trade paper for PMs and commodities fast as red dragon fly! Bankstas continue printing plenty no matter, and China-man (you) buy the effing dips or whatever...you dink.
tom
Hot damn. Nice reply Zhandax. Everything I was thinking epecially number 3. It's especially true for gold but other pm's act in roughly similar manner, which is, the basic, absolute value doesn't change, or changes very slowly, everything else...paper, volatile commodities, various derivatives, tulips, disco, sky-pie, fluctuates around them. You may smirk dismissively (especially if you're rockin' a Princeton econ degree) and call this gold bug speak but I am not a "gold bug" I'm just a guy who studies history, law and money and no one has yet convinced me that this basic take ain't true.
I thought point 5 the same. No aging demo problem? every entitlement program and pensions has major issues.
It is called FUNDING.
I said in 2007 to many people that the problems were in the trillions, not billions.
Lost housing wealth, lost employment, lost interest income, rising commodities, ponzi banking, fraudulant accounting.
"sell your silver", yep I won't sell the only thing that has real value. This turd is shilling for the comex lack of physical.
Ram it down, as many will reload. Bring it.
Sorry.. I found this article very weak.
I don't believe him either.
are you saying there was an article in all that shit? I missed it...
This article sponsered by Jon Nadler and Friends of the Fed... Silver making your confetti look bad Ben? How many trolls can dance on the head of a pin?
PMs will stop their historic climb when Ben stops printing.
I could care less about the paper silver market.
I should sell my silver insurance now because the weatherman said their is a hurricane heading my way? lol
If you "could care less", then why don't you? :)
Actually, I found a number of articles in this piece --- several "a"s, "an"s and "the"s.
The rest of it was a steaming pile of colonic ejecta, however.
I love how the silver market now has its very own Tokyo Rose.