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.
Soul Train's picture

Those leveraged short are trembling, since most of them are under water.

They need a V to get them out of their circumstance.

Articles like this are alarmists.

However, anytime something rises as fast as silver has since last year (and especially these past few months), it is normal for there to be some profit taking by speculators and more shorting by the pessimists.

Good perspective by the writer. I say, may the smartest money win.

Look, who trusts the money cartel Federal Reserve anymore? Silver is the wise choice for an alternative currency.

Just remember that the good ole' USA used 100 % silver in their currency until '64/

Anybody remember the exact explanation provided to the sheople back in 64, to remove it?

2500saturdays's picture


I have looked and can't find reference to exact explanation.

There is the coinage act of 65. Notes to the effect that Ag is removed

as it is going up in price and causing a coin shortage. I was not old enough

to remember.

What was the exact explanation?


TimmyM's picture

Dian, you say interest rates are going up. Well why don't you run the numbers on what percentage of tax revenue goes to cover servicing our debt at 5.25%.
You say the 30 year average price of silver is relevant like driving by the rear view mirror. But what if we just worked through a 100 year glut of historical monetary supply and no one knows the new price?
Investment fund flows? The total above ground market cap of silver is around 50B. That is nothing if the world decides silver is money.
Fed tightening? Do you really think the credit crises is over? How solvent is Citi? Or any number of European banks?
A glut once prices start to fall? How many Chinese are standing by yearning for something besides paper? How many Indians? You do the math.
Yes silver is in a parabolic rise. But what if the old price was the artificial price? What if today's perception of a parabola is tomorrow's blip before a
geometric move?

This is not some Wall Street sponsored commodity fad. This is mom an pop worldwide deciding what is money.

earnulf's picture

I would agree.   2010 service on the debt was 413 Billion dollars at an effective rate of about 1.5%, at least according to the Treasury.   You add 4% to the interest rate and the cost to service that debt....doubles, to 830 BIllion or so.      

That 413 Billion BTW, was 18% of the entire revenue stream for the government (2.2 Trillion).

And the government says in 2013, revenue should be over 3 trillion dollars (3.087).     That 830 billion interest would then consume 27% of total revenues.   yeah, silver's in a bubble alright.

jm's picture

Not sure why you got junked, 'cuz your points are good ones.

I will say that the gold silver ratio makes is a warning sign.  Also, silver is definitely correlated to GDP... I think everybody here agrees that the "recovery" is taking a bad turn.

So there's better ways to take on a carry trade, and there are cheaper inflation hedges.

Seems that these margin hikes are reducing some serious silver leverage in other parts of the world.

let-them-eat-cake's picture

JPM backhander to the author perhaps?


Not bad for an article devoid of facts and evidence. Someone link him to Harvey O.

New World Chaos's picture

You're like Meth Man- flailing at Shadow People.

It took 18% interest rates to cut off the 70s inflation, and that was when America actually built things and had low debt and a much less burdensome government.  If the Fed tried that today, all of Wall St. would be bankrupt tomorrow and the government would be bankrupt the next day.  Zimbabwe Ben might take away the meth pipe for a couple months just so he can make everyone beg for it back, but rest assured, he will bring back the meth because it fuels half the budget.  There will be no rehab this time around.  Within two years, America will be a rancid carcass in a dumpster, with bloated rats squabbling to eat what they can before the garbage truck comes.

You only listed a few nebulous cons about physical silver.  Let me fill in some pros:

  • Inflation protection
  • Tax avoidance via barter
  • Lawyers can't see it, incl. divorce lawyers
  • Immune to forfeiture (unless the pigs waterboard you)
  • Can't run a fractional reserve scam
  • The government can't confiscate it from everyone
  • No financial surveillance
  • No counterparty risk
  • Starves the NWO
  • Will retain value under the new system

Basically, it's broad protection against kleptocracy.  Therefore, as kleptocracy increases, so will the purchasing power of silver.  The best way for the elites to steal the value of our silver is for them to stop stealing everything else...


New World Chaos's picture

You will know silver is in a bubble when:

  • raises 10 million oz. in an IPO
  • Max Keiser is Time's Man of the Year
  • Businesses don't accept FRNs but will take silver
  • Paris Hilton, Lindsay Lohan and Snooki all pimp their own lines of silver jewelry on the idiot-box
  • Your co-workers won't shut up about who is going to win "Flip That Eagle" reality show
  • The Dow:Silver ratio reaches single digits
  • Some junior miner buys out De Beers
  • Crammer goes all in
  • Cumming colloidal silver gets you free fucks
  • The government runs a surplus and Wall St. stops the fraud
jimijon's picture

Yea, and I sell the remaining 180 or silver Rounds I had minted. HA!

$52 dollars now.

Scubacuba's picture

Silver eagles selling right now on Ebay with bids ending at $56.00 plus 4 shipping...

And then you have the Apmex buying bullion at premiums?

Sure sounds like a bubble ready to burst..

Craigslist here in Seattle had people lisitng adds for buying silver/gold.

I remain on the hold and buy on the dip position.

A russian neighbor told me of his account to witness the death of hyperinflation in his country.. one day buy bread, next day what do you have to trade me............


lunaticfringe's picture

This author has no problem spinning opinions into fact and conclusions. In fact, I would argue that we are no better than Greece, that bubbles occur when a far greater segment of the population get involved, and yes in fact- I am a doomsday guy. We are a debt driven fiat system. That is how money is "created" and that true price discovery- fiats intrinsic value- is zero. It is backed by nothing and dollars are created out of thin air. And unlike this article- those are facts.

Arkadaba's picture

And this particular opinion made me laugh out loud:

if worse comes to worse the US will just have to cut back on military spending

IMO, not happening anytime soon

MilleniumJane's picture

+1.  I am open-minded enough to read differing opinions, but the alarm bells really went off when I got to that sentence.  Like the oligarchs are going to kill their cash cow (war) for the sake of balancing the budget *snort*.  Asiablues, that is a big negative on that idea.  Don't you watch the news?  Social programs are always the first on the chopping block.  BTW, did they ever find those billions of fiat dollars missing in Pakistan?

Chuck Walla's picture

And it sure as hell won't be entitlements, votes cost money!

Temporalist's picture

When you rob Peter to pay Paul you can be sure that Paul has got your back.

RoRoTrader's picture

The weekly chart is VERY parabolic since the break of $20 and then $30. With the RSI at 88 hitting a sequence of possibly the 4th (irony) significant price correction dating back to 2004.

Looks exactly like natural gas when Katrina was around.

What is the outcome for economic and social consquences of a sustained break of $50 or a collapse of the USD?



HomemadeLasagna's picture

The author would imply that the outcome doesn't matter, as the chances are so low:

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.


...unless on-the-ground events make the doomsday scenario look like a high probability event.

Scubacuba's picture


Buy, sell, buy or sell, buy? Sell?

This is crazy. Yesterday too the moon, today to the floor.

I was watching a report from Mr Mad money Jim Cramer saying today (April 25th) to invest 20% of your portfolio into Gold.....

Tomorrow he will be saying sell......

Twindrives's picture

Asiablues is abviously short silver and can't find any to buy.  Sour grapes.   

Creed's picture

I've seen this movie before, back in January? when the mainstream bought-and-paid-for media began a full court press against the precious metals complex

which crashed it for a week or 2

but I don't recall seeing these kinds of bash postings run on ZH at that time, maybe my memory is faulty


1- anyone that has been around the pm market for a few years knows damn well it is overdue for a correction

2- those same folks know the fundamental outlook for pm's is bright as hell going forward for years

Creed's picture

wow...asiablue is the ZH MSNBC mouthpiece


critical think your way thru it boys

weinerdog43's picture

Sadly, you have failed to take your own advice.

Creed's picture

Sadly, you have failed to take your own advice.



sadly, you're a brainwashed product of bought & paid for liberal media- heil Soros!

rocker's picture

Why wasn't this article focused on Gold, Grains, Oil, and Fertilizer.  Talk about bubbles.

My point is Silver has been artificially kept down by the likes of the morque.  It is less of a bubble than all those above.

golfrattt's picture

The real question to be asked is why..?

WHY were you even watching him...??  Cramer is a PRODUCER of bubbles, who then disowns them once they pop...  can you say JD Uniphase..??

He is the prototype crash and burn buy-side analyst. Buy low, buy higher, buy higher still..

oh yeah, and sell at the bottom...

Imminent Crucible's picture

Another question is "Why would I listen to Dian Chu?" In early February, this brilliant "market analyst and economist" said oil was overpriced at $103 and bound to fall. She went on to opine, "as winter ends...gasoline and distillates probably have already seen their highs for the year already." That was February, on

Her final gem: " I am here to tell you there are no ‘Values’ in the Physical Silver Market"

No, Dian. You are here to tell us to buy energy stocks and support the sectors you work for.  Major shill fail.

Hansel's picture

I hear you.  Buy, sell, blah, blah.  I'm choosing to ignore all of it.  Nothing has been fixed fiscally in this country, so I will keep on keeping on.

SRSrocco's picture


Well, it maybe true that silver has taken a pretty steep leg up, to say silver is in a bubble is like saying the dollar is a safe haven (even though many countries you visit now won't take them in restuarants or retail stores).

There is a great deal of brain damage today affecting analysts and their subscribers.  How someone can call silver a bubble when the greatest fiat experiment in history, the US DOLLAR, is well past its expiration date.

Let's point out some REAL BUBBLES...shall we?

* Grandmas talking tech stocks after bingo 1999 = Bubble

* Two McDonalds managers buying a $750,000 house in California in 2006 with no money down = Bubble

* 46.6 Square feet of Retail per Captia in USA 2011 = Bubble

* US Treasury Market = Bubble (ask Bill Gross)



Gold hit $1500, and silver just barely hit $50.  Gold is almost double its price in 1980, silver is FLAT.

In 2011, looks like there will be 40 million silver eagles sold in the USA.  If only half of Americans were able to buy, that would be about 160 million people.  If only Americans bought these 40 million, each would get a quarter ounce.  Does that seem like a FRICKEN BUBBLE??

How many people have 401k's, Pension Plans, IRAs, CDs or money market funds?  Probably at least 50-60 million.  But that's not a bubble.  Each American owning a quarter ounce of silver in 2011 is a BUBBLE.

Do you see the Brain Damage here.  Trying to compare Condos to Silver is complete nonsense.  Fuel costs are rising because of a falling EROI - energy returned on invested.  The lower the EROI, the more of a liabilty suburban living becomes.

Silver is a store of value, a Condo is a true depreciating liability....especially when there is plenty of SUPPLY...but very little demand. 

Silver is the opposite.

Folks....there is a lot of BRAIN DAMAGE out there....and it ain't good for you



Ckashan's picture


I'll believe Asia Blue when the FED stops becoming impotent. 

danimal's picture

"Gold is almost double its price in 1980, silver is FLAT."

Please tell me you now why it was that high in 1980. You can't possibly use that price in you analysis.

rocker's picture

If you apply the same ratio silver should easily exceed $ 90.00.

SWRichmond's picture

From the OP: We spend like drunken sailors, and that can be fixed.

Describe the makeup of the citizen political majority in the U.S. for a balanced budget.  List their accomplishments.  For extra credit, list the mass media outlets who are on their side and who support slashing both welfare (corporate and individual) and warfare.  List the members of the veto-proof majority that make up the "Tea Party Caucus" in the U.S. Senate.

That's the problem with unsubstantiated statements of "fact."

Modern Money Mechanics's picture

Ted Butler - April 23, 2011 - Weekly Review

Given the surge in volume and price action in SLV ... silver is going out when it should be going in...

Yes, we are at what many would consider the nose-bleed territory of high prices in which a sell-off should be expected, but the actual data rolling in still is supportive of higher prices.

Since silver was ultra-depressed in price by the ongoing manipulation, the price of the call options was always cheap... Unfortunately, ... I did run out of money on many occasions ... caused great financial hardship to my family and I deeply regret putting them through it...
The good news is that my cumulative options loss of two decades has been offset by many times in the rally since August.

silver call option sellers ... in the two-decade-life of the silver manipulation... the sellers took in the buyers premiums and never had to pay out any claims... silver option sellers... range from individuals to large financial trading companies...

The only real solution for the remaining silver option sellers may be to quit the business completely and buy back or neutralize their open exposure to a further rise in silver prices... the financial and emotional stress to these short sellers is such that it increases the odds of a silver price explosion.