Backwardation: What Everyone is Missing

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Prudent investors make wise markets: this should be the quote above every trading desk.  The enemy of the hedged investor is not wild markets, nor bearish markets; it is their own emotions.

With silver prices reeling to highs we haven’t seen since the 1980s, every piece of information has earned some urgency.  Immediately, the world attempts to decipher new developments and information as if there is some sort of end of the world scenario looming below.

While we subscribe to the view that the silver market is being manipulated, backwardation cannot be immediately interpreted as a symptom of such manipulation.  For that to be the case, we would have to reason that the majority of investors know about the excellent investment that is silver, as well as the market dynamics that make it so greatly undervalued.  That simply isn’t the case.

Instead, backwardation is a very clear signal, and it is not inherently a tip of the hat to a shortage in silver.  In fact, economics tells us there is shortage in everything, at least as it relates to price.  The price of silver is nearing $30 per ounce; thus, there has to be a shortage of silver at $25 per ounce, otherwise $25 would be the market price.

What Backwardation Means

The time value of money may be a theory applied best in finance and one better assigned to paper currency, but it has relevance in the metals market, as well.  When backwardation occurs, the markets are telling us that it is willing to pay less for a commodity in the future than it is right now.  Essentially, the ratio of supply to demand is greater at the long-end of the curve than it is in the short-end.

That isn’t implicitly market moving, however.  It could very well mean what we suspect it to mean: producers are far more interested (temporarily) in locking in prices into the future than investors are buying into the future.  Consumers, those who wish to use the metal for production or consumption in manufacturing and jewelry, probably have plenty of forward contracts already…at lower purchasing prices.  Those who need silver in the future have it (assuming, of course, that there will be metal for delivery when the time comes – another issue for another time).

Bringing back the time value of money, we know that an item should be worth more in the future than it is right now.  Buying a March 2011 January future should be less expensive than a 2015 December future, since the December future should take into consideration the financing costs of borrowing money for four years.

However, what many are missing is that there is no time value of money.  Borrowing costs are plummeting, and the risk-free rate is, for all intents and purposes, null and void.

This isn’t to say that investigation into silver backwardation and short-selling isn’t valid.  Instead, it is to say that either: A) the markets are functioning properly and the price of silver is simply reflecting the risk-free rate advantage that can be earned elsewhere in combination with miners’ willingness to lock-in prices or B) that the markets are manipulated.

Either way, it doesn’t much matter.  Money has no time value, and that isn’t natural.  Consumption is as economically advantageous as is investment.  Even if all the evidence pointing toward manipulation is found to be untrue, it is certain there is manipulation in currency, and that means silver goes higher.

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In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical guidance for precious metals investors.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit Silver-Coin-Investor.com, subscribe to our E-Course completely FREE of charge.

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Three December Details You Hopefully Haven’t Forgotten

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As January and the new year kick off to a fast start, we shouldn’t be so quick to forget about 2010, especially the events of December 2010. A number of very important news releases will set the stage for the silver markets in 2011, and interestingly enough, one company, JP Morgan, is featured in each.

#1 Morgan and Copper

In early December, it was discovered that JP Morgan may be behind the buying frenzy copper markets, just as it is believed the bank is massively short in the silver markets. For many, copper presents an opportunity to buy into a groundswell of real copper demand amid low interest rates, emerging market growth, and an expected decline in copper output.

Some analysts, however, see it differently, and instead believe the combination of long copper and short silver is essentially a long-term, double short on silver. Silver, of course, is a by-product of copper mining, often brought out of the ground in search of new copper reserves. When mining companies see higher copper prices, they’re more likely to seek new copper, and in the process, find more silver. But that’s just the start to December’s wild headlines.

#2 JP Morgan’s Suspect Denial

A spokesperson for JP Morgan denied that the firm owned 80-90% of the copper positions in London, but would not comment on whether it held positions smaller than 80-90%. Thus, it can be concluded, as many already have, that JP Morgan owns 1% less than the 80-90% range.

The Financial Times later printed an article from a JP Morgan employee who claimed the company was reducing its massive silver short position and that the position would later be “materially smaller.” Regardless of the admission or lack thereof, a smaller silver position for JP Morgan in silver means a much higher outlook for silver prices.

#3 Suit Filed Against JP Morgan for Manipulation

A Michigan law firm filed a class action lawsuit against JP Morgan and HSBC, two banks that have been suspected in silver manipulation. As many may or may not be aware, JP Morgan is the custodian of the popular iShares Silver Trust (SLV), an exchange-traded fund that is supposed to be backed by real, tangible silver bars. HSBC is the custodian of the smaller ETFSecurities Fund (SIVR), another fund said to be backed by physical metals.

The suit isn’t interesting by itself. After all, a great deal of lawsuits are filed every day. However, this suit, should it proceed to court, will require, at a minimum, an audit of JP Morgan and HSBC vaults. Such an audit is the only way to determine if JP Morgan and HSBC are involved in manipulation and that they are performing to the contract of each fund.

Plus, as with any public dispute, this case will have be to solved in public. Here’s to hoping no one takes a settlement!

Get Ready

Whether JP Morgan is found to be guilty of manipulating the markets or not, one thing is certain: silver prices are going higher. “Materially smaller” silver shorts (they can’t afford them much longer, can they?) brings even more upside for silver as each closed short is erased with an opposite “buy-to-cover” order.

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In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical guidance for precious metals investors.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit Silver-Coin-Investor.com, subscribe to our E-Course completely FREE of charge.

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Gold and Silver Price Conspiracies Earn Their Weight

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Investigations into the trading at the COMEX have yet to make headlines, but they could uncover what traders have been seeing for a very long time. The price of gold and silver ebb and flow as part of a malicious attempt to corner the industry and create profitable opportunities for investment banks and hedge funds.

Mega Banking and Precious Metals

It has become a common battle cry among precious metal followers that large traders are manipulating the price to keep the COMEX going. Since the COMEX allows exchange-traded fund shares and other cash equities to be used as a deliverable vehicle for gold, investors believe that the COMEX could actually offer hundred times more gold and silver than actually exists. To keep that kind of leverage going, investment banks and the largest traders are tasked with the job of making sure that the price of gold and silver is kept at a price at which very little physical metal is actually delivered. A gold price of $1250 means far less options will be redeemed, so the markets will continue on, able to deliver just as much gold as is requested.

See it in Action

Investors who aren’t yet sold on the idea should look to see the manipulation in action. The easiest way is to pull up a chart of either SLV or GLD (ETFs for “physical” gold and silver) and look at the week before options expiration. In the third week of these months, most often starting one week before options expiration, the price of both physical silver and gold drop like rocks, particularly when the price is near an important (and heavily traded) futures contract price. The trend is far more pronounced on gold, which is typically less volatile than that of silver.

Highlighting the Trend

The manipulation attempts have worked out very well in the past year, with only a few months able to sustain enough buying volume to fight back against aggressive and often naked short selling. Those months without a dip were often the ones in which gold performed the best, indicating that the naked short sellers can be overcome. All in all, in eight out of the last twelve months, the naked shorting has won out, and spot prices for gold took a nosedive in the last week leading up to options expiration.

Buying on the Dips

Whether you are a believer in the conspiracy theory or just see an excellently formed trend in the metals market, you have a great chance to turn it around for a profit. First is to center your purchases around the time when futures and options come to expire; that price is often the cheapest you’ll find for that particular month.

The trend is clear that the large price movements appear only within the week, and they are strongest when the price of gold or silver is currently sitting on, near, or slightly above, a very important options figure. For example, $1250 or $1251 instead of $1225. Remember, open up new positions in your favored metals only during the week up until options expiration.

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In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical guidance for precious metals investors.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit Silver-Coin-Investor.com, subscribe to our E-Course completely FREE of charge.

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A Market Bigger than the World Economy…Ten Times Over

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The derivatives market may be better reserved for a fairy tale. Comprising a value worth more than a decade of the world’s productivity, the derivatives market is the sleeping giant of all asset bubbles. As you dig deeper into the financial underworld, you’ll find that this sleeping giant may just be the puppet master of finance and government.

Take a Deep Breath

As large and powerful as the derivatives market may be, it isn’t exactly some crazy conspiracy. The derivatives market is powerful because it is worth trillions and is the final exchange for packaged financial products ranging from home mortgages to bets on the weather in Zimbabwe. Everything, every decision, every product, and every market of chance can be hedged against and bet upon, and that’s why the derivatives market has mushroomed in size.

Legitimate Derivatives Uses

The derivatives market is made up of roughly 100 mega financial institutions and acts as a mechanism for balancing risk. This is why you’ll find investment banks like Goldman Sachs and insurance companies such as AIG all participating in this trillion dollar marketplace.

Goldman Sachs can bet on a package of mortgages against AIG without ever issuing a single loan, allowing itself the opportunity to speculate without any of the leg work required in the more tangible business setting. While your community bank has to advertise, sell, and sign the paperwork to obtain exposure to the mortgage industry, Goldman Sachs can phone up an investment bank to make a wager on the real estate market without lifting a finger.

This is how the derivatives market earns its real world functionality. It is in itself the largest insurer in the world, compiling every risk into one central exchange.

A Life Example

Let’s say there are three friends: Jim, Bob and Dan. Dan is always lean on money and never has enough to pay the bills. Although he’s a good guy, he always owes someone money, and he doesn’t exactly have the best history in paying anyone back, at least not on time. Dan, needing to borrow enough to pay this month’s bills, asks Bob for a loan. Bob agrees, gives him $200 and requests that the money be paid back one month from today.

Later, Jim and Bob are at the bar (also known as the derivatives market). Bob tells Jim he lent Dan $200 to pay the bills, and Jim laughs hysterically, noting that Dan is never good for his debts. Bob disagrees, testifying for Dan’s sincerity. Dan, feeling good after a few drinks, and with Friday’s paycheck deposited in his bank, decides he’s willing to let his money talk and offers Bob a wager.

If Dan pays Bob back on time for the full amount of $200, Dan will give Bob $500 cash. If Dan doesn’t pay back the loan under the terms agreed to, Bob owes Dan $400 cash, giving Bob a slight advantage considering Dan’s spotty record. They shake on it and the deal is settled.

The Bet on Dan

The example above is exactly how the derivatives market works. If you paid close attention, you’d notice that a loan of $200 is now worth either $400 or $500, depending on who is the winner of the wager. The two counterparties, Jim and Bob, have made a wager worth multiples of the actual real life event in their own form of the derivatives market, and now they have more at stake than what the loan is actually worth.

Now, both are highly intelligent people. Jim knows he could pay Dan $200 to pay Bob a week late than agreed and make out like a bandit with a $200 profit. Bob knows he could give Dan the $200 to pay him back, and he could make a $300 profit from Dan’s wager.

Now, with these bets in place, they’ll each try to buy Dan off, just as banks and other institutions buy the power of government and central banks, effectively changing the game in their own favor and making a gold mine in the process.

Derivatives’ Dirty Side

You’ve just paid witness to the dirty side of derivatives. Knowing now that they can change the rules and operations of the game to affect the outcome – and their profits – big banks have a virtual stranglehold on every event that happens both in government and in macrofinance. In doing so, the banks bring their fairy tales to reality. The $600 trillion market, though a fairy tale, can easily siphon itself into the real world…and it has.

When the derivatives market finally turns over — there will be a mad dash to safety. Precious metals – both gold and silver – are tiny markets held back in price only by the powers of the central bankers and the very institutions that peddle these complex financial instruments.

The irony is that anyone can benefit from the impending derivatives fiasco, protecting wealth while simultaneously positioning yourself for the greatest investment opportunity to come around in generations.

Find how you can get started investing in silver the safe way here.

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In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical guidance for precious metals investors.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit Silver-Coin-Investor.com, subscribe to our E-Course completely FREE of charge.

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Precious Metals Market Manipulation, Grab a Calculator Before the CTFC Investigation

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As the CTFC begins to investigate claims by a whistle blower that the precious metals markets have been manipulated by several large US banks, investors are left to ponder: “What will happen to silver if manipulation is found?” Can you say, payday?

Silver’s Current Price

At just over $18 per ounce, silver is heavily underpriced considering both its historical prices, as well as the amount of inflation in the years since. Since 1913 and the creation of the third US central bank, the Federal Reserve, the price of silver has advanced at a small discount to the actual rate of inflation. The monetary base has grown from a few billion dollars to more than $1.6 trillion since 1913, all while silver has only increased by 3000%. Though 3000% has been enough to accurately track the change in prices, it has done little to keep up with real inflation, that is, changes in the money supply.

Silver Consumption

Another factor in the price of silver is how much the metal is actually consumed in processes such as manufacturing electronic devices, creating silver jewelry, or processing film.

In the last decade, silver has been readily consumed almost as quickly as it has been produced, with the largest driver of growth coming from the electronics sector. In the same computer you’re using to read this article, there are several grams of silver, most of which will never be recovered due to the economic costs of removing precious metals from electronics. Some many years later, your computer will be thrown away, the silver will be hidden in a landfill, and it will never come back to the surface. For all intents and purposes, it will remain unrecoverable, never to be used again.

What Happens When Manipulation is Found?

If the CTFC declares that the silver markets have, in fact, been manipulated, it is certain that the price of silver will skyrocket. Most silver analysts think that the price of silver isn’t being manipulated by pure trading. Instead, they’re convinced that the amount of silver being traded on the futures market is not 100% represented by physical metals. This means there is more electronic silver being traded in the form of futures than what actually physically exists. Therefore, as rare as silver is thought to be today, it will be even rarer than we once believed if the markets are being manipulated with excess futures.

Grab a Calculator

If you were to extrapolate the amount of currency in circulation in 1913 (roughly $10 billion) to today’s figure of $1.6 trillion, you would find that the amount of money has actually grown by a figure of 160 times, or 16,000%. Silver, by contrast, has earned 30 times its 1913 price, or 3000%.

Clearly, there is a huge discrepancy in the numbers, opening up the possibility that should the markets be found to be manipulated by excess futures supplies, the price of silver could rocket from $18 per ounce to $90 per ounce – just by calculating the differential in the change of the amount of money and the performance of silver over time. Take these figures to the bank. If the silver markets are manipulated, silver will sky rocket. If they aren’t (by some miracle), you lose nothing. Now that’s a bet worth taking!

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In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical guidance for precious metals investors.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit Silver-Coin-Investor.com, subscribe to our E-Course completely FREE of charge.

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How Second Rate Silver Brings First Rate Returns

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Silver has dominated the commodity and precious metals explosion through 2009 and 2010 with returns that meet and exceed any other precious metal. However, why is silver still a top investment? For two very important reasons: its volatile supply and its stance as gold’s little brother.

Silver’s Volatile Supply

As you probably know by now, silver production usually occurs as a result of mining for other metals. Today’s miners aren’t just going out to the mines to find silver, but instead looking for other metals like copper and gold, and they just happen to bring up silver in the process. This doesn’t seem like that much of an important factor, as even the beloved gasoline is a byproduct of oil refining (and was once thrown away!), so it wouldn’t seem to be so important that silver is a secondary concern for miners.

However, the fact that silver is a byproduct of other mining interests is very important. The first reason is because the total value of metals mined is only a fraction made up of silver. Because the total value of these metals is only made up of a fraction of silver, a rapid change in silver price does little to influence the amount of metals that are brought to the ground.

Supply cannot in any way, shape or form possibly keep up with demand. When demand for silver increases, so does the price, but the producers, who have a greater financial interest in other metals, cannot bring large supplies of silver to the market unless the numbers for the other metals makes sense. Perhaps the best scenario for silvers value would be a drop in the value of gold, nickel, lead and zinc. If the price of other metals fall, the amount of silver found in tandem with other metals would too.

Little Brother Effect

Silver and gold dominate the scene for stores of value and inflation hedges. However, for many, a proper collection of gold bullion at $1350 an ounce is out of reach, and fractional pieces are marked up 10-20%. So where do these people turn? To silver!

This, I believe, is one of the largest reasons why silver continues to rally higher and higher than other precious metals. While only a few wealthier, or overleveraged, investors can afford to purchase ounce after ounce of gold each and every week, silver investing takes a far smaller toll on an investor’s bank account. This proves to be even more true in emerging markets like China and India, where a full ounce bar of gold would be out of reach for most workers, skilled or unskilled.

This effect will become even more prominent with the onset of 1099 reform. Such reform will make all gold coins of a half ounce or greater reportable to the IRS through a 1099 form. However, reaching the same threshold with silver would require the purchase of 24 ounces of coin, a very dramatic difference.

While demand for silver will continue to grow as gold investors swap for untraceable silver, the supply side of the equation will fail to catch up due to silver’s secondary status in the hearts of the mining companies. Stock up because the best days are still ahead.

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In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical guidance for precious metals investors.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit Silver-Coin-Investor.com, subscribe to our E-Course completely FREE of charge.

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Soros Effect: The Market’s Clear Rejection of Authority

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George Soros has broken central banks, built a billion dollar fortune, and awarded himself fans around the world who adore his no-nonsense speculative approach. While he was once a kingpin of the financial markets, he took a backseat years ago to step away from his Quantum fund, only to return to an audience that has long gone.

Ordinarily, a man of his influence would have the power to sculpt the financial markets as he saw fit. Empowered with billions of dollars, he could find an emerging trade, announce his stake, and allow the financial followers to make his vision a reality. This had been the case with many of his investments; they were necessarily part of the playground that is social proof.

But this time the markets are different – Soros doesn’t matter.

If it were the year 2000, Soros sale of his paper gold positions would have sent the market into a tailspin. Gold would have dropped precipitously as investors, in for the long haul, began to question whether or not he had a leg-up on their investment thesis. However, when Soros exited his gold position just weeks ago, no one listened.

Instead, gold is off only 2% in the wake of his exit. In culling back his exposure, the market dipped, only to find enough buyers and believers who are in it for the long haul. We questioned whether or not Soros had been playing the hand of the manipulators, who should value his influence in shaping market dynamics. He may have played their hand, but individual investors are calling his bluff.

The Biggest Bubble: Optimism

While it may be hard to find an optimist in a world filled with uncertainty, they do certainly exist all around us. In the mainstream press, politicians voice solutions to the United States’ debt woes with grand plans so great they will take a decade to conquer. Talking heads eat up the plans, as if they had already been executed.

But in government, there is no execution. There are only idealists. There are those who forecast changes in government so large that it should only be months before the American economy experiences a great rebound. These idealists are the only optimists left.

On the other hand, the realists—the pessimists to traditional thought—are the only traders willing to stake their bets in the future. They’re doing the executing as the idealists throw up grand plan after grand plan.

In the metals markets, it is he who puts his money where his mouth is that has real influence in the markets. Soros had no money where his mouth was—he had only paper bets in a fictitious market and the certainty that he could make a minor profit in a short-term bull run.

It should be come as no surprise that while the stock, bond, and currency markets may bow down to Soros’ wagers, metal investors aren’t so willing. The widespread rejection of Soros’ brand should be social proof to the rest of us that the metals markets dominated by Wall Street bankers are still financed by every day, average investors who are in metals to own metals, not to own more dollars and cents.

This is only the beginning of a revolution in modern finance—the individuals still call the shots.

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In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical guidance for precious metals investors.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit Silver-Coin-Investor.com, subscribe to our E-Course completely FREE of charge.

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Copper Gains are Government-Sponsored

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China steals the show when it comes to commodities. Large public works projects, particularly in developing key infrastructure and housing projects, buoy commodity prices. Increases in demand are naturally bullish for inelastic necessities like copper, which has only strengthened as spending from Beijing keeps China’s GDP on the up and up.

Silver investors should be interested in the market price of copper. Most silver is merely a value-add to copper producers, who stumble upon the metal in search for the easier found copper. Higher copper prices lead to more copper production, and silver comes with it.

Copper Demand Artificial

When a product has an inelastic demand curve, a change in demand brings a larger change in price. If copper demanded increased by 10% as supply flat lined, high bidders would have to buy out the interest at the bottom of the price curve.

Government programs often come with very few restraints on pricing. This is true in the United States, where research and development costs for major military developments frequently cost multiple times more than their projections. It’s also true in China, where cost is hardly a constraint for a government keen on keeping employment strong, even if it means investing in new projects that provide zero economic return on capital.

Behind copper’s rise is a direct investment by the Chinese government to develop new affordable housing units. Alongside the new housing projects, infrastructure investments in the electricity grid keep copper demand strong. But one has to wonder how long copper used in Chinese projects will remain in Chinese projects. Remember, the Chinese government has long been a fan of building real estate developments for tens of thousands of people – only to tear the buildings down a few years later.

A savvy investor would note that if China isn’t interested in returns, only employment (which is natural for a country with a Communist history), then it would be naturally interested in continuing this trend to every last detail. Scrapping copper for recycling allows the Chinese to show employment in building homes, and employment from destroying and reusing their components.

The financing effect

It’s impossible to look at China and ignore the widespread price controls. Price controls are obvious in financing – so obvious that the copper market has become proxy for those who want to borrow inexpensively.

Hedging prices between London and Shanghai is big business. If prices between the two markets become thick enough, the costs cover the shipping from the LME to Shanghai. From there, buyers can offset the easily funded purchases from the LME with hard to raise cash from Shanghai. The net effect is several months of free borrowed money. Not only is the money free, but it’s also highly-valuable in a country that tightened lending controls to slow rampant inflation. For those with access to the financial markets, forward copper contracts are net out a win-win scenario.

How long this proves to be true, however, is another story. As Chinese financiers hedge the difference between their cost and the cost on the London exchange, more and more copper is purchased months in advance, some of which will be purchased during periods which might not benefit from China’s fiscal stimulus.

Silver supply, which is necessarily affected by rising copper prices, might not be around for much longer. Such extreme leverage to one economy with strong price controls should leave investors to consider the long-term implications of a short-run government program: rising silver supplies might be temporary.

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In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical guidance for precious metals investors.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit Silver-Coin-Investor.com, subscribe to our E-Course completely FREE of charge.

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Silver’s Liquidity Risk

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It’s unlikely that any silver stockpile will go without a buyer.  As more and more investors place a portion of their tangible assets in gold and silver, the market for metal grows.  However, just like in high finance or even in personal finance equations, liquidity risk is a concern that investors should have on the mind.

In terms of finance, liquidity risk is the risk that over-leveraging may create a default on debt service.  A company may borrow capital to invest in the business and essentially lend money by offering 30-day payment terms to customers.  Should the company keep a high level of leverage while maintaining few current assets (cash and accounts receivables) the company runs liquidity risk.

Liquidity Risk in Silver

There are obviously many people who buy silver.  However, there are also many people who buy $100,000 luxury cars.  The real question is how many people buy silver or $100,000 luxury cars.  Even those we consider poor could come up with $1 to buy a luxury automobile.   Pawn shops will buy any quantity of silver at $1 per ounce.

But how close can investors get to spot?

On the retail level, bullion dealers represent a source of liquidity.  A dealer often pays a few points under spot to purchase silver ounces before marking them up above spot to create a profitable spread.  Liquidity providers like bullion dealers do help ensure a viable market exists for your silver, but to what end is this dealer your friend?

Premiums and Purity

At the .999 fine thresholds, silver buyers are predominately bullion dealers, who buy and sell investment grade silver.  Sure, recyclers and refiners will purchase .999 silver, but few offer a spread that competes with an investment-grade dealer.  Silver .999 pure simply isn’t in the part of the market a refiner wants to service.

At 90% pure—“junk” US coins being an example—prices begin to reach equilibrium.  Investment-grade dealers offer significantly lower bids on 90% grade silver than they do for .999 silver, as it may take weeks or months to sell.  Additionally, if the dealer needs liquidity of his or her own, he or she will have to sell the silver quickly.  On the other hand, a refiner sees 90% silver as the best possible silver for his or her market.  Top-quality .999 silver doesn’t need refining; 90% silver needs only a little work.

Portfolio Purity

In thinking how to best structure a bullion portfolio, it would make sense to accumulate assets with a total weighted purity level.  For example, a portfolio of 90 ounces pure silver and 10 ounces 90% silver is essentially .99 pure.  Should hard times come, the 90 ounces of nearly-pure silver are liquidated with ease at prices close to spot. The cost of liquidity, in this case, is fairly inexpensive, as there are ample buyers for .999 pure silver.  If the same buyer were to have accumulated junk silver at a discount, he or she would still stand to lose as the market for junk silver simply isn’t as liquid.

Investors should mind the liquidity risk in their portfolio, opting for .999 pure when possible, while chasing some junk silver for a value investment.

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In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical guidance for precious metals investors.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit Silver-Coin-Investor.com, subscribe to our E-Course completely FREE of charge.

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Transaction Volume Lifting Silver

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Behind the meteoric rise in silver prices might be the European banking crisis, or it may be Ben Bernanke’s next Federal Reserve meeting.  Though the headlines promote one very basic idea—a catalyst necessarily drives prices in the financial markets—transactions must take place for silver prices to move.  It now appears that the catalyst has a driving force: the American public.

Last week, online auction site eBay confirmed an emerging trend: Main Street wants access to gold and silver.  As the stock markets dipped through the early August days, Main Street reshuffled their portfolio at a rate not seen since the financial crisis.  Brokers recorded record transaction figures, thus giving lift to at least one segment of the financial industry still one step removed from retail banking.

Main Street running from stocks isn’t much of a story, but where they found themselves after their risk-flight may prove to set a new trend.  Main Street ran not to fixed-income, which provides the lowest yields in history, but to gold and silver.  And how did main street grab onto the rising commodity bull?  Individual investors were buying over the counter, on eBay.

Quadrupling Volumes

The largest gold and silver seller on eBay, Great Southern Coins, took the time to speak to a CNBC reporter, noting that his company had quadrupled in the 45 days leading up to the August 9th sell off.  During the height of the European banking fears, when the ECB purchased Spanish and Italian bonds to stave off a collapse, Great Southern Coins registered sales statistics five to six times that of their normal selling trends.

Gold and silver are now mainstream.

The continuation of the trend appears certain.  Few are selling their gold and silver, and those who are buying are buying in bulk, hoping to offset some of their exposure to global growth in their stock portfolios with inexpensive one-ounce silver rounds.

Some sellers took profits as premiums soared.  Shortly after the S&P downgrade of US debt, the price of gold rounds selling on eBay surged to offer one of the frothiest premiums to spot prices.  Sellers in the gold and silver bullion category on the site increased 14% overnight, whereas buyers increased only 10% in number, thus confirming that there is far more buying interest than selling interest on a per person basis, even with gold hitting new record (nominal) highs.

This story gives lift ahead of what should be a very strong Asian market for silver in the autumn months. Recently, Indian gold markets, which open in the earliest trading sessions on Monday, have set the pace for prices for the remainder of the week.  Stronger volume orders and fresh demand from India, plus middle America, should buoy gold and silver as each enters into the strongest market with the highest prices ever.

Should the uncertainty continue to reign over the equity markets, silver looks like America’s go-to risk trade, if not a pure inflation play.  This should bring higher silver prices in the coming months, especially on top of Asia’s strong demand.

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In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical guidance for precious metals investors.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit Silver-Coin-Investor.com, subscribe to our E-Course completely FREE of charge.

****

To download this article, right-click on the link for the format you want to use
and choose “Save as” or “Save link as,” depending on your browser.
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