Silver Shortage Causes Price Disconnect

(Manipulation begins to fail, paper prices fall.)

Silver Stock Report

by Jason Hommel, August 17, 2008

Franklin Sanders understands, and explains that physical silver and gold are selling for higher prices than paper silver and gold.

James Turk reveals in his article today, “A Fabrication Bottleneck or Something More”:

Turk acknowledges, “In other words, there is presently a huge disconnect between the paper market and the physical market.”

But Turk says goldmoney is not yet having trouble finding large, 1000 oz. LBMA bars.

Here are several points to keep in mind about 1000 oz. bars: 

First, there are position limits!  This means there are silver shortages for the super rich, ever since the days of the Hunt Brothers in 1980.  The limit is 1500 contracts in a given month; a limit of 7.5 million ounces.  I believe Turk is not noticing any shortage, because he has never needed to order more than that in a given month.

Second, just because people own bars, or that bars are listed in inventory at the NYMEX exchange, does not mean they are available for purchase at today’s prices!  The total ounces at the NYMEX seem to remain at about 130 million ounces.  That’s not just “unwanted” silver; it’s owned by funds, speculators and investors, who may actually understand silver, who might not be willing to let it go except at much higher prices, especially as they come to understand the facts about the shortage of silver.
Third, David at Wexford Coin notes that he’s “not a fan of 1000 oz. bars for the average client since shipping them back to distributors is a nightmare if the bar packs higher than 75 pounds in a Flat Rate Priority Mail box using Registered Mail. Just about the only method for retail customer to ship WITH INSURANCE unless they have such a large quantity that distributor will arrange a carrier pickup at a business address.”  Wexford, one of my favorite and most trusted and highly recommended dealers, now has a minimum order size of $10,000.

David at Wexford is extremely busy with buyers, and emails me to say he cannot return all of his phone messages.

But there is a shortage of 100 oz. bars!

Producing more 100 oz. bars should be easy.  They can pour 100 oz. bars nearly as easily as 1000 oz. bars.  I know for a fact that the machines to make them are not running at capacity! 

Why is it that people think that pouring silver bars is a difficult or skillful or time consuming activity?  Men have been pouring silver bars since Biblical times.

There is, indeed, a “production bottleneck”. 

But that’s happening because demand has greatly increased, and years of old supply has run out!

Most silver purchased by investors is NOT recently manufactured.  Only a little is “made fresh”.

See, it’s a fundamental attribute of silver that it does not spoil.  It lasts 1000’s of years!

Therefore, most silver that used to be available for purchase, when you could buy it, was manufactured sometime within the last 30-40 years.  (Perhaps 1/2 of all silver was mined in the last 50 years.)  It is not uncommon to find 1 ounce rounds that say they were made in 1970 or earlier!  Those are cool to hold in your hand, because you know from prior price history that that very coin burned some hands as the price collapsed from 1980.  Silver, itself, is usually a form of history in your hands.

As another example, Englehard 100 oz. bars are no longer manufactured, but they are a “staple” or “standard form” of silver for the industry, right along with the currently manufactured Johnson Matthey bars. 

Therefore, in order for retail investor forms of silver to develop a shortage, then all or most of the inventory that was manufactured in the last 30-40 years has been purchased and is no longer available at present prices.

Or, new product is mis-priced at below market prices, which thwarts the free-market clearing process. 

That’s called a shortage when years and years of stockpiled & produced product runs out!  What else would or could you call it, or how else could it be described?

It used to be that the old silver products were sold by the coin dealers to the refiners, but that’s no longer happening.  The flow is reversed, and it changed around January/February, 2008, when demand from the public increased by about a factor of 10 at many coin shops.

So, the “production bottleneck” isn’t because some machines broke down and need to be fixed. 

It’s at least partly because pre-existing old manufactured silver is no longer being sold to the refiners that would melt it down to be manufactured into new silver products in the first place!

It’s at least partly because newly manufactured silver is among the only supply left!

Here’s the next big misunderstanding people have:

Dealers are not just “withholding inventory” they bought at higher prices.  Proof?  They will take your money now, to lock in a price now, and they will hedge by buying paper futures contracts, until they can find product to buy. 

The other key here is that if they do have product, they won’t want to sell it, unless they can get more, and they can’t get more, because the public is no longer selling, and there is a pronounced production bottleneck!  Why should they sell out, if they can’t restock?

Many major dealers will hedge with futures. 

But a futures contract is not the type of silver they want, as David Wexford explains above, so they have to sell that contract for real 100 oz. bar or 1 oz. round silver, eventually. 

Many major dealers are reporting no silver in “the dealer network”.  If I’m hearing lies, prove it.  People who say there is no shortage should put up, or shut up.

Other dealers will take your order now, for inventory that will take 8-10 weeks to deliver. 

Who has such crazy policies as that?  Perth, Kitco, Northwest Territorial Mint, Johnson Matthey, and others.  You should avoid them, in my opinion.

And if you have to wait 30-60-90 days for silver from any seller, it means they are selling what they do not have, and hope to get it from someone else that does not have it today either!  That means they are short, (they owe you silver) that they do not have!

And if there is a “regular” 60 day delay, where they have you pay for it all up front, instead of a tiny 5% deposit down payment, then they are “floating” on your money, like you gave them an operating loan!

Proof that they sell what they don’t have:
SOLD OUT, with a warning:

IMPORTANT NEW NOTICE: Due to market volatility and higher demand in the entire industry, we are anticipating delays in supply of all bullion products. Please note that you can continue to place orders and prices will be guaranteed; however, cancellation fees will still be applicable regardless of the length of the delay. Consequently once inventory is received there may also be delays in processing and shipping by our vaults.

I find Kitco’s notice hilarious, and sad.  Kitco is essentially saying they will lock you in on price, for silver that they don’t have, and cannot find, and their disclaimer seems to indicate that they can delay you indefinitely, and if you want your money back, you have to pay a fee!!!

That smells like a default in the making, to me.

How can Kitco sponsor Nadler’s editorials saying there is no shortage, and then put up a big disclaimer about a shortage?  Yeah, I’m the ignorant one who doesn’t get that.

Here’s a list of 4000 coin shops across the U.S.

The man who made that list, has his own coin shop, and he’s “out of silver”.  He refused our buy order of $18,000 on Friday.  
You would think that a man who keeps track of 4000 dealers would know where to find silver.
He runs the shop at:

It’s the list that I link to at:

It’s good to know your local coin shop, of course.  If you take cash, in person, for real silver, the possibility of a failed delivery is near zero.

Many nations around the world do not have the network of coin shops as exists in the U.S. 

So, if you cannot find a coin shop, try a jeweler.  Ask them for their industrial supplier.

Also, look up “industrial silver suppliers” in the phone books or on the internet.

All of that proves that there is a real shortage of real physical silver.  Don’t believe me.  Follow the links.  Try to get silver.  See for yourself.

Many people agree there is a shortage of retail investor silver, but they get confused by the lower price.  They think a lower price means more silver must have come into the market.  That is not how our markets work.  Our markets are affected by paper silver futures contracts, and very few people ever attempt to take delivery of that silver, they buy it on leverage, for the investment returns, not for real silver.  So, some people can sell “silver promises” to excess, and never deliver, and if they sell more “paper silver” than exists, that can manipulate the price.

Recently, the CFTC said that the paper market is not depressing the silver price. 

My report on their report:
A Further Warning to the CFTC! May 16, 2008

The CFTC report came out on May 13th, 2008.

The CFTC report basically opened up an invitation to funds and traders to try to manipulate the price of silver lower by selling paper silver futures contracts, with virtual impunity, or no risk of getting into trouble with the authorities. 

A very large trader could short silver futures, and drive the price down temporarily, in the hopes of being able to buy more options on silver directly from the miners, for an up front cash payment, and some of the miners desperately need capital to survive.  This would be illegal, but hard to prove, since short sellers are anonymous to all except the CFTC, who has basically said they will do everything in their power to look away and ignore the problem.

Some people wonder and lament, “how will it ever end, will it never stop, they are too powerful to be stopped!”

But they are failing right now, as prices for paper and physical disconnect.

They will fail more dramatically as more and more people refuse to trust failed paper promises.

It will end in default.  They will fail, like they failed in 1933 when gold went up from $20 to $33/oz., and like they failed in 1971 when gold went up from $35/oz. to $850 by 1980.

They are, in fact, defaulting now, as deliveries are delayed, and as prices for physical silver go higher than paper silver.

This next time, they will probably fail in a much more spectacular way, for numerous reasons.

First, there is much more paper money than ever before.

Second, there are now more derivatives and paper futures contracts on everything than ever before.

Third, gold and silver will be going up so high, they will attract investor demand so intense, that they will need to raise interest rates beyond 50% to save the dollar, and make the dollar more attractive than gold and silver, which will be going up higher, faster than 50% per year.

Fourth, they used paper futures contracts, and interest rates of over 20% last time to tame the bull market in the 1980s.  This time, both bond and futures will fail, and people are already beginning to reject them.  Therefore, the usual tricks will not work.

The laws of supply and demand can only be broken for a short time.

Nothing is more powerful than reality.  The reality is that silver is scarce.  Price will catch up.  Get real silver now, if you can find it.


Jason Hommel