Why Paper Silver is not as good as Physical Silver

(Paper silver is all forms of silver held by another, such as ETF’s, 3rd party Vaults, futures contracts, options, certificates, brokers, or even bullion dealers orders in transit)

Silver Stock Report

by Jason Hommel, August 12th, 2008

Yesterday, silver hit a low, and was down dramatically to as low as $14.08/oz.  I’m sure the dip caused a lot of margin calls on people who owned silver futures contracts, who had to sell out.  Perhaps this is a time to review a few more reasons why all forms of paper silver are not as good as owning physical silver.

1. Default risk. Silver is good because it cannot default. All issuers of all forms of paper silver can default and fail to redeem their paper for silver, and are therefore not silver.  Those who default might be bailed out, but only in more paper, which is inflationary, which is why you want silver, not paper.  There is a lender of last resort for paper, but not for silver.  When Handy and Harmon, a silver refiner, defaulted due to their bankruptcy, people were paid nothing. Furthermore, payment in paper money that is quickly devaluing due to hyperinflation is no protection, and not the kind of protection that you get with real silver.

2. Bankruptcy risk. This is different from default risk. The company who sells paper silver could go bankrupt. That’s different than if they default on any silver accounts or contracts directly.

3. Broker risk. This is another, different risk. When you buy paper silver futures contracts, you usually do it through a broker. That broker can end up stealing money out of customer accounts, even if the broker does not go bankrupt.  Brokers are not covered by FDIC insurance. There is SIPC.  They only reason they have to try to reassure you that your money is safe is because it isn’t!
4. Exchange risk. If you own futures contracts, you usually do so through an exchange, unless you own an “over the counter” derivative. Even if your broker is ok, and if the person on the other side of the trade is ok, maybe the exchange will “change the rules”. This is different from default risk, bankruptcy risk, or brokerage risk.  The futures market exchange changed the rules, and “defaulted or defrauded” silver investors in 1980.

5. Confiscation risk. Paper contracts could be confiscated by government, since they are traded via “known” agents and exchanges, the standard brokers.  Real silver is portable, and can be moved outside of the jurisdiction of any hostile governments, or held until after the failure and collapse of any hostile governments.  Silver owned by individuals is orders of magnitude safer.  It’s not worth their time to confiscate silver of 10,000 people, who live among 10 million people in 10 million homes. It’s also far too dangerous, and political suicide. It’s much easier to confiscate silver that 10,000 people have pooled together in one place!  It is nearly impossible to confiscate silver that is locked up in a hidden place and cannot be found.

6. Buying paper silver diverts demand away from physical. Thus, paper silver is not real.

7. Paper is a promise. Silver is payment. Fundamentally, paper is not silver, and cannot be silver.  Paper is only money due to “fiat” law, and during times of chaos, such bad laws are ignored.

8. Silver is limited. Paper promises can be created endlessly and have no limit.

9. The entire reason for buying silver is to avoid the failing paper promises of an entire industry. To trust another paper promise is just silly.

10. Fraud is admitted as “standard business practice” among brokers who hold paper silver (not futures contracts) for clients.  This is not hearsay, this was admitted in a legal proceeding.

11. Storage fees are charged for silver that does not exist, as “standard business practice” in the broker industry.  This is not hearsay, this was admitted in a legal proceeding.

12. Buying paper silver creates a lower price for silver. The silver price does not move up when you buy paper.  This is self evident.

13. Buying paper silver puts “cash” into the hands of the manipulators, and enriches the “enemies” of truth and true value.

14. Leverage risk.  With futures contracts, you can get margin calls.  This creates an increased chance of loss that does not exist if you pay for your own silver in full, 100% owned, with no leverage.

15. Margin increases. This is different from a margin call. As silver prices move up, more margin is required to maintain an approximately 15% down payment rate on futures contracts.

16. Time risk. One form of paper silver, (options on silver futures contracts) expires. If the price of silver does not move up enough in a short time, the options expire worthless. Real physical silver will last over 2000 years, from Roman times, with just a slight tarnish that will actually protect the silver from further tarnish.  Silver does not expire.

17. Gambling risk. With futures, you are gambling, and your gain comes at another’s loss, not through creating anything that helps people, such as a stockpile of a needed rare commodity, or increased production of a rare commodity. Risk is not the definition of gambling, gambling is when two people make a bet with each other, and one is a winner and the other is a loser, in a zero sum game. Life is risky, and life is not a zero sum game. Risk is minimized with 100% owned physical silver.

18. Moral risk. Your gain necessarily enslaves another to perform what might not be able to be performed. Enslaving others is morally wrong.  Some people say morality should have nothing to do with investing, but I think that if you cannot apply your morality to your life, then your morals are useless.  Owning physical silver is taking responsibility of your own wealth, and taking dominion over what God has provided for mankind.  

19. Tax risk.  Real silver is owned anonymously. Trading accounts are not anonymous; they have your number. Real silver can be sold anonymously for cash. Paper silver is tracked, and thus, capital gains taxes or any sort of new, confiscatory “windfall taxes” may apply.

20. Market risk.  Paper markets and exchanges seize up from time to time, especially during wartime or other crisis times.  Physical silver coins or one ounce rounds can instantly be physically traded to another person without delay or contact or permission from any intermediary. Thus, physical silver is the ultimate form of liquid wealth, and the ultimate form and expression of just power.  Physical silver can even be transported over borders, if need be.

21. Real money does not grow on trees, nor is it printed on paper!  Money is not only, and not merely, a “medium of exchange”.  Money is, and must also be, a store of wealth, a unit of account, and a means of final payment (not a promise to be paid!)


Jason Hommel