What’s the Price of Silver?

(Would you like paper or metal?)

Silver Stock Report

by Jason Hommel, September 10, 2008

When it comes time to talk about silver, most people first ask, “What’s the price?” I can no longer say. 

My programmer summarizes the situation:
“I just got off the phone with Jason.

1. Industrial users are seeing longer lead times, and higher prepayments
2. Retail bullion is tightening and always 1 week of inventory away from default
3. Huge paper silver defaults imminent (Kitco, Perth, Barclays, etc all reporting major problems)
4. If prices go up, investment demand will skyrocket
5. If prices stay low, defaults are imminent
6. If prices shoot up and down, businesses will break from volatility
7. The system has no where to run, it is at it’s final cliff (after 37 years, from 1971.).”

The Mints are swamped, and operating at maximum capacity, or not at all, so the shortages will not end anytime soon.

A: Sunshine mint, who make blanks for U.S. Mint’s Silver Eagles, says all new orders have an estimated lead time of 5 months, out to February.
B: NWT Mint, has lead times of 4-6 months.
C: Johnson Matthey refinery stopped taking orders for 100 oz. bars, as we know.
D: Perth Mint remains a joke, claiming to have $880 million in gold and silver in “working inventory”; but more than half is leased out to their 40% owned AGR Matthey, which is closing offices during a time of record demand from the public. I mentioned that to the mint master of the Sunshine, and he laughed, and was flabbergasted, knowing what he could do with that.

Even if the mints are at maximum capacity, the market is demanding far more than they can produce. So, product shortages will continue for months, even if there is no 1000 oz. bar shortage (but I think there is a shortage of 1000 oz. bars.) Further, they are not raising prices, nor will they allocate product to higher bidders. 

The Paper silver price is going down faster than the physical silver price.

So, people who own paper silver are losing more money than people who own real silver.

Premiums for physical are growing, and will likely continue to go up for the next 6 months, or perhaps indefinitely.

Dealers who have hedged in paper, are falling behind, and do not want to bid higher for real metal. They are hoping that premiums, the price paid over spot for physical silver, will come down. It probably will not.

That’s the biggest reason why many dealers “can’t find silver”; because they are unwilling to pay the growing premiums.

If they don’t pay it, they won’t have any silver for their business, and they will be out of business. So, at some point, they will “get it” and pay for it.

If you don’t pay it, you won’t have any silver to preserve your capital, and you will be out of capital.

Most people don’t want to watch their paper go all the way to zero, so at some point, most people who own paper money or paper silver will “get it” and pay for it.

Examples of real silver selling for more than paper silver:

Example 1

My programmer, Shelby Moore, notes:

I bought Maples from a dealer for $14.40 ($1.49 over spot) on that first big drop from $15 to below $13.

Today in same quantities (500+) Maples at the same dealer are $14.31 ($2.79 over spot).

Yet paper silver owners have lost -11% of their value since then. My net worth in Maples has not declined at all in the same time.

Example 2

I’ve repeatedly warned my readers about the Perth Mint, because they have had far too many complaints about not being able to deliver allocated silver in a timely manner over the years. This means they are either scraping the bottom of the barrel, or are technically bankrupt, but insolvency to silver investors is rarely something that causes a foreclosure or bankruptcy. It just causes physical prices to rise more than paper.

One of my readers reports that premiums for physical silver from the Perth Mint are out of control. It can cost 30-40% more for physical, and that’s the “penalty” or “premium” for exchanging a Perth Mint silver certificate for real silver. It was reported this week to me by one of my readers that Perth was charging over $200 Australian for a 10 oz. silver bar, which is $20/oz.

Has anyone been able to cash in their Perth Mint certificates for cash? Or are you trapped?

Example 3

As late as 1964, a US silver certificate paper dollar and a silver dollar were the same price.

Today, as everyone knows, a silver dollar is worth about ten times more than a paper dollar.

So, in the past bull market for silver, real silver became more valuable than paper silver.

The same thing is happening today, and just like then, most holders of paper silver are in denial and don’t understand.

What is paper silver? Anything where the metal is not in your hot little hands. If the metal is held by someone else’s cold clammy hands, held for you, then it’s paper silver, because it’s their liability to you.

Example 4

Ebay.com Silver Eagles in rolls of 20 have sold for over $400, which is $20/oz.

Example 5

My auction where 25 bars were bid for $4.01 over spot.

Some people just do not understand markets. Some of my readers have suggested that I was price gouging. But I did not set the price, it was set by the highest bidder in the auction market.

Some of my readers suggest that I simply “tell” people to not sell silver below $50/oz, so that will become the price. But I do tell. I can’t command, obviously, I can only suggest that people not sell. And for the most part, people are not selling, or if they do, many more are buying. Also, remember, much silver is still coming to market by the miners, far more than ever came from investors selling. Most silver coming to market now is from the miners.

Example 6

90% junk is now $0.50 to $.70 over spot and 40% is sold out.

Junk was below spot before the paper price drop. So this is another example of
paper silver holders falling behind physical holders.

Example 7

What if “THEY” told you that your silver was worth $2 per ounce? Would you believe them? No? Then why believe them today?

The purpose of manipulation has several goals:

1. To make the dollar look good by comparison.
2. To discourage silver investment. This time, the lower price is failing to do that.
3. To encourage silver investors to sell. This time, the lower price is failing to do that.

So, the manipulations are obviously failing, except it is making the dollar look good. They had to hammer silver by over 40%, and only got about a 10% increase in the dollar in overseas markets. Not bad for “wasting” $2 billion on the silver market, so at least they got some bang for their bucks. In fact, they probably made far more than $2 billion, just on the Forex markets, even though they have not, and cannot cover their silver trade.

And the manipulations are now a blatant joke.

People wonder, “how long can this go on?” Be patient, it will probably be over rather quickly now. The futures contracts that are not backed by any silver may come due in perhaps in 3-6 months, or maybe within 2 years the COMEX will be gone. That will be bigger than the FNM and FRE “conservatorship/bankruptcies”.

What will happen next? It’s anyone’s guess. I have one. Maybe the paper sellers will never cover. Maybe they plan to default, while maintaining a low price. After all, if you have to give out a “cash settlement” because there is no silver, then it’s far better to default at $10 than at $100, right?

Some people assume there will be short covering. Not necessarily. Debts that cannot be paid will not be paid. That’s what bankruptcy is all about. You cannot squeeze blood from a stone, and you cannot conjure up silver from a short seller of silver who has no silver and who cannot find any silver and who is bankrupt.

The silver debt might take down the entire Exchange. No, scratch that, there is the ‘paper payment’ clause. They will continue to sell paper silver in all forms (including the dollar) until there are no more buyers.

It’s a very profitable business selling paper. My dad sold “Da Vinci” paper airplane packages for $1.50 that cost 80 cents to print up. He used very high quality paper. He stopped when people stopped buying.

Something to think about: In Zimbabwe last year, when there was runaway inflation, there was an official price of gold. The officials needed gold, because their currency could not be used to buy anything outside of the country. So, the price of gold rose, officially, by 10 times in one day. Something like that could happen here.

What if tomorrow, or next week, the price of silver was $50 or $100/oz. That would not let any new speculators “get on board” a new price rise. I expect something like that to happen one day. Recent history shows that’s how it can go.

If it does go that way, very few holders of “paper silver” will benefit; most, if not all, will lose.

If paper silver bag holders start selling to save their skins, their sunburn will start to sizzle, as their selling of paper will cause paper prices to go down further, and premiums for physical silver to rise even more.

Something to think about:

If the silver investment market is $1 billion at around $13, then it’s about $7 billion at $100.

Question: How much is $7 billion in the grand scheme of things financial? Peanuts, right?

People sometimes ask me, “Jason why not try to convince a billionaire to buy silver?” Oh, but I am. It’s you. 80,000 readers. Average net worth is about $100,000. That’s an asset base of $8 billion. Yes, I know many of you are broke. But if there is one guy with $10 million for every 100 broke people reading, that’s how it averages out.

It is already far too late for someone with $8 billion net worth, you (collectively), to protect yourself with physical silver; especially if that silver cannot be found.

Therefore, I stand by my call to buy silver at $21/oz. The shortages started then, and have only gotten worse. Clearly, many of you did listen, and it was good that you did! But the majority reading me have still not acted.

Fortunately, for those who can really listen and accept it, you (individually), it might not be too late. Most of the people on my list, over half, have been reading me for less than a year. It takes the average person about a year of reading me before they start to act. I know. I get the emails from appreciative readers. Some take even longer, like 3 years, and then “buy their first silver”. You might want to decide to act sooner, especially since they are giving away silver nearly for free right now, if you can find it.

Many are still reporting to me their shock that the coin shops are totally sold out, and cannot find any silver. Even though I’ve been reporting this for 5 months now. What? Do you think I’m lying? No, for most people, it just sounds preposterous and against everything they think they know. But it’s completely fitting with everything I’ve ever studied about silver.

You might want to speed up your “conversion” or understanding by browsing my archive:

Something to think about:

It’s reported, or theorized by at least two sources now, that JP Morgan is one of the major banks who sold about 130 million ounces of silver in a month, about $2 billion. JP Morgan is also the custodian for the Silver ETF, SLV.

The SLV is “paper silver” of the worst kind, as it puts the rat in charge of the cheese. Also, holders of the SLV are losing out, as premiums for real silver rise. Investors in the SLV who bought an equivalent of 100 ounces of silver cannot buy 100 ounces of real silver for the same price anymore. Paper silver holders are falling behind because they did not buy the real thing.

So, what’s the price of silver? Is it $11? $14? $15? $20? Or more like “heading to $100?”

By the way, we used to “quote the price” at the main page of silverstockreport.com in a neat little application that quoted a 5 minute delayed average of 5 other precious metal price quotes. That always bothered me, because I knew we were not selling, so it’s just a “re-quote”. I finally took it down. What’s the point? It was wrong and misleading. So, it had to go.

It was just numbers on a computer screen. Meaningless. Think about it.

Example 8

It could be worse. What if you owned Lehman Brothers stock? Stock went from $16-18 to $7.79 in two days. Or, you could have owned FRE and FNM stocks and lost even more. Funny thing. LEH lost over $7 billion in market cap in two days. There’s not even $7 billion in silver in the world to buy! Not below $100/oz.! 


Jason Hommel