Silver's Supply/Demand Paradox

(Silver price goes down, demand goes up.  Silver price goes up, demand goes up!)

Silver Stock Report

by Jason Hommel, May 29th, 2008

Al Korelin had me on his internet radio show yesterday for about 8 minutes, here's the link:
http://www.kereport.com/DailyRadio/Daily052808.mp3

We discussed the letter I wrote to the CFTC , and the silver shortages, which are proof of manipulation and price fixing, as are the limits at NYMEX.

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Some people don't understand how there can be shortages, and refuse to believe in the reports of shortages, since the price of silver has gone down in the last two-three days.

Other people don't believe that silver prices could be fixed too low, since silver prices have generally been rising since 2003.

These misunderstandings may exist because silver has a unique and paradoxical supply/demand curve.

In Econ 101, we are taught that as the price of an item moves up, there will be less demand, and if the price moves down, more demand.  Therefore, the market will discover a price that is optimal where supply meets demand.  Silver should act like that for industrial demand; however, industrial demand has continued to rise in the face of rising silver prices, contrary to what we would expect.  But silver is used in such tiny quantites in most forms of industrial demand, that rising prices will not affect usage very much, which is called a "price inelastic" kind of demand.  And so, the small increased industrial demand could be a function not of the price of the silver, but of the overall growth of an economy led by increased inflation, which creates a false boom.

But silver has another kind of demand, one that creates a paradox where sometimes demand really goes up as price goes up! 

Silver in today's world is increasingly becoming a wise investment.  And more and more investors tend to buy more as the price goes up.

Why?  Because investors are drawn to returns like moths to a flame.

This supply/demand paradox of silver is a rather advanced concept in the field of economics, and today, silver's supply and demand curve must be an extremely advanced concept not even taught in Graduate School, but perhaps only in investment newsletters similar to mine, since economics does not even teach about silver and gold.  But the concept where demand goes up as price goes up, is described by the terms "Giffen Good" and "Veblen Good", which are rather uncommon economic terms.

http://en.wikipedia.org/wiki/Giffen_good

"In economic theory, a Giffen good is an inferior good for which a rise in its price makes people buy even more of the product as a consequence of the substitution effect and the income effect for that good."

Perhaps Silver is a Giffen good, since Silver is an inferior good or precious metal as compared to gold, in the sense that since silver is heavier; and therefore, it takes more work to store and lift an equivalent value of metal.  Silver is also an investment product that one will buy instead of gold, due to the substitution effect, so that as gold goes up, and gold becomes increasingly unaffordable, then people will tend to buy more silver.

However, on the other hand, silver is a superior good, a superior investment metal compared to gold, since the supply and demand fundamentals for silver are better which are setting up a situation where investors will get superior returns by buying silver, and thus, perhaps silver is a Veblen Good?

http://en.wikipedia.org/wiki/Veblen_good

"In economics, Veblen goods are a theoretical group of commodities for which peoples' preference for buying them increases as a direct function of their price, instead of decreasing according to the theory of supply and demand.

It is claimed that some types of high-status goods, such as diamonds or luxury cars, are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products."

Another example I can think of is Lobster, which was first a food for poor people, prior to it becoming a luxury item. 
http://en.wikipedia.org/wiki/Lobster#History

In recent years, I read of a wealthy man who bought a $75 million painting, I can only assume because he wanted something he could show off.

He could have bought a wall of just over 4000 COMEX bars, that would have been over 16 feet high, and over 100 feet long.  I think that would be far more exclusive of a thing to buy for $75 million!  Imagine showing off a wall of real wealth at parties!

it has been suggested by several of my associates that perhaps we should promote silver by making it more stylish somehow. 

Ok, how's this:  Silver is cool, because it's a slap in the face of the man.  Silver fights the power structure.  Silver tears down economic inequality built up by the Wall Street fat cats.  Silver is power to the people.  Silver is freedom!  Bling-Bling!

Price fixing for silver works as long as it can discourage investment demand.  Price fixing for silver stopped working in 2003, the bottom of the market for silver, when investor demand for silver had been reduced to below zero for over 15 years, and when the entire world had long stopped using silver as money.  You cannot suppress investor demand below zero, and the continued attempt to keep silver prices low has backfired, since silver is now moving back up.

This is not to say that the efforts and methods of price fixing have stopped, such as futures markets, and negative propaganda, it just stopped working to create ever lower prices.

So, while shortages in silver exist today, and are evidence of a price fixing that has fixed the price of silver too low for decades, the shortages in silver will get worse with higher prices for silver, which will stimulate ever growing investor demand. 

This is why I have long attempted to persuade you to act as soon as possible to get all the physical silver that you possibly can get, regardless of the temporary and minor price swings between $21 and $16, because it's not going to get any easier to source supply and find silver, but rather, it will get harder as more investors enter the siliver market!

By the time silver rises to over $25/oz., investor demand may go up three, to five, to ten times what it is today, creating even worse shortages.  Thus, you don't have to worry about who you will sell your silver to as the price rises, it will only get easier to sell silver at a premium, or higher price than normal.  There is always www.ebay.com , and silver now typically sells there at a premium above spot, further confirming the shortage of silver.

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Inflation continues to soar.

"Dow Chemical, the top U.S. chemical company, said Wednesday it will raise prices for all products as much as 20% on June 1, calling the plan essential to mitigate the effects of surging costs of energy and related raw materials."
http://money.cnn.com/news/newsfeeds/articles/djf500/200805281650DOWJONESDJONLINE000877_FORTUNE5.htm

"For instance, the cost of polyethylene - a commodity chemical used in a variety of consumer products, such as plastic shopping bags - has climbed from roughly 30 cents a pound five years ago to about 80 cents a pound now."

Many household items will be soaring in price.  Twenty percent inflation, in one month?  Amazing!

These are the kinds of price rises that can slow down consumer purchases, and vastly accelerate purchases of silver as an investment that protects one from such inflation.

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Here's another commentator who just doesn't get it:

Tony Schwensen writes:
Why Does A Mint Lease Out Gold/Silver?
http://www.321gold.com/editorials/schwensen/schwensen052908.html

Tony seems like he interviewed the mint, and took them at their word, without doing any analytical thinking whatsoever, as he writes:

"AGR Matthey is a commercial operation and like any business it has many jobs and must prioritize in favor of its major clients. This sometimes means delays in delivering to minor clients during busy periods. The physical investment demand for silver and gold at the present time is at unprecedented levels. This means delays are inevitable but note again that these delays do not necessarily imply a shortage of the metal. These delays get exacerbated when rumor mongering takes place and demand for "certain" products vastly exceed the ability of the Mint to supply (a self fulfilling prophecy if you like)."

They "Must prioritorize in favor of its major clients?"  Ridiculous!  They are producing a commodity.  Product can be allocated in either of two ways.  First, by seniority with rationing, or by price!  They are not allocating product based on price, like they should!  If they are not acting in a free market way, then they are price fixing!  It's so basic!

Furthermore, a refinery can pour 100 ounce bars just as easily as they can pour 1000 ounce bars with no delays.  The delays, therefore, are indeed, evidence and proof of a shortage!

Imagine going to the store to buy milk, and seeing no milk on the shelves, and being told that all the milk is being allocated to the cheese factories because they are the major clients, and you will simply have to wait 6-8 weeks, but that there is no milk shortage.  Insanity is the only word to describe that situation and excuse.  Tony, what are you thinking?  Really!  But it gets worse, since if you want that milk, you have to pay today.  Total insanity.

It's very irresponsible for 321gold to publish such a poor report.  What could explain such bad editing?  Well, Bob Moriarity, the publisher of 321gold, seems to continually go out of his way to publish things that try to make me look bad, because Bob and I had a discussion about silver that I published that made him look bad.  See it here:
http://www.silverstockreport.com/reports/silverstockreport40.htm

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By the way, getting back to the issue of the Perth Mint's responsibility to their certificate holders, and delivery delays which do suggest shortages, and possibly fraud, which is the real issue, the Perth Mint's lawyers let the truth slip out!

http://www.perthmint.biz/downloads/Investment/PMG%20Tax%20Issues.pdf
See Page 3, two paragraphs from the bottom of the page, where it says:

"Gold Corporation continues to be the owner of the gold bullion backing the PMG [ie, certificate]. However,
even though Gold Corporation holds gold bullion in order to back the PMGs, it is not required
to do so and does not hold gold bullion for the benefit of the Holder."

Thus, if you own a silver or gold Perth Mint certificate, it is no evidence that you own any gold or silver, they own the gold or silver, not you.  And furthermore, they can do anything they want with their own gold (not your gold) including spend it on whatever they want, since they are not required to hold it for the benefit of the holder of the silver or gold certificates!

It's exactly as the Mogambu Guru said, as I quoted 12 days ago:
http://www.silverstockreport.com/2008/bullionbanks.html

The Mogambu Guru Writes:
"Unallocated gold is the most widely traded form of gold in the world. While this gold remains unallocated to you, the regulator considers it part of a bank's liquid reserve."

He figures that 99% of gold deposits are in unallocated form, and therefore all the deposited gold is, in effect, in a big commingled pile in the basement of the bank.

Another way of looking at this stunning fact is, "This makes unallocated gold an attractive way for the bank to maintain its regulated liquidity, because you have paid for your gold, and the bank is free to use your money, while it is also able to add your unallocated gold holding to its own reserve."
http://www.dailyreckoning.co.uk/gold-investment/to-trust-or-not-to-trust.html


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The desperation of those who would attack silver and gold becomes more evident with each passing day.  They are now attacking and slandering gold-back programs, not because of any fraud of those who run such programs, but because such programs are "outside the system" and allow the possibility of terrorists having access to anonymous, payable wealth.

Ottawa warns on gold-backed Web trades
http://ago.mobile.globeandmail.com/generated/archive/RTGAM/html/20080526/wrfintrac26.html

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The Jon Nadler stupidity index just went up another level yesterday to reach new highs.

Just yesterday, Jon Nadler quoted someone who said:  "Gold should outperform silver in this environment as the latter is more dependent upon investment demand."
http://www.kitco.com/ind/Nadler/may282008B.html

But as anyone who has half a brain who has studied the silver and gold markets should know, that's a blatent lie.

The gold market is far more dependent upon investor demand than silver, not the other way around.

About 95% of the gold market is purchased for investment demand.

In contrast, only about 7% of the silver market is purchased for investment demand.

So, if investment demand for precious metals is going down, it means that silver should outperform gold, as it has been, and will continue to do!

Surely, a man such as Jon Nadler is aware of those fundamentals, so why would he say such a thing that would only damage his own credibility?  Because he's desperately trying to talk silver down! 

Interestingly at kitco, Silver Eagles and Maples at kitco are still listed as "out of stock"!
https://online.kitco.com/bullion/completelist.html

Sincerely,

Jason Hommel

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You can buy silver in lots of 100-500 oz. at my auctions at www.seekbullion.com
Auctions end M-Th, Sat, At 7PM Pacific, but you can place bids anytime, 24/7.  Wires only.  USA Shipping only. 

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http://rocklincoinshop.com/