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:
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
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
Other people don't believe that silver prices could be fixed
too low, since silver prices have generally been rising since
These misunderstandings may exist because silver has a unique and paradoxical
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
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
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?
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.
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
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
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.
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.
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
Inflation continues to soar.
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
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?
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
another commentator who just doesn't get it:
Tony Schwensen writes:
Why Does A
Mint Lease Out Gold/Silver?
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
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
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
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:
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!
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,
Gold Corporation holds gold bullion in order to back the PMGs, it is not
to do so and does not hold gold bullion for the benefit of the
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:
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
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
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
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."
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
About 95% of the gold market is purchased for investment
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"!
Jason Hommel >
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