-- Posted 11 November, 2008 | | Discuss This Article - Comments:

The Wallace Street Journal

By David Bond, Editor

The Silver Valley Mining Journal

Munich – OlympiaPark, built for the 1972 Summer Olympics here in Munchen, looks a little tired and dog-eared these days, not a lot different from the state of the gold and silver markets – equities and physicals.

But scratch beneath the pallid paint and weather-stained concrete a tad, as we did at Frank and Jan's excellent adventure, the just-concluded 2008 Edelmetall & Rohstoffmesse precious metals and resource show, and all hell is breaking loose.

The Edelmetall & Rohstoffmesse precious and resource metals show is an annual must-attend for European precious metals investors, and we're surprised more U.S. and Canadian resource companies don't take some of the money they waste on shows in New York and Vegas every year and jump across the pond to meet these folks. Attendance of 4,000 this year was ahead of last year's, sure evidence that the Europeans are paying closer attention to the slow-motion nuclear explosion going on in the financial markets than are their Pablum-fed American counterparts who, now that the presidential election is over, are happy to go back out to their pasture and their ignorance of the feedlot and slaughterhouse awaiting them when the NFL football season is over.

Because it's coming, this financial slaughter, and there is something in the European genetic code that senses it – a scent that coddled Yanks of this generation just aren't wired to whiff. Perhaps it is because the verdant fields, the pleasant undulating hills and the polite forests stretching from Rorschach to the Normandie highlands are fertilized with human blood from two world wars commanded by world banksters and their puppet kings and parliaments, whereas in America we have forgotten our own Civil War.

Which may explain why there were mob scenes in Munich around the three bullion dealers with booths at the Edelmetall & Rohstoffmesse as we walked in mid-morning last Friday, the show's opening day. At first, we didn't know what the fuss was about; maybe someone was scalping tickets to the World Cup.  The crowd was so thick it looked like carrion birds swarming a dead desert coyote.

The going rate for generic 1-ounce Austrian Philharmonic or Mexico Libertad silver coins at Munich?  €11.50 Euros or about $14.56 USD for a “commodity” that is supposed to cost under $10. We were told that at an earlier-that-week mining gathering in London, the same silver rounds were fetching ₤10 pounds, or some $15.62 USD. (Everything is more expensive in London than in anywhere else in the world because one of these days they're going to paint the place, but still . . . ???)

Prices don't improve much as one moves up the quantity scale, where scarcity looms an equally large factor and amortized fabricating costs ought to go down. One-kilo coins were bearing a huge premium. And silver bars cost a hell of a lot less to pour or re-pour than a mint's cost to stamp out presentable rounds, though not so you'd know by the premiums they command.

So what gives? Is a vast (fill in the word)-wing conspiracy of coin dealers manipulating the retail silver price? Hardly. Those guys are scrambling so hard to get product (and guarding the identities of their sources when they're successful) they don't have time to talk to each other, much less plot and scheme together. Someone who could find a cheaper source of quality silver rounds would do so, and offering said rounds at a lower price, would make a killing. But nobody can.

Silver supplies from the mines continue to fall. Coeur and Apex can't even find daylight above the darkness of the ditches they've dug themselves into in Bolivia. The newly reopened Sunshine silver mine in our neck of the woods promptly shut down – not due to price or mining issues so much as inept management, but who cares? That's 5 million fewer annual ounces coming to market in the next decade than imagined. Rochester's done. Base-metal producers, the sources of 70 percent of the world's newly-mined silver, are throttling back because of the commodity recession. Miners of all those fancy new projects in Mexico and elsewhere are finding their per-ounce costs to be several dollars above the current phony paper price.

Our friend Sean Rakhimov proposed a thought-provoking concept. (Sean is publisher of the on-line Silverstrategies.com website, a mine analyst and a contributor to Silverminers.com. and other quality web journals, and is an Eastern European survivor of the Soviet Union's implosion to boot, so he knows whereof he speaks.) What is going on, right now, opines Rakhimov, is nothing less than a legal black market in silver, the last vestige of real money for us common folk. This is worth considering:

A black market occurs when the State mandates a price for a commodity that cannot be produced, bought, sold or had for that price – usually a ploy to make state-reported economic figures look better. The inexorable result is that the price of the commodity will rise beyond the official price to the point where producer and consumer are willing to do business in the shade. (Ask any Venezuelan about the posted price and the real price of a gallon of milk.)  Reverse black markets also occur: cigarette and booze taxes are prime examples. Indian tribes in Idaho do a land-office business selling cigarettes to Washington State residents at a discount to Washington's Draconian tobacco taxes.

Markets, just like non-Potomac water, seek the path of resistance. As any kindergarten-level Austrian understands, black markets exist only courtesy of artificial social policy. Chavez can claim he's got the world's lowest price for milk, on paper, even as Venezuelans pay as much or more as anybody else. The Peoples Republic of Washington State can claim its reducing smoking thanks to its high tariffs on tobacco, when in fact all it's done is send the tobacco buyers to Idaho.

(The downside for human flesh in all of this, of course, is that in having created black markets, the State now feels morally compelled to execute those who participate in them.)

But I digress. In the case of silver, what we have is what's shaping up to be a State-set price of $10 USD for 1 troy ounce of triple-fine. This price, like Hugo Chavez's milk price, tells the cattle that the U$ dollar is OK. The reality is a pile of Munichers and Londoners swarming around to buy whatever silver they can at $15 an ounce while they still can. Sean Rakhimov is right: this is a black market right out in the open.

What is to the empiricist quite absurd is why anyone would want to buy (and hassle with) overpriced physical gold and silver when he could participate in paper spot-price action on the ETFs. We have heard it suggested that a smart guy would sell his physical silver or gold at the current premiums, bank the profits, and then leverage back in to the physicals, at paper price, by way of the ETFs. 

Why indeed? This temptation has crossed our own tiny mind. Why not sell what we've got at the 50-percent premium, then buy it back on paper for the published spot price? And the answer keeps coming back in the form of another question: Would we rather own a $600 Winchester rifle than $600 worth of Winchester stock, even if we knew we could sell the Winchester shares tomorrow for $900? And another answer keeps coming back, in the form of yet another question: Which instrument better controls the bullet? And which feels nicer to hold?