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Think Gold Premiums Are High? Wait Till You See Silver!

By: Stefan Pernar

-- Posted 27 January, 2009 | | Discuss This Article - Comments:

When the COMEX spot price of silver dropped from $20 to $10 per ounce in the two months period from mid July to mid September 2008 despite multiple insiders reporting acute shortages of real metal in the market, evidence mounted and calls grew louder that the price of silver was being manipulated.

Specifically, the very figures of the Commodities Futures Trading Commission (CFTC) showed that two US banks had increased their silver short positions from 6,199 contracts in July 2008 to 33,805 contracts in August 2008 as pointed out by Ted Butler in one of his commentaries. Since then, far from returning to normal levels, the manipulative short positions only grew more concentrated as reported out by Gene Arensberg in early December last year. Past experience in similar cases and vested interests to maintain the status quo unfortunately left little hope for a serious investigation to take place.

The last word on the matter was yet to be spoken however: In what can only be described as a surprise U-turn the Wall Street Journal reported on September 25 that the CFTC did indeed now move ahead with an investigation after asserted only a few weeks earlier in May 2008 that every claim of manipulation in the silver market was either “implausible” or “tenuous”. There are still signs and wonders. Evidence for ongoing silver market manipulation in the meanwhile continued to grow and calls to reveal CFTC conclusions in the matter became ever louder.

As I showed in my recent analysis of the real price of gold when I calculated the eBay premiums for one ounce gold eagles and buffaloes, a disconnect between paper gold and physical bullion can lead to a hefty increase in premiums of more than 25% as opposed to a more normal 5-7%. When it comes to a high value metal like gold these figures are indeed staggering.

In order to examine similar effects on the premium of 1 ounce silver american eagle bullion coins I used the same method and analyzed silver eagles sold on eBay from early March 2008 until today and had some interesting results. After painstakingly cleaning up the data to remove items of primarily numismatic value - such as graded and proof coins - a massive 249′317 sold ounces (data available upon request) yielded the following picture and speaks volumes in regards to what kind of premiums buyers are willing to pay for real silver:

One can see that from what we can only assume to be pre manipulation premiums over COMEX spot of between 10 and 20% the premiums shot up to over 90%(!) over COMEX spot prices around the end of October 2008 amidst signs of market manipulation and only now have come down again and receded to about 50% on top of spot. In comparison to Gold premiums which almost quadrupled from about 7.5% in the first half of 2008 to a bit over 25% at the peak in early November 2008, the premiums on silver jumped a whooping 8 fold!

A bit of perspective seems to be in order. With a very real fear of hyperinflation in China and either that or bankruptcy for the US and Great Britain - the latter of which by the way just recently dropped interest rates to the lowest point in its 315 year banking history - one can not evade the question of how a return to sound money will effect the prices of both gold as well as silver.

Well - gold could take on the role of representing large denominations by either backing relevant notes or serving as metal for coinage and silver could do the same for smaller denominations. Rather straight forward - no? But not so fast there cowboy! As opposed to gold - of which almost all that has ever been pulled out of the ground over the course of history is still available today - silver has a far more pronounced double function of industrial as well as monetary metal.  As a result Ted Butler estimates that only about 2.5% of historically produced metal is still available today. At current prices that equates to about $1.65 of metal for every man,woman and child on the planet. Meaning that silver will have to appreciate markedly to serve as anything resembling pocket money and serve as small change once we return to sound money.

The fact that relevant legislation has been introduced not only in Indiana but New Hampshire as well makes these discussions far from academic.

Stefan Pernar

-- Posted 27 January, 2009 | | Discuss This Article - Comments:

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