-- Posted 7 April, 2010 | | Discuss This Article - Comments:

Silver investors should remember to always pay attention to the per ounce premium they pay to receive physical metals.  While premiums are important as a barometer of the actual silver you're obtaining per dollar, premiums also play a very important role in gauging current market manipulation. 

Why Premiums Imply Manipulation

There is possibly no other commodity that is as fundamentally fungible as metals.  Unlike corn, soybeans, beef and pork bellies, metals are identical, whether they are produced in the breadbasket of America or in the slums of the third world.  Other natural commodities, like beef or corn bushels, can vary in quality, in taste and visual appeal.  Beef raised in the European Union, where cases of mad cow disease have been plenty, carries additional risk than beef cattle raised in America.  While the end product may be similar, they are not always as fungible as you might hear from an end user, or the consumer. 

With all that said, the smallest premiums should be found in commodities that are more identical from area to area, and a greater premium is paid for commodities that aren't so similar.  However, premiums work differently in the case of the commodities markets.  Pork bellies, which can vary greatly in quality, especially to the diner and butcher, are traded with thin premiums.  Silver, on the other hand, carries a larger premium over the marketplace despite being universally the same.

The Workings of the Silver Premium

It is true that much of the silver premium exists to protect the individual broker from the risk of a lower silver price between the time they buy silver rounds and the time they sell them.  In addition, the premium helps cover overhead costs, including storage, security and personnel to manage silver holdings.  However, these costs are also borne by investors through the futures markets in other commodities that are not as easy to store or manage as small one ounce rounds of silver.  So why is there such a big difference?

People Don't Trust the Futures Markets

Simply put, those who are buying silver as an investment are rather untrusting of the futures market to protect their wealth, and the premium implies that investors value having silver in their possession over having it in a vault thousands of miles away.  Having silver in your own hands assures that you are the actual owner, and that the money you paid to purchase the silver is actually represented by real, tangible metals.

Premiums Are on the Rise

Following allegations by a whistle blower that the futures markets are being manipulated by investment banks and brokers, premiums for physical metals have begun to rise, despite little changes in market volatility.  There is no better dataset to test this theory than the last few months of trading.  After falling from $17 in January to $15 in February and bouncing back to $17 in March, premiums in March and January should be similar.  Of course, they are not. 

As the CFTC probes into the allegations, silver investors once satisfied with paper ownership are now demanding physicals, and as a result, the price of silver traded off the markets is rising.  Many silver rounds are now selling for a full $1.19 over spot, far greater than the price of $.79 over spot in January.  For this spread to grow shows only one fact: the silver markets are being manipulated on the market, and investors are taking notice in mass. 

Dr. Jeffrey Lewis

www.silver-coin-investor.com