-- Posted 25 August, 2010 | | Discuss This Article - Comments:

One fact is very, very clear: the silver markets are horribly suppressed.  As we reported months ago, it was discovered in May that the silver futures market is purely paper, and there is an actual whistleblower to tell the tale. However, that testimony was subsequently squandered when the closed circuit TV had “technical errors,” and days later Andrew Maguire, the famed whistleblower, was in a hit and run accident. 

However, not all of the suppression talk need be reserved for so called “conspiracies,” as silver is suppressed right before your eyes.

Treasury Issues

The US Treasury issues and rolls over trillions of dollars in new debt each year.  While investors often see this as an inflationary action (and it is when quantitative easing takes place), the result is usually deflationary, at least temporarily. 

New issues of paper debt, like Treasuries, actually reduce the total pool of outstanding cash that can be invested in new projects, commodities, or even in the stock market.  However, unlike new projects, commodities, or corporations, paper debt can be created out of thin air and creates very few tangible products. 

Therefore, what you have in debt is wealth destruction, as trillions of dollars that might flow into other safe haven investments like silver flow into Treasuries, where the money is then wasted in government bureaucracy and isn't spent until months to years after it is borrowed.  This little slush fund can suck trillions out of the real, physical economy each year, and it does wonders to suppress financial product prices, especially in commodities.

ETFs, ETNs, and Their Fees

Exchange-traded notes are about as criminal of a product as you could ever imagine.  ETNs take in billions of dollars that are held by the issuing firm.  The issuer then makes bets – not actual purchases of silver – on which direction the price of an underlying commodity will move.  If $30 billion were to flow into commodity ETNs, not a single dime would actually be invested in commodities.  If it were, prices would be affected, but instead, it flows through the backdoor and reduces overall interest in the physical markets. 

Don't discount the role of fees in the commodity markets either.  With annual fees on commodity mutual funds and ETFs going as high as 2% per year, the total amount of gold and silver held in these funds (if there is any at all) declines at a pace equal to its annual fee without any new investment. 

Therefore, if there is $100 billion in commodity backed ETFs, ETNs, and mutual funds, as much as $2 billion a year is cashed out and sold on the marketplace.  Without new blood (err, funds), the pool of commodities sees an influx.  

And don't forget premiums!  The ETF PHYS claims to own deliverable physical metals, but it recently traded with a premium of more than 13%.  Thus, for each $1 invested, only $.88 went to the metals markets.  Premiums on closed-end funds like PHYS for other commodities can run even higher.  The infamous UNG ETF touched a 15% premium before heading lower as new shares were issued, however, even with the new buying power, natural gas continued to stagnate.

Clearly, commodities’ real values are suppressed by the hand of fancy financial vehicles. 

Dr. Jeffrey Lewis

www.silver-coin-investor.com