-- Posted 23 February, 2011 | | Discuss This Article - Comments:

There’s a term gold and silver investors like to use to describe changes in premiums based solely on changes in the markets and demand for physical metals: the crisis premium.

The crisis premium was most recently encountered at the turn of the new millennium when hundreds of thousands of people stashed record collections of gold and silver to protect against what was supposed to be the worst electronic catastrophe ever.  Bank balances were supposed to go to zero, and computers were to become virtually worthless when the date rolled over to 01/01/00.  Of course, that never happened, no one died, and the sun still rose the next morning.

What we have on our hands now looks to be a crisis premium, but the crisis, interestingly, isn’t showing in the premium.  Instead, it is showing in the price of silver itself.

International Revolution

Because metals are driven by a number of different elements, fear being a large portion of this driving force, the silver markets are responding favorably (for longs) to the world’s newest revolutions.  In Libya, tens of thousands, maybe even hundreds of thousands, have taken to protest.  In Tunisia, the citizens are still searching for freedom. 

These crises obviously scare many investors, particularly those with exposure to areas rocked by riots and in industries where their daily business may be affected by new tensions.  Libya, for example, is a very important piece of the oil trade.  Egypt was a top concern as well, since literally billions of dollars of merchandise and raw materials flow through the Suez Canal.

Physical Price Time Delay

The shock we’re seeing in the paper physical markets can be linked quite easily to international revolution.   We have to consider that the inflows into speculative, market-based silver products are mostly the result of the “give it to me now” mentality.  That is, when fear sets in, investors want to hedge themselves as soon as possible.

In comparing the metal markets and ETFs to the corner coin shop, it is obvious which the faster alternative is.  ETFs can be snatched up in seconds.  In contrast, it isn’t even certain if coin shops will have enough silver to supply just a Wall Street speculator.  Plus, funds are easy, and they don’t even require actually taking delivery of the metal (a benefit to Wall Street, but not so much to an informed commodity investor).

Taking all that into consideration, it is sure that premiums on all physical metals are sure to rise in the coming days.  The move to financial paper silver was breakneck hedging, but it would only be reasonable that these positions will be later unwound and covered by purchases of physical silver.   This kind of market buying and selling is common, even among average gold and silver buyers, because it allows investors to lock in prices down to the very minute before they can then go buy equal amounts of gold or silver in physical form, while simultaneously reducing their paper silver positions.

How high do premiums go?  No one can know definitively, but today’s premiums are awfully low when compared to crisis premiums of the past.  Take that in mind before you delay your next silver purchase.

Dr. Jeffrey Lewis

www.silver-coin-investor.com