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The Real Silver Price Based on Paper or Silver Bullion?

Commodities / Gold & Silver Aug 28, 2008 - 08:52 AM GMT

By: Peter_Degraaf

Commodities

Best Financial Markets Analysis ArticleOnce-upon-a-time, in ‘never-never' land, there were two competing silver prices. These two silver prices were at loggerheads with each other. Every time the ‘real' silver price began to rise, a ‘paper' silver price would show up in large quantities and scare some of the holders of real silver to dump and run.

Silver miners and coin dealers with ‘real silver' in inventory, instead of being organized, and using supply and demand to determine the price of silver, would look at a computer screen, check to see what ‘paper silver' was doing and meekly accept that as the price at which to sell silver.


The Silver Users of America (SUA), is the only ‘user cartel' in existence. (Cartels are usually comprised of suppliers – OPEC comes to mind). For years the SUA and their willing accomplices have been able to spook the people who deal in ‘real silver' into coughing up silver at low prices, simply by dumping ‘paper silver' onto the markets. While there are no manuals available detailing how they do this, we will have to make some assumptions based on observations regarding market action.

Here is my assumption: Assume that I am a member of the SUA, and it is in my interest to keep the price of silver as low as possible. Along with my fellow SUA members, I go about engaging half a dozen large bullion banks that are active in the futures markets. I mention to them that my fellow SUA members and I would like to cap a rally that has just driven silver to a new high. Would it be possible, I ask them, as soon as we see that buying is drying up because of resistance at this new price, for you and your fellow bankers to start selling a large number of futures contracts and options using ‘paper silver'?

Let's pick a time when there are not too many people active in the marketplace, and volume has slowed right down.

My fellow SUA members and I will do the same, and as soon as we create some momentum, the hedge funds will dump their ‘long' contracts and join us, since they like to chase a trend. Then, the small and large investors who have bought silver on margin will have to sell, and they will also become our helpmates.

By any chance, do any of you bankers have an inside track to any of the central banks? It would be very helpful if one or more central banker could raise the value of the US dollar at the same time as we start our selling campaign.

It would also be very helpful if you people used your influence with the governing body at the various futures exchanges to tell them that what we are doing is simply ‘normal market behavior.'

If we all work together, then you and your fellow bankers will be able to buy back the contracts you sold high, at a lower price, and my fellow SUA members and I will be able to buy ‘real silver' cheaply from the mining industry, since these people still have not figured out our game and have not yet banded together to form a suppliers cartel.

A funny thing happened last week. The SUA and its fellow travelers may have pushed ‘paper silver' too low. Shortages in ‘real silver' began to appear, and more and more people now are beginning to understand what is happening. My advice to those among you who think you are buying ‘real silver' when you are trading ‘paper silver' is this: Make sure you buy ‘real silver' with the profits you make in ‘paper silver', just in case it turns out there is a shortage of ‘real silver' to back the ‘paper silver.'

Featured is the daily silver chart. The blue arrows point to times when the silver price fell below the 200DMA (red line on the chart). Two years ago, at the seasonal low in September, price fell to 2% below the 200D. A year ago during the August seasonal low, price fell to 3.5% below the 200DMA. Last week during the presumed 2008 seasonal lows the price was pushed 37% below the 200D!! Think of this as the sellers of ‘paper silver' having pushed a beach ball well below the surface of the water in a pool. Think of how rapidly the beach ball can rise when it is released, then go buy some ‘real silver', just as I have been doing.

Notice the RSI at the top of the chart is already turning positive, and the MACD at the bottom of the chart is also ready to turn up again.

The positive aspect that is impressive about the rise in today's silver price (Tuesday 08/26)), is the fact that the US dollar is also rising. In 2005, silver, gold and the US dollar all rose in tandem.

Therefore, a decoupling (separating the metals from the movements in the US dollar), would not be unique. The main driver for silver and gold is the fact that ‘real interest rates' (T-bills less CPI) are currently negative. Whenever rates are negative, silver and gold usually rise, as money in bank accounts is punished.

This is ‘real silver'. It does not fold, crumple or burn, you cannot create it on a computer.

By Peter Degraaf.

Peter Degraaf is an on-line stock trader, with over 50 years of investing experience. He issues a weekly alert to his subscribers. For a 60 day free trial, send him an E-mail itiswell@cogeco.net , or visit his website www.pdegraaf.com

DISCLAIMER: Please do your own due diligence. I am NOT responsible for your trading decisions.

Peter Degraaf Archive

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