$100 Silver And The Dirty Secret Of Silver Monetary Demand

$100 Paper Silver Lions

Oddly, and thanks in part to the rise of the precious metals ETF’s, large investment and banking institutions have continued to dispense with all manner of recommendation, analysis, and commentary.

Seasoned observers should take these statements for what they are; typically contrarian indicators, or signals, of impending market moves.

Recently, Bank of America closed its silver short, while in late June of this year, Citibank’s Tom Fitzpatrick called for $100 silver.

Ultimately, despite all the noise, the uncontrolled expansion of the Federal Reserve’s balance sheet is the key factor determining the value of the measuring stick used in these price predictions.

Silver Price Discovery

The price offered for physical silver has two essential components:

- The basic spot price.

- The wholesale mark-up or premium.

Paper price discovery is a nebulous construct calculated by using the futures price in a market where investment banks have primary influence (or where they rig the price). The result is that the price of silver (and Gold) is not derived by its physical demand or supply, but rather by the speculative positions standing long or short on the commodity exchange like any other traded commodity, stock or currency.

Alas, the basic mechanism of price discovery (based on demand and supply for actual use) of anything traded on an exchange has been terminally infected by speculators having access to unlimited funds and super fast computers for trading resulting in volatile price swings and the quite (near) destruction of the mining sector for these metals.

Up the Proverbial Creek

By demonetizing the metals, and suppressing the price of silver from the commodity side, we have lost one of the last true crisis signals in a system that is teetering on the edge of the abyss. It would be obvious if it weren’t so complex, and therefore, off the radar screen for the masses.

For most of it’s existence, the US Central Bank remained behind the scenes. The irony is that Paul Volker was the first “super-star” central banker (for all the wrong reasons) made famous for his fiscal conservatism in going against the grain by fighting the then visible inflation and demonstrating the FED’s independence.

Since that time, as the great credit boom grew larger and with each bust rescued by more infusion of the same, we now find ourselves in a position where the direction of the market is completely at the mercy of the words spoken and recorded by the Federal Reserve Chairman and its Open Market Committee.

The Fed is now backed into a corner. It can no longer continue with its bond buying without competing for the much needed REPO market collateral. Because of this, it faces another Lehman-like market freeze without the political support to protect the derivative fallout it had last time around.

The Fed desperately needs the US government to expand its recently shrinking deficit in order to create the “room needed” for more debt monetization. Tapering is off the table but war, and the aftermath of the government shutdown, may be suitable options.

$100 Silver and The Dirty Secret of Silver Monetary Demand

Long term precious metals investors have endured two major events where massive (induced) sell-off’s resulted in a scramble to off-load the paper silver equivalents. The fall from $20 to nearly $8 resulted in near shortage. The more recent fall from $49 triggered unprecedented demand and physical off-take, with the damage still unfolding.

The price of everything, including precious metals, will likely suffer when speculators unwind their positions due to some event they have not anticipated nor foreseen. But the measuring stick, a fiat currency past it’s average life span, ensures that ultimately wealth will be counted in ounces.