Why Worry About Bullion Silver

After reading somewhere that bullion silver might become unavailable in a future shotage, someone asked why worry about bullion silver since there is plenty of more refined coins and bars and other silver items that could be melted for use in industry. My response:

Bullion silver is likely to be less pure than coins or small bars, but 1,000 ounce bullion silver bars are cheaper per ounce than the smaller fabricated sizes. Bullion silver is typically available for only a few cents more per ounce than the spot price in the paper futures market. So long as bullion bars can always be purchased at little more than spot price, a business that simply melts the bars would never pay more to melt fabricated silver, even if it is more highly refined. If the business could not buy cheap bullion bars locally, it would simply go long a futures contract and then stand for delivery of the physical bullion silver.If a company cannot get bullion bars from the futures market to consume for its production needs, then there will be a delivery default on the futures exchange.

Publicity about that default will immediately result in panic buying by all industries that need to consume bullion silver, but do not have a surplus stock on hand because they depend on just in time delivery. Imagine the additional buying that would be contributed by investors and speculators when news of a default spread. When the futures exchange defaults on delivery of physical, then all buyers of paper contracts would demand delivery, but no one would sell a paper contract if it obligated them to deliver real physical metal that is not available. The silver price in a delivery default might not make it all the way to the moon, but you can be sure that the price spike would be much higher than you can imagine.