Bloomberg recently published an article on the discussions taking place concerning the establishment of a new « fix » on the silver price. The old « fix » will end on August 15, 2014, bringing potential consequences that I’ve already analysed.
What is interesting in this Bloomberg article is not so much that discussions have taken place to determine a new way of fixing the price of silver, but rather the information about the scope of the silver market.
The article states that the size of the global annual silver market is equal to $5 trillion.
Bloomberg has always been a reliable source with their published data; thus it is interesting to compare the size of the silver market as announced by Bloomberg with the size of the physical silver market.
And this is where things get interesting and really surprising...
In a recent interview, David Morgan confirmed to me that the annual physical silver production is of roughly one billion ounces. With silver trading around $20 currently, this represents a $20 billion market for physical silver.
So the size of the physical silver market is of $20 billion, whereas Bloomberg is mentioning $5 trillion.
How can such a difference be explained?
Well, these $5 trillion represent the entirety of the « paper » silver market, including all « paper » financial products (certificates, options, ETFs etc.) derived from the real physical market and allowing investors to be « exposed » to silver.
This makes for a 250 to 1 ratio between the « paper » market and the physical silver market.
This would mean that, for every ounce of physical silver, there are 250 ounces of « paper » silver circulating in several financial products. In other words, only one contract or certificate issued out of 250 would be convertible in physical silver.
The disconnect between physical and « paper », or virtual, markets is considerable.
The financialisation of the silver market is resulting in a leverage of 250 to 1.
(The multiplication of those financial products on silver has skirted investors’ demand from the real physical market, thus creating a virtual silver supply without putting any pressure on the physical silver market. A roundabout way of keeping the price low.)
If now, as the regulation agencies are claiming, the goal is to create a new fixing for silver that would better reflect the physical market (notably from pressure coming from countries, like China, wishing to have their say in the fixing of precious metals prices), the leverage between « paper » silver and physical silver is at risk of radically evolving.
Let’s hypothesize that the silver price would be directly based on the physical silver market :
Today, the actual size of the silver market is, according to Bloomberg, of $5 trillion.
$5 trillion divided by 20 billion (physical market) = 250
250 X $20 (silver spot price) = $5,000 an ounce
If the price of silver were based directly on the real physical silver market, silver’s price should be at $5,000 an ounce.
This price may seem totally crazy, but who can pretend knowing exactly how an ounce of silver is worth, after decades of manipulation and turning real investors’ demand from the physical market to the « paper » one, and years of exponential monetary printing by all the planet’s central banks?
The actual spot price for silver has no real value and is not legitimate when we seriously compare the real physical silver market to the « paper » market and its myriad of financial derivatives.
I’m not saying the price of silver will reach $5,000 an ounce; I’m just saying that the actual PHYSICAL silver spot price is not only extremely undervalued, but that it is an illusion compared to the real value of an ounce of physical silver, since it is totally disconnected from reality.
Every investor holding silver in the form of financial products, without the possibility of verifying the physical existence of their investment, should ask the question as to what will happen when more holders of said products will ask for physical delivery.
In reality, we already know what will happen, because one of the large banks from the Netherlands, ABN-AMRO, already defaulted, a little more than a year ago, on its « gold » certificates by settling customers in cash.
Fabrice Drouin Ristori
firstname.lastname@example.org - Twitter @fabricedrouin