David: Markets move for one reason and one reason only.  Markets move because there’s more buying pressure that moves the market up, or there’s more selling pressure that moves a market down.  That’s how markets move.

Now, everybody that watches CNN or CNBC or Market Watch or on and on wants to know why the market moves up or down at any point in time. Well, why?  They might be told because the Fed Chairman came to whatever meeting and his briefcase was full or it wasn’t and other type of nonsense.  But the truth of the matter is there’s either more buying pressure or more selling pressure.

Now the silver market has gone down and gone down substantially.  So we know for an absolute fact that there’s a lot more selling pressure than there is buying pressure.  That’s why it went down.  No dispute about that.  There can’t be any other explanation period!!

The fact is there’s a lot of selling pressure.  For a long period of time, the market does not care whether that selling pressure is on paper or that selling pressure is for real.  So the futures market is determined by paper transactions not by physical transactions.

That is a fact.  So because the market doesn’t care for a very long time, whether the market is sold on paper or not, the price is fixed by this obscene amount of selling by powerful well financed entities in the paper markets.  And that is what sets the price.

Now, what does that mean?  Well, it means what we’re watching is a massive amount of selling of silver on paper!  However, the physical market is saying, hey, wait a minute here.  I can’t sell my physical silver for this price.  But it can be done on paper.  So you have to ask in my view the reverse question.  Why not take advantage of them?

Why not buy it on paper, stand for delivery?  If you want cheap silver, the cheapest silver you can buy is out the futures market.  Go buy up a contract, pay for it in full, and stand for delivery.  If enough people do that long enough, trust me.  The price would start reflecting the physical demand and not this arbitrary paper price that’s based upon a plethora of selling from time to time.

Trader's Blog: Interesting, The catch to that, however, is everybody out there, all our readers out there, David, could go out and buy a futures contract today, they could basically say that they want to pay it in full and store it at the Comex.  But I still don’t feel comfortable about that is how that’s ever going to change the price unless they all said they wanted to take delivery.

Because it seems to me that they’re playing with other people’s silver in trading silver anyway.  Wouldn’t you agree with that or not?

David: If you have a warehouse receipt from the Comex, you own your silver – in other words, you’ve paid for your silver in full and simply pay storage fees to have it held in an approved facility for you.

I personally wouldn’t worry about that in any way, shape, or form.  That silver is usually held in what is known as the eligible category.  That means you’re an investor and you own it. Please note that you can have it physically delivered-taken from the warehouse and sent to you to store however you wish personally. I know that some of our clients have done this.

However, there’s another category for Comex silver, and that’s called the registered category.  And that’s where most of the dealers own their silver.  Now, in that category, a dealer that has silver might go ahead and swap that same silver out to, let’s say, the exchange traded fund or lease it to somebody in the jewelry industry or something like that.  Some of that silver certainly is sold more than once.

Trader's Blog: David we hear from investors that there’s a shortage in physical silver.  And they don’t understand why.  Are the mines depleted?  Why is there a shortage in physical silver?

David: Well, let me address that.  First of all, I disagree that right now there’s a shortage in physical silver outside of the retail market, which is your retail product, which is your 100-ounce bars, your 10-ounce bars, your one-ounce rounds, your silver eagles, silver maple leaves, the kind of silver product bought by the public.  Anything that a physical silver investor would be purchasing from the physical realm, there is a shortage there.

It’s very tight supply.  And you can make a strong argument that there’s a shortage.  However, on the mining side, there was what was called a deficit for 15 to 16 straight years, depending upon which study you look at, whether you looked at the Silver Institute study or you looked at the CPM group study.

But roughly, both agree that for roughly 15 consecutive years from 1990 to 2005, there was a deficit.  A deficit is not a shortage.  A deficit means that the amount of silver that is mined by all mining activity on a worldwide basis is not sufficient to meet the demand.

So supply and demand always have to meet.  They always have to meet.  So how does the supply and demand meet?  Very simply, the above-ground stockpile of silver, which was at 2 billion ounces in 1990, is now at roughly half a billion ounces or 500,000,000 ounces above ground.

So in other words, 1.5 billion ounces of silver has been eaten up out of the above-ground stockpiles over the years 1990 to 2005.  So roughly 100,000 ounces a year has been eaten away.  However, depending, again, on which study you use, around 2006, the mining activity on a worldwide basis is greater than the amount of silver demanded by all markets.

So there’s actually been an increase in mining activity in the last several years that is greater than the demand.  Now, if that worries you, and you think you shouldn’t buy silver, then you have to stop and think for just a moment.  The amount of above-ground silver supply right now in the world is less probably than ten months, probably six months.

But I’ll be conservative and say ten.  The above-ground supply of gold is basically 40 years.  So if you’re a gold bug, and you say, well, gold is the greatest thing going’.  There’s a 40-year supply, and silver, there’s probably less than 10 months.

However, the real argument is whether silver is a monetary metal or not.  And of course, I argue strongly that it is.  There are people that are in the gold only camp that argue only gold fills that role.  But that’s a discussion for another time.  So is there a shortage?  Retail, yes.

On the industrial side, where we’ve been discussing a lot of the silver activities, which is extremely important to pay attention to, the 1,000 ounce bar side, I don’t believe that there’s a shortage.  But I want to use the word yet.

Because as long as the investment demand stays strong for silver, there could a squeeze of some type developing as we speak.   Because people will demand silver in physical form, and the more that there is demand for silver in physical form, the tighter and tighter the supply becomes.  So hopeful that answered your question.

Trader's Blog: OK...so why don’t Silver spot prices agree with each other at the end of the day?  I mean some dealers charge a different price on the same day for example.

David: The reason the spot prices don’t agree with each other is that there are different market makers in the market.  Each retail dealer has their own bid and ask spread.

The futures exchange sets the paper price.  And that price is the starting price that most of your dealers use.  Now most of the dealers in the market that is the physical silver market will take that price and then add on some type of fee.  Right now they are adding on a huge premium because the supply is tight AND the demand is still high!

Now when the dealer buys silver from you, most of the time, not in every case, they do buy it from you at spot price or if you like the price quoted on the Futures market.  Also, different articles of silver can have different premiums on them.

For an example, the silver eagle that’s minted by the United States mint usually has a much larger premium for one ounce of silver than what’s called a silver round, which is basically the same amount of silver struck by a private mint that’s normally referred to as a medallion.

So the actual price you pay can depend on how tight the market is, what the demand is, what type of coin you’re buying, who you’re buying it from, and on and on it goes.  So that’s why they don’t agree.

Trader's Blog: Well I feel like this has been a crash course in Silver...without the crashing! Thank you very much for taking the time today to explain a few things. That being said would you be willing/able in the future to come back and maybe address a few more silver questions or concerns that our audience might have?

David: I'd love to! Have you audience just post a comment and I'll work through them and answer them on a future post...how does that sound?

Trader's Blog: David, sounds like a great plan! Keep things running smoothly over at Silver-Investor.com so myself and our readers can keep learning about Silver.

David: That I will do!