Silver Bubble Fueled By Small Investors

Thanks for the thorough explanation. Does that mean they could also lower margin requirements if they were so inclined?

 

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yes, the CME can raise or lower margin requirements on any thing at any time

 

Buy copper it's the new silver or was that Titanium

 

Small investors get excited. That is the entire basis for understanding them to me. Small investors typically do not understand the markets or what they are investing in, so they always choose what has returned the most recently. In practice, this leads to "chasing returns" and buying high and then selling low when they get discouraged.

These are the reasons I see small investors actions the greatest contra indicator there is to investing. You always want to try to sell what they want to buy, buy what they are selling, and seek out assets they aren't aware of, because by the time they are aware of them its too late. This, of course, is predicated on buying low and not trying to time a bull run, like I know Cloud and Jim and others like to do. That is just not my favorite kind of investing, but it can work.

Btw, not losing until you sell is a wives tail, since you always lose your opportunity cost constantly. Yes, you can always wait it out, like you could have from 1980 to 2009 to come out even, but then you lost almost 30 years of returns.

Chris

 

True, not in absolute value, but it effectively can. I would say silver at $4 when I bought it was effectively zero based upon how much relative value it had lost in 3 or 4 decades. Stocks can go to absolute zero where commodities cannot, but they effectively can go there. Silver today is more in line with historical value, (high side sure, but not crazy high like 1980). So many people get wrapped up with a number, but remember every single year every commodity we buy should go up because of inflation, but humans don't think that way, we remember actual numbers. I would say if silver went to $8 it is effectively zero compared to what its purchasing power used to be.

Hope that makes sense, but I am not sure if I am explaining it well.

 

Many people think that the exchanges are independent, unsupervised, easily and safely manipulated by groups, but many do not know that the exchanges are part of a SEC dependent company "The CME group" , and their SEC reports are available to the public so anyone can go through them and look for manipulation, conspiracies, etc. If you ask owners of the stock CME, they are happy for volatility and for margin protection, as the company ( and they) would suffer the losses, not any "big boys". IMO.
http://finance.yahoo.com/q/pr?s=CME+Profile

Jim

 

Pork Bellies.......oops, wrong forum.

 

On pork bellies ... Mr. Valentine says ... "they're panicking right now ... i can feel it ... they're all saying ... SELL SELL"

 

Great explanation. I was wondering if the price dropped because people were forced out of the market, or if it was just that the conditions were less favorable than elsewhere. I guess we'll see if the price drops tomorrow after tonight's planned margin hike. I wonder how long this can go on? Well, if this is the only thing keeping the price down, then the current price seems like a bargain to me. I can't forsee raising margins at last week's rate as a sustainable trend. These hikes came just in time to prevent the psychological $50 silver which would have caught everyone's attention and further bolstered speculative interest. All commodities dropped, and the dollar rose, IMO because of this single event, and now central banks are buying up tons of gold at discounted prices.

Relating back to the topic, I think that pretty much solidifies that this is not a bubble, or at least that this bubble isn't ready to burst on its own yet. A lot of people in China are buying up SLV and demanding physical in exchange for it, instead of going through the usual channels, and the amount of above ground silver is the lowest it's been in 800 years. Some argue that one day it could be worth more than gold. I don't think that will happen, but I do think the recent run was justified and will continue if unimpeded.

 

In the stock market, when the small investors buy, they usually buy in lots of less than 100 shares or "odd lots".

Through many market cycles, when the pros see a lot of this activity, it's a signal to sell. It also works in reverse as a signal to buy.

Obviously, it's called the "Odd lot theory"

 

They can't. SLV and GLD have very specific wording in their original SEC filing

So the "asian" buyers would have to act through an Authorized Participant ( and I do not believe any are asian banks), and redeem a basket of 50,000 shares of SLV and pay expenses and storage fees, etc. It would be less expensive for them to deal in the future market themselves. SLV holders that aren't APs can't demand delivery.

Jim

 

As I don't have firsthand knowledge of this, I'm not willing to die on this mountain, but just to show that I'm not making it up of my own accord. =)

http://www.pricelessgoldandsilver.com/patrickheller11.htm

I suppose "a lot of people" isn't exactly the most accurate phrase choice. Here's another link about SLV I found interesting.

http://www.resourceinvestor.com/News/2011/5/Pages/Silver-Clobbered-on-Multiple-Fronts-.aspx

 

That depends on what you consider what silver's purchasing power used to be.

If we take the year 1964, when the value of an ounce of silver was approximately $1.29 (meaning the silver in a silver dollar was worth approximately face value), and insert that figure ($1.29) into an inflation calculator, we get a value of approximately $9 for 2010, or an increase by a factor of 7. Thus, a value of $8 for one ounce of silver today would theoretically not be too far below its purchasing power in 1964.

http://www.dollartimes.com/calculators/inflation.htm

Naturally, some things have increased in price by more than 7X since 1964, such as college tuition (in many places), health care costs, gasoline, housing (in some areas). Even so, silver's value today (nearly 30X its 1964 value) seems well above its purchasing power in 1964.

 

For the most part the basics are correct, but their understanding of the process is hazy.
In the first URl they say:

Well the first mistake is that SLV is a 1:1 ratio, and it is GLD that is the 1:10 ratio ( i share GLD = 1/10 oz gold. So 50,000 shares is only 50,000 ounces. And the Authorized Participants are the banks/brokerages that "own" the SLV trust, and they would not do anything to bring the trust in default such as decreasing silver supply below needed levels or increasing it above needed levels. The second URL makes it a little clearer,

SO when silver physical price decreased, the shares of SLV that were cashed in, accumulated in baskets of 50,000 shares. So then the trust had to sell 50,000 ounces of silver in their keeping for every basket of 50,000 shares redeemed to replace the cash they paid out. If 50,000 shares of SLV was sold the next day, they would have to buy 50,000 ounces of silver to put into the trust account. That is why the SLV price does not track exactly the price of silver, even considering the trust charges to the holder, as there is some hysteresis due to the trust buy/selling.

Either some people didn't think it out carefully or it was an "urban legend". If I had enough to buy a basket worth of silver ( 50,000 oz. ) I would do the future market route and avoid SLV charges, both buying the SLV shares, and redeeming them. Same basically for GLD.

Jim

 

The OP's article explained it in an off-hand way. It was stated the Silver market was too small to attract the very large investors to prop it up when the slides start. Well, this means that a single large investor CAN sell a large quantity and drive prices down. Sell short and knock it down some more. At the bottom, place some large buy orders and watch the price climb. Those who profit move market fluctuations are not necessairily trading in the US and subject to our rules and regulations. Once one market starts movement, the other exchanges seem to follow it. I mean if you drive the price down 10% in Tokyo, that is going to travel around the globe.

The market is so underfunded that I believe there was some manipulation in the 80s and I think the same ploy is taking place today with the exception that Silver will never return to the $5 level as it did following the 80's. I believe such a large segment of the world's population that can now legally own PM's in their countries coupled with a basic distrust of currency is going to prop the prices. It might be noted that individuals now have opportunities to exchange PM's with each other that didn't exist in the 80's. ie; the internet and on-line marketplaces. Since the majority of silver is privately held, and those people now have the ability to market or increase their holdings without using a brokerage or trading house the game has changed. IMHO