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The marginal cost of production also includes recycling & production as a byproduct of something else. So even if it did cost $20 to mine new silver from the ground, total production costs of silver could be much less.

 

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Yes, the byproduct mining would continue. But the primary silver mines would have lower production. But since most companies calculate costs net of byproducts, even there production will start to decrease if the silver credits drop. The law of supply and demand really works, and the only way you are going to get a lower price that sticks is if demand declines or something happens to radically change the cost structure in the mining industry. It's possible but not probable.

 

By "demand decline" I am assuming you are simply talking new silver demand decline. I very well could deinvestment of silver coins and bullion by investors to raise money for the "next hot thing". This would glut the market, and lead to lower demand of new ore, thereby suppressing prices for a period. Not forever, but until the market cleared. This and some government sales is what pushed silver prices so low in the 90's, as I believe production costs were still above the market price for silver for some mines at least.

I am just saying I don't see why industrial demand would need to wane to facilitate a price decrease. It could, if something like a breakthrough of using copper instead of silver for solar panels were announced.

 

I have often wondered how paper gold and silver certificates can be traded without having a direct connection to a real supply.

Anyone here know, if for example, corn and wheat can be traded on paper without a direct relationship to how much corn and wheat there actually is in exhistance?

If the price of a commodity is determined by paper side bets, is this not a way to manipulate the price in favor of the people who trade this paper and not the actual company that produces it?

 

It's called naked shorting. When there are more shorts on the market for silver that far exceed the physical supply then you know there is a disconnect. It's a nasty creation by the banksters that prevent true price discovery.

 

A consistent and prolonged disinvestment of bullion coins by investors would depress the price as you suggest. I was responding to a comment that action in the [paper] futres market could do the same thing, and I don't see that as being probable.

I don't see the disinvestment happening, however. The situation in the 90s was largely caused by the intentional sale of silver from government stockpiles regardless of price. From what I can tell, individuals have historically sold silver when the price went up [as in 1980], not down. So if this happened as you suggest, it would be a new phenomenon. Ask the people here how many of them would run to melt their collection of ASEs by date, or Pandas, or Libertads, "junk" Franklin halve collections, or even their wives silver jewelry if silver went to $10. I don't think there would be too many takers. The great unknown would be the ETFs like SLV. Would they be inclined to take possession of silver to melt at low prices or at high? That might make a difference.

 

Although people tend to believe the shorts are naked when this might not be the case. Take JPM for example. They are held up as a naked short and market manipulator. But one of their clients is the government of China which is said to have large silver reserves. So maybe JPM is just basis trading for a large client and isn't a naked short at all. There is no way to tell, but it would be dangerous to assume either cash without more evidence.

 

Here it is just after 10:30 am CDT and over 90,000 contracts consisting of 5000 bushels of corn have traded already. Annual world production of corn is about 30 billion bushels - US production 12 billion.

Here it is only lunchtime and 6% of the entire US corn crop has already changed hands today. Well on paper anyway.

 

Yes indeed Justafarmer. Go and have a look at Harvey Organ's blog if you are interested in the perversion relative to silver.

 

But, I am not sure this is any worst than the perversion that happens with the other half of agricultural commodities where maybe .1% of the commodity changes hands on the exchanges, but these trades set the market price. Of course, the players with the deep pockets in these markets basically set whatever price they feel like.

Its hard to have a perfect market, with enough liquidity to preempt one or two customers cornering the market and setting whatever price they like, and having one with too much "paper" commodity so that it is not indicative of underlying asset value.

Chris

 

But do they? Does the speculator set the price? Or does the middleman who has too much inventory sell a futures contract to cover that portion of his inventory that he doesn't think has a physical buyer?

I think that too many times it looks to the outsider [e.g., us] that the paper trades set the price [in many markets], ignoring for a moment that those paper trades might be initiated by Cargill, Archer Daniels Midland, and others through one of their many agents to hide their actions from the public and each other.

The same could apply to silver.

 

Well the specific market I am extremely well familiar with everyone knows the players. I will not name them here, but its a familiar name that always lowers the price on this market to lower their own input costs, as they are a branded company and are not affected by commodit pricing. So at least in that one market, I know for a fact its blatant manipulation by one firm.

The overall point being too much paper commodity, or too little, either are very poor markets. Getting the right balance is not an easy exercise, as many commodities simply do not have enough varied buyers and sellers to operate efficiently.

 

Good point and makes you wonder how bushels would have traded in the U.S. if the seller had to have the real commodity in a grain bin, get the auger and tractor out, line up a truck or a few v-boxes and load them, then make a real delivery to the buyer instead of doing it from a computor screen.
This much trading in a few hours, as you gave a good example of, gives the public a perception that there is lots of that particular commodity to go around thus keeping the price low. I was born and raised on a farm and know how you feel when you have no control over price.

 

But it is different. Here is the reason.

The difference between a commodity such as corn & wheat vs a PM like silver and gold, is the former has a shelf life. If someone doesn't take physical delivery of the train load of corn by a certain date, it rots and the worth of that physical commodity drops to $0. So manipulation by big players has its limits. You can't short it indefinitely as the physical commodity will actually be delivered to someone and the price will be set by what it can be sold for by the consumers. It has to be consumed in a certain amount of time for it to have worth in the process. i.e. Physical supply and demand sets the price because the short holder is going to want someone to buy that corn before it goes bad. (there is a side issue of that if the price of corn gets too high by paper trades, people will move to eating potatoes or something else)

On the other hand, there is no shelf life of gold and silver. A gold or silver bar can sit in the same vault for years and it won't decay, rot, etc. This makes it possible to short it multiple times (naked shorting) and if any of the buyers decide they actually want to take delivery, the owner of the bar can pay them off in cash with no worries of holding onto something that will become worthless in 6 months. The actual gold bar may never see the light of day. i.e. The amount of paper gold/silver sold sets the price without regard to the physical demand. Of course, all bets are off if the buyers of the shorts all demand the physical.

 

I would think that in a case like that you have a moral and perhaps legal responsibility to take this to the proper authorities with whatever documentation or evidence you have unless it is just hearsay.