Loading ...Bifurcated Market – Silver Bullion
We often hear the term bifurcated market, not just in the investment world, but also in markets in general. Commercial, consumer, industrial etc. I would like to discuss the Silver bullion market in a slightly different perspective, than I usually do.
I often post my analysis and price targets based on the trading action and the charts. This post is looking at the silver bullion market from an overhead glimpse at the supply side. We know from various industry and analyst reporting about the annual production, and the various user demand etc.
Where things appear to stand currently is as follows. The retail investment demand side seems to be quiet with a steady churn of buying and selling at both the LCS and bullion dealer levels. Premiums have come in from their recent spike on the previous silver run to $30 in mid April.
The bifurcation comes into play when we look at the industrial and large user market. That is where we see tightness as evidenced by the 10%+ spread in quotes from China and India versus the NY Comex pricing. This lines up with the accepted wisdom that physical bullion is flowing from West to East, similarly to the Gold market.
Of course, as much as retail demand in the US and elsewhere can jump and create spikes in the demand and price, it is the big industrial buyers who are really driving demand and ultimately setting the price.
Not so much that they are necessarily increasing demand at a significant level but more so that their usual steady demand may force prices up rapidly and meaningfully if supply isn’t available to meet their regular needs.
I’ll offer an alternative view and it’s not mine. It’s Ted Butler’s who I regard as the foremost authority on these matters. Price is set by one overwhelming dynamic, and that is at the Comex. It’s is not really based on industrial demand. It is based on a few simple concepts. First off it only has to do with 1,000 Oz bars. If it is not a 1,000 Oz bar it simply doesn’t effect the price. Next it is determined by a handful of large bullion banks. Principally the “big four”. They have controlled the price for 40 years now through a rinse, wash and repeat process. They have been able to do this with unlimited credit and the regulators looking the other way. It has been an incredible money machine for them.
But here is the thing….
It’s in the process of coming unraveled, as we speak. It seemed like it never would. You know darkest before the dawn type stuff. But underlying consumption has reduced above ground supply now to the point that there is in fact a supply/demand imbalance due to artificial price suppression.. This has been deferred for a few years now through shuffling inventories and eating into ETF stores. But the market is now at the ignition point. The Chinese are now at the point of taking control away from Comex. Is that final inflection point upon us now? Perhaps.
But once this finally occurs the underlying dynamics will take over and the upside could be so explosive that Ted once described it as a nuclear b0mb sitting on top of a Saturn 5 rocket. When one becomes aware of the unique structure of the silver market which is totally unrelated to gold and frankly has nothing in common one can see what this thing has the ability to eventually do. But bare in mind the volatility will be epic. Hang on over the next 2-3 years.
Thanks for that detailed recap of how we got here and what is likely next. That is exactly where I was going but figured most here are familiar with the past. I was saying that given the large industrial demand is pretty much a constant and rising with solar etc. it is the lack of supply because of the Chinese and Indian taking the metal from the West (Comex) that will drive the price higher. I totally agree with your excellent description of how we got here. I have alluded to Butler’s arguments about the Comex and manipulation in many of my posts on Silver in the past. Buckle up and enjoy the ride, at least as far as the upward silver price. The ramifications as to the economic and political fallout may not be as enjoyable.
It is also of note what Keith Neumeyer is doing with the mint that are now opening. As you know the US Mint has ceased production of silver eagles despite the law requiring them to produce them. Well First Majestic’s mint has the intent to be able to use up ALL of the mine production so they will totally bypass the banks and deny them the supply. Moreover that greatly reduces the leverage the banks can use to manipulate the market. It is just another source of supply that is being cut out to the banks.