That Precious Metals Rumor Mill

rumor-mill

We are hearing rumors this week of a shortage of the big silver bars, the thousand-ouncers.

No, we don’t refer to bullion banks saying this. Nor big dealers, who are happy to sell us as many of these as we can buy. Nor our peeps in high places (we don’t claim to have any such peeps).

We refer to the usual suspects. We talk about abundance and scarcity of the metals in nearly every one of these reports, in terms of the spread between spot and futures prices. Some people assume that their local dealer’s markup on Eagles represents spot. Sometimes the price of Eagles may seem a decent proxy for spot, but it is not. Eagles are produced in a supply chain that is inflexible. If demand rises above a threshold, it will first pull the Eagles out of the distribution channel. And then it will drive up the premium on Eagles. This may be a shortage of Eagles, but not necessarily a shortage of silver.

It’s All Relative

Let’s make sure we’re clear. The magnitude of the difference between what we call relative abundance and relative scarcity could be around 2% annualized. For a contract that expires in two months, this is 0.33%. For a $23 metal, this amounts to around 7.6¢. Another way of saying that the change in the spread is small is to say that the basis is a sensitive indicator.

Another rumor we’re hearing, related to the first, is that a Famous Buyer is purchasing a large quantity of silver. Whenever you read about a Big Transaction, we encourage you to ask if the buyer is urgently taking the offer price, or if there is an urgent seller hitting this buyer’s bid price. It may be good enough for the mainstream media to say only that “Chinese firm Acme bought 10,000,000oz of silver” (or worse, “China bought”). But for serious analysis of the metals, they need to say if the transaction is at the bid or offer price.

These are quite different scenarios. In one, the buyer wants the metal today and is a price-taker. A big buy will of course lift the price. In the other scenario, the seller wants the cash today. Either way, the story reads the same—the buyer is the active participant.

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Disclaimer: This content is provided as general information and for educational purposes only and should not be taken as investment advice. We do not guarantee the accuracy and/or completeness ...

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