What is really going on...

We're going back to pretending we know what is happening. Some of the opinions in these articles are very well researched while most are just hunches. The subject of this post is the latter.

At the moment, silver has been over sold. That means that the price is lower than it ought to be due to more people than normal having sold. Why this happens in May is not really a mystery; people have to pay taxes in April so easily negotiable investments go down in May. Thus it has always been.

About the market in general, though, there is much more to say. At the moment, a silver shortage is under way, according to all sorts of semi-reputable rumor. From sources with the same level of reliability, we're hearing that the amount of refined silver available to the market is perhaps one tenth that of gold. This means there is ten times as many gold as there is silver available to sell right now.

Gold, by and large, is used little in industry, most of it being used for jewelry and other decorative purposes, and the balance used for investment. This means most of the gold mined is converted to the sorts of things people hang on to. The things made out of gold are, also, easily convertible to pure (investment grade) gold.

Silver, on the other hand, is primarily an industrial metal. Most of the silver mined is used for industrial purposes, in electronics, in health care, and in a myriad other applications. Most of the silver so used is not easily recovered, and, while the recycling of electronics is on the rise, a significant amount of silver has already been disposed of in landfills.

The much smaller percentage of silver that ends up as investment grade also is used more as a conduit for other financial purposes, rather than as a store of value. This means that silver swings wildly, one of the reasons people tend to hold gold instead. Given that it takes far less money to drive the silver market by purchasing a large order, it is easier for a hedge fund investor, for instance, to park money in silver while moving it somewhere else, making a nice profit in the process. I won't discuss how this is done right now, because I barely understand it myself, but it does happen.

All this means that gold ends up being the preferred money store. To a certain extent, this is so because it is so. In other words, while silver certainly appears to be considerably more scarce relative to gold at the moment, people still believe gold to be valued because it is scarce, which is only partly true.

It is scarce, but it is largely scarce because investors buy and hold it. This is the same situation the dollar is in, that it is held in massive amounts by foreign interests, keeping its value up. Since many investors, both public and private, buy and hold gold as a hedge against inflation, it works as a hedge against inflation. The price is kept high because people are buying and not selling.

Silver, on the other hand, has both upside and downside potential. It is known as the cheaper money metal, meaning that young and less wealthy buy it because they get more for their money, so there has always been a market for it. Also, it has been no secret that it appears more scarce than gold, so speculators have also been buying it as a long-running speculation. This author, for instance, bought silver at $7 an ounce some five years ago, with the current price around $35 or so, last I checked.

The potential upside could be a flip in the relationship of gold and silver, which happened in medieval times, when new silver mines led to silver being far less scarce and therefore worth less. Were this to happen, the amount of fiat money that could be made would be very impressive, indeed.

However, if you believe, as the Bureau unanimously does, that inflation must happen in the future, silver may be a better hedge, as it may go up against gold and oil, as well as food and property, things that you will need. Were this to happen, it would present both a profit opportunity and a hedge.

As usual, this article is not intended as investment advice. You are urged to do your own research, as it is your money you are investing, and we won't help you if you lose it.