Hold on to the silver lining

Hard asset vs.derivative and the "dangers" of paper

The silver market has taken a nose dive in recent trading sessions, leaving many of those positioned on the long side underwater.  Taking a deep breath, it may be time to acknowledge the difference between physical and paper

Put simply, paper derivatives do not price in fundamentals. Nevertheless, price movements in paper products are shaping sentiment, and are moving the precious metals far off the radar screen as an attractive investment — except perhaps for the very few that see their intrinsic value. All paper derivatives markets have ballooned so far from reality, that along with the rapidly expanding money supply, they seem to be gigantic bubbles in and among themselves. Furthermore, the latest silver market rout indirectly serves to support the metal’s price in the long term by forcing numerous suppliers out of the market, as their production becomes increasingly uneconomic.

Given falling silver prices — consider the alternatives

Those considering moving their investment funds out of the paper silver market into other assets, are probably now looking at the available alternatives. Here is a quick overview:

  • Bonds - Most individuals will not be able to leverage enough to short bonds.
  • Equities - The recent stock market rally from its 2009 lows could disappear swiftly, and in the end, you will be left holding a paper certificate tied to management that is both dependent on and held inside a troubled financial system.
  • Housing - The much touted non-recovery is finally manifesting itself via rising mortgage rates. The sad truth regarding pent up foreclosure-based shadow inventory will reveal itself soon.
  • Farmland - Even farmland has been over bid and is expensive historically speaking.
  • Forex - Getting involved in trading currency markets means ultimately chasing one piece of paper versus another, as all fiat currencies have become.

Holding Physical - The irony of physical demand for precious metals is that despite the recent decline in price, a surge in physical demand is occurring.

In many ways, paper metal derivatives represent a type of front line, underhanded confiscation since people are duped into holding them instead of the actual metals that their prices are supposedly based on. After this, the sequence of a more overt confiscation policy looks like it will go after:

  • Derivatives
  • Paper metal certificates
  • Electronic metal balances

Furthermore, the Cyprus bail-in banking debacle looks like the template for future deposit confiscations. 

With respect to pensions and 401k plans, the coming market volatility will probably 'convince' the masses that the government knows better. Sadly, the 'government guarantee' seems to be the sacred cow that will be sacrificed to bring about the great “financialization” of everything.

Making paper currency legal tender was the first step in this process, and the ensuing propaganda campaign has effectively steered a generation away from sound money principles.  Only by seeking real value can investors see the benefits in continuing to hold silver.

About the Author

Jeffrey Lewis has been an advocate for silver purchasing for the past six years. He writes regularly about it at silver-coin-investor.com

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