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Friday, March 25, 2011

Why Bullion?

Above is the chart comparing the recent move of bullion silver (black) to the silver tracking stock (blue).

Physical silver is clearly developing a huge premium over the spot price. Why?

For one thing, the spot price is based on the Futures price (near term contract). And as everyone who follows the precious metals markets knows, many more futures contracts are traded than there are ounces of bullion available for delivery. This is true for both silver and gold.

About 100,000 gold contracts are traded each day on the comex. Each contract represents 100 ounces of gold. If every contract were held to maturation, at the very least 10 millions ounces of gold would be delivered every month. Within five months the entire year's world wide production of gold would be delivered. Within 10 years all the gold ever minted in world history would have been delivered.

Clearly, as in all financial schemes based on paper - which is to say "the honor system," someone's not playing fair. And in fact, if you, a small time player, decided to take delivery of one contract - you'll find you won't be able to do it. Go ahead try it. I did.

However, if Goldman Sachs decided to take delivery, you know the Comex (gold exchange) will be damned well obliged to get them their gold. And at some point, someone with leverage will decided to take delivery. Then you will see the premium of physical explode.

And at that point you won't be able to buy physical any more. Unless you are Goldman Sachs.

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