Price Of Silver And The Lack Of Availability

quick question, are paper silver futures able to demand physical silver for their paper at a time in the future? IE if you buy December silver futures, will physical silver be delivered in December or will you never see any metal at all?

Short answer: You will only see metal if you ask for it. It will be relatively low grade ugly bars of roughly 1000 ounces, about the size of a loaf of bread. No one is going to show up one day and ask where you want a bunch of silver dumped unless you arrange for it.

Briefly, futures are all paper. The mine agrees to sell at today's price plus contango, which is the cost of storing until the future date, plus the interest they would earn if they took the money today. They're guaranteed a price, and are being paid storage even though they don't have the silver mined yet.

The end user, say Kodak, locks in at today's price, pays storage fees rather than having it kick around, and gives up the interest rather than have their money tied up for months. They can then plan what they will charge for their film (or jewelry) without having to stockpile silver for months.

The mine may want to sell or Kodak want to buy when the other end is not in the market. So the mine sells a contract and a speculator buys it, hoping that the price of silver goes up and he can sell it for more when Kodak or whoever wants it.

Anyone with sufficient credit can buy or sell a contract. If you want to sell 5000 ounces of silver, you can offer a contract, and hope to be able to accumulate that much before the due date. Obviously, short of a disaster, this will not be a problem for the mine. It might be for, say, a coin dealer.

Whoever holds the paper contract when it matures has the option of taking physical delivery, and there is usually silver in the system for this purpose. Most of the contracts are only speculators, tho, with little physical delivery taking place.

Where the spot price and physicals come into play is when those who are normally speculators trading paper decide they want silver, like the Hunt brothers did in 1979-80.

When their contracts were up, they asked for silver. No one expected this, and while the mines were making enough for Kodak, and everyone knew roughly the quantities involved, suddenly there is a demand for delivery of hundreds of thousands of silver that aren't there. So dealers who agreed to paper contracts selling silver now have to pay whatever price is necessary to get the silver to fill their commitments.

For a short period, they can borrow from the trading stockpile, but they have to replace it. When this happens month after month, the spot price keeps rising. Same as if a dealer likes to keep $1000 inventory of silver coins and more people want to buy than sell, he has to raise his buy price to maintain his inventory, and/or his sell price to reduce demand.

I found Biggfredd's writeup of the paper silver market interesting.
In far smaller terms, such as with coin dealers, I can see all this buying/selling affecting short-term availability. There will always be a different demand (and pricing) for collector bullion (such as Maple Leafs).
On the other end, I've seen people come into shops and buy 100 oz. bars for a small margin over spot, and when they come to sell only a small margin applies. I'm talking bullion here--ASEs and Maple Leafs are different.

That's why paper futures investors rarely (if ever) take delivery of "1000 oz." bars. Their weight varies from bar to bar, requiring assay service to sell them, whereas 10 and 100 oz. bars made by well-known assayers such as Englehard are easy to personally transport and sell.

Bullion coins are even easier to transport, can be sold in smaller increments, and their 'legal tender' status affords them some additional advantages for selling and trading (some localities will tax the sale of precious metal bars, but not legal tender coins).

I don't so much bullion anymore, so couldn't really tell you what's coming in. Are the OPMs from between when Walter was running it as Jackson Precious Metals and when Silvertowne bought it, or another maker?

Speaking with a dealer yesterday, we discussed the large disparity between spot price and physical silver.
How interesting...this was less of an issue a few months back. My "gut" tells me that after volatility settles down, this price spread will narrow. I could be wrong, but back when silver wasn't moving much, bullion sold closer to spot.

Right now silver is spotting @ $8.98/oz! But good luck trying to find any at that price!