Silver: Lower Levels Still Ahead Despite High Premiums

by: Avi Gilburt

Many of you have been asking me how I can still view lower prices ahead for silver despite the high premiums that many seem to be paying to buy physical silver. Well, as many of you realize, we seem to be dealing with a somewhat bifurcated market. And, despite most of your views to the contrary, the traded market may still represent the real price for silver.

I called one of my members on, J. Keith Johnson (Another Joe on EWT) who maintains WWPMX, is a charter member of the Hard Assets Alliance and a writer in the metals industry, to get more insight into this issue and his perspective was an interesting one:

A lot of folks who see today's premiums think that the dealers are crooks who are just taking advantage of the situation. It's understandable to be disappointed in the premiums. But we really need to step back and realize that the dealers are running a business. In a matter of a few hours, the price dropped way below what they paid for their inventory. There's no way they could sell at those prices. What business can keep running if they buy high and sell low? They'd be better off closing the doors and just keeping their metals.

However, at the same time, we saw the premium in PSLV go negative. In fact, this seems to be the first time this has happened since the trust was launched in Oct 2010. This is a physical silver trust and unlike SLV, one's PLSV units can be redeemed for physical silver.

Again, Joe had an interesting insight into this anomaly:

We're really dealing with different dynamics of supply and demand. One is truly for the tangible asset, representing a physical market that requires specific inventory and the ability to deliver. The other represents an investment vehicle that is incredibly liquid and much more subject to the moods of the market.

What we can conclude is that silver is truly an inefficient market with a lot of lag between the physical price and the traded price. While many will view the physical market as the true representation of the price of silver, if we start seeing the premiums coming down the longer silver stays at these lower prices, then we may have a solid argument for the premise that the physical market may not be the more accurate representation of the true value of the metal. In fact, the traded value of silver may really represent the true value at any given moment, with the physical market simply attempting to catch up. The only reason for the bifurcation would then seem to be the timing it takes for the equilibrium to re-establish itself in the physical market while it catches up to the exceptionally volatile trading market.

While this is purely a hypothesis at this time, if we begin to see premiums coming down on silver over the next month or two, then we will have substantial evidence to support Joe's thesis. In fact, since I follow sentiment patterns in the market to determine where the metals are headed, I actually appreciate Joe's perspective on this issue, even though most of the readership here will disagree. Well, in truth, most of the readership disagreed with me that we will see the 22 region, so, simply because the majority of the readership here disagrees with me usually makes me feel as though that is the correct perspective.

As for where this market is going, I am not swayed at all by the recent action in silver, and, in fact, it has bolstered my perspective of another drop coming to a new low. Although, at this time, I can see the possibility of a move up to the 26 region before the next leg down takes hold, I still do not view us in a larger bullish set up at this time, and my analysis last week remains my primary perspective, which means we can still see a 20/21 handle on silver on the next decline.

Disclosure: I am long SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am trading the potential downside using SLV put options.