A Silver of Truth?
I have literally sat in my chair, struggling with a question for over two hours: "why has silver moved parabolic since the QE2 announcement?" It has been surprising for the following reasons:
1) QE2 was a nominal disappointment (see the immediate tanking of the market post-Jackson Hole announcement), Goldman set expectations for $100 million month, 10 months
2) Major investment banks declarted before the actual announcement that QE2 was "priced in" (how an unprecedented action with no apriori modeling in a open system can be "priced in" is beyond me)
3) Silver has traditionally lagged gold's movements for the past year
My questions, knowing this, are why
1) Why has QE2 been expressed most fervently in the precious metals market?
2) Why silver specifically ?
3) Why so dramatically?
4) Why has the major movements been witnessed post-QE2 announcement (when things were said to have already been "priced in")
5) Why has it decoupled its synchronizing with general fall of dollar (if you notice, it rose on Nov. 8th despite the dollar strengthening in many categories)
I think I have a theory that explains this.
Simply, I believe that SLV (NYSEARCA:SLV) and SIVR (NYSEARCA:SIVR) and DBS (NYSEARCA:DBS) and USV (NYSEARCA:USV) and whatnot act, whether intentionally or not, as massive price suppressors due to the creation of "paper silver" (parallel to "paper gold") that satisfies investor's demand for precious metals.
Buying physical bullion is deemed socially atypical, a mix between the bizarre, conspiratorial, and apocalyptic. One would expect the purchaser to wear an aluminum (industrial metal) hat during their precious metal purchase. In the real world, buying physical bullion is crazy.'
But how crazy is it in a post-QE2 world? A world where Glenn Beck and Rush Limbaugh spent the day and night raving about hyperinflaitonary money printing on November 3rd and 4th?
Very possibly, QE2 announcement spurred a lot of people to get off the computer, and physically go to a bullion shop to buy their lazy selves a physical hedge due to fears that are becoming increasingly more rational in a post-QE2 world.
It explains why the movement can especially be seen in PMs, as a major media attention on the action raised the awareness and cognizance surrounding QE2 to the general public.
It explains why it was seen in "poor man's gold" or "common man's gold" rather than $1,400 dollar/ounce gold as silver would be more malleable (pun intended) to public revulsion regarding QE2.
It explains why so dramatically, because announced QE2 raised the fear about money printing, lower the stigma about making actual purchases of bullion. This increased "physical demand", both newly created and shifted from "paper demand", due to changing social perspectives and has overwhelmed the traditional structure of the COMEX bullion market.
It explains why the price increase has increase irrespective to the general movements in the dollar vis-a-vis other paper currencies and other more illiquid and less egalitarian commodity markets as we witnessed on November 8th
Thus, the thesis as follows. Precious Metal ETFs have absorbed demand for precious metal by creating a large supply of "paper silver". The actual QE2 announcement reduced social stigmas (due to increased fear and stronger rationales) regarding physical bullion purchases to create more "physical demand" (which is what drives bullion prices on the COMEX). This demand for "physical" allocated capital in the more liquid and "popular" markets, which have lower barriers to entry, overwhelming the traditional supply and demand metrics in the market.
Disclosure: LONG PMs, inflation hedges