Silver‘s recent valuation drop could likely drive a physical silver shortage as 2011 draws to a close. The last week of September saw silver lose approximately 25% of its value, to settle in a range lower than has been touched all year.
Although silver may not be at its annual low yet, the character of the silver market is likely to create physical silver shortages in the near future. Why is this scenario likely?
Most silver investors, including dealers of physical silver, are small investors, mostly purchasing collectible coins or saving for a rainy day. Precious metals dealers are usually small businesses, who are unable or unwilling to hedge their investment bets by purchasing when prices are rising. Many dealers rely not only on customers who purchase their silver at a premium, but on capital appreciation of a wildly fluctuating commodity. The resulting niche market for silver buys and sells in a much slower cycle than the giants of Wall Street. Fortunes are made not in days, but months or even years.
Dealers of silver who have purchased at recent highs are likely to be unwilling to sacrifice their silver at the discount generated by recent price plunges. They would be sacrificing nearly thirty percent of their original investment. Likewise small individual investors currently see little advantage in selling now, no matter what they paid initially for their silver stores.
As silver’s paper losses translate into bargain pricing for physical silver, both dealers and savvy investors will seek out a bigger bite of the precious metals pie. Look for bullion silver premiums to make their adjustments in the coming weeks.
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