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How is the Silver Price Determined?
Many silver investors ask, “How is the silver price determined?” It is question that is so important to gold and silver investors and yet can be very difficult to understand. Silver is traded around the clock and around world in the commodity markets of New York, Chicago, London, Zurich, Paris, Hong Kong, Shanghai, and Sydney. The trading of silver goes back to the 17th century with the London markets and to this day London remains the center of the physical silver trade for most of the world.
COMEX
However, it is important to note that the COMEX division of the New York Mercantile Exchange is the most important paper contracts trading market for silver. The silver price or silver spot price is determined by the COMEX. While the buying and selling of physical silver affect the silver price, paper silver is by far the biggest market force driving the silver price higher or lower. It is estimated by economists and precious metals experts that the ratio of paper silver contracts to physical metals is between 100 and 200 to 1. Some experts go as far as to say that the ratio could be as high as 500 to 1.
Why is this significant? A common misconception amongst investors is that when the silver and gold price falls there is a larger amount of physical metal on the market, but this simply isn’t true. It is extremely likely in the current environment to see the price of silver and gold fall and not be able to get a hold of physical silver. A great example of this was back in 2008. During this time silver fell to $9 an ounce and so many investors wanted to get in, but very few investors could buy the physical metal. Why? Because while paper silver was being sold investors holding physical metal were hording and were only buying more.
Exchange Manipulation
What silver investors need to realize is that the exchanges themselves are a manipulation of the silver prices. As a silver investor myself, I view this as a positive thing, because it allows me to purchase physical silver at prices I would never be able to access if the market was based solely on the physical supply. Having said this, silver investors must also realize that at some point there will be a run on the exchanges. Any investor holding a paper silver contract can request delivery. The problem is that currently on average only 1% of all paper contracts actually request physical delivery. The COMEX division does not have nearly enough metal to meet the demand that would arise if a run on the exchanges occurred. The inevitable result would be silver prices shooting through the roof as the available above ground stock of silver would be completely exhausted within a very short period of time.
