As I mentioned on Sunday, the Government Debt Bubble is now at epic proportions. It is also known as the Bond Bubble. Switzerland’s Bank of International Settlements is now warning of this bubble as well. See: http://www.arabianmoney.net/gold-silver/2012/12/10/swiss-bis-warns-of-another-2008-style-credit-bubble-about-to-burst/
You will notice that this articles speaks of gold and silver as safe havens. In the meantime, large bullion banks have shorted gold and silver beyond the futures market’s ability to deliver the actual metal if taken for delivery by the long side of the market. A silver futures contract is sold with a commitment to deliver a specific amount of the metal at some date in the future at a locked in price today. This protects the buyer from price changes before delivery. However if the price goes down, the buyer must still pay the contracted price. If the price goes up, the buyer enjoys the extra profit. The seller of the futures contract is “short” and expects the price to go down before the delivery date. As the price goes down, the seller can buy an offsetting contract to close out the position.
What happens if there are more contracts than physical metal available for delivery and the buyers decide to take delivery? A crisis! If the bond bubble bursts, many investors will flood into the precious metals for safe haven. If and when this happens, demand will skyrocket and the same banks that were too big to fail will be at risk of failing again. It is liable to get ugly out there.
Currently it is estimated that Non-US banks and the US banks’ positions amount to a total short of 290,000,000 ounces of silver. This is about two years of silver production net availability. This amounts to a massive attempt to keep the price of silver down. This is at the same time that silver is being increasingly used for solar power and other high tech needs. China’s economy is rebounding which will also increase the demand. Could this be setting the stage for silver to return back to the historic 16 to 1 price ratio to gold? What about those silver stocks?