Here is an excellent post from yesterday's USA Gold Forum:

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Solomon Weaver (2/12/2000; 22:23:24MDT - Msg ID:25208)

IN DAYS OF YORE and silver bars galore

TOMCAT - I DEDICATE THIS LITTLE STORY TO YOU...PERHAPS YOU TOO ARE A SILVER BUG.

In very old times, a market was a place where you took something you had produced to meet those who were interested in buying it. Coin was a convenient way to store and transport the value of something you had sold until you used that value to buy something.

Although there were certainly contracts made even back then, where for example a large householder with many servants, who did not want to plant potatoes that year, might pay for seed potatoes, give them to a farmer with the agreement that the farmer would return double the amount of potatoes at harvest time. Is this not unlike a futures contract?

Now, when I think of a modern gold mining company (or a corn farmer) who is making most of their money from a single product, taking that product down to the market to "sell" it (so that bills can be paid, new investments made, and profits taken home), I understand that he will be paid a price which is determined by the market. That market, in classical jargon, sets the price based on the relationship between supply and demand. For example, I am one of those poor unfortunate householders who have had to experience the dramatic reduction in "supply" of heating oil and diesel up here in the Northeast this winter, and the very rapid price rise that this caused. Fortunately, I got a brand new woodstove at half price a while back because with many Americans feeling like cutting and hauling wood, and cleaning ash to be a "barbaric relic" of the past, the vendor had literally no demand for it.

Now here is something interesting: When I decided last year to buy one of those 1000oz units of junk silver, I had to send in a "certified" bank check before the goods could be shipped. Now that I have them, if I want to sell them back, I have to send the silver back and cannot "sell" it until it is safely at the BB. So, this is living proof that there is a "market" out there that considers the transfer of the physical asset to be a fundamental element of the sale. Now, even more interesting: I could have used my line of credit to allow the same broker who sold me a junk unit to "purchase" two units (using margin) so that my net gain could be doubled. I could have (hopefully) "sold" these two units at a profit to someone elseall the while never ever having to have carried that 60lb box into or out of my home. So, this is living proof that there is a "market" out there that considers ONLY THE POTENTIAL transfer of physical assets ON DEMAND to be a fundamental element of the sale.

In the first case, the verification of my ownership is a heavy box. In the second case, it is a file in a computer saying which side of the deal I was on. In the first case, I have SILVER. In the second case I have a SILVER DERIVATIVE (in the sense that the value of the paper printout "derives itself" from the value of a given amount of silver). Folkssorry to use Silver instead of goldbut like POOR old Solomon sayssilver is the poor man's gold. Those of you who are less poor enough to have a box of gold can certainly substitute gold anywhere you read silver.

So we have TWO different markets. We have the SILVER MARKET, and we have the SILVER PAPER market. There are two things which tie the two together. The first is that the "prices" in each are the "same". The second is that the paper has the right to DEMAND DELIVERY, which means the paper is really a PROXY of the real market. This implies (in a truthful market) that the SUPPLY OF SILVER PAPER which is offered for sale, is exactly corresponding to a physical storage of REAL SILVER which has been set aside by the owner and cannot be offered for sale twice. If this rule is followed, then THE SUPPLY AVAILABLE to both SILVER AND SILVER PAPER markets is in fact identical, and price based on demand should be the same in either market.

NOW, let us say, that an entity who owns a large fraction of the SILVER in our market decides to issue TWO PAPER CERTIFICATES for each unit of silver (and claims that he can go outside of our market to buy more SILVER if needed with the extra money he just got by selling a second supply). Let us say that this fact was known by all players in the marketand we all understood that it "might" not really be possible for us all to "demand" at once. Now, in a real market, a "buyer" of SILVER would now have to ask himself, "if I pay for the SILVER today, but accept PAPER SILVER for it now, what are the chances that I will not be able to CONVERT IT ON DEMAND to SILVER?" If the answer is that there is a given risk, then the VALUE of the SILVER PAPER is actually marginally lower than the value of the SILVER. As our large friend creates larger numbers of SILVER PAPER he continues to reduce the value of the SILVER PAPER vs SILVER.

Now let us move a little farther forward in time. Let us say that certain other entities in our market were jealous of the great profits which our large friend could make by issuing PAPER SILVER and selling it at the price of SILVER. So, after a certain revolt and negotiation, rules were made which allowed a certain large cartel to issue SILVER PAPER under certain guidelines of liquidity and collateral. As the supply of SILVER PAPER continued to multiply, it eventually reached the point where several multiples of SILVER PAPER existed for each SILVER. As new players entered the market with the purpose of SPECULATING, the cartel would take their money, and issue them their SILVER PAPER. If they were clever speculators they could wind up with more SILVER PAPER than they started with. If not, well we all understand that gamblers can loose. As more and more "gamblers" enter the market, who have no real interest in ever DEMANDING DELIVERY of SILVER, it becomes easier and easier for the cartel to pay out the money profits to those who want to "exit the market with their winnings".

Over time, the market swells to include both a large PAPER SILVER float and with brisk PAPER SILVER trading, a very high transaction velocity. The "primary" activity of the market becomes the frantic betting and handwaving, and end of day settlements. The SILVER sits quietly hidden in the basement, a ceremonial relic of the market. On any given day, a few sellers to the market are actually silver mining companies who have come to sell their SILVER. The bouncer greets them at the door and sends them in to the bartender who checks the invoice on their shipment, and issues them SILVER PAPER, which they carry over to the cashier and exchange for money. It is very obvious to the miners that the SILVER and the SILVER PAPER have the same value. At about an equal frequency, there appears at the door an executive from Kodak, or a jeweler who needs to buy some SILVER. They give the cashier some money, who issues them SILVER PAPER, which they take over to the bartender who fills out a sale invoice and sends them down to the basement with the bouncer to pick up their SILVER. It is also very obvious to them, that the SILVER and the SILVER PAPER have the same value.

The fact that for every unit of SILVER actually coming into or leaving the market on a given day is only about one percent of the amount of SILVER PAPER that trades does not seem to bother the party. They are much to absorbed in their games. The fact that in a bad week, the price of SILVER PAPER may fall so much that the "net loss" that week to owners of PAPER SILVER is more than the entire cash value of a years worth of NEWLY MINED SILVER does not bother them because in a good week the "net gain" might far exceed that. In time, based on the swollen number of NEW SILVER PAPER created the market can even come to be a more important value creation engine than the mining industry which provides the product.

But there is a great problem here. Contrary to what everyone believes, as soon as one of the big cartel players is not able to DELIVER ON DEMAND, the value equality between SILVER and SILVER PAPER is questioned. The market players know that they have seen Kodak executives coming by to pay cash and pick up SILVER so they know that since they are witnessing a potential default on SILVER PAPER they immediately DEMAND PAYMENT IN SILVER in the hopes that on their way out the door they could find a Kodak buyer.

Suddenly, there are two very different markets. SILVER PAPER holders who have little chance of getting delivery, and SILVER owners who can deliver immediately. Is there any surprise that the price of SILVER will be much higher than the price of SILVER PAPER? Is there any surprise if the bar actually closes down and the miners and Kodak buyers decide to start meeting somewhere else?

Poor old Solomon

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Ray

-- Ray (ray@totacc.com), February 13, 2000

Answers

Ray,

Interesting post, thanx. If only we could take physical delivery in exchange for our greenbacks. Was at my local small town "Cafe Barbarous Relic" last week and took physical delivery of three rolls of halves at 4.0 times face. What are others paying for same, anyone?

-- JB (noway@jose.com), February 13, 2000.

Ray, thanks, nice thread. Wonderful analogy.

-- NoJo (RSKeiper@aol.com), February 13, 2000.

Here is a link to "Southern Coin and Precious Metals". I have not done business with them but find they appear to be reasonable in price. First click on the "Spot Price" for the metal you are interested in and then look up the coin and multiply it by the % over spot to determine their asking price.

Southern Coin & Precious Metals

Ray

-- Ray (ray@totacc.com), February 13, 2000.

Here are a couple more links:

Blanchard & Co

Affordable Jewelry and Precious Metals

-- Ray (ray@totacc.com), February 13, 2000.

Yes, good "ol silver. I remember the days when one could sell a $1,000 face bag of silver quarters for $12,000, as the price of silver per ounce zipped up over $40.00. But the guys in paper silver options were the ones who got the $40.00-plus per-ounce recompense, not silver-bag-seller me. And then the bottom fell out. Hence the addition to the statement, "Silver is poor man's gold ... and you'll be poor if you ow

-- W. Harr (wharr55555@aol.com), February 13, 2000.

Yes, good "ol silver. I remember the days when one could sell a $1,000 face bag of silver quarters for $12,000, as the price of silver per ounce zipped up over $40. But the guys in paper silver options were the ones who got the $40-plus per-ounce recompense, not silver-bag-seller me. And then the bottom fell out. Hence the addition to the statement, "Silver is poor man's gold ... and you'll be poor if you ow

-- W. Harr (wharr55555@aol.com), February 13, 2000.

The link to Affordable Precious Metals and Jewlery, WATCH OUT!!!! I had MAJOR problems buying some gold from them back in Dec. 99. Still have not received my full order, and they have my money. I am going to have to get a lawyer and sue!!!!

-- (Dorado@doco.com), February 13, 2000.

Thanks for the tip Dorado, the only one of the three links that I have dealt with is Blanchard & Co., I believe they are one of the largest Dealers in the country. Have had no problems with them.

Ray

-- Ray (ray@totacc.com), February 13, 2000.