Has the silver market been pricing in the coming collapse? In a word, NO!
Markets dominated by the impulses of real people largely no longer exist. The machines have taken over, as bots read the news and respond rapidly with large transactions.
No matter how volatile world markets will get, remember that there will be more Cyprus-type events, more Quantitative Easing programs, more denials of the importance of inflation, more threats from Central Banks to remove liquidity, more mining sector failures and more bubble callers designed to influence mainstream investor opinion.
COMEX Dominates Metals Pricing
Prices for physical precious metals still move based on the COMEX futures price action. If silver futures rise, physical prices go up, and if futures fall, physical prices drop. Furthermore, just like always, silver’s price action typically depends on the monthly event cycle.
For example, trading in silver is always heavy around the COMEX options expiration dates, as professional option traders actively rebalance their portfolios to remain delta neutral.
Furthermore, several key events tend to provide intuitively positive news for the precious metals. These include the release of the FOMC Minutes, speeches or testimony by Fed Chairman Ben Bernanke, Presidential press conferences, and the various jobs reports that are dominated by the Non-Farm Payrolls data release.
Hedge funds have reduced long silver exposures and seem to be maintaining a short bias. Commercial shorts have reduced their net positions.
Overall, it seems that the silver market has reached a likely bottom for now. This has nothing to do with deflation, inflation, bond markets or currencies. It is instead all about the paper trade.
Deflationary Fears and Silver Demand
Economies tend to naturally go through periods of deflation and inflation as they weaken and then strengthen. Long term silver investors should beware of the futility of focusing on this cycle to forecast demand for silver.
U.S. government budget deficits are running $1.2 trillion per year, and unfunded liabilities are increasing at rate of $6.9 trillion a year. In just a few years, the Medicare system will be bankrupt, thereby adding another $1 trillion per year to this deficit. Budget deficits will only grow from here.
The deflationist’s theory has always been that when pushed into a corner, the politicians will make the tough choices and implement the necessary budgetary cuts, but they will not.
The deflation argument might seem correct until the day that the inflationists are proven right, and the whole thing spirals out of control in the blink of an eye. This traumatic event will most likely take the form of a currency crisis and an international crash in the U.S. Treasury market.
How Silver Looks Now
Industrial demand for silver might well decrease in future as cheaper replacements like Graphene are found. Nevertheless, if that happens, the chronically undervalued silver market would probably go right back to focusing on the unresolved problem of this mountain of outstanding sovereign debt.
In a weak economy, people start questioning the creditworthiness of those who have taken out existing loans that they may not be able to repay.
The global economy will eventually experience the same sort of severe financial crisis that the United States experienced in 2008, in which many financial institutions would have failed had the U.S. government not stepped in with truckloads of just printed bailout money. Government intervention in businesses seems to have now become a regular occurrence.
Remember, silver is just a commodity until the day that the increasingly tenuous paper currency based financial system finally unravels. Then it will once again become hard money, and investors who want to preserve at least some of their wealth through such a crisis will wish they owned it.
from Understanding Gold & Silver Prices, Benefits, Miners by Jeffrey Lewis