Silver Shortage? or Otherwise? That Is the Question, Paper Silver vs. Silver Bullion

Stoughton, WI -- (SBWIRE) -- 02/01/2013 -- Many of the gossips talk about the connection between physical silver-actual silver bullion-and paper silver, which is the silver that exists only on paper in the form of exchange-traded funds (ETFs) or futures contracts.

Some market observers have speculated there isn't enough physical silver currently available to make delivery to all of the owners of silver futures, which would result in a "default" by the Comex where the silver contract is traded.

This would be a major interruption to trading in silver, gold and other hard commodities. The price of physical silver, gold or other contract deliverables might spike higher until there was enough of the underlying commodity to satisfy demand from the futures marketplace. But is this likely to happen? According to Kitco, a major London-based bullion agent, this is not likely at all.

Kitco Senior Analyst Jon Nadler at Kitco said in a video interview that there are 207 million oz. of surplus silver overhanging the actual markets. "...it's pretty sizable and it is a quantity that needs to be absorbed in one way or even another either by ETFs or even by physical purchases or else we will have a price problem."

Referring to the suspended sales of U.S. Silver Eagle coins, Nadler said,"...there is absolutely no shortage of material to make these types of coins. It's just a question of fabrication capacity."

What does this mean for silver prices? Clearly, silver has been in a downtrend since rising above $48 an oz back in the spring of 2011. From today's price of $31.18, silver appears to be in a fairly narrow trading range from support around $30.75 and resistance in the area of $32.50. This particular price action would seem to confirm Nadler's declaration that there is still a lot of silver overhanging the market.

Yet, as the bulls will explain, new silver production has been muted because of the lower price and, with deals such as HSBC's purchase form KGHM, it is only dependent on time before the surplus is worked off and prices start to rise once again. Silver bulls also cite increased commercial production in China as a reason behind higher silver prices.

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