The local silver coin dealer may prove to be the ultimate silver price indicator.
The lower the managed paper price of silver, the more physical metal is reduced due to increased demand. Furthermore, the higher the demand for silver, the higher the physical premium moves.
This is typically the case in true price discovery, but who really wins in this unprecedented dichotomy— the buyer, the seller, or the dealer?
Higher physical prices tend to beget renewed speculative interest, and yet higher miner valuation is limited because of higher input costs.
The Silver Mining Sector and Government Finance
No one can know where or when the next bubble will form, but one looks already close to bursting in government finance, so it seems almost inevitable that commodity prices will rise significantly in the near and medium term as more and more stimulus is needed to fuel this giant Ponzi.
Scrap silver flows will likely continue to flow back into industry, where it is needed more and more as the developed world continues to play catch up. At the same time, consumer income and growth, fueled by the government-sanctioned build up in credit and mortgage finance will compete with that demand.
Furthermore, the current financial era allows the U.S. central bank to set benchmark interest rates at artificially low levels, while monetizing trillions of Federal and mortgage-related debt. Also, the vast majority of government spending actually
This policy induced spending feeds through directly to greater income and spending levels throughout the economy, leading to higher prices.
While demand will be there, because of higher input costs, it therefore appears less likely that new exploration, new mines or an overall rehab of the silver mining sector will occur anytime soon. Remember that at least two thirds of physical silver is mined as a byproduct of other mining activities.
A Governor on Demand
Paradoxically, marginal physical demand from new silver buyers may be quelled somewhat in this situation. This state of affairs could even have the effect of fueling more investment demand toward silver derivatives that will only further distort the pricing relationship between paper and physical silver assets.
The last frontier would be a replay of the troubling double digit inflation of the 1970’s leading up to the fabled "Hunt Brothers induced" blow off top in 1980. The difference being that the seventies was a time when ‘everyone’ knew about inflation and where inflation was high enough to curb profits from investing in equities.
Price Discovery, Coin Dealing, And the Return to Sound Money
The irony here is that the return of true physical price discovery where silver prices are forced to align with or be expressed by real supply and demand factors could be the ultimate signal of a U.S. Dollar confidence failure, especially if the premium moves visibly and with velocity.
As U.S. investors increasingly lose confidence in their country’s paper currency, this situation marks the time when the local silver coin dealer breaks through to the modern age.
Coin dealers, like farmers to a certain extent seem to have become a dying, if not significantly aging breed. The growth in competition from Internet coin dealers has made it difficult to be profitable as a local coin dealer.
There simply is not much margin in bullion coins or for the customer looking to get the most from their metal. This may well change when true price discovery returns to the silver market.