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Silver and the Nature of Supply and Demand

Thursday May 10, 2012 15:33

Many observers of the silver market have wondered why futures prices for silver seem so low when demand for the physical metal continues to increase in the face of an ever dwindling supply of the precious and industrial metallic commodity. 

In essence, the economic model of price determination by supply and demand factors would seem to indicate a considerably higher equilibrium price for silver than what is currently prevailing.

As a result, frustrated silver holders often eventually conclude that the silver futures market is simply being manipulated by those with a compelling interest in seeing the price of silver at unrealistically low levels, perhaps so that they can more easily purchase the physical metal themselves.

How Supply and Demand Theoretically Determine Prices

According to the theoretical supply and demand model of price determination, the price per unit of a commodity will fluctuate until it stabilizes at the level where the amount demanded at that price is equal to the amount supplied at that price. The result is an equilibrium state in terms of price and quantity.

The traditional relationship between supply and demand is often depicted by a graph plotting quantity on the x-axis against price on the y-axis for both the inclining supply curve and the declining demand curve.

These curves generally slope in opposite directions since rising prices tend to both decrease demand and increase supply, while falling prices tend to increase demand and decrease supply of a commodity.

The point of intersection between these curves represents the equilibrium price and quantity for the commodity, which should ideally be the same as the market price.

Covert Silver Market Manipulation Could Eventually Create a Crunch

If the silver market is indeed being secretly manipulated by the use of paper futures contracts to keep physical metal prices artificially low, as some people believe, then the market may well be a coiled spring just waiting to snap and propel silver prices upward.

They argue that if this manipulation ceases, the result could be a substantial market crunch when the forces of supply and demand for silver are ultimately allowed to find their equilibrium point at a considerably higher price level.

For example, if metal futures exchange rules were changed so that all silver futures contracts were required to be settled in physical metal, rather than just having physical delivery be at the option of the future contract’s seller, then any manipulation of the silver market by those excessively rich in printable paper currency would very likely have to stop.

The price of silver would then probably rise to meet its proper equilibrium level, unless more manipulative steps were taken to prevent this from occurring.

"In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical information for precious metals investors".

Dr. Jeff Lewis
www.silver-coin-investor.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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