Silver: The nature of supply and demand
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.
-Umesh Shanmugam
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