How Silver Prices are Determined

Many investors tend to ask themselves, “How are silver prices determined?” As may be obvious, this is a question that defines the fine line between successful and unsuccessful silver investors — and yet, it is a question that is very difficult to truly understand. After all, silver is frequently traded all throughout the day and nice and all over the world, including in the commodity markets of New York, Chicago, Sydney, Shanghai, Hong Kong, Paris, Zurich and London. In fact, the trading of silver has been traced back to the markets within London during the 17th century, and even today, London remains the primary center of the physical trade of silver for the majority of the world.

Of course, one would be remiss not to mention the importance of the COMEX division of the New York Mercantile Exchange with regard to paper contracts trading market for silver. COMEX is what determines the price of silver, or the silver spot price. Many economists and experts in the industry of precious metals estimate that the ratio of physical metals to paper silver contracts is from 1 to anywhere between 100 and 200, with some experts claiming that the ratio could be even significantly higher — about 1 to 500.

What is the purpose of this? A number of investors share a common misconception that when the gold and silver prices fall that there is a significant amount of physical metal floating around in the market lowering the value, but this is just not the case. In fact, it is incredibly possible that there could be a drop in gold and silver prices while there is still a great difficulty of obtaining physical silver.

One such example was back during the recession issue of 2008; at this time, the price of silver dropped to a low $9 an ounce. With this low price, any investor with money to spare was seeking a way to purchase as much physical silver as possible, but it was impossible for most investors to do just that. The reason for this was because paper silver was still being sold while numerous investors were holding their physical metal and hording it, only looking to buy more and not sell.

Exchange Manipulation
The one thing that an investor of silver need to keep in mind is that the exchanges are a major part of the manipulation of the price of silvers. Having said that, investors of silver must also consider that there could be a run on the exchanges. An investor that has a contract for paper silver can request delivery, but the issue is that only 1 percent on average can generally request delivery on a paper contract. It is difficult for the COMEX division to meet the demands of metal should there be a run on the exchanges. This would result in a huge increase in the price of silver due to the rapid exhaustion of the above ground stock of silver.

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