Some good news and bad news

[Donald Miller]

Historically (over more than one hundred years) silver has a relationship to gold of approximately 16 to 1. At that ratio with the current price of gold, silver should be priced at above $90 per ounce. The reason for the recent drop in silver prices was a change in the margin requirements for silver purchases.

While gold has come off less than $100 per ounce from it's recent record high the price decline in silver has been much more extreme, percentage wise, than gold. The US Mint released statistics that indicate that while gold bullion has declined that they have produced over 84,000 ounces of gold coins since May 1st of this year. That indicates to analysts that gold has more room to the upside with prices of $1750 per ounce in the intermediate term. That would make silver worth above $100 per ounce when one considers the historical price relationship.

I own both silver and gold and consider it a prudent store for a sizable portion of my estate considering that inflation of the US dollar is predictable and probable. That will mean that assets held in dollar denoted instruments will decline in value to the extent that the US attempts to inflate as a means of paying its indebtedness.

[Donald Miller]

Why is raising the margin requirements a bad thing? I am not knowledgable on all this, but it seems like if you buy $1000 worth of silver, you should pay $1000 for it -- and not a lower percentage on the hopes that the value will go up and you can pay what you "borrowed" to buy it when you sell it. Margins seem to be just a risk-inducing loan system.

Buying stocks or commodities on margin is a way to maximize returns on investment. You are correct in that low margins can lead to excessive exuberance in the market (witness the results of the real estate bubble...which was the result of margin purchasing).
The overwhelming preponderance of real estate would never be sold if it were not for borrowed money...ie margin) However, that being said, margins have been around longer than I have been alive and I am older than dirt.

[patrickjames]

You could google JP Morgan and the silver market.......Fishy fishy

[Thebes]

The major bank players in the precious metals markets have been playing fishy for years. There are many times more contracts out for gold and silver than there is gold or silver available for physical delivery. Some of the big banks have even billed clients for a "vault fee" on metal that was never physically in their possession and which was sometimes undeliverable upon demand.

I never liked the idea of margins in any market, just as I find "paper silver" to be absurd... either you have silver or you don't. But that's not how the financial barons work, they trade promises for it instead. The same is true for mortgages and even for checks drawn on banks- these things abstract money into promises that are traded instead, in essence temporarily create a type of money.

The timing of the margin change was a transparent attempt to stop a rally that was not in certain corporations' interests. In this case it worked, though it seems that the premium for the physical commodity has went up as a result; physical silver is still virtually unobtainable at traditional premiums over spot. Within a few months silver will probably rally again. Not so good for us here in the long term.