Nickel, Zinc & Silver – section (b)

This video is a follow on from the previous video dealing with Nickel. If you haven’t seen that video, I would recommend you doing so before watching this one.

Let’s pick things up from where we left off …

So what does this mean for other metals, like Zinc and especially for the precious metals like gold and silver?

Well, before we zoom in on the precious metals, permit me to pan out a little and take a look at the situation from a broader perspective.

I believe that in the future we should see a switch from paper assets to hard assets especially as paper assets are revealed to not have that much intrinsic value. As compared to hard assets, they aren’t worth that much, if anything at all. Commodities, by contrast, are real, tangible assets. They exist in the real world not in some fabricated, artificial, synthetic world.

This brings us onto “derivatives”.

Tradable financial instruments like Options, Futures, Exchange Traded Funds (ETFs), mining stocks and all that malarky are “derivatives”. The term “derivatives” comes from the fact that value is derived from the underlying asset, or commodity. Without getting too technical, derivatives are financial contracts between two parties which detail price and quantity of an asset. These derivatives can be traded much like the actual product itself. The trading of derivatives is referred to as the paper market. I prefer to call it the “synthetic market” because it’s an artificial construct.

The two markets, the paper, synthetic market and the physical market exist alongside each other. In the normal course of events, the paper, synthetic market should roughly reflect the state of the physical market. There should be a strong correlation between the prices.

But there is an issue with the derivatives market which Rafi talks about.

The actual inventory of real physical held in exchanges is a lot less than the amounts that are traded on the synthetic derivatives market. The trades are made as if there is a lot metal, but that is not necessarily the case. This can expose traders to real risk should any unusual price action occur. There is a dangerous detachment between the paper, synthetic derivative markets and the real, physical product that the markets are supposed to represent and from which they derive their value from. This is the inherent weaknesses in the derivatives market. Rafi warns about this and he’s absolutely correct in doing so.

Let’s now turn our attentions to Zinc very briefly … Rafi believes that what happened in Nickel could happen in Zinc. Stocks of Zinc are at very low levels for various reasons. The Nickel situation was essentially what is termed a “Short Squeeze”. This was made possible because of the diminishing availability in inventory of the metal itself. Rafi gives a detailed account of this in one of his videos, so I won’t go into that here. He also talks about Zinc in relation to Silver.

So let’s now look at Silver …