Silver Market’s Rise Due to Chinese Speculation

Yesterday morning the Financial Times ran a story about Chinese retail investors being the source of the rocketing prices for silver worldwide.  I have been saying nationally that commodities are in a bubble.  Want proof of the froth?

On the Shanghai Gold Exchange, where precious metals futures are traded, turnover in silver contracts (i.e. the number of contracts bought and sold) has risen 2,837% (!!!!!) since the beginning of the year.  Oh, my God!

Let’s put that in comparison in terms of a bubble.  Those silver contracts that the Chinese are trading represent 70 million troy ounces.  Each year worldwide, according to Wikipedia, total silver production is only 671 million troy ounces.  So the Chinese trading represents 70 mm ÷ 671 mm = 10.4% of total silver production.

This may not sound like a lot, but as I reported earlier this week during the dot.com era the value of U.S. equities (i.e. S&P 500) being traded on a given day was on average only 0.6% of the total value of the entire market.  So the Chinese silver trading – and this is just one commodities market – represents a bubble that is: 10.4% ÷ 0.6% = 17.3x bigger than the dot.com bubble.  Oh, my God, Part II!

Folks, to all of the talk that the commodities surge is due to inflationary monetary policies that will collapse the worldwide economy and that gold and silver are the only way to protect yourselves, I say that is a load of poo.  Why?  Those buying and selling gold and silver contracts are not taking possession of the metals they are “trading” – which is what you would have to do to protect yourself in the event of economic apocalypse.

No, these folks are trading paper contracts on electronic exchanges.  So tell me if the world is in the midst of economic apocalypse how likely is it that those paper contracts have value?  How likely is it that those electronic exchanges are still operating?  What we have here is not apocalyptic thinking, just greed.

Jason