Confirmation of the coming end to the paper silver market will very likely pivot on the physical dealers’ bid price, so this key benchmark bears very close watching indeed.
When the buy back for physical silver price far exceeds the paper price, then you will know the silver market is just about ready to explode to the upside.
Basically, a physical silver dealer will pay more than the current spot price if he is desperate to obtain the inventory that he is buying directly from the public, but not under any other circumstances.
There is a natural limit to how much such a dealer will pay for silver, since he has to make a profit when he then sells it on to someone else.
That odd situation may actually have happened last month, and it may happen again in the future under circumstances where extreme shortages of the physical metal itself are seen.
The separation between physical and spot silver seems to be growing. The latest drive by attack on silver’s price barely registers when on-average prices, including premium, remain just below $30 — about where prices were before the April downdraft.
Physical silver dealers have had the choice of locking in lower prices and waiting for delivery versus waiting and selling their current inventory, probably relying on numismatic silver to support them in the meantime.
Bullion is a low margin segment of the physical silver business, but its availability is perhaps the closest barometer of real, above the ground demand.
Why the Dealers’ Bid Price Matters
While the overwhelming majority of business seen by physical silver dealers is from the buy side, the bid price that physical silver dealers are showing customers who want to sell has recently begun creeping higher.
Over time, increased demand and new customer orders will gradually boost a dealers’ bid price. When dealers need inventory but cannot receive enough silver in time to satisfy customer demand, their bid prices will typically rise.
That appears to represent a type of retail market backwardation, in the sense that silver dealers will place a premium on having the precious metal in hand now for their customers versus in the future because of the various delays involved.
Silver in Buyers’ and Sellers’ Markets
At a certain point, a seller of physical silver will mentally establish the lowest price that they are willing to accept for their precious metal. This might depend on its weight, the attractiveness of its current format, and any residual sentimental value it holds for the seller.
The more desperate they are to sell, the lower the price they will typically accept, and the market takes on the character of a buyers’ market.
Conversely, the more the seller values the silver they are holding, the higher the price they will demand for it. At that point, the market changes its character and becomes more of a sellers’ market.