Investors interested in buying silver stock should be aware of a few curiosities unique to precious metals. The primary one is the fact that no market is manipulated more openly or aggressively than the silver market. The other issues relate to how the white metal would trade if allowed, given its dual role as both commodity and investment or monetary asset.
There are many options available to the individual investor who is interested in purchasing precious metals. The choices can be broken down into two main categories. One is the physical option where actual metal is taken into possession and controlled by the individual. The other is paper or derivative option where exposure to price is indirect and encumbered by the entity who manages the position.
Within each category there are some differences or subtle differences. In terms of the physical metal side, many will naively choose to have the metals stored outside of their control and in a depository. For example, most retirement accounts that are converted to contain precious metals require that the metal be held in a wharehouse managed by an intermediary. This leaves the investor directly exposed to some of the very fears leading one to invest in the metals to begin with, especially physical metal. Namely confiscation of retirement assets or collapse/default of the currency system.
The paper side holds a vast array of options and derivatives and futures which are all basically derivatives - consisting of indirect ownership. Many who come around to silver will be led to the derivative side, where any paper gain is constantly offset by the risks mentioned a few line ago.
In the mining sector in particular, the drama has been massive. Silver mining companies in particular have suffered horrendously over the last few years and really well beyond that given the decades long price intervention unique to the monetary metals.
In fact, they’ve suffered so badly that the cost of producing even ounce of the metal is actually more expensive than the metal itself, so these companies have really taken a beating as the price of the metal the price of the product that they produce has been manipulated downward by those that control the majority of the selling side of the market.
Market manipulation has a very specific mechanism. Mainly it works by the large banks who own a concentrated side of the short or the selling side of the futures market. They are able to use high frequency trading in order to flash bids or to fake options or fake purchases. What they do is suddenly come in to the market and the algorithm traders who are speculators see these bids coming in and their programs automatically trigger selling or buying for that matter.
The precious metals bullion banks have been able to trigger selling which is basically done by the speculators or hedge funds while at the same time buying and in gold for example the banks have been able to actually become long in their concentration because of all of the selling.
The manipulation of the metals is a reality and unfortunately the mining stocks have tended to follow the price of the metal all the way down. Once the metal finally turns back around, the mining stocks will most likely follow but the damage that’s been done is probably permanent. An entire sector, a generation of geologists been shunted from emerging into this sector. Money is not infuses in the sector, and mergers and acquisitions have not been able to occur given the poor share performance. It looks very bleak for the silver mining sector in general.
While buying silver stock may be akin to the allure of a penny stock, replete with a thousand rationalizations for why it should move higher any moment now, care should be taken in roaming this highly controlled arena where price discovery is far from valuation based on fundamentals.