There's always more paper everything than physical. That's how the commodities world works...agriculture, metals, energy, that's the entire point of the paper market. It's there to be a hedge device for producers and holders of commodities. If you had to wait until you refined every ounce of silver or grew every bushel of wheat, there wouldn't be much of a fuckin' futures market, nor a purpose for it.
There is no homogeneous "commodities". Soft and hard commodities are two entirely different animals, with a different set of dynamics and underlying fundamentals.
The futures markets for perishable commodities work very well, I think, but only because seasonal demand and supply cycles of soft commodities keep prices in check. The paper representing them is constantly being created and destroyed in the short term, and does not float forever, as they tend to track and balance finite seasonal production to demand and consumption. That does not mean these markets are not subject to manipulation - they are. However, manipulation is a two-edged sword, as all the competing paper are constantly adjusting relative to perceived, expected, and actual supply, which holds everything, and everyone, in check.
Underlying demand and supply cycles exist with hard commodities as well (as with mining/refining versus industrial consumption), but that is only a part of the fundamentals. Actual nonperishable supplies are not naturally cleared and accounted for annually, the way soft commodities are, and as a result the above ground supply, can be, and is constantly, distorted, as futures give birth to a wide variety of long term derivatives that are more akin to financial assets, the paper of which can indeed be inflated - and routinely are in a way that does not in any way resemble the soft commodities market.
Such hard commodity distortions go away in the case of a natural physical shortage, as when annual consumption exceeds annual below ground supply. This is a "physical shortage" when we consider two distinct supply sources -- annual production versus above ground holdings, or "reserves". The fact that both might be available on the open market is incidental. In the case of industrial consumption, the buyer
always takes delivery. Annual production that does not keep pace with industrial consumption is compensated by tapping into above ground "reserves". That particular fundamental is not only finite, but is also not reflected in the ever-expanding paper derivatives, so many of which are tied into options for delivery or "multiple conflicting claims on the same physical".
Eventually, above ground holdings, or open market reserves, diminish to the point where the tightened above ground supply becomes obvious to everyone. Not by anyone's estimation, but by real constraints on availability. At that point all paper becomes volatile, as margin calls tighten along with supply, as everyone makes a grab for the remaining physical. That is when supply and demand cycles become much closer in resemblance to the dynamics of soft commodities. That also means a massive deflation of paper derivatives, and increase in price, as paper finally recouples with the hard commodity it represents.
Now, even if there is a case of "fake shortage", where, for example, someone has deliberately and secretly stored a massive stockpile of silver and held it in reserve for later sale, the fundamental that siphoned down the above ground supply in the first place will not have changed. The market will continue to siphon even that supply as it is made available, until, once again, the fundamentals are closer to that of soft commodities.
Those are the fundamentals, which have nothing to do with whether or not COMEX, JPM or anyone else in back rooms are colluding to manipulate paper and prices.
My thoughts on why the sudden recent drop:
The vast majority bought gold and silver on spec, while others bought as a form of "closing their eyes and holding their breath". Whether they bought it on long term expectations or not, demands for cash in the current economy are rampant - especially at this time of year. A lot of "investors" bought without regard to whether they could hold their breath, and are forced to exhale, forced to liquidate their holdings (paper or physical). They need cash, and they need it now, of all times.
So, buy more on the massive dip, because it really is a temporary windfall, regardless what caused it. Meanwhile, none of the fundamentals, or the end game, have changed - especially for silver.
