As we follow the machinations of the metals market, especially Silver, one is reminded of the prediction of price divergence between paper and physical metals as the wheels begin to come off the bus.

As I reported in another thread, I have now seen a local coin dealer who was cleaned out of three bags of junk silver coins in a single day, leaving him with about $3 face in US junk silver on hand. I have also observed lower value numismatic coins showing up as "junk", since the melt value is now greater than the "current" numismatic value.

These observed events suggest to me that we are not far from the predicted point where physical metal becomes impossible to obtain, even though the COMEX or LBMA prices are still held within reasonable bounds.

And so, the question is, what events and what machinations can we expect to see in the physical market as the divergence becomes complete. Will we require an actual default of the commodities exchanges before physical floats to a new value, and therefore becomes available, or, can we expect long periods in which physical is just plain unavailable at any price? Or, will there develop a "black market" in physical in some fashion, either locally, or internationally?

Excellent question Hockmir (an early contender). I'm not sure I can provide an answer to match.

This is another one of those areas where I'm going to use the cop-out of "insufficient data". We are already seeing some modest divergence, which is visible in the ETF's. The CEF fund, the Sprott funds, and those vehicles which provide a solid assurance of actually POSSESSING real bullion are trading at a premium.

Meanwhile, we look at the highly-suspect "paper" bullion-ETF's, GLD and SLV, and we see they are trading at a discount. Part of that discount is an inherent aspect of their business model: management fees dilute the funds over time. In the case of GLD, we also know about "D-Day": the 11th day of the 11th month of the 11th year (Nov.11/2011) when GLD ominously warns that management fees can be expected to rise.

This is obviously where the real "paper" vs. "physical" decoupling is going to take place, simply because they represent the largest pools of "paper bullion". So we have two dynamics taking place: the internal dilution which increases the discount of GLD and SLV, and the divergence in investor preference - where the thought of having the world's largest gold short and silver short (respectively) as "custodians" for one's "bullion" becomes more and more frightening to sophisticated investors.

On the other hand, what about when gold (and silver) "mania" finally arrives? Along with the prices of bullion soaring higher, we would see a stampede of investors wanting ANYTHING that was labeled "gold" or "silver". So if GENERAL public interest surges before the banksters are exposed, this might very well help them prolong their games longer than if there was not such a "tide" of investment dollars.

Barring such an event, we can watch the current inventory "dramas" taking place in London and New York for clues as to when the divergence will begin to explode. A couple of years ago, a European bullion-ETF (sorry, can't recall the name) suffered a massive plunge in unit price because the "custodian" for its bullion was one of the failing/failed banks that was struck-down by the Crash of '08.

The MOMENT that a fear developed in the market that the "custodian" could not honour its bullion commitment, the price of this paper bullion plummeted. In the case of GLD and SLV, they are so large that if/when either is suspected of not being properly backed, the prices for ALL "bullion" investments where bullion-backing isn't 100% verified will plunge precipitously. What you'll see isn't simply a divergence, but a plunge toward ZERO for every bullion product which loses the confidence of the market.

If new technology for counterfeiting bars proves successful, that is another variable which could create "divergences" even among categories of "physical" bullion.

I saw this in an article on this website earlier:

"Weaker Euro states are absolutely incapable of repaying their mountains of debt – thanks to the punitive interest rates inflicted on them by Wall Street’s terrorists, via the credit default swaps market."

If this is the case, I don't really understand how it works. What is the relationship between the CDS market and the interest rate that Ireland or others need to pay on their bonds? Is there a deliberate move to widen the spreads? How does that work in detail?

I've checked through Mike Hudson, Simon Johnson, Mike Whitney, but I can't seem to find a real, detailed explanation of this link between CDSs and overall interest rate increases. If you have any insight on this, I'd appreciate hearing it.

Thanks, btw, for all the great articles and insight.

Another very good question - as this is something which I have never explained in complete detail before.

Much like the bankers push down gold and silver by shorting them (piling onto one side of a bet), the Wall Street terrorists use credit default swaps to push UP interest rates - by piling into the bet that these states will default.

As more and more bets are placed on defaulting, the COST of the credit default swaps which INSURE against default soar sky-high. While there is not a DIRECT connection between the price of credit default swaps and interest rates, since (supposedly) these higher credit default prices mean that a country is less creditworthy, lenders jack-up their interest rates as a result.