Silver producers are being held hostage to the paper silver market, says, Eric Sprott, Sprott Asset Management CEO.
Speaking to Mineweb the week after posting a letter on King World News calling on silver producers to act to ensure that the physical market, rather than the paper one, determine the price of the metal, Sprott said that he wished producers of the metal would " finally realise what the paper boys did to them in 2008 - they nearly bankrupted them all and yet they haven't got involved in these lawsuits which I find troubling."
Asked whether or not he has received any feedback from the producers on his suggestion that they "reinvest 25% of their 2011 earnings back into physical silver," Sprott said that there had been a groundswell of interest - more than he had ever seen before - but that still more needs to be done.
Sprott says that the idea stems from two factors currently at play within the silver market: the first is the general weakness seen within the global banking system, the second is the level of volatility in the system.
"For example, when silver hits $49.50 between the various paper markets, there was something like one billion ounces of paper silver sold that day - and purchased of course. But, we only produce about 900 million ounces a year... what do you think of the guys who were selling a billion ounces of silver who didn't have a hope in hell of providing it?"
By investing in the physical market, Sprott believes, producers would be able to show that there is indeed an imbalance in the physical silver market.
"It's a pretty fine line right now whether they can meet all the demand on a day-to-day basis, if by putting 25% of their cash into silver - it might have the effect of decreasing the supply by around 10 percentage points... I believe 10 percentage points would be enough to make a difference."
He adds, "I'm very frustrated by what's going on in the paper silver market. I just find it unbelievable that you can have silver go down $6 in 13 minutes one time when the markets weren't really open and then you get four margin rate increases the next week - four... It smells like a set up to me."
This frustration is made all the more acute for Sprott because of the strong underlying story he sees playing out in the physical market.
Currently, he says, there is nothing in the macroeconomic environment that would lead him to think that people don't want to own physical silver.
Over the long term Sprott believes that he market has made gold the reserve currency.
"I don't care whether the central banks have or governments have, but the markets made it the reserve currency... central banks have been aiding and abetting that process - they're almost making it the reserve currency by their actions, not by their statements and when it was a reserve currency silver traded at a ratio of 15 to 16:1 of the price of gold."
Over the shorter term, he says there is clear evidence of strong demand for the metal, "demand for silver is versus the demand for gold in the investment arena and when I see people like Gold Money sell as many dollars of silver, as gold. When I see the US Mint sell as many dollars of silver as gold which by the way implies in both instances, 50 times more physical than gold. And when we did the IPO for Gold Trust we made $440 million. When we did the IPO for the Silver Trust we made $550 million...Well how can the price be 50:1 when the money is going in 1:1?"