I believe that the paper traders are hammering PMs for several reasons I won't get into. However, at some point if/when demand for physical increases it will cause the paper price to split from the physical price. For PMs to rise to some of the high prices you often see predicted, the split of physical from paper must occur. Otherwise, the paper markets will always have the ability to let the prices run up, then slap them down, rinse and repeat.
The good thing about physical PMs, which separates them from strictly paper, non-secured assets, is that the physical cannot be manipulated (not counting counterfeit of course). There is only so much in the ground, above ground and lying on the ocean floor from shipwrecks, etc. If a person demands delivery of the metals, there is no way to fractionalize the supply of PMs so a small amount of the metals are being used to represent a larger amount like what we see in modern fractional banking where a bank can loan out a certain X times their deposits because they know not everyone is going to demand the money all at once.
My view is that a number of bad events are going to happen someday in the future that will cause those with access to large amounts of cash (current estimates of low end 700 trillion to high end 1200 trillion in derivatives right now) to seek physical over paper and that is when you will see PMs go crazy. The only thing that would stop this is if the gov increased interest rates way up, like they did in the early 80's, when they went up to near 20%. Right now they are lowering rates in the EU and in other places. I don't think they will raise them here because that would bring about an instant depression, at least according to some.
As far as the price of a commodity's cost of production being related to its market price, that would work if we were dealing with real, physical PMs. The bulk of the trading going on in PMs driving the prices is paper where the longs do not demand delivery. A good example of this is platinum, currently at about 1421 per ounce right now, but it costs over 1700 per ounce to pull from the ground. Platinum is used in many important industrial apps like silver and the above ground supply is limited. I am not buying anymore platinum for now, but will if it drops further. Right now I don't think cost of production has anything to do with the current PM prices: paper trading, yes, lack of sufficient demand for physical to blast it past the paper prices, yes. I see all of this changing next year or in 2013 at the latest.
Unlike many who are PM bugs, I love waking up and seeing the prices tank. That may sound crazy, but I don't have nearly enough stashed away to where I feel secure with respect to what I see coming down the road.
Just my opinion.
Jim
