Friday, June 18, 2010

Silver: Is A Physical Squeeze Starting To Bubble Up?

(Note: I pulled yesterday's post about the Russian scientist/BP after enough commentors presented enough evidence which calls into the question the credibility of the news source I used. I originally found the article link on the Financial Times blog, FTAlphaville, which led me to assume the news source was good. It may or it may not be, but after doing a little more due diligence - thanks to commentor suggestions - I decided I would rather let FT rest on shakey foundations, but not The Golden Truth!)

The Comex had two large silver withdrawals this week. Yesterday's warehouse stock report showed 1.2mm ounces were removed, 900k of it from the "eligible" inventory, which is the investor inventory being "safekept" at Comex depositories but not available to be delivered.  480k of that 900k was removed from Scotia. With all the discussion and unrefuted (by Scotia) accusations about Scotia's depository safekeeping methodologies, it wouldn't surprise me to see even more gold and silver going forward being taken out of Scotia's customer inventory.

But here's an even more glaring issue: as of last Friday, the net commercial short position in silver, as per the COT report, was 55,329 contracts.  At 5,000 ozs/contract, that's 276,645,000 ounces of silver sold short by the big bullion banks (Mostly JP Morgan, HSBC and BNS - and mostly JPM at that). What's the problem?  The total silver inventory being reported by the Comex is 118 million ounces. But of that, 66 million is customer inventory not available for delivery, leaving 52 million ounces of silver that can be delivered vs. 276 million of short paper silver.

Let's break it down to just July silver. The July silver open interest is 47,921, which means that there is 239 million ounces of silver that has been shorted for July vs. the 52 million available for delivery. See the problem?  Historically JPM could count on the longs to sell their position before first notice of delivery day or tender for cash. If the Comex silver longs start correlating with the trend in the actual physical market, the Comex will default on silver deliveries...

A reader related to me yesterday that he had a silver bar delivery problem with the Comex about three months ago that had to be resolved using his broker's lawyer. Our fund has experienced several delays in getting silver delivered from the Comex - with HSBC as the counterparty - over the past year.  This includes last year, when our April silver was not delivered until June 20th (7 weeks past contractual last delivery day).

Furthermore, I know that my friend who is a bullion trader here in Denver is having a hard time sourcing any kind of real supply of silver bullion on the "bid side" of the market, which means he's having a hard time finding retail sellers in any kind of size AND his buyers want silver right now. He was definitely postured as a much better buyer and was beating me up to sell him some silver eagles.

That the physical market in gold and silver is getting tight is not new news. But the above withdrawals from the Comex customer silver inventories this week, in the context of the anectdotal events as described above, can only lead one to believe that an enormous amount of pressure is being created by the trend of big investors demanding physical delivery into private depositories that are trustworthy and not connected to the bullion banks, who are likely leasing out some portion of the bullion in their depositories.

One more interesting development has to do with scrap supplies of gold.  In the past, when gold breaks out to new highs, European bullion dealers report the emergence of a large supplies of scrap selling that hits the market.  Last January (2009) the flow of scrap into the market was credited with causing the subsequent pullback in price.  So far in this latest move, very little scrap supply is being reported.

GATA has maintained for over 11 years that eventually the physical market demand would completely overwhelm the ability of the paper short interest to satisfy delivery demands.  I would argue that the market is starting to transition into that process and it will lead to much higher prices.  In fact, I believe all but the most knowledgeable gold investors will be stunned by coming price movements.  What will be even more shocking to many is the premium over spot that the market will pay for deliverable physical bullion.


  1. I have always believed that the dumb big money will one day wake up and be in a panic to own Gold/Silver and we will be able to name our price.

    Joe M.

  2. Your source may, indeed, have been dodgy, but this one not so much.

    Unfortunately, what it says it that the methane being expelled in this disaster is far far higher than one finds in "normal crude." What conclusions can we draw from that. I am not an expert, so I don't know.

    However, it has been suggested in several quarters that what BP has done, is drill so far down as to penetrate the earth's crust and bring up "abiotic oil". I have argued strenuously against the existence of such a substance, but the overwhelming pressure associated with this gusher and the level of methane have me questioning long held assumptions.

  3. Damn Edwardo - thanks for the link. In "The Road," the author never specifically identifies what happened. Everyone assumes it was a nuclear holocaust...but he NEVER specifies...

    Joe - you are 100% on the money!

  4. Does Denver Dave = Ted Butler?

    Speaking of scrap gold, interesting to see these little "Cash for Gold" shops popping up all over the place. I saw one just yesterday around my office building that I didn't notice before.

  5. Tulving still has plenty.

  6. Yes retail coin dealers have supply, although Tulving has been sold out of several silver SKU's.

    The tightness is at the commercial/institutional level.