Friday, March 18, 2011

So what's happening over at the COMEX with Silver?

Thought we would take a moment and take a look at silver again today.

According to analyst Harvey Organ, there remain 923 notices (or contracts) to be filled for the March Delivery period. Each contract is for 5,000 oz's so this represents 4,615,000 oz's still waiting to be delivered.

We are now equally balanced between the number of oz's that have been delivered by the COMEX this month with the number of oz's waiting to be delivered.

And while the COMEX has until the end of the month to deliver this silver, observers note that there has NEVER been a month where we have reached the halfway point and there remains 50% of the outstanding silver undelivered.

This is your greatest bit of evidence that silver is in short supply.

COMEX inventories are divided into registered and eligible categories. It would be most useful to think of these two categories as dealer and investor inventories, respectively. Registered inventories are committed to be delivered to fulfill maturing contracts. Eligible inventories are often stored in COMEX bonded warehouses to allow the owner the option to make the metal available to fulfill COMEX contracts, but there is no obligation for the owner to make the commodity available for the purpose.

The inventories that do exist may also be subject to the claims of other creditors.

Clearly the COMEX vaults (on the dealer side), which supposedly have 53 million oz's in reserve, are probably empty (the silver having been leased out to other entities in the giant silver ponzi and not available at this time).

Oh my!

So what does that mean for the 923 contracts which are currently standing for delivery?

Well... there's an interesting thread playing out on a yahoo chatboard right now.

The poster claims that he has bought 3 of those COMEX contracts (150,000 oz of silver) and wanting physical delivery. He states the COMEX has advised he may not be getting his silver delivery, but they have offered him shares of the exchange traded fund SLV plus a premium of 70%.

The key element of this story, of course, is that the COMEX is supposed to be THE key pricing mechanism for the price discovery of the true value of silver.

If this, and similar stories, are true than the COMEX is now an extremely broken pricing mechanism since it cannot gauge real supply and demand. There is a demand for silver, the silver isn't available, so the price should be moving higher in order to make the silver available to those who want it NOW.

More importantly, if there's a shortage of a specific commodity you can't have a certain party (hello JP Morgan Chase) naked shorting in order to manipulate the price down. You can short a contract if you have a supply of the commodity to back it up, it's illegal to short if you can't.

You will hear the argument that COMEX commodity contracts are mostly traded by investors who never intend to take physical delivery. Instead, they normally exit their contract before maturity or replace it with another contract with a maturity further in the future. As a result of this practice, the available inventories held to make contract deliveries only cover a small fraction of outstanding contracts.

The fact that so many want physical delivery right now, the COMEX defenders will claim, is an anomaly.

But as demand for silver increases, the reality is that this situation is not an anomaly.

And the reality is that JP Morgan and HSBC are probably naked shorting huge amounts of silver that they can't even supply to the market.

If the short squeeze continues, the dam will have to burst and the spot price of silver will have to rise dramatically to reflect the current supply/demand situation.

We continue to watch the COMEX situation with keen interest.



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1 comment:

  1. I must be missing something here.

    Holders of long contracts are being bought out for huge premiums by the COMEX? What is happening to the parties who hold the other side of the trade? Is the COMEX demanding that they pay these huge premiums?

    If the long contract holders are making huge premiums it means someone else must be losing an equal amount. Who is losing this trade?

    If it is the short contract holders, why would they continue to be short at these market prices? Maybe it is my lack of knowledge of the COMEX, but if you are having to pay huge premiums to cover your naked short positions, then regardless of the market price of the underlying commodity, are you not losing money?