On June 16, the New York COMEX had a total of 119.5 million ounces of silver in bonded warehouses to cover more than 600 million ounces of open contracts. Since then, there have been significant withdrawals almost every day, despite apparent efforts to scrounge up new silver inventories from elsewhere and also to pressure customers to not take delivery on their contracts.
As of the close on July 20, COMEX silver inventories were down to 110.66 million ounces, a 7.4% decline in the past five weeks. Rather than being a general decline from all depositories, the run is focused on two specific depositories: the Scotia Mocatta subsidiary of the Bank of Nova Scotia and HSBC, the British bank formerly known as Hong Kong Shanghai Banking Corporation. These two depositories are generally suspected of having insufficient physical precious metals in their vaults to meet their contractual obligations.
Scotia Mocatta was recently embarrassed by a report in a Toronto newspaper that the bank threw multiple obstacles in the way of permitting a 73-year old woman who wanted to convert her paper silver certificates at that bank into actual physical silver that she could withdraw. Scotia Mocatta officials refused to come to her hospital room to execute the paperwork, refused to accept properly drafted papers appointing her attorney son with the authority to accept delivery on her behalf, refused to let her visit the nearest bank branch to her hospital to make the withdrawal, and even attempted to intimidate her from withdrawing her physical silver when she made arrangements to personally come to the bank headquarters to conduct the transaction. If Scotia Mocatta has so little silver on hand to meet its obligations for this one woman, it may not be long before they start to default on deliveries altogether.
By the large number of undelivered COMEX July silver contracts that were tendered for delivery—much later in the month than normal—it would appear the COMEX is having difficulty meeting its contractual obligations. Under its terms of operation, the COMEX is entitled to unilaterally settle such contracts for cash or for shares of a silver exchange traded fund instead of physical silver, but I haven’t heard of this occurring on a large scale yet. That may yet occur before the end of July if their ability to deliver physical silver becomes a major problem.
The COMEX silver market did go into backwardation on July 16. Normally, future month contracts trade at a higher price than the current spot month, roughly by the interest and transaction costs for the time delay. This normal situation is called contango. When the current spot month price rises higher than future months, that is called backwardation. The July 16 spot month price was higher than for all future 2010 contracts.
When a market goes into backwardation for more than a couple of days, that is a sign of a physical supply squeeze, where prices often rise quickly. We may not be at that stage by the end of this week, but I am confident that we are getting closer to the day when the price of silver will take off.
Delivery problems just keep getting worse. If you think you own silver in any form other than physical forms in your direct possession, or in segregated storage (not unallocated or allocated storage) under your name, you may not have much time to avoid losing some or all of your investment. Protect yourself now.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His periodic radio interviews can be heard on WILS 1320 AM in Lansing, www.talkLansing.net, and on www.yourcontrarian.com.