On June 16th, the COMEX reported total silver inventories of 119.5 million ounces. Ten trading days later, on June 30, total inventories had fallen to 113.56 million ounces, a 5.94 million ounce (4.97%) decline.
There have been significant declines on nine of the last ten trading days, but this story has received almost no coverage by the mainstream media.
One reader of my June 25th column where I broke this story commented that this pattern was consistent with activity a year ago. It is true that inventory levels do fluctuate. For instance, the COMEX gold inventories are much higher now than they were a year ago.
However, some information I have learned in the past five days further demonstrates that the current run on COMEX silver inventories is not just something that happens occasionally in a stable exchange.
In particular, a high percentage of the withdrawn silver has apparently been from two specific depositories, not just all of the COMEX depositories in general. Those who have studied the details closely state that the banks losing the bulk of silver have been Scotia Bank and HSBC.
Scotia Bank has been rumored for many months to have very little physical precious metals in its vaults to cover customer deposits. This can be done, in theory, if the bank owns derivatives to cover their short physical position, but these derivatives are only as good as the other party’s abilities to deliver on demand in event of a possible Scotia default. There is not really any hard and fast information to prove that the derivatives are worth the paper they are printed on. In fact, since the total amount of extant silver derivatives exceed many years of silver mining production, let alone the much smaller amount of available above ground inventories, there is a huge reason to be fearful that the paper silver market could be heading for a crash in the near future.
On one day in June, there were 630,000 ounces of silver withdrawn from other COMEX depositories on the same day that 610,000 ounces were deposited at Scotia Bank. This seems more than coincidental. It looks suspiciously like an emergency transfer from another depository to help Scotia Bank avoid default on making delivery that day.
If this drain of COMEX silver inventories continues, it could literally be the spark that brings down the entire global financial system, Any indication that owners of “paper” silver may not be able to convert their paper into the physical product will only increase the demand to do just that.
As I said five days ago, this run won’t be confined to the silver market for long. Owners of paper gold will see what is happening and almost certainly step up converting their paper into physical metal. By the way, the COMEX recently reported that physical delivery of maturing gold contracts thus far in 2010 is running 39% higher than for the same period of 2009. The parties facing the largest potential losses are naked sellers of gold and silver commodity contracts, where there is no physical inventories to fulfill their liabilities. The entities with such huge positions are major banks. As gold and silver (and probably platinum, palladium as well as many other metals) prices rise because of the supply squeeze, it could easily happen that many major banks and central banks could go bankrupt.
It scares me to think of the worldwide upheaval that could result from this growing run on COMEX silver inventories. I am even more terrified that, not only could it happen, it could bring on a severe financial crisis within a matter of weeks. Those who will be least harmed by these developments are those who get out of paper silver and gold and into physical metals as soon as possible.
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.