On June 16th, the COMEX reported total silver inventories of 119.5 million ounces. Six trading days later, on June 24, total inventories had fallen to 114.9 million ounces, a 4.6 million ounce decline.
On June 24th, the COMEX silver market had over 137,000 open contracts. At 5,000 ounces per contract, that means that commodity contract sellers owed a total or more than 685 million ounces of silver at contract maturity. The COMEX bonded warehouse inventories cover less than 17% of all silver owed.
Now, most COMEX contract buyers never ask for physical delivery. In practice, most buyers will sell their contracts before maturity or will roll them over for a new contract with a delivery date further in the future.
Still, there have been a growing number of reports of delays in delivering physical silver when owners requested it. Further, the number of maturing COMEX silver contracts where the owner asks for physical delivery is running far above the same period for 2009. So, there is reason to worry about the ability of the COMEX to meet continuing demand for physical delivery.
If withdrawals continue at this pace, COMEX warehouses could be empty within seven months! Long before that happened, I would expect COMEX rule changes to limit or prohibit taking delivery. Existing COMEX rules would also be used, which allow for settlement of contracts with cash or with shares of a silver exchange traded fund in lieu of providing physical metal.
The main reason to worry about this run on COMEX silver inventories is that there are no significant quantities of physical silver held by governments, central banks, or in the private sector that could be mobilized to stem a panic. Equally important, any run on the COMEX silver market would certainly expand to a run on COMEX gold contracts. As physical demand for gold increased, that would inevitably lead to higher gold prices, thereby hurting the value of the US dollar.
COMEX inventories fluctuate, so any declines are not automatically an indicator of a run on silver. Still, the withdrawals each of the six days through June 24 have been significant. When you put this trend in the context of already existing concerns over the ability of the COMEX to deliver physical silver, I fear this COMEX silver market problem could come to a head before the end of July. Any supply squeeze would result in soaring silver prices.
If you own any forms of what I call “paper silver,” you now face a higher risk of losing some or all of your investment. I urge you to strongly consider getting out of these positions (commodity and options contracts, shares of exchange traded funds, unallocated accounts in storage, and certificates of stored silver) within the next two weeks and replacing them with delivery of physical silver. My columns are not so widely studied that this essay would likely hasten the breakdown of the COMEX silver market. But, even if there is no commercial signal failure by late July, there remains a good possibility it could still happen later. If you prepare now, you will be ready for any eventuality.
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.