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The reported silver
inventories in COMEX-licensed depositories have increased noticeably in the
past few weeks, up some 12 million ounces to a total of over 118 million
ounces. This is the largest amount of silver in these warehouses since 1998. As
such, it has raised questions in people's minds about the true supply/demand
situation. Let's see if we can analyze COMEX silver inventories objectively. As
you may recall, I wrote two articles about these inventories in June,
"The COMEX Silver Shuffle" and "COMEX Silver Warehouse
Stocks", so I'll try to be brief. Forgive me if there is some
repetition.
Before discussing what the inventory increase tells us, we must recognize
what it doesn't tell us. The first thing to remember is that any short term
increase or decrease in COMEX inventories tells us very little in absence of
other information. Sure, it feels like short term inventory increases are
bearish, in that such increases suggest more silver available, just like
decreases suggest less availability. But, in lack of substantiating
additional information, such suggestions are incorrect. Long term increases
or decreases might suggest something more meaningful, but short term changes
suggest inventory rearrangement - from the unknown category to the known, or
vice-versa. Even with the recent increases in COMEX inventories, we're still
not above my long quoted figure for world known silver bullion inventories of
150 million ounces, as I allowed for a such an
increase in COMEX stocks. In fact, I expect COMEX stocks to continue to grow,
as I'll explain shortly.
There has been no sudden and dramatic changes in
world mine or recycling production, or sudden changes in world consumption
patterns to indicate that silver supply/demand fundamentals had been
radically altered and account for increases in reported COMEX inventories. If
anything, world economic activity, led by China, appears to be on the
upswing, always good for industrial silver demand. By nature, world commodity
fundamentals are slow and plodding, like stopping or turning a supertanker. One
or two percent changes in annual supply or demand, are generally big news. I
can assure you that the twelve million ounces did not come into the COMEX
because the world suddenly produced 12 million more ounces than it needed in
the past few weeks. The silver came in for a reason, not because there was a
sudden surplus. In fact the real reason the silver came in is both bullish
and good news for everyone, silver bulls and bears alike.
I see two possibilities for the recent increase in COMEX silver inventories,
and these reasons are related. Quite simply, the silver came in because it
had to come in. In other words, the silver was brought in by the shorts in
order to make delivery against the upcoming December delivery month, the
biggest of the year. The shorts had to bring it in because they knew a good
number of longs were standing for delivery. This is the most likely reason
the silver came in - there was a known demand for physical silver. Does that
sound bearish to you?
What it tells us is that the 106 million ounces that were in the
COMEX-approved warehouses prior to the 12 million inflow,
is not all available for delivery. Just because we can see 100+ million
ounces sitting in these visible warehouses does not mean this silver is
available. I know plenty of people who store their silver at the COMEX
warehouses and it is no more available for delivery at 5 dollars than silver
held in people's homes and safe deposit boxes is
available at five dollars. The recent inflows of inventory into the COMEX
proves that the vast majority of silver already there was not available for
sale and delivery, because why go to the trouble to bring in new stuff if the
old stuff can be delivered?
But there is another reason why I think there has been a recent inflow of
silver into the COMEX, related to the first reason. I think the silver is
being brought in to make the COMEX default-proof, in response to my recent
efforts involving New York Attorney General Eliot Spitzer. The gist of my
solution (please see "The Solution") is to make sure the shorts
have real silver in their accounts by first delivery day. It is clear that
could be exactly what is happening. (Interestingly, the silver being brought
in appears to be by one entity, most likely the big silver short, because it
has been to one warehouse and one category - Brinks and registered.)
So we are looking at the real possibility that the NYMEX/COMEX is doing just
as I suggested to avoid default. This is not surprising as the solution
itself was on the money. That's why you haven't heard any objections from the
CFTC and the COMEX, as there was nothing to object to. But, let's be
realistic - there was also no way that either the CFTC or COMEX would ever
come out and publicly acknowledge that I gave them a constructive solution to
a very serious problem, because that would open a possible Pandora's Box of
questions about my other convictions and analysis about the silver market. That's
OK, because the important thing is that the integrity of the market is being
strengthened. Let me repeat - the silver coming into the market is great. It
reflects new demand for real silver and weakens the chance of default. I hope
it keeps coming in. It would not surprise me, at the end of the day, to see
the COMEX contain well over 90% and close to 100% of all
the world's known silver bullion inventory.
One last thing in closing. I've heard from people who suggested that my
solution to delivery default in COMEX silver (insist that the shorts have the
goods and longs have full cash by first notice day) should be applied to
other commodity markets as well. I agree, but have been hesitant to write
about it, as I prefer to stick to silver. But recent activity in the Chicago
Mercantile Exchange (CME) live cattle market prompts me to speak out. There
was, in my opinion, much greater than necessary volatility in the recently
expired October live cattle contract, that could
have been avoided had my solution been in effect on the CME. The unnecessary
volatility commenced around first delivery day and continued through the last
trading day. There were more days of limit moves, both up and down, including
expanded limits, than there were non-limit moves. Such extreme volatility can
be blamed squarely on the enormous open interest in the October contract
going into delivery, over 12,000 contracts on first delivery day. Since there
were only 20 contracts actually delivered at the end of trading for the
month, it is safe to say that both the longs and shorts were bluffing, and
that neither ever intended to make or take delivery - just speculate until
the very last moment. I'm certainly not against speculation, but it should
not be the driving force in setting prices and enhancing the risk of default.
I'm not saying that cattle prices are at historic highs because of all the
bluffing during trading in the October contract's delivery period. I'm saying
that the dramatic volatility witnessed during the delivery month could have
been avoided had that bluffing been curtailed, by insisting that both longs
and shorts were capable of delivery by first delivery day. No legitimate
market or economic good was accomplished by permitting unbridled bluffing
down to the wire. It's a miracle that the result wasn't default. This is just
what I hope we avoid in COMEX silver.
Theodore
Butler
www.investmentrarities.com
(No one can safely predict the future and
it’s possible that Israel
Friedman’s Butler’s
analysis will prove incorrect. Silver can go up, but silver can go down. It
is up to you to read, analyze, and arrive at your own conclusions. Prudence
requires we emphasize that precious metals may or may not prove to be suitable
for your consideration.)
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