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Two months ago, after a confederation of followers of Reddit and other websites succeeded in forcing a market tightening on shares of GameStop and other companies with a high percentage of their shares sold uncovered, some have started to suggest that this practice could be repeated. the upcoming expiry of the COMEX silver futures contracts of March 2021.
This attempt to drive up the price of silver has not worked well. Those who thought they could provoke a short squeeze didn’t do their homework to uncover two major obstacles to a successful campaign. First, they didn’t realize that the bulk of silver trading activity is handled by paper contracts, with very little physical change (as a percentage of trading volume) in hands. A high percentage of the effort to force a squeeze on the money supply has been led by the purchase of paper contracts, which has simply led to more short sales of paper money.
Second, keeping the price of silver low is a tactic used by the US government to help lower the price of gold. Remember that the prices of gold and silver are actually bulletins about the strength and stability of the US government, the US economy, and the US dollar. The two metals rise or fall in tandem most of the time. Therefore, one way to restrict the price of gold is to make sure that the price of silver is under control.
The US government has been explicitly authorized to manipulate the price of gold since 1934 through the use of the Exchange Stabilization Fund. In addition, the federal government can call on the major trading partners of the New York Federal Reserve, the Bank for International Settlements, and allied central banks to cooperate in efforts to keep gold and silver prices low. . It is also supported by the actions of COMEX.
Declassified government documents confirm that gold prices were manipulated almost continuously from 1934 until the time of the most recently released documents – around 10 years or so. Is there any reason to believe that the government would have ceased such activities more recently?
When gold futures began trading on COMEX in the mid-1970s, this was established as an additional means of controlling the price of this metal.
The COMEX gold and silver futures markets are essentially a fractional reserve system. Only a small fraction of contracts are covered by physical stocks in COMEX bonded warehouses. The reason this can work, in normal markets, is that the overwhelming number of investors in COMEX futures are investing in the price, with no intention of taking delivery of the physical metal when the contract expires. To avoid having to take or deliver an expired contract, long and short sellers typically buy a netting contract before maturity to liquidate their position, often to re-establish their position in a new contract with a longer maturity. distant. .
To give you a current example, the COMEX of April 28, 2021, the silver stocks in its bonded warehouses were reported to a total of 117,932,837.29 ounces of silver registered and 242,687,267,093 ounces of qualifying silver. . Registered stocks agree to be available for delivery against an expiring contract called for delivery. Qualifying inventory is simply stored in COMEX warehouses, but is not obligated to meet delivery on an expiring contract unless and until the owner chooses to reclassify the money to the registered category.
As of the April 27, 2021 final report, COMEX had open interest on 172,470 silver contracts, each representing 5,000 ounces of silver. This means a potential liability to deliver 862,350,000 ounces of silver if each holder of a long position requests delivery. Indeed, the silver stocks recorded by COMEX cover less than 14% of contracts in progress. Even including 100% of qualifying stocks, this covers less than 42% of open positions. These percentages of coverage are roughly typical of COMEX.
While some silver futures contracts on COMEX do not expire until July 2024, a total of 150,313 contracts (751,565,000 ounces) expire no later than July of this year.
It is this huge disparity between COMEX stocks and open positions that theoretically presents the opportunity to try to compress the silver market.
This time around, the Reddit mob and its allies are trying to squeeze the silver supply by avoiding buying paper money and instead buying physical metal requested for delivery. One tactic is calling their subscribers to buy a 100-ounce silver bar on May 1. If 100,000 people did it on the same day, it would create an instant demand for 10 million ounces of physical silver which is simply not available in the over-the-counter market right now. This could force some COMEX contract holders to call up their expiring contracts for the delivery of physical metal.
Theoretically, this could lead to a compression of the silver supply which would lead to a noticeable increase in the price of silver.
In practice, this will not happen to a significant degree. Here’s why.
A significant percentage of COMEX money investors on the long side of contracts use leverage. Most of their investments are made with borrowed funds. The COMEX periodically changes the margin requirements on leveraged investments. In the event of a tight supply threatening to push the price up, COMEX could impose a significant increase in margin requirements that would force many long parties to sell all or part of their positions to short sellers.
If this were not enough to break the attempt to squeeze the supply, COMEX could almost certainly avoid many deliveries of physical money by the other options to fulfill a contract called on delivery – a cash settlement, delivery of money. ‘shares in a silver exchange traded fund, or the delivery of some money plus a contract in the London silver market for the same number of ounces.
No, I don’t think a sudden demand for 10 million ounces of physical silver, if it were to grow, would be enough to drive the price of silver up quickly. So the question then becomes how much demand for money would it take to achieve such a result?
A good example came in 1997-98 when Warren Buffett’s Berkshire Hathaway bought about 130 million ounces of silver in paper contracts, then unexpectedly requested physical delivery instead of rolling the contracts over to the ‘deadline. The move caused the price of silver to rise more than 15% as short sellers scrambled to find physical silver. The price could have gone up, except that Buffett accepted cash payments deemed to be around 7% of the value of the money to accept a six-month delay in delivering the money.
Since then, the establishment of silver exchange-traded funds has placed an additional obstacle in the attempt to force a tight supply in the silver market. Nonetheless, I expect the current tightening in the supply of physical silver to continue to put pressure on significantly higher silver prices before the end of this year.
Patrick A. Heller has been honored as FUN Numismatic Ambassador 2019. He is also the recipient of the 2018 Glenn Smedley Memorial Service Award from the American Numismatic Association, the 2017 Exemplary Service Award, the Harry Forman National Dealer of the Year Award 2012 and the 2008 Presidential Award. Over the years, he has also been honored by the Numismatic Literary Guild (including twice in 2020), the Professional Numismatists Guild, the Industry Council for Tangible Assets and the Michigan State Numismatic Society. He is the communications manager for Liberty Coin Service in Lansing, Michigan, and writes Perspectives of freedom, a monthly newsletter on rare coins and precious metals. Back issues of the newsletter can be found at www.libertycoinservice.com. Some of his radio comments titled “The Things You ‘Know’ That Just Aren’t So, And The Important News You Need To Know” can be heard at 8:45 am on Wednesday and Friday mornings at 1:20 pm WILS in Lansing (which broadcasts live and is part of the audio archive posted to www.1320wils.com).
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