I have written several times regarding the size of COMEX futures going into delivery periods. It is time to do this again with silver. The September delivery month has 65,000 contracts still open. This represents 325 million ounces of silver. The "registered" category at COMEX now has just over 60 million ounces available for deliver. If you tally up the entire inventory, this is roughly 175 million ounces.
As we have seen plentiful times in the past, the futures normally get rolled into the next active month and we merrily go on down the road. In fact, over the past year we have seen large amounts of gold and silver contracts initially stand for delivery only to see them either rolled at the END of the delivery period or "settled" with little or no movement in the inventory statistics. Both of these situations have had speculations by us conspiracy nuts that they are being either "cash settled" or cash settled with a "premium" attached to entice the contract owner. Is this true? I obviously do not have any proof that premiums are being paid but it is a logical explanation and the lack of inventory movement is supportive of the theory.
I would ask the question, "is a COMEX default plausible"? Judging by the current numbers standing for September silver, the inventory available to satisfy delivery is oversubscribed by more than 5 times. Yes I understand, we have watched over the last year or two this very same scenario play out. Heavy open interest going into delivery and "poof", they then just disappear. I would also ask if the past heavy open interest may have been "dry runs" at busting COMEX open like a watermelon? Maybe the huge open interest is a form of "collateral"? Let me explain with a possible twist.
As you may remember, I have put forward the thesis that the Chinese (and thus the Russians) have been and are behind the heavy open interest in silver which has been building and building. I believe the Chinese have "spread" their holdings around through various proxies in order to be "discreet" with what they are doing. Logically, who else has deep enough pockets to have withstood the price of silver going from $40 to $20? The open interest has been stubbornly high throughout the last 2 years and without any great "flushes" of open interest as one would expect with the huge and frequent downdrafts. Obviously the "sellers" have also had deep enough pockets to beat back the buying pressure created at and below the cost of production. To me, "Chinese proxies" in silver make as much sense to me as "U.S. Fed/Treasury proxies" do in Belgium, I think it just makes common sense.
I would like to further my thoughts on this theory. Why, (if I am correct and China "is" the huge open interest in silver) would China sit back and absorb $ billions in losses? Does this make any sense at all? Don't investors "invest" to make money? Very crudely, 150,000 contracts (750 million ounces) taking a $20 loss is $15 billion, this is HUGE right? Wrong, in the scheme of things as I see them, this is merely the cost of doing business and less costly than a ham sandwich (unless you are really hungry). Remember, China has amassed over $3 trillion of U.S. Treasuries so $15 billion represents one half of one percent. In perspective this is very cheap "insurance, I'll explain in a moment.
OK, so here is the rest of my theory. I believe the Chinese have been "using" their positions on the COMEX. This can be looked at from several angles but they all amount to the same thing. Maybe the Chinese have these positions as a "detonation switch"? Maybe they are holding COMEX futures so they are able to at any time and for any reason, blow up the game? Maybe the position is "leverage" or a gun to the head of the U.S. to continue delivering gold ...or else? It is even possible that China is using this position as a "lien" on the silver inventory so it can't get away from them? I believe China leased silver out to the U.S. in the 1990's, maybe this is merely a way to "attach" some or all of it?
Whether my theory is correct or not remains to be seen, the important thing to understand is how small the silver market really is... and how important it is to retaining the "trust" element in the Western financial system. The 60 million ounces of "deliverable" silver at current prices are only worth $3 billion. Ask yourself what would happen if (when) they run out and cannot deliver more? Ask yourself, when COMEX fails to deliver silver then what will your thought process be? You will probably want "some" if you have none or MORE if you already do, right? Will your thought process go further? "Further" as in the gold market? "Further" as in platinum, zinc, copper, wheat, rice, cotton, orange juice, milk, coal or any other market where "paper" represents "real stuff". Basically, if not enough silver existed behind the contracts then what other markets might this same condition apply?
Do you see where this can lead to? If I am correct and China is in fact the outsized and unusual open interest in silver, they are sitting on a detonation switch to the entire financial system of the West. Actually, rather than call it a detonation switch, the better term would be "kill switch" because this is exactly what would result.
I am sure there will be many who either don't believe this theory or even tell me I'm nuts. If I were China, THIS is exactly what I would do! Follow this reasoning through if you will, China has already shown "trust" in the U.S. as evidenced by their U.S. Treasury holdings. They "trusted" us by lending capital to us and in return expecting to receive payment in the future. "Payment" is not and will never be in question because we can simply create the dollars to pay. What is in question is what those dollars will be worth on the international markets when they are paid? You see, for very little money, expense or even effort, China can "force" the U.S. into a "bankruptcy" using this tiny silver position.
To wrap this up, laugh if you will but I don't think you should. Think this theory through several times before you fire mudball comments back to me. It really is simple and not complicated at all. In fact, it makes as much common sense as a bank, a pawn broker or even a private lender moving to "secure" their loan(s). I believe China is merely acting in their own best interests because after 2008 they have watched us willfully bankrupt ourselves and grossly devalue the dollar. They have imported massive tonnages of gold since then, why not hold an "insurance policy" in silver which can be "claimed" whenever you choose? What lender wouldn't act in this manner? Regards, Bill Holter
http://blog.milesfranklin.com/
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