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Silver closed last week under $17 for the first time in 4 years.  Maybe we have in store another “event” like 2008, 2011 or 2013 where the “price” gets forced down which explodes demand to a point where shortages again show up?  I have written several times before how a shortage should never ever show up in any real market if prices crash because of “selling.”  If real silver were in fact being sold then the market would be awash in silver and no shortage could exist.  …The last 3 episodes there were severe shortages which is your proof that it was not in fact real metal being sold, only paper contracts representing metal, this logic is not arguable.

I have written several times regarding the high and growing open interest in the COMEX silver contracts.  It is my belief the Chinese via proxy are the longs and will at some point call for delivery.  I was “reprimanded” by a very famous commodities trader telling me that the open interest was high only because of “spread trades.”  Spread trades only amount to 23,000 contracts which if subtracted would still leave us with 150,000 contracts or more of silver, still historically high.  Something is just not right, the open interest in gold is near multi year lows while silver touched 6 year highs last week, “spreads” do not explain it.

I have also argued that both silver and gold have seen concentrated sales where 50% or more of global production is dumped within 24-36 hours which in a real market where real metal trades, could not ever happen.  Who could have this size of metal and who would sell in a fashion to destroy their own price even if they did?  The answers of course are no one, and no one.  I get it, hedge funds are momentum traders and pile on in whatever direction any commodity is moving but gold and silver have now had access trades open lower or unchanged in 106 out of the last 110 trading days.  This is a statistical impossibility.  So it is what it is, but what does it mean, and what has silver trading way below the cost of production now unleashed?

The U.S. produces about 33 million ounces of silver per year, the mint has already sold 34 million ounces through October 2nd.  Think about this for a moment, this is just mint sales alone.  The entire U.S. production has been eaten up by the sales of coins alone, what of industrial demand such as solar, technological and medical demand…which over time will only grow with each newly discovered use?  During just the first 2 days of October, the mint sold 1.65 million ounces, this action does not square at all with investors panicking and selling silver.  My guess is if the price continues to be hit on COMEX we will again see a 2 tier market where premiums are quite large (over paper prices) for the actual metal and the wait times for delivery again begins to expand with outright shortages existing.  I believe the question is going to arise “what really is the price of silver,” is it the COMEX price or the price to actually procure real silver?  On the other side of the globe in Shanghai, silver stands now in full backwardation, this argues for scarcity rather than plentiful supply.

COMEX may very well “price themselves out of the market” if they push their hand much further.  Think about it, what would $12 silver on the COMEX mean if real silver was trading at $18 or even $24 in Shanghai?  Would the December longs have any choice whatsoever but to arbitrage the price discrepancy?  Buy it on COMEX and ask for delivery …then sell it in Shanghai and deliver the metal as is required by their law?  It is this situation which will eventually drain whatever inventory is left in the COMEX (and SLV) in my opinion.

I will leave you with a comment sent to me by a reader with a little of my own tweaking.  He said …”I buy silver with fake money for 20% less fake money than they can mine it for. Will I win? Ask any child able to grasp the concept and they can answer that!”  Think about what he is saying here?  He is describing COMEX to a tee, they trade nonexistent silver back and forth maybe 100 times or more than is actually produced globally …and THEY set the price.  What will happen when one day the premium to purchase real silver rises $2 or $3 while the COMEX contract drops $1 or more?  What will a 2 tier market do?  It certainly will not create confidence in paper pricing versus cash and carry.  The danger as I see it is COMEX may now be pushing their hand too hard and too far …as the Shanghai exchange now exists as a potential check and balance to paper pricing.  If COMEX moves the price too far from where the cash price trades, they will effectively arbitrage themselves out of inventory, out business and out of confidence.  Time will tell.