Buying Silver as Kyle
Makes the Case for Hedge Funds
By Dr. Jeffrey Lewis
Up to this point,
no major or big money has entered the silver market or stood for delivery in a
significant way outside of outspoken Toronto-based silver ETF manager Eric
Yet it is rather
hard to imagine why they would not be joining Sprott, with QE's stretching to
infinity, Fiscal Cliffs, Debt Ceilings, European Financial Crises, and now
Germany no longer trusting its precious metal "custodians" as it repatriates its
Add these factors
to the still-extreme risk of bank asset deterioration from public debt servicing
constraints, the excessive concentration of deposits held in the too-big-to-fail
financial institutions, and the risk of systemic contagion resulting from just
one derivative-generated event — and the market has plenty of reasons to be
bullish on silver.
Why are Big
Funds Not Buying Silver?
of the big investors have avoided entering the silver market because they either
do not know about or understand these factors, or if they do, they do not want
to be the ones blamed for pushing the tottery financial markets over the edge.
the relatively small amount of above-ground investment grade supply of silver,
it would be difficult to accumulate a large position without setting the market
they may fear delivery issues, especially given the tightness of demand. They
may also be concerned that industrial users will be given preferential treatment
in a physical squeeze.
Other concerns may
include the fear of volatility and degree of irrational pricing behavior in the
silver market that makes technical analysis particularly challenging.
in a Fractional Reserve System
In a two-year old
YouTube video that recently resurfaced, Kyle Bass compares the value of total
gold futures and options open interest with the value of the actual physical
what would happen if just four percent of longs actually stood for delivery. The
exchange spokesperson assured him that this never happens, since only one
percent of buyers sometimes stand for delivery, and even if they did, the price
would sort everything out.
When it comes to
the value of silver options outstanding based on CME data, not considering
concentration, the open interest numbers runs in the hundreds of thousands of
contracts at times that collectively represent over a billion ounces of silver
or more than $30 billion dollars at current price levels. Combine this with the
700 million outstanding futures contracts worth roughly $20 billion, and this
yields a total of $50 Billion worth of silver CME derivatives.
Compare this with
the total COMEX silver inventories that are only approximately 150 million
ounces, or $4.5 billion. The ratio of 11:1 demonstrates the fractional reserve
concentration and net short exposure matters most, these numbers are staggering
and do not include OTC or London-traded silver derivatives. All of this lends
further support to the fractional reserve status of silver futures.
Investors Trust the Paper System?
Due to the high
ratio of paper to physical, many silver investors have questioned whether they
should trust the paper that this fractional reserve silver system is based on.
for concern include: the state of regulatory capture, the precedent set by the
handling of client assets in the MF Global bankruptcy, the open acceptance of
re-hypothecated claims, the rarity of physical delivery, and the frantic
months-long in and out deposits and withdrawals of warehouse silver - long
chronicled by silver analyst,
Given all of these
factors, it would seem difficult at best to trust the paper market when so
little silver metal is actually left 'inside the system', nor should one even
expect cash in return in the case of default.
Basically, in a
world where quadrillions of derivatives trade unregulated in the shadows — many
of which do not even have a physical asset on which they are based — an ounce of
silver in your hand is really worth many ounces of silver paper due to the
non-zero risk of an eventual paper market default.
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