1 Jul 2011

Frightening COMEX Silver Volume In May Massively Distorts Silver Price

By all accounts the price volatility in silver for the month of May 2011 was shocking. Silver went into a FREE FALL from near $50/oz to $35/oz in a matter of days. Clearly this is a market that is massively dysfunctional and an immediate remedy is needed if the regulators want to preserve what is left of the people's faith in free markets.
The CME recently published their Monthly Metals Update for May in which they disclose the total volumes of futures and options traded for the month.
That report can be found here: http://www.cmegroup.com/trading/metals/files/MoMU.pdf
According to the CME the average daily volume of Silver futures and options in the month of May was 117,196 contracts and 13,786 contracts respectively or 655M ounces of paper silver traded per day. There were 22 trading days in the month which puts the total amount of paper silver traded on the COMEX in May at 14.4 BILLION ounces (14,408,020,000 to be exact).
Wait just a minute! These are NOT legitimate trades in silver but rather SILVER DERIVATIVES that have lost all touch with their underlying physical asset. The market for silver futures and options is supposed to exist to help the silver market function smoothly for price discovery as well as to help participants manage risk. It is not designed to set the price of the underlying commodity which should solely be determined by specific supply and demand characteristics according to commodity law. The Silver Institute estimates the total physical demand in 2010 was 1,056.8M ounces. On a monthly basis that would translate into 88M ounces per month.
Could this be true? Let's look at the supply side which is much more easily verifiable. Actually, the official physical supply numbers for silver over the last 10 years are relatively stable. Here's the estimates on physical silver supply from the World Silver Survey 2011 (net of implied disinvestment and paper silver hedging) .


As you can see the annual supply of physical silver is VERY stable and growing at an average rate of 1.6% which is in line with global population growth. In 2010 there was a decent 7.4% growth in physical supply which should be expected with a rising price but that still only put total physical supply in 2010 at 995.7M ounces or 83M ounces per month.
So here we have the global physical market for silver trading in the 80M-90M ounces per month range and yet the COMEX paper silver market in the month of May traded 14.4 BILLION ounces of paper silver.
That is a ratio of 160-1 paper vs physical ounces of silver trading!
But that outrageous ratio does not reflect the true picture as the COMEX is just one of many paper derivative silver markets which include the LME, the Silver ETF's, silver pooled certificate programs, silver swaps and all other paper silver exchanges and OTC markets. All of these paper derivatives should be measured against the monthly physical supply for silver of 83M oz/mo. Given all these other forms of paper silver derivatives I would estimate that the COMEX only represents one third of the total paper silver transactions.
That is a ratio of 500-1 paper vs physical ounces of silver trading!
No wonder the price of silver fell so dramatically! The PRICE of silver has absolutely NOTHING to do with the underlying physical silver market. The price of silver is massively distorted by computer trading programs trading millions of ounces of paper silver back and forth to each other to STEER the price not discover the price. There is no "free market" for silver anymore.
We are at a very dangerous point in the silver market as 500-1 leverage does NOT unwind in an orderly fashion.
Buy as much of the REAL PHYSICAL SILVER as you can get your hands on.
The "Day of Reckoning" is close at hand!


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