I’ve given up putting a timeline on all of this, as it has become a fool’s errand. But in my alternate life, where I get paid to do things – unlike this – which is a passion project, I have a career where I also manage projects. With this, you look at milestones to be reached. Your timeline is more or less based on reaching objectives. If objectives are not reached, or hiccups happen, it can push the project to the right and delaying it. What seems to consistently happen is algos sell into paper silver, irrespective of the underlying fundamentals. I have fun with this – trying to understand how all of the levers work. Just when you think you know what’s up – some item comes out of nowhere to smash your heart.
By now, you are all tired of this.
But I have a fresh look at this. Something I had known about but put in the back of my mind for the last year or so. I recently read a refresher on this (Bullionstar piece) – and then connected the dots with the COMEX numbers Michel provides daily.
Let’s back up a bit. You have the eligible and the registered. The “eligible” means they are bona fide COMEX bars that are allowed to be put up for sale at any time. Meaning, these bars went through a rigorous process to get into the vaults. The reason so many don’t take off for investment purposes seems to be what to do with it, and then how to re-sell it. You get this beautiful 1,000 oz door stopper, sitting at your house, and you want to unload it when silver hits $100 an ounce. You aren’t walking to your local coin shop to get rid of it. You probably have to get it back into a vault, which might cost you a pretty penny and have it re-assayed. So many people that buy and sell these bars may just keep them in the vault for storage until a later time.
I have issues. The first and foremost is the world markets see this COMEX ELIGIBLE as supply. The problem is, it is not “registered” – and therefore it is not AVAILABLE as supply. Meaning – it’s for sale, right now. It does NOT mean someone with silver in eligible cannot sell. It means that as registered, today, someone can buy a contract and take delivery of that silver that is registered to sell.
Let’s look at Michael’s numbers.
With this, you see the vault totals at 305m and registered at 38m. This has the eligible at 267m. If you go back to 7th grade set math, you see that the registered is a subset of the total. The eligible in the below circle takes up a vast majority of the 305m total.
Where I get into fights with the futures guys is – “eligible is NOT registered, and it’s NOT for sale. It COULD be sold, but it is NOT on the showroom floor”. To which I get, “but yes – it can be sold”.
I need to really start to escalate my rhetoric here, and I wanted to go back to Bullionstar’s article, here. I had remembered the 50% haircut they mentioned – in GOLD. Meaning – at the time like a year and a half ago when there was like 400m oz in the vault, the idea was that PROBABLY 50% of this metal is a long term hold and won’t be for sale at any price. That would give 200m or so in “eligible” that could quickly move to registered at any moment. This is listed in this document they linked regarding silver inventories. However, it appears their estimates were murky, at best. It is being suggested that the eligible may have more long term holders, and the 50% haircut may be very low.
Rather than look through the lens of the eligible and registered with those bubbles – I wanted to break this down further into THREE total LOGICAL categories.
- Long term hold. Not selling at any price. (I’m not going anywhere)
- Waiting for much higher silver prices, but looking to sell at some point (show me the money)
- The price is right, right now, let’s do this (Price is right)
If you look at it through THAT lens, one can only speculate the ratios. Above, they assumed a 50% haircut. But – that may not be right. Let’s look at the players…
All three of these are combined in the vault totals at 305m. At first glance, there’s the 50% haircut in the 267m eligible – taking that down to 133m eligible. Then you have 40m in registered. This could be what that looks like.
However, at issue is this. We have NO IDEA how much of the eligible is actually a long term hold. Let that sink in. It doesn’t mean they can’t sell. It means they don’t WANT to sell. So this really should not be counted as part of the stocks – but without knowing each buyer’s intent, you cannot tell.
What if….it looked like this?
This is important to understand, as it indicates that a whole lot of paper contracts are being sold under the impression that there’s a lot more silver there that’s for sale than there is. If we assume that mine supply of silver is roughly 800m oz each year (you get another 200m via recycling, etc) you can then determine that mine supply each month, if coming in equally, is about 67m oz per month.
If you look at it through that lens, you have about 1 month of mine supply in eligible that is waiting for higher prices to sell. At THIS price, it’s not available. You then have roughly 13 business days, or perhaps 3 weeks of mine supply that can be sold, today, at this price.
The registered supply has dropped from 150m oz during silver squeeze to 40m today. If you take that over 18 months, that is bleeding 5m oz from registered per month. At this rate, with 40m in registered, the REGISTERED vaults will be empty and barren June 2023.
I ask you this – if price continues at this level, what is to entice those eligible to sell? You see one of two items:
- Total system collapse. Everything will deflate. Silver is liquidated at market prices (whatever they are) to get to the dollar or to cover margin calls. The more that try to sell – the lower the price goes. What you can consider is that all of the people who are selling silver today may be betting on that scenario. Maybe they don’t want to short the market – but may short silver. If their AT&T stock goes down, perhaps their short in silver goes up. If their AT&T goes up, they lose on the silver short bet.
- Melt up. In this case, the price of silver goes way higher, and entices eligible to sell. This can help add supply and slow the rising price of silver. However, at these levels, a melt up would blow out shorts because there is no physical metal to cover all of these contracts. In this case, a forced cash sale is made. If there’s a total of about a month and a half of physical inventory, and a price melt up happens – you are then competing with silver investors who hop back in on price rise, driving the price up exponentially faster. To me, it would be hard to see shorts get back in at any significant volume until $30 is hit – but as the 4th time or so going up against this, it might blow right through it to $35 or so, before retesting $30.
Just this morning, there seemed to be cracks that a pivot may start as early as December – but the ease in rhetoric may start to move first with the PMs, who have been very much beat down. The miners were clubbed even harder, and these might have a strong bounce coming.
Ultimately though, I’m very much concerned about how the COMEX pricing mechanism operates with algo and HFT. I think the shorting with paper to simply bet on a lower price later is absolutely horrible to do with such a small market. Additionally, the underlying silver supplies coming from the mines are getting more and more expensive to make – with lower grades and higher fuel prices – with a lot less viable mines coming online or in the pipeline.
I’d say the biggest development over the last 15-20 years has been the fact that there’s only really a handful of “silver primary producers” left on the planet. Quick – name me 3. It’s hard. Everyone knows First Majestic, but they are now close to 50/50 gold to silver. Endeavor silver is still 60-40 silver to gold last I saw, but everyone’s darling of Pan American is only a 26% silver producer – mostly base metals. What that means is a VAST majority of the silver now coming out of the ground is a byproduct of lead, zinc, copper, or gold. What that REALLY means is when the stock market starts to tank – and base metal productions slow, it also means drastic reductions in silver supplies coming to market. This might be why you have been seeing 5m oz draw down on registered each month. Consider the silver investor who is trying to buy as much as he or she can right now, which may be responsible for a lot of the silver not getting back into the vaults.
When you are talking $18 silver – you have newer companies able to take the 1,000 oz bars off the COMEX (or Kinesis) and mint their own products to sell to investors.
The questions then surface…
- If we are seeing a complete downturn in the economy, and base metal production drops off due to cooler markets, would we see drastic silver reductions in mine supply coming to market?
- Could the depressed $18 prices stall new silver mines from being built? If so, what effect does that have with known underground silver supplies and what is left to mine?
- If prices are continued to be pushed lower by COMEX, AND retail has found a way to bypass 100% silver eagle premiums, could silver investors legitimately take out all known inventories inside of a year?
- IF the silver shorts pile on, and IF a pivot happens, could we see the short squeeze of the century?
- How does a COMEX silver product work if supply continues to decrease dramatically, and price is going down with it? It would stand to reason logically that if supplies were going down as much as you see them, that economics would dictate the price should be much higher?
- With the “green revolution” here with solar and EVs, even with a market downturn – how could silver not be going up in demand every year?
- How long until silver has its nickel or palladium moment – when lack of physical supply completely overwhelms paper shorting when someone actually looks at this closely?
October 22, 2022 at 11:46 am
Great article Nate. As you stated, the question when it comes to the silver market is when will supply and demand dynamics really overtake the Comex paper market. Or, in other words, when will the hard reality of the physical market really impose itself? One thing is for sure, $20 silver Comex price is not going to hold for much longer.
October 24, 2022 at 3:16 pm
New Pacific Metals – 100% Ag
MAG Silver – 75% Ag
Endeavour Silver, Silvercrest Metals, GoGold Resources – >50% Ag
October 24, 2022 at 3:23 pm
MAG not in production yet, to the best of my understanding. Endeavor was 60% the last time I checked. I’ll have to take a look at my numbers. Point is, there are maybe a handful now that make over 50% silver in the entire world today!