No compression in the silver market in the near future

Two months have passed since private investors, participants in specialized forums on the Reddit social network, boosted the stock prices of GameStop and other companies to sky-high heights through coordinated purchases. The excitement during this time is verse, and the indicators returned to normal. Some Reddit investors have suggested that this practice can be repeated on the COMEX exchange on the occasion of the approaching expiration of March silver futures.

Why was the attempt by private investors to squeeze the silver market unsuccessful?

The attempt by private investors to raise and keep the price of silver did not lead to the desired consequences for two reasons. Firstly, they did not realize that the bulk of silver trading is carried out using paper contracts, while physical precious metal is practically not used (it comes to repayment of contracts in rare cases). Most of the efforts to reduce the supply of silver were aimed at buying paper contracts. Secondly, containing silver prices is one of the tactics used by the US government to control gold quotes. Gold and silver prices are, in fact, litmus paper, by which one can judge the stability of the US economy and the dollar.

The US government has directly managed the price of gold since 1934 with the help of the Stabilization Fund and the exchange rate. In addition, the federal government can call on the Federal Reserve Bank of New York, the Bank for International Settlements and the central banks of the allied countries to curb gold and silver prices. In addition, the COMEX exchange helps the government in this.

Declassified government documents confirm that gold prices were manipulated almost continuously from 1934 until the publication of the most recent reports - 10 years ago. Is there any reason to believe that the US government has now stopped such activities?

In the mid-1970s, COMEX began trading in gold futures contracts, which was another way to control the price of this precious metal. Gold and silver futures are a partial reserve system. Only a small part of the contracts is covered by physical reserves of precious metals in the stock exchange. This system works well because the vast majority of futures contract holders do not order the supply of physical metal after the contract expires. To avoid the need to accept or secure the delivery of a contract, sellers of long and short items usually purchase a compensation contract before the maturity date. So they close their position and restore it in a new contract with a maturity in the more distant future.

How much silver is stored on the COMEX exchange?

On April 28, 2021, the volume of registered silver reserves at the exchange's customs warehouses was 117, 9 million ounces, and the precious metal corresponding to the exchange's criteria was 242.7 million ounces. Registered inventory must be available for delivery under the nearest contract.

According to the report of April 27, 2021, 172, 5 thousand silver contracts were opened on the exchange, for 5 thousand ounces each. If each holder of a long item orders delivery, it will be necessary to deliver 862.4 million ounces of silver. In fact, registered stocks of precious metal on the exchange cover less than 14% of outstanding contracts. Even if all silver reserves are taken into account, they cover less than 42% of open items.

Some silver futures contracts have maturity until July 2024, but a total of 150.2 thousand contracts (for 751.6 million ounces) are due to be repaid no later than July this year. The huge discrepancy between physical silver reserves and existing open positions under contracts creates an opportunity to compress this market.

New Reddit Investor Plan to Crash

Recently, Reddit investors tried to cause a shortage of silver supply by buying it in physical form. One of the participants urged subscribers to purchase a silver ingot weighing 100 ounces on May 1. If 100 thousand people did this on the same day, then the volume of demand amounted to 10 million ounces, which are simply not available. This may force contract holders on the exchange to withdraw the supply of physical metal. Theoretically, this can lead to a reduction in the supply of silver and a noticeable increase in its price. However, this will not actually happen.

The fact is that a significant number of silver investors on the COMEX exchange who have taken a long position use the credit shoulder. Most of their investments are made from borrowed funds. The exchange periodically changes margin requirements for investments with a credit leverage. In the event of a supply shortage that threatens to raise the price, the exchange may seriously increase margin requirements, which will force many investors with a long position to sell part or all of their positions to carriers of short positions.

There are other ways to avoid the supply of physical silver: cash settlement, the sale of shares of silver exchange funds, the provision of a contract in the London silver market for a similar number of ounces. Consequently, the sudden demand for 10 million ounces of physical silver would not significantly increase the price of precious metal.

How much does it take to buy silver at a time to achieve market compression?

In 1997-1998, Berkshire Hathaway, owned by American entrepreneur Warren Buffett, one of the largest investors in the world, bought about 130 million ounces of paper silver, and then unexpectedly demanded a physical delivery instead of prolonging the contracts. The result is that the price of silver has increased by more than 15%. Since then, silver exchange funds have appeared. They represent another obstacle to reducing the supply of silver on the market. However, the current limited supply of physical silver will continue to put pressure on the quotes of this precious metal.