How to Play $60 Silver


"Only price discovery can alleviate a physical silver shortage."

ETF Daily News, George Maniere

Last weekend I did a lot of study on the Silver Comex, the iShares Silver ETF and the Sprott Physical Silver ETF.

I want to begin with a review of what I learned by my study of the Silver COMEX. In my opinion, there is no debate regarding any physical shortage of silver. It is real and it is undeniable.

Going back to May 2011, 2,166 contracts stood for delivery in the silver futures market. By the end of the first full week, two-thirds had accepted cash settlements to forgo claims on physical metal. For July 2011, 2,397 contracts stood for delivery. In the first two days of July, 697 have already given up their claims compared to only 120 contracts filled by supposed physical delivery. The COMEX only has about 29 Moz. available for delivery to serve those 2,397 contracts (representing about 12 Moz.), so there is no doubt that they have every incentive to induce cash settlement.

The price of silver going into July has been pretty steady, though volatile. However, there is no crash-induced incentive to accept cash over physical. The fact that so many people are taking the cash route so early in July leads me to conclude that a hefty premium is being paid to compensate contract holders to give up delivery rights.

These speculators, as much as they are dismissed as greedy and evil, are performing a simple task that all markets are supposed to feature: price discovery. If there is a physical shortage, and I believe that these cash speculators are showing that it is very real, it should follow through to the price of the metal. Only price discovery can alleviate the shortage—that is the free market way of allocating scarce resources. Yet, after May's price action, it has not.

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