Wednesday, April 24, 2013

Oh Hunt Brothers Where Art Thou?

Evidence of precious metal supply shortages in the retail market is bullish for gold and silver.  However, as long as the primary banks can continue to create paper gold and paper silver the market prices for these metals are subject to their whims.  A default on the COMEX or LME will trigger panic for paper holders and finally allow gold and silver to trade at their physical value.  

An exchange will default when a contract or option holder demands the physical metal backing that contract and the exchange is not able to deliver it by loading it on the investors truck.  Historically, contract holders either cash settle by accepting an amount of cash equivalent to the value of the metal backing the contract or they 'roll over' to new contracts with expiration dates further in the future.  No trader and few investors really want to take possession of the physical metal due to the transportation and storage costs.  When the day comes that traders and investors fear that they might be forced to cash settle their precious metal contracts at yesterday's market prices, they will want the physical metal.  The value of precious metals will jump the day of a default because market supply will be revealed to be much less than previously thought.  Many will pretend to be shocked on that day. 

The first investors to demand physical metal may actually receive it, at least until inventory at the exchanges runs out.  Investors realize this and therefore the situation is ripe for a run or stampede.  There is enough uncertainty and control fraud in the financial markets that I would have headed for the exits a long time ago.  In fact, I did.  Unfortunately my holdings are not nearly substantial enough to swing any markets, even highly levered markets.  What will finally trigger a panic at large institutional investors and hedge funds?

There must be some clever investors with billions of dollars tempted to take a large position in physical silver, and some silver forwards or options contracts.  Then when the contracts expire, exercise their option to take physical delivery of the silver.  When the exchange defaults and cannot deliver the silver, and the default is publicised, the paper market will collapse and physical prices will increase which will provide a terrific return on their original investment.  

The silver rather than gold market seems the more attractive market for this strategy since central banks do not buy, sell and store silver to back their governments' currencies.  And, 55% of annual silver demand is for industrial purposes instead of jewelry, photography, silverware, and coin and bars, according to The Silver Institute.  Industrial demand provides a floor on the value of silver.  No one really needs gold for anything except to get away from fiat currencies.

The experience of the billionaire Hunt brothers in 1980 may be dissuading some from trying to expose the exchanges and the paper silver market.  The Hunt brothers effort to corner the silver market was derailed when the COMEX changed the rules and placed new, heavy restrictions on the purchase of silver on margin. Someone is going to try it: George Soros?  John Paulson?  Carlos Slim?   Who will play the leading role in Oh Hunt Brothers Where Art Thou?

Some 'swells' are about to get an 'advance tutorial.  It's all about the money boys!'


  1. Since nearly all traders positions are based on margin, they do not have the
    capacity to take physical delivery, by posting full cash settlement amount,
    in advance of settlement. ( It ain't about the "transportation and storage",
    they don't have the $$$ or desire to hold physical) Too bad for them!