March Silver Contract Deliveries Could Get Interesting

But only if the stoppers remove their bars from Comex vaults

Right now there's 109mm ozs worth of Comex March silver contracts standing for delivery. This is 90% of the registered inventory of silver in the vaults and 27% of the total amount of silver in Comex vaults. Those are big numbers. That said it's irrelevant if the entities taking delivery do not remove their silver from Comex vaults. Possession is ten 10ths of the law when it comes to physical gold and silver ownership. Until the metal is removed from the Comex banks’ possession, it can be subjected to swaps, leases and rehypothecation activities.

“Rehypothecation is when the bank in possession of your gold or silver bars uses those bars as collateral for its own borrowing activities. JP Morgan was caught rehypothecating silver bars when MF Global blew up.

The graphic above is the daily open interest report for Comex silver. 21,874 contracts (4k delivered last night, when first notice officially began) translates into 109,370,000 ozs of silver. Here’s a snapshot of yesterday’s Comex vault inventory:

Registered is silver that has been made avaialable for “delivery” - or at least is represented by an accounting entry on Comex vault operators ledgers to that effect. Eligible is the amount of silver that is “safekept” at Comex vaults and which could be made available for “delivery.”

Note the disclaimer at the bottom I highlighted in yellow. That was added by the CME not long after it acquired the Comex in 2008. That disclaimer tells us that the vault reports are not audited by an independent third party, which would entail reconciling all of the bars with the records kept by the vault operators (the largest of which by far is JP Morgan - see my comment above about rehypothecation, swaps and leases) AND testing the purity of the bars.

“This report is produced for information purposes only.” In other words, and in legal terms, the vault inventory report nothing more than hearsay evidence.

Because gold and silver bars are rarely removed from the Comex vaults, meaning the vault operators maintain possession (do you really trust JP Morgan?), and because the vaults and the vault reports are not audited, there is a definitive lack of accountability.

Clearly the CME has concerns about the lack of accountability which is why it slapped that legal disclaimer at the bottom of the daily report. But, then again, why doesn’t the CME impose accountabilty measures rather than looking the other way from under the veil of a legal disclaimer?