The Truth About The Comex

My commentary here combines two thoughts to two separate inquiries in my comments section concerning the state of affairs on the Comex:  whether or not the Comex will ultimately default and whether or not China will be the one to force the issue.

Let's look at JPM as an example. JPM is short silver contracts representing 200 million ounces. The Comex has only 111 million total ounces of silver, of which only 56 million are registered, meaning available to be delivered. So JPM is short nearly 4 times the amount of deliverable silver on the Comex.

Aside from the extreme manipulation that is going unenforced here, if enough silver longs were to stand for delivery, theoretically JPM would blow up - or be forced to cover - driving the price of silver significantly higher.

My fund partner and I were just discussing the idea that ultimately, just like in 1980 when the Hunts tried to corner the silver market from the long side, the Comex will change its rules in order to avoid a default.  This time around the rule change I anticipate will allow JPM to settle those contracts in cash OR, as they've already done in terms of changing the rules, allow JPM to settle those contracts using the SLV ETF.  The Comex may even go as far as allowing JPM to "force settle" its silver shorts using SLV.  Remember, there is precedence for the Comex's changing the rules in order to protect itself.

IF/When this occurs, it will send a big signal to the global market about the true condition of the growing scarcity of physical gold/silver. But in the meantime, as JPM has shown with its ever-increasing weekly silver short position, JPM can just keep selling as many contracts as it wants to try and keep a lid on the price of silver knowing that it ultimately will never have to deliver the underlying amount of silver.

We have already seen the Comex bailed out of a gold squeeze last May when Deutsche Bank, a large gold futures short seller, suddenly transferred 800,000 ounces of gold from London to the Comex, alleviating a potential blow up delivery short squeeze.

So, the short answer to the issue is that I don't believe the Comex will "blow up" any time soon because the CFTC refuses to enforce market manipulation standards on the gold/silver market. And I don't believe it ever will enforce those standards, contrary to Ted Butler's dreams, and I think the Comex will continue being an illegal short-selling operation of gold and silver until there's a "de facto" default, which will occur when JPM has to force-settle its silver shorts with either a huge cash premium offer or several 10's of millions of shares of SLV.

Eventually Comex will be rendered useless. I don't know if this will occur from a physical squeeze, or if the cause will be the Comex changing the rules - as they've done in past - to allow for cash settlements, or if global players will just ignore the Comex altogether.

The 9 million ounces of gold and 111 million ounces of silver supposedly sitting in Comex depositories, even if all were made available for delivery (which would require private investors using the Comex as a safekeeping depository to register and make available their metal), and notwithstanding the fact that the total Comex inventory would fall far short of satisfying delivery demands if all the longs decided to stand for delivery, wouldn't put even a small dent in the global demand for physical gold/silver

My best guess is that China is leaving the Comex alone for now, letting the manipulating bullion banks keep a lid on the price - thereby allowing big buyers like China to accumulate metal at artificially low prices. When it becomes impossible for big chunks of gold (i.e. like the IMF gold for sale) to be acquired in the context of the current trading range, my best guess is that China will force the paper price up to the point at which a seller would be willing to offer a big chunk of metal. The price right now is transitioning into a dynamic in which the price at which big sellers are willing to sell is really where the real market clearing price will be established.  And since the IMF hasn't yet sold its remaining chunk of gold (I'm assuming they are waiting for higher prices, since they would be shooting themselves in the foot hoping for a lower price, right?), I would surmise that the market clearing price for a big chunk of gold is much higher than the current price.

I don't know if the big buyers will blow up the Comex in 2010 because, for now anyway, the Comex is a big buyer's best friend.

I will say with 100% conviction that silver at current prices is the investment opportunity of a lifetime.  Happy Holidays.