Comex silver inventories on fall - what could it mean for white metal?

Warranted silver volumes went up in August and September

Warranted Comex silver volumes went up in August and September and keep up on raised levels. This happened however in cost of eligible volumes. Transfers caused Comex, to be more ‘physically’ liquid, at the same time pushing its total volumes down and making its inventories less in volume. So what would it mean and how to understand such transfers? First, need to provide some explanation on division of Comex volumes and specialist language used.

Available (eliglible) is type of volume not tied to the COMEX futures trade and could be owned by anyone, including mints, refiners, jewellers, investment funds, banks or individuals. In example – some volumes may belong to ETFs and act as back up on issued shares purchased by investors. No warrant has been issued on eligible stock. This means, metal may be potentially acceptable for delivery or simply transfer to market would owner decide to sell it, but for now, as such, Comex has no rights for said volume. It only charges for storage and act via its approved agents as a guardian of said volume. As a rule of thumb, Comex assumes approximately 50% of eligible inventory may not be available for trading at all, as being subject of long-term investment. For owner of eligible volume, easiest way to dispose or purchase large tonnage of silver, is to have it of course in near proximity of liquid markets. Hence, volumes are being stored in Comex approved warehouses, and meet Comex specifications as listed in delivery guidelines, to improve swift transaction.

On the other hand, ‘registered’ in Comex language, refers to metals in stock, stored currently in approved vaults to which operators have previously attached warrant, as part of the process of delivering metal to the COMEX exchange. Let’s assume that we’re large silver ETF, and decided to sell some of our volume. We let know Comex on our intentions so volume we want to dispose of is being turned from eligible to registered. Now in theory Comex owes us money for silver, but effectively as it acts as intermediary, our real counterpart is different entity trading on Comex, that had opened ‘long’ position or simply had open future and upon maturity it opted for physical delivery. In the age of electronic ledgers, disposals and purchases are being made this way, so there is no need to move or transfer said volume from warehouse A to warehouse B, unless of course buyer demands physical delivery.

Warrant is financial document that notates the quantity of silver that meets COMEX requirements for a futures contract. It works like a check for the registered amount of metal purchased within the vault. In other words, these are electronic titles for specific volume, held in a specific warehouse and for detailed range of numbered bars. In the warrant’s details, you can even find supplier’s name. Warrants are issued by a Comex-approved depositary and are registered in the system.

So let’s say, we owned silver futures with near maturity date. We informed Comex on our intention to realise physical delivery upon maturity, to one of the indicated in T&C warehouses. As per T&C Comex has now certain time to make a delivery. Our volume equivalent at registered stock is now being warranted. Our transaction may be subject of several warrants, assuming there are insufficient volumes in warehouses located in our designated delivery point.

Our standard delivery will be 999 purity silver bars of 1k troy oz (31.10 Kg) each, with a weight tolerance of 10% add or take. Difference is a result of using refining techniques appropriate for a large size, less detailed bars for high volume trading. Gold deliveries contracted on Comex have a weight tolerance of +/- 5% on a 100-oz bar. For platinum, minimum lot is 1 x 50 oz, or multiplications of 10 oz adding up to 50 oz. Weight tolerance on that may be +/- 10%. And similarly for palladium, where minimum lot will equal 100 ounces.

Tradeable volumes exclude most of retail traders due to size and value. Single tradeable volume is being called ‘transactional lot’ or just ‘lot’ and it is equal 5k ounces (5 x 1k oz bars). Would we liked to acquire 7k oz of silver, we have to make a choice – 1 or 2 lots – as there is nothing in between. But let us not forget Comex is predominantly derivative market, providing price exposition but also enabling settlements both in physical volumes or USD. As such, it is under supervision of Commodity Futures Trading Commission (CFTC). CFTC tried for nearly a decade to implement appropriate restrictions limiting size of speculative positions that can be entered into. This was finally done during autumn of 2020. So single entity is being limited to 3k contracts a month. 3k contracts, each for 1 lot equals 15 mln silver oz of open positions in total for one entity. In comparison, we globally supply approx. 1 bln silver ounces a year. And at the end of August number of open interest (open contracts, each for 1 lot) at silver on Comex stood at 135k.

Recent evolution of Comex volumes

On 17th of August 2023, Comex registered silver had fallen by 3.2 mln, reaching 27.6 mln oz. That was the lowest volume of warranted white metal since June 2023. At the same time, eligible volume went up by 3.7 mln oz reaching 252.1 mln oz. As a result, 17th August reported vault totals had grown by 0.5 mln oz reaching total of 279.7 mln oz. At the same time open futures contracts dropped by 809, and had been reported as 137.4k. Every single one is for a volume of 5k ounces of silver. Hence, with trading volume was at approx. 687 mln oz. Open interest / open futures contracts were equal 246% of all vaulted silver, while registered volumes had been able to settle in physical metal just 4% of positions. 17th of August, silver opened at 22.4 USD and closed at 22.7 USD, reaching price of 23 USD intraday. That marked bottom of local correction, with prices rebounding upwards.

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Next few trading days brought not much changes on registered volumes, however ontinous withdrawals of eligible volumes made them shrink to near 249 mln oz, with vaults totals reaching 276.5 mln oz. Open interest were oscillating in between 135-139k. Then, 25th of August happened.

On 25th of August, Comex registered silver had grown by modest nearly 8 mln oz, reaching total of 35.6 mln oz. That was attributed to JP Morgan transferring said volume from eligible to registered, and was considered as largest daily increase since late August 2020. At the same time, eligible volumes went down by 8.3 mln oz, ending day at 240.5 mln oz. As a result of these movements, reported totals diminished by 360k oz, ending day at 276.1 mln oz. Open futures contracts dropped by 2.6k and had been reported to be at 136.1k. Every single contract equal 5k oz of silver. Hence with open interest worthy nearly 681 mln oz, they were worthy of 247% of all vaulted silver, while registered volumes been able to clear 5.2% of all future contracts at once. Silver closed 24th of August with price drops to 24 USD. On 25th August, Asia pushed silver to continue its move downwards, then Europe pushed it upwards, then US session brought lot of volatility in between 23.9-24.4 USD. Silver finished day at 24.2 USD.

Monday 28th of August brought more transfers, as Comex registered had grown by another 6.8 mln oz transferred by JP Morgan from eligible. Hence registered volumes reached 42.4 mln oz, while eligible shrank net by 5.7 mln oz, reaching at the end of a day 234.8 mln oz. As a result of the above movements, vault net totals had grown by 1 mln oz, reaching 277.2 mln oz. Open interest dropped by 624, reaching 135.5k. As each is worthy 5k oz of white metal, all open futures contracts were at equivalent of 677 mln oz. This translates to 244% of all Comex vaulted silver – both registered and eligible. However share of registered volumes regards to open interest had grown to 6.2%. Silver price stood at 24.2 USD, forming classical long legged doji star.

29th and 30th of August brought some further changes to both eligible and registered, although not as spectacular as in preceding days. Some volumes had been added to eligible and then partially transferred to registered. Open interest on 29th August were lower than on previous days, however they reached nearly 135k contracts on 30st August. Same day, on opening of US markets, silver attempted attack on 25 USD, but has been pushed back.

We could carry on like that for whole September, however we’re aware that it would be slightly annoying, and our kind readers would possibly be fed up with data. Hence we prepared table covering discussed period of time.

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What we see is lowered number of long-term stored silver, and more white metal being subject of warranted category. At the same time trading volumes went south as well. Currently silver moves sideways between range of 22.2 USD lows and 25 USD tops. These levels form strong support and resistance levels and are mostly same levels we’ve been on during most 2020, 2021 and 2022.

Historical movements - too much or not enough for price action?

Important question is – would Comex stored reserves of silver are enough to boost up price of silver metal or just the opposite? In May 2023 we stood at approx. 33 mln oz registered which were forming part of 230 mln oz of total inventories – both eligible and registered. Then, by August we experienced transfers from registered to eligible, which ended up with proportion of approx. 31 mln oz to 249 mln oz. That evolved onto 27/252 proportion of 17h of August – which marked local bottom and which we already described in previous chapter.

Pre-August and August lows on registered inventories gave assumption to many commentators to push narrative that ‘price of silver is going to skyrocket due to insufficient volumes’. This dominated precious metals sphere for weeks. Then JP Morgan moved approx. 10 mln oz from eligible to registered, which again was widely perceived this time as move that may elevate silver prices. This also didn’t happen, and at mid-September we have seen 42 mln oz registered, 232 mln oz eligible, with grand total 274 mln oz in vaults total.

On this occasion, we also need to have a look on the long-term historical levels, as they tell us interesting story and may help understand if and how level fluctuations affect prices. Between 2000 - 2012 total silver stored in vaults stood at 100-120 mln oz. By 2017 it had grown to 150-200 mln oz in total, which reflected growth of interest in silver. Apart of silver coin fabrication lot of silver investment products had been created. Just to mention of many, iShares, ETFs, ZKB Silver, Sprott – all of them were created between 2006 - 2007, but had grown on popularity due to 2007 - 2008 financial crisis, which in certain parts of the world has been extended in time due to debt burden. We mean of course on European debt crisis, which especially affected PIIGS countries.

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Needless to say that precious metals gained on price as effect of that, establishing in most cases new all-time heights, undefeated in most cases until 2020 - 2022. And Silver ETFs had shares backed up by physical silver stored in LBMA’s and Comex’s vaults, however apart of them, many other were created, simply giving exposure to price, miners, junior miners, leveraged, inversed, leveraged & inversed… That was just part of ETF boom, which with regards to precious metals derived many investors from storing physical volumes towards having different type of exposure, bearing promise of having shares backed by physical metal. At the same time we experienced sharp growth of interest on silver coinage purchase. That includes both coins, medals, collectible and all types and sizes of bars. So these two elements could be combined together as retail and institutional growth on silver demand, however only part of that contributed to Comex vaulted stocks.

Eventually financial crisis has been contained and quantitative easing has been unleashed. Financial markets became connected to intravenous money bags, and in effect started moving upwards. Hence demand for precious metals had fallen, along with their prices. Took couple years for them to rebound. Silver inventories reached total of 150-200 mln oz range by 2017. Then, by 2019 we experienced growth on silver Comex inventories. With 300 mln of combined registered and eligible. This was an effect of growth on investment demand combined with ramping up silver production occurred between 2016 – 2020.

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As Covid did struck in 2020, industrial production had fallen and many miners were forced to temporarily shut operations. However ramped up demand from ETFs and retail investors made silver not to suffer that much eventually on oversupply.

Just with regards to top 5 currently largest silver ETFs – for 2023 these would be SLV, ZKB, CEF, PHAG and PSLV. All of them actively use LBMA’s and Comex vaults. With beginnings of 2008 their combined stocks stood at approx. 200 mln oz, which has been tripled by 2010, due to strong demand. We remained on levels of 600-650 mln oz until beginnings of 2020. Ramp up on demand from investors made these volumes to reach over 1.1 bln oz in 2021-2022 period. This was of course caused by strong price action occurred on silver in 2020, but also in rebound of industrial demand occurred in 2021. Only in 2023 combined stocks of said top 5 physical ETFs went down to 850 mln oz.

So what could be said on vaulted silver levels?

Why silver ETFs are so important in this story? Rise of demand for investment silver led to creation of silver backed ETFs. As each share issued supposed to be backed up by physical volume vaulted, that meant white metal had to be purchased and stored. With reasonable assumption that approx. 50% of Comex eligible volumes are secured for such type of investment, this makes some short and mid-term unavailable. On 22nd September 2023 Comex stood at 42 mln oz registered and 231.5 mln eligible. Applying said 50% on eligible would give us Comex silver proportions of 41/116 (rounded up) mln oz. This adds up to 158 mln oz, which effectively puts us in line with historical volumes. Having registered in between 30-40 mln oz and eligible at 100-150 mln oz was standard level observed during last decade. We do not deny right of existence of silver backed ETFs as their creation made difference to the silver market, boosting overall demand and raising certain stock levels. But maybe, for understanding real Comes silver levels we should exclude their locked and backed with physical silver shares.

We referred previously to silver stocks owned by top 5 ETFs. How much do all of them have? Approx. 1 bln oz.

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But apart of ETFs there are also people and institutions who decide to buy and store silver instead of using it i.e. for industrial purpose. As we still discuss Comex inventories, unfortunately on this occasion we have to exclude large number of retail and individual stackers, who keep their coinage and kilobars outside of Comex vaults. But in addition, let’s add to the above wide spectrum of social media and Reddit propagators. Individual and personal stocks may be impressive in terms of retail, but based on retail products, and most often not sufficed enough to meet even 1 Comex transactional lot of 5k oz.

But fact is, last few years strongly supported building silver inventories. Pre-Covid industrial demand and inflationary factors, post pandemic industrial boom, recession combined with high fuel prices and inflationary pressures. And let us not forget of course on re-balancing portfolio, form of investment, needs to protect wealth and capital… and hopes for 100 USD for silver propagated by some promotors.

So let us compare what we know for now on Comex inventories, to what is happening on different important silver markets. London started reporting silver inventories since half of 2016. Started at 950 mln oz, went up to 1.1-1.2 bln oz tops and experienced recently sharp fall. Now LBMA stood at approx. 875 mln oz. On this occasion let us not forget, that Asia bought approx. 100 mln oz for fabrication investment and tech.

Another example - China silver warehouse stock at Shanghai Future Exchange. As on 22 September, 1.2 bln oz. Right now China experience steep drawdown being effect of capital controls temporarily imposed in attempt to stop outflow from Yuan. Hence 1.2 bln oz are not the highest levels, as these were reached in 2021 at 3 bln oz. And what is worth mentioning, seems that SFE stocks fluctuate more in line with Comex, that would be expected on LBMA-Comex. However need to be aware that there is much more silver in depositories around China which do not have to be reported.

Key point regards to inventories is, would they lie intact within vaults then price remains neutral. Would inventory holders decide to disgorge their inventories, it is negative. And would they decide to add more silver to inventories, this could be considered as positive for price. However additions have to be conducted in fast pace, to create positive price effect. As for now, silver demand around the world staggers. In industry it is related to lowered demand and high financing and manufacturing costs. On investments, it seems that for now all possible fears had been priced in precious metals already. Hence apart of inflationary pressures, Comex investors (predominantly seeking price exposure, not physical volumes) may not see any strong rises for silver price in nearest but short-term future.

Summary

Sometimes lack of bad news are however good news. Silver fell sharply and just looking on a price chart it doesn’t look like it’s going to breakout in short-term. We’re in between 22.50-25 USD price range for now. Of course, we operate with USD here, but you pay for silver in local currencies, end these recently started to depreciate again, making silver more expensive. However we would expect standard seasonality occurring November-December along with deteriorating market and economical condition to provide support for price of silver, even despite of – for now – demand being sharply lowered. However without sharp interest in silver – that is higher trading volumes, and higher inventories – silver may lack for now fuel to make strong upward breakout on price charts. But this will happen upon reaching appropriate phase of economic cycle.

What we experience now, is transition from 2nd to 3rd phase of economic cycle. Normally it is not pleasant time, not even to mention 3rd phase itself with fully developing bear market. Now, after QT extraordinary it may lean even more onto extremes. But that is story for another time, which we’re going to discuss soon in our analysis of the ‘R’ word which bankers around the world avoid to use. For now however, let us remember on saving our capital capabilities during oncoming difficult times on financial markets. Precious metals may help us in such task, although upon global downfall on indices, have to be aware on how would they react.

For now, we enjoy moment of quiet on precious metals as they keep on moving sideways, while most of financial assets either deliver losses or chop short and long positions due to volatility. Below are 20y US treasury bonds, adjusted by inflation and interest rates – they delivered loss of 54% since 2020 tops. And this type of investment products are being kept by banks, retirement funds, institutions etc.

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