Silver Default Looms?!

by Jason Hommel, Feb 20th, 2011

I apologize in advance that this essay is entirely without humor, completely sober, and deadly serious.

As I write on Sunday evening, Feb. 20th, silver prices are up another 40 cents to $33.10, another 30 year high, going back to the previous high of $50 from Jan. 1980. In the last two trading days, last Thursday and Friday, silver prices increased about a dollar per day.

What's going on?

As I read on the blogs, about 53,000 silver contracts for 5000 oz. each are nearing the first delivery day on Feb. 28th. At that time, each contract must be fully funded to await delivery in the following 30 days, or sold before then. By the way, 53k x 5k = 265 million oz.

http://tfmetalsreport.blogspot.com/2011/02/wow.html

The crazy thing is that the four COMEX approved warehouses have only about 100 million oz. of silver in them. So, in essence, a default looms.

Will this be it? If so, what will happen?

Usually, all but a very few contracts roll over to the next months. The futures contract holders rarely stand for delivery, as in their view it is too difficult, and too costly; they are in this game for the leverage. They usually only put down 10% of the money, so that if silver gains another 10% in price, they double their investment quickly. And if silver moves down 10%, they lose everything!

But here's the kicker. COMEX just raised margin requirements 50% on Friday, meaning that the longs had to put up something probably like 15% instead of the usual 10%. (I have no idea of the real figures, as I have never traded futures, I have never had a futures broker, and don't know where to go for that data.) This means that the longs were not scared out of their positions, as the silver price went up, not down, as the manipulators had intended.

What I do know is that usually, the majority of futures contracts stand about 3 months away from delivery. But not now.

Tonight, 53,000 contracts are looming for either close out, or they will stand for delivery. Out of about 150,000 to 200,000 contracts!

Harvey says 150,000 contracts in open interest.
http://harveyorgan.blogspot.com/

321gold.com says 200,000 contracts in open interest.
http://www.321gold.com/cot_silver.html

The current situation will be resolved in 8 days, and again, in another 30 days after that. Both deadlines are worth watching closely.

Either way, this situation presents several problems.

Clearly, if the longs stand for delivery of 265 million oz., when there are only 100 million oz. in the warehouses, there will be a short squeeze, and the price can go ballistic to the upside, perhaps prices could go up by 5 times higher in a few days. (more)