Up to this point, no major or big money has entered the silver market or stood for delivery in a significant way outside of outspoken Toronto-based silver ETF manager Eric Sprott.
Yet it is rather hard to imagine why they would not be joining Sprott, with QEs stretching to infinity, fiscal cliffs, debt ceilings, European financial crises, and now Germany no longer trusting its precious metal "custodians" as it repatriates its gold.
Add these factors to the still extreme risk of bank asset deterioration from public debt servicing constraints, the excessive concentration of deposits held in the too-big-to-fail financial institutions, and the risk of systemic contagion resulting from just one derivative-generated event, and the market has plenty of reasons to be bullish on silver.
Why are big funds not buying silver?
Presumably, many of the big investors have avoided entering the silver market because they either do not know about or understand these factors, or if they do, they do not want to be the ones blamed for pushing the tottery financial markets over the edge.
Furthermore, given the relatively small amount of above-ground investment grade supply of silver, it would be difficult to accumulate a large position without setting the market on fire.
Alternatively, they may fear delivery issues, especially given the tightness of demand. They may also be concerned that industrial users will be given preferential treatment in a physical squeeze.
Other concerns may include the fear of volatility and degree of irrational pricing behavior in the silver market that makes technical analysis particularly challenging.
Silver delivery in a fractional reserve system
In a two-year old YouTube video that recently resurfaced, Kyle Bass compares the value of total gold futures and options open interest with the value of the actual physical gold inventory.
Bass questions what would happen if just 4% of longs actually stood for delivery. The exchange spokesperson assured him that this never happens, since only 1% of buyers sometimes stand for delivery, and even if they did, the price would sort everything out.
When it comes to the value of silver options outstanding based on CME data, not considering concentration, the open interest numbers runs in the hundreds of thousands of contracts at times that collectively represent more than 1 billion ounces of silver or more than $30 billion dollars at current price levels. Combine this with the 700 million outstanding futures contracts worth roughly $20 billion, and this yields a total of $50 billion worth of silver CME derivatives.
Compare this with the total Comex silver inventories that are only approximately 150 million ounces, or $4.5 billion. The ratio of 11:1 demonstrates the fractional reserve silver system.
While concentration and net short exposure matters most, these numbers are staggering and do not include over-the-counter or London-traded silver derivatives. All of this lends further support to the fractional reserve status of silver futures.
Should silver investors trust the paper system?
Because of the high ratio of paper to physical, many silver investors have questioned whether they should trust the paper that this fractional reserve silver system is based on.
Additional causes for concern include: The state of regulatory capture, the precedent set by the handling of client assets in the MF Global bankruptcy, the open acceptance of re-hypothecated claims, the rarity of physical delivery, and the frantic months-long in and out deposits and withdrawals of warehouse silver.
Given all of these factors, it would seem difficult at best to trust the paper market when so little silver is actually left 'inside the system,' nor should you even expect cash in return in the case of default.
Basically, in a world where quadrillions of derivatives trade unregulated in the shadows — many of which do not even have a physical asset on which they are based — an ounce of silver in your hand is really worth many ounces of silver paper due to the non-zero risk of an eventual paper market default.