Buying silver as Kyle Bass makes the case for hedge funds

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.

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About the Author
Jeff Lewis

In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of, where he provides practical guidance for precious metals investors.

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