We have covered the rapidly declining Comex gold inventories in previous articles and we have mostly ignored Comex silver because the action there has been relatively calm - unlike in the Comex gold market.
But some strange things are now occurring in the Comex silver warehouses. Comex silver is now starting to be drawn down, and it seems that someone is buying a lot of silver and moving it to the JPMorgan Chase (JPM) warehouses.
These are very interesting developments and should be very relevant to investors who own physical silver and the silver ETFs (SLV, PSLV, and CEF) because any abnormal activity may signify extraordinary events behind the scenes that would ultimately affect the silver price.
As investors can see in the chart above, silver inventories seem pretty healthy with both registered and eligible stocks at decent levels. This has been a significant difference between silver inventories and gold inventories over the last year - gold inventories have dropped precipitously, while silver inventories have remained relatively strong.
We will take a closer look at these numbers but let us first explain the Comex a little more for investors who are unfamiliar with it.
Introduction to Comex Warehousing
Comex is an exchange that offers metal warehousing and storage options for its clients. The list of their silver warehouses can be found here and their gold warehouses can be found here. In the case of silver and gold, the metal is stored at these official warehouses on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse. This offers large holders of precious metals a convenient way to store their metal with minimal storage fees - very convenient indeed if you hold large amounts of gold or silver and you don't want to store them in your basement.
Silver and gold stored in these warehouses can fall into two categories: Eligible and Registered.
Eligible metals are those that conform to the exchange's requirements of size (1000 ounce bars for silver and 100 ounce bars for gold), purity, and refined by an exchange approved refiner. Eligible metals are stored at Comex warehouses on behalf of banks or private parties, but are not available for delivery for a futures contract.
Registered metals are similar to eligible metals except that these metals are also available for delivery to settle a futures contract. Comex issues a daily report on gold, silver, copper, platinum, and palladium stocks, which lists all the metal that is currently stored in Comex warehouses and how much eligible and registered metal is present.
This information allows investors insight into how much metal is currently backing Comex futures contracts, what large gold and silver owners are doing with their metals, and how many clients are requesting delivery of their metals. There is a lot more to glean from this information but for the purpose of this article we will focus on the gold drawdown.
Silver at Comex Increases but the Nominal Value Decreases
Before we look at the numbers we have to give a plug to the folks at Troy Oz Gold who provided important data that helped to contribute to this article. Their site is free to use and provides investors with terrific information about Comex inventories, ETF inventories, and a lot of other data about everything related to the gold and silver markets - investors should check it out.
One thing to remember about Comex inventories is that even if inventories increase, the total value of the stock held at Comex may decrease if the price drop is greater than the increase in supplies. With that knowledge let us take a look at Comex silver inventories for 2013.
As you can see in the table above, Comex inventories have increased since the beginning of the year, which would ordinarily be a negative for inventors because that would signify healthy supplies. But when we look deeper at the numbers, even though total silver held at Comex has increased from 157 million ounces to 164 million ounces, the actual value of that silver has dropped. The value of silver held at Comex has dropped from a little over $5 billion dollars to only $3.2 billion dollars - almost a 40% drop in the value of silver held at the warehouse.
This means that the increase in silver held at Comex has masked a decline in the value of total silver, which is by far the more important factor. If the price of silver was stable, this would be equivalent to a 40% drop in silver quantities - much more bullish than an initial look at inventories would suggest.
JPMorgan Silver Transfers
Even more interesting than the 40% drop in the Comex's nominal silver value has been the recent transfers of large amounts of silver to the JPMorgan warehouses.
As investors can see in the table above, JPMorgan or someone owning an account at JPMorgan has been transferring large amounts of silver from other Comex warehouses (in this case Scotia Mocatta). This is actually very unusual because there have been no other transfers to any other warehouses in this methodical fashion.
Additionally, these transfers started on 7/18/13 and there were no significant transfers in the same fashion from these accounts before that date.
We believe that this is more than just a client transferring their silver from storage at Scotia Mocatta to JPMorgan for two reasons. First, the transfers occur from registered silver to eligible silver, which signifies that these are two different entities because why would a client keep silver at a different status in their new warehouse? If your silver was registered at Scotia Mocatta then it would probably stay in registered status at JPMorgan. Secondly, if it was a inter-client transfer then we would probably see one large transfer - why transfer the silver in different amounts over a long period of time?
Though we cannot prove it, we do believe that these silver purchases are not from a JPMorgan client, but rather are purchases made from the firm's accounts. The amounts are fairly large (around $70 million dollars of silver) and the purchases have been very methodical.
So the question is that if these are purchases made by the firm, does JPMorgan know something about silver we don't know? Are they becoming bullish on silver?
Unfortunately, there are no clear answers to this question, but maybe a clue comes from the trading strategy of master trader Richard Wyckoff, a trader in the 1920s and 1930s. This strategy, which is discussed a bit by the Financial Post, essentially says that the best way to succeed in the markets is to watch the "big operators" and understand what they do and how they make money. Wyckoff discusses how these big operators will bid down a stock or commodity through different types of strategies, while accumulating. Then once others join in on the slaughter, these big operators will be buying that asset off of the hands of these new entrants. Finally, when they have attained their full position, they will use the same strategy in reverse and bid up the asset and clear out those who jumped on the short selling bandwagon and make a lot of money doing it.
This process is nothing new and is one of the oldest strategies in Wall Street, buy when everyone else is selling and then sell when everyone else is buying. And it works even better if you can push people into buying or selling - which big players can do.
Is this what is happening in silver? Is JPMorgan buying silver at multi-year lows as retail investors buy the S&P 500 (SPY) at all-time highs? We do not know but this situation should be monitored closely because it is very strange.
What does this Mean for Silver Investors
There are many reasons why investors should own gold and silver, including the fact that mining costs have been rising and true all-in costs for gold and silver are close or above current spot prices, but this may provide an additional reason. Declining nominal values for silver held at the Comex are a very bullish sign, but the addition of these purchases by JPMorgan or a large JPMorgan client also may add to that argument.
Investors interested in this opportunity should consider an allocation to silver by purchasing physical silver or one of the silver ETF's (SLV, CEF, and PSLV). Those looking to take a riskier position may consider investing in one of the beaten up silver miners such as First Majestic (AG), Pan American Silver (PAAS), or one of the smaller producers such as Silvercrest Mines (SVLC).
Interesting developments and the risk seems relatively low because investors can trade in stock market gains (up for the 5 years straight) for gold and silver which have been absolutely hammered this year - contrarian positions are how to make the most money in markets, just ask Mr. Wyckoff.