In our weekly coverage of COMEX gold inventories, we saw that registered gold continued to be transferred to the eligible category, but inventories were generally unchanged for the week. Silver inventories had a much different week than in gold, with registered silver rising significantly as eligible silver had a significant drop - which resulted in a decline in total silver inventories for the week.
This is something that should be very relevant to investors who own physical silver and the silver ETFs (SLV, PSLV, and CEF) because any abnormal inventory declines may signify extraordinary events behind the scenes that would ultimately affect the silver price.
One other thing to note is that even though we do compare activity in gold and silver since they are similar in their monetary qualities, investors should also realize that silver and gold also have significant differences - which would affect their COMEX stocks. The primary differences are that silver is bulkier to store (thus it requires more warehousing space) and that silver is primarily used for industrial purposes (in which case users are not storing silver for investment purposes).
Both of these factors may have a significant impact on why silver is stored in COMEX warehouses, and thus any investors comparing gold inventories with silver inventories need to bear these things in mind.
As you can see on the chart above, COMEX eligible and registered silver inventories have not shown the large decline that investors have seen in COMEX gold. 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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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 silver drawdown.
This Week's Changes: Large Amount of Eligible Silver Transferred to Registered Silver
Let us now take a deeper look at the week's changes at the COMEX warehouses.
Note about the Table: The silver price used in the table is the Friday LBMA closing price for silver.
As you can see in the table above, COMEX inventories have increased since the beginning of the year from 148.8 million ounces to 163.7 million ounces, which would ordinarily be a negative for investors because that would signify healthy supplies. But when we look deeper at the numbers, even though total silver held at COMEX has increased, the actual value of that silver has dropped from $5 billion dollars to a little under $3.9 billion dollars - a decline of about 20% in the total value of silver stocks.
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 20% drop in silver quantities - much more bullish than an initial look at inventories would suggest.
Let us now take a look at registered silver stocks.
On the week eligible silver declined by 4 million ounces, as much of the eligible silver was transferred to the registered category, which increased by around 3.4 million ounces. In total, COMEX silver warehouses showed a decline of 659,506 silver ounces on the week as the silver price rose by around 3%.
What Does This Mean for Silver Investors?
COMEX silver inventories have not shown the large decline that we have seen in COMEX gold inventories, though in nominal dollar terms they have also been declining. Investors must keep in mind that silver is a bit different than gold, and industrial users (which may be significant users of COMEX warehousing) have completely different actions and intentions than do gold investors (which are the primary users of COMEX gold warehouses). Thus COMEX silver inventories may be much less of a sentiment indicator than COMEX gold inventories.
As silver investors what we are primarily looking for is to see COMEX silver inventories decline, which would be a bullish sign - though it is only one factor we use to analyze our investments in silver. Currently, COMEX silver inventories are relatively stable and have shown minor declines in total silver over the past few weeks - but nothing significant.
For investors in the silver ETFs (SLV, PSLV, and CEF) and the silver miners (AG, PAAS, CDE, etc.), what we really want to see in COMEX silver is declining inventories. Silver inventories seem to be relatively stable at a little over 160 million ounces, so in terms of silver supply, COMEX silver inventories seem to be a neutral indicator that doesn't seem overtly bullish or bearish.
We still believe that silver is an investment worth owning for other reasons. As we've mentioned earlier, the gold inventory situation is very bullish for gold and since silver is highly correlated with gold, it should follow in gold's footsteps because it is the other monetary metal. Additionally, the silver market is much smaller than the gold market (COMEX silver is $3.9 billion versus COMEX gold at $10 billion), so any moves up will be magnified as large amounts of money pour into a relatively small market. Finally, silver has a much more important use as an industrial metal, which limits investment supply and creates a sponge for about 70% of annual silver mining supply. For these (and a few other reasons) we are still big proponents of silver ownership.
In conclusion, while we believe silver is an excellent long-term investment, COMEX silver supplies remain adequate and it doesn't seem like there is any particular shortage in silver at the COMEX. What we are paying close attention to is any large increases or decreases in COMEX silver, which we will continue to monitor and we believe investors should keep an eye on.