COMEX Silver Inventories Have Been Dropping - Should Investors Get Excited?

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Includes: CEF, PSLV, SLV
by: Hebba Investments

Summary

Recent COMEX silver stockpiles have been dropping from their highs of over 180 million in July to just under 170 million.

While this is encouraging for silver bulls, we think much more declines in inventories need to occur.

There are reasons to be bullish on silver, but at this point COMEX silver inventory declines are not one of them.

In a recent article we pointed out that dropping COMEX registered gold inventories are a bullish sign for gold investors as it suggests a tighter market for available gold. We haven't been covering silver inventories as the action in the silver market has actually been much different than the gold market with no significant drop in COMEX inventories - but that seems to be starting to change. This would be very important to monitor for investors with positions in physical silver and the silver ETF's (iShares Silver Trust (NYSEARCA:SLV), PSLV, CEF).

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on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse.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.

Changes in COMEX Silver Inventories

Let us now take a look at where COMEX silver inventories stand and what investors can learn from them.


Source: ShareLynx

As investors can see, the drop in silver inventories is still minor considering the buildup over the past decade, but it seems to be a larger drop then the past two we've seen since 2013. In fact, the drop from the recent high of 184 million ounces of silver seen this past July to around 168 million ounces is the largest drop seen in quite some time.

One thing that is deceptive about the chart above though is the fact it only shows total ounces and not the total value of those ounces. This is a bit misleading because it suggests that inventory levels in early 2013 of 170 million ounces are the same as current inventory levels of 170 million ounces - the value of those same ounces are completely different. For example, in early 2013 those 170 million ounces at around $30 per ounce were worth just over $5 billion dollars, while the current value of that same amount of inventory is only worth around $2.5 billion dollars - 50% less in real value terms. For industrial usage that may not matter much as those entities care primarily about quantity, but for investors the amount allocated is much more important than the quantity.

Conclusion for Investors

While the recent decline in COMEX silver inventories is encouraging for silver investors, it is still a drop from almost record high levels of COMEX silver inventories and thus a bit premature for silver investors to get excited. It would be much more bullish if we saw this decline continue to the 150 million ounce level. The other thing that would be very bullish is if we saw registered inventories drop disproportionately versus eligible inventories (like we're seeing in the gold market) as that could suggest that investors are hoarding silver. In fact, this would be more bullish than the same happening in the gold market as silver's industrial use has plenty of consistent non-investment buyers that need silver to maintain operations.

While we are bullish on silver for other reasons, at this point declining COMEX inventories are not yet enough to get us excited but are worth monitoring for silver investors.

Disclosure: I am/we are long SIVR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.