Instead of concentrating on the COMEX, I wrote that we need to be looking at the Asian markets, which ironically, are more transparent and less leveraged than the Western based COMEX.
The Physical Silver Story is Currently More Exciting than Gold’s Physical Story
I also outlined my reasons for stating that the physical silver market is presently under more stress than the physical gold market. However, I also stipulated that this is more particular to Asia than the Western world, as with relatively normal silver premiums in the Western retail market right now, these same stresses have not emerged over here yet. Rather, they are more particular to Asia, and more specific to buying silver in volume.
Shanghai is Setting off Alarm Bells
In order to get a better idea of what is going on in Asia at this time, let us start with a chart of the Shanghai Futures Exchange silver stocks for the last year and a half:
It would seem that what we are witnessing here is a very alarming decline in silver inventory at the Shanghai Futures Exchange. This decline has been very pronounced in March, April, July and August of this year.
Wait… Let’s First Contextualize Things
Although a potential failure to deliver – or at least a corresponding rise in price – would appear to be in order here at first glance, let us take a moment to look at the Asian markets in order to contextualize what is really going on.
Firstly, the Shanghai Futures Exchange should not be confused with the Shanghai Gold Exchange. In order to better understand what is going on in Asia in general, we cannot isolate the Shanghai Futures Exchange to the exclusion of the Shanghai Gold Exchange.
In the following Shanghai Gold Exchange chart of weekly silver stocks, we can see that their inventory is also at similar levels to the Shanghai Futures Exchange.
There is a Precedent to this Physical Drawdown
However, it should also be noted that the Shanghai Gold Exchange silver stock dropped to almost 10 tons in late September of last year, which was obviously a startlingly low amount of silver to have on stock in such a physically oriented type of exchange.
Note that within four and a half months, the Shanghai Gold Exchange had restocked to 170 tons, which means that if the Shanghai Gold Exchange could restock that amount of their silver stock within the space of four and a half months, that this would not be an impossibility for the Shanghai Futures Exchange to do now, either.
However, the question does remain: Where will they get this type of volume from, especially at these low prices? Who will be selling these types of amounts without affecting price?
Shanghai Silver Premiums are Presently Quite High
We can observe in the following chart that Shanghai Gold Exchange silver premiums are at a full 7.07% above international prices. Although this is not an all-time high, it is certainly indicative of there being pressures in the Asian physical silver market:
We are not currently witnessing these types of premiums in the Shanghai Gold Exchange gold premiums, which indicates that the physical stresses in the silver market are currently stronger than those in the gold market.
The Japanese Exchange’s Silver Stock is Running Extremely Low
When we look at other Asian exchanges such as the Japanese TOCOM exchange, we see that their physical stocks are also extremely depressed:
Presently, TOCOM only has 6.50 tons of silver, which is a lot less than what both the Shanghai Futures Exchange and the Shanghai Gold Exchange have in the way of silver stock now.
That being said, we need to keep in mind that the TOCOM silver physical inventory has been in a relatively similar state for approximately a decade, although the amount of physical deliveries from the TOCOM exchange will not compare to those of Shanghai.
September is a Big Month for Structural Change in the Price Discovery Mechanism
The point that we have been trying to drive home recently, though, is that it would seem that by the end of September, this former market paradigm should begin its major shift to a new, much more physical one.
This is due to the planned September opening up of the Shanghai Gold Exchange and the Singapore Exchange Ltd. trading platforms to foreigners, and the consequent loss of the current corrupt, opaque price discovery mechanism of the LBMA and COMEX.
These changes are right around the corner, but that doesn’t mean that there will be immediate repercussions. However, it would appear that there are presently some serious strains on Asian stocks of physical silver. I will be following up on the underlying physical inventory story on a regular basis.
Level Heads: Keep Your Eye on the Prize
This is very bullish for silver. Nevertheless, we need to remember that as I outlined above, this is not the first time that these types of cracks have appeared before. So as long-term investors or savers, we should keep our eye on the physical story, with a patient outlook for the coming few years. Just keep stacking, and stay as far away from leveraged paper games as possible.
We only need to keep our heads screwed on tight, and know that these matters can take longer to play out than we first think.