It’s important to understand that the Shanghai Futures Exchange as well as the Shanghai Gold Exchange behave more as a physical delivery market than the COMEX. I was speaking with Chris Marchese, analyst at Silver-Investor.com on this very subject.
I don’t spend a lot of time researching or analyzing the trading behavior in the silver or gold futures market. Chris went onto say the most of the silver and gold contracts at the COMEX are settled in cash, whereas the vast majority of contracts on the Shanghai Exchanges are settled in physical metal.
Which is probably the reason we are seeing a huge draw-down of silver stocks at the Shanghai Futures Exchange.
Let’s first look at what took place at the Shanghai Futures Exchange during the month of July. On July 1st, there were 234 metric tons of silver held in warehouse stocks. However, in the beginning of the month and especially during the last two weeks, there were large withdrawals.
As you can see, by the end of the first week of July, silver inventories fell 30 metric tons (mt) from 234 to 204 by July 4th. There were some small withdrawals and deposits over the next several weeks, but the net change amounted to a 12 mt withdrawal by Friday, July 18th.
Then in the last two weeks, withdrawals picked up considerably. There were 23 mt removed by the week ending July 25th and another 21 mt during the last week of the month. Here is a screenshot from the Shanghai Futures Exchange website showing how much silver was withdrawn on Thursday, July 31st:
In one day, 15 metric tons (15,278 kilograms) were removed, which accounted for nearly 10% of remaining silver stocks.
While withdrawals of silver from the Shanghai Futures Exchange were substantial during the month of July, if we look at a more longer-term chart… its even more impressive. At peak inventories, the Shanghai Futures Exchange held 1,143 mt of silver in March, 2013.
After the PAPER SMASH in the price of silver in April, we can see just how fast inventories declined. By August, 2013, silver inventories at the Shanghai Futures Exchange fell 610 mt to 533… a staggering 53% decline. Inventories continued to fall, but a slower pace until they reached a low in November at 418 mt.
Then over the next three months, there was a build of silver stocks to a high of 575 mt in February, 2014. Interestingly, the price of silver and inventories at the Shanghai Futures Exchange both increased during the same time. As the price of silver went from a low of $19 at the beginning of February to a high of $22 at the end of the month, silver stocks increased by 84 mt (491 mt to 575 mt).
Once the price of silver started correcting lower, inventories declined in March to 417 mt, and then a huge fall to 246 mt by the end of April. In May and June, silver inventories remained relatively flat as spot price bottomed then headed higher in June.
When June rolled into July, once gain, the price of silver headed lower right along with the decline in silver warehouse stocks.. Another 86 mt were withdrawn in July as inventories are now the lowest level (148 mt) they have ever been.
In a nutshell, silver inventories declined nearly 90% from their record peak set in March, 2013. The Shanghai Futures Exchanged experienced a net decline of 995 mt from March, 2013 to the end of July this year.
Lastly, Chris stated that trading volume on the precious metals exchanges are heading East to Asia. He said that trading volume the Shanghai Futures Exchange and Shanghai Gold Exchange are nearly 3 times higher than the volume at the COMEX. Investors are beginning to realize the COMEX is nothing but a paper rigged market so they are moving to Exchanges where one can actually acquire PHYSICAL DELIVERY.
Things seem to be getting quite interesting in the precious metal markets. I discussed this in my recent article, Three Signals For A Huge Silver Spike In 2014. If you haven’t read the article… it’s worth a look.