The Tiny Silver Market, Part III

(Over the Counter, "Other Precious Metal" Derivatives, explained by the BIS!)

Silver Stock Report

by Jason Hommel, October 6th, 2009

I first reviewed the tiny size of the silver market. Investors purchase about $1 billion worth of silver per year See:
http://silverstockreport.com/2009/tiny-silver.html

A few days later, I highlighted the BIS OTC Derivatives for "other precious metals", which revealed a notional amount of $111 billion, which is about 111 times larger than the annual investment demand for real physical silver.
http://silverstockreport.com/2009/tiny-silver-II.html

Fortunately for all of us, a man who read my articles took action, and emailed the BIS, and asked some good questions, which revealed some good answers.

First, I will admit that much of the discussion on how the BIS counts the figures is over my head. But for those who question the validity of the numbers it is instructive to note what the BIS does say, at the first link in their answer, paragraph II under, "coverage".

"All published figures are adjusted for double-counting resulting from positions between reporting institutions."

That means the figures are more accurate than some might think.

It is also important to note the distinction between the notional values, and the gross values, both of which are listed at the BIS data charts for OTC derivatives, here:

http://www.bis.org/statistics/otcder/dt21c22a.pdf

The notional value is the value based on the actual metal underlying the contract. So a silver contract, either a futures contract or an option, for 5000 oz, at $17/oz., would have a notional value of $17 x 5000 = $85,000.

The gross value is dependent upon the price paid for the contracts, so if you could buy such a contract for about 10% down, and get 10:1 leverage, the gross value would be more around $8500.

Unfortunately, the BIS states that they don't think the notional values represent true risk. This is unfortunate, since the notional values might represent only a fraction of the true risk.

For example, if a short position requires only $8500 to initiate, which "controls" $85,000 worth of silver at $17, and if silver prices double, then the liability on the short side is 100% of the notional value.

But if silver runs to $170/oz., then the short side liability is 9 times the notional value!

Remember, the notional values in the silver market are somewhat close to the $111 billion figure, the difference being platinum. Clearly, they sold way more silver than exists. If they have to cover that, or deliver that, then they could push the silver price more than ten times higher than today, so the potential silver liability could well exceed $1 trillion.

Oh yes, a man emailed me today, wondering why I'm not commenting on why silver and gold are making this breakout move. Hello? It's everything I'm talking about. The fundamentals. People are waking up to the fact that the real silver market is a $1 billion market, and the fraudulent silver market is $150 billion, and the fraudulent "money" markets are $400,000 billion. That realization is enough. China buying, too. Whatever. The silver market is tiny, too small to accomodate significant buying, without the price moving up. That's what a "small" market means. Price must go up.

One more thing, we sold out of American Eagles today. And one of our wholesalers has been sold out of Krugerrands for over a week. Interesting times.

Here are the letters, for those who would like to research the BIS OTC numbers further. Please help me research this. If you find something significant, I'll try to share it with my readers.

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To the BIS:

To whom it may concern,

I was looking over the following PDF file found at http://www.bis.org/statistics/otcder/dt21c22a.pdf and I was wondering what metals are included in your "Other Precious Metals" category in Table 22A? Will you forward me a breakdown of this category and what precious metals are involved?

Thank you so much for your time and assistance,

Mr. F

From: "Mallo, Carlos" <at bis.org>
Date: October 5, 2009 3:35:23 AM EDT

Dear Mr F,

Many thanks for your message showing interest in our statistics on OTC derivatives market activity.

Concerning your query, please be informed that the category "other precious metals" listed in table 22A includes precious metals other than gold, i.e. silver and platinum.

For a more detailed definition of the different data types, instruments, risk categories, etc. covered by our statistics, let me please refer you to the following documents:

1) Methodological notes of the latest statistical release on OTC derivatives market activity, publically available in our website at: http://www.bis.org/publ/otc_hy0811.pdf?noframes=1#page=8

2) Paper N14: "Guide to the international financial statistics-new version": http://www.bis.org/statistics/intfinstatsguide.pdf#page=32

3) Methodological section of the latest Triennial Survey:
http://www.bis.org/publ/rpfxf07t.pdf?noframes=1#page=33

I hope this helps!

Best regards

Carlos Mallo
BIS-IFS

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=========

See
http://rufftimes.com/

Sincerely,

Jason Hommel

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