Are they trying to deter buyers of silver???

 

As we all know, precious metal prices have been going through the roof for something like a year now, and show no signs of slowing down.  This has led to well-informed speculation that the Chicago Mercantile Exchange (CME) and similar bodies in other countries may not hold enough physical silver to meet the futures contracts they have permitted to be traded against their holdings.

... according to the CME’s registry there are 440 million ounces of silver located in its depositories. However, the current silver futures contract  which settles in late March 2026  has an open interest of 150,200 contracts. At 5,000 ounces of silver per contract, this comes to 751 MILLION ounces of silver contracts trading… or 1.7 TIMES the amount of actual silver the CME has stored in various depositories.

Put another way, the CME is permitting silver contracts to trade that are backed by NOTHING.

The CME, rather than addressing this issue, has chosen to introduce a new silver futures contract, the mini silver contract, that represents the right to buy or sell 100 oz of silver (as opposed to the usual 5,000 oz).

The catch?

This new contract is settled “financially” meaning there is ZERO silver backstopping it.

Put another way, rather than doing something to address the fact that much of the current silver trading is backstopped by nothing, the CME is doubling down by introducing NEW derivatives that are EXPLICITLY financial in nature… with ZERO actual exposure to silver itself.

There's more at the link.

The current 3-month futures contracts terminate on March 27th, if I've got it right.  What happens if a holder or holders of those contracts demands physical delivery, rather than rolling over the contract into a new one?  Will the CME have enough silver metal in its vaults to make good on those deliveries?  Informed opinion is that it doesn't.  As the article above goes on to ask:

What happens to the financial system when traders begin to realize that the CME is allowing derivatives to trade that are backstopped by NOTHING?!?!

That's a very good question.  It also provides a very rational explanation for the new silver "futures" or derivatives that the CME is offering, because they are not redeemable for silver - only dollars.  Investors who buy them are, in a sense, pretending they hold silver futures, but they don't - only a piece of paper that ties the redemption value of those futures to the silver price, not the metal itself.

Does that seem like a worthwhile investment to you?  Do you trust the CME and its ilk to pay out on time, in full, whether in precious metals and/or at rightful value?  One wonders . . .

That leads me to another interesting point.  As I write these words, the spot price of silver is quoted at US $94.89.  Many dealers are quoting 1oz. silver coins at a premium of up to 20% above spot:  for example, APMEX is quoting a 2023 1oz. American Silver Eagle coin at $112.32.  However, if you go to the website of the US Mint, a 2023 1oz. Silver Eagle is listed at - wait for it - $169.00!  That's fully 78% higher than spot - a ridiculous premium... or is it?

What if the US Mint did not have enough silver in stock to satisfy demand, or was uncertain whether it will be able to get enough stock to satisfy future demand?  Is it possible that, rather than admit to that, they're pricing their coins so high as to deter most buyers?  If they "lose a sale" on a coin they don't have enough of, because the buyer thinks their price is too high, they've actually lost nothing at all - and if the buyer decides to buy it anyway, they've made an extraordinarily high profit on the stocks they actually have in their possession.  I'm sure they'll lose some cash flow that way, but with their stock of precious metals for security, short-term financing won't be a problem.  There's really no downside for them, is there?  However, I'm willing to bet that their bulk sales of silver and gold coins to other dealers and brokers is priced much more reasonably than their retail-sale coins - otherwise, they'd be shut out of the wider market.

There may be a different, perfectly logical and rational reason why the US Mint is pricing its wares so highly, but if there is, I can't think of it.  Of course, I'm neither a futures trader nor a precious metals expert.  Can any of you come up with another reason, readers?

Peter