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COMEX Default Looming?

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The latest articles say that the LBMA, COMEX are going to default in the next few weeks. What is all this fuss about?

Apparently the open interest in silver is at record highs while the silver price is dropping. This is not normal because normally the open interest should decline. But let’s first ask ourselves, what is open interest?

Open interest is the total number of options and futures contracts that are not closed on a particular day. If someone opens a call on silver on the futures market, then open interest increases by 1. If open interest is increasing at a rapid pace, that means there are a lot of traders on the futures market making calls (long) and puts (short).

The key metric to watch here is the following:
When open interest is increasing, it means that the price trend in silver will keep going up/down.
When open interest is decreasing, it means that the price trend in silver will reverse the trend.
So what do we have here? We have an increasing open interest in silver, with a declining silver price. That means the drop in silver price is likely to keep going lower as shorts are creating more and more short positions. Once the open interest trend changes, then we will see a reversal in the silver market to the upside.
Chart 1: Silver Open Intrest
So we have a huge battle in the market with a huge increase in short sellers. That increase in open interest is also found in the total stock at COMEX silver (Chart 2). You see the total stock in green is at record highs, while the real physical available silver in blue is not increasing. How can it be that we have so little physical silver in storage for delivery at the COMEX, while trading is so high? If somehow 10% of the longs start to ask for their silver delivery, the COMEX will default. And the chance of default will go up if the open interest keeps increasing. Keep watching the blue line (registered physical silver) as it goes down.

LCNS net short positions Vs. Open Interest

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I haven’t looked at this possible correlation yet, but thanks to “goldbug” who reminded me here, I just decided to take a look at this possible correlation.

Apparently, they do correlate. When open interest skyrockets it’s mostly because of the increased net short position of large commercials.

That makes life simpler, you just have to look at the open interest which is given each week on the ‘GotGoldReport‘ site, and you will automatically know whether net short positions went up or not.

If open interest is high, you can be sure that silver will sell off.

Chart 1: Open Interest Silver
Chart 2: LCNS Net Short Positions Silver