New Hong Kong Silver Contract May Reveal Physical Short

The WealthCycles Staff

The Chinese Gold & Silver Exchange Society (CGSE) recently announced its intention to initiate another deliverable physical silver contract, with trades denominated in the Hong Kong dollar.

GSGE is the authorized spot market in Hong Kong for physical gold and silver, and delivery will have a 956 oz. (30kg) minimum compared to the 5000oz. minimum at the COMEX in New York.

CGSE is further expanding electronic silver trading to boost the city’s position as a precious metals trading hub and because it sees a strong capacity for silver price hikes in the near future. In addition to fully outfitting their silver-trading hub, CGSE has petitioned the Chinese government for permission to establish a precious metals vault at the Hong Kong International Airport. The exchange also has plans in the works to develop a physical silver and gold depository on mainland China, previously banned because CGSE has been considered by China’s government to be a foreign entity. In 2011, some 25% of CGSE’s trade came from mainland China, a figure expected to increase to as much as 30% for 2012, according to a recent Reuters report.

CGSE already supports contracts denominated in multiple currencies:

Present

  • US dollar London “loco” silver (500 & 5000oz.)
  • US dollar London “loco” gold (10 & 100oz.)
  • Yuan kilo bar gold
  • HK dollar kilo bar gold
  • HK dollar tael (1.22oz.) gold

New Contracts

  • HK dollar silver

Expanded trade in physical metals among Asia’s vast and newly affluent population of potential investors may have unintended consequences: By making physical delivery more convenient and attractive for buyers, the reality of tight supplies and delivery delays will only inflame demand and may hasten investor awareness that more metal is pledged on paper than exists in the world’s depositories.

CGSE is making this move with the expectation that trading in silver is poised to increase and will most likely out-perform gold in terms of volume. CGSE’s yuan gold kilo bar contract has failed to meet CGSE expectations, with daily transaction volume of 2-3 billion yuan instead of the expected of 5-6 billion yuan. Cheung believes the low performance on the yuan gold contract is due to the fact the Chinese national currency is still pegged to the dollar:

“This may be due to the limited yuan currency volatility that crimps the potential of making profit through arbitrage. Moreover, the limited availability of yuan currency loans in Hong Kong also prevents institutional investors from obtaining yuan-denominated line of credit easily for trading,”

Despite the lower than expected results on CGSE’s yuan gold contract, expectations for the new Loco Hong Kong silver contract is high. A yuan-denominated silver contract is still under consideration for now.  In addition CGSE believes that with the price of gold hovering around $1,725 per ounce, access to an additional precious metal with a lower entry point will help drive the growth of silver trading, which will consequently move the price of silver upward. Again, according to Cheung:

“As another precious metal besides gold, we envisage that the new platform would elicit demand from institutional investors to hedge or arbitrage,”

If trading volume rises, it is logical to expect that demand for delivery of physical silver will also increase. This of course raises the question of whether or not there is enough actual silver in the vaults around the world to service this demand. As we chronicled in a WealthCycles article earlier this year, there is ample evidence to suggest Silver Supply Inadequate To Meet Growing Demand. We wrote further about the impacts of mainland China launching deliverable silver contracts on the Shanghai Futures Exchange earlier in the year after they asked for public comment a month prior.

Were large numbers of Asian investors to experience delivery delays, the effect would no doubt fuel a sense of urgency and accelerate demand. As Wealth Cycles readers know, demand for physical metals is only expected to grow, as investors face the reality that unless they hold their property in-hand, when the chips are called in they may end up holding nothing more substantial than paper.

Physical trades will help to discover the true price of silver.

I would be concerned if any contract could be rolled over, thereby creating another paper market.

We need more physical markets and fewer paper markets. Jim Page

I have been waiting for this so called squeeze on deliverable precious metals for 5 years. It's like a circus that just keeps rolling on. If could be another 5 years at this rate. Why keep my money in precious metals if there are other investments which will yield SOME returns during the long wait.

FIVE YEARS AGO WE DID NOT HAVE THE MESS WE HAVE TODAY

FIVE YEARS AGO THE SILVER I BOUGHT WAS MUCH LESS

FIVE YEARS FROM NOW EXPECTATIONS ARE HIGHER THAN STOCKS AND BONDS AND TRESURIES

W R

I agree!! What is the point if the markets are so manipulated by the cartel anyway? Wait for what?

Great Question! I too feel this way! Also, if there is such market maipulations by the cartel, what's the use? Wait for what and how long?

Wait for COMEX and other exchanges to refuse delivery of physical metal, instead declaring "force majure" as they have in the past.

At that point the paper price / western NY spot price of silver referenced as the dollar denominated "value" of silver will be invalid, and paper futures promising delivery of physical silver if the owner should "stand for delivery," would be recognized as useless and price would fall.

Meanwhile the price of real silver will rise far beyond the price for the useless paper silver, the divergence returning silver to a true market dictated value relative to other goods.

This is what some wait for as they save.

Most recognize saving in silver alone bears them "interest" at a rate equivalent to depreciation of the dollar's purchasing power, therefore this "wait," is not without current benefits.

Lastly this "wait" thrills most as they still earn paper above their rate of expenses, seeking to save in silver and gold is far more efficient the longer the conversion rate still favors the saver.

Cannot find the original article...

The five year returns on both gold and silver are north of 100%. Have you doubled your money on anything else in the last five years? What dynamic has caused this doubling to occur? Has that dynamic changed? If not, your patient endurance through a prolonged but normal bull-market correction is both necessary and wise.

You make a good point and I too have watched
my G and S bullion fall in value.
I keep reminding myself of the fact that 90%
of the returns will occur in the last 10% of
the cycle.
Keep the faith!
Regards

Will Long
England

If you dont keep your money in precious metals you will miss out on the biggest wealth transfer in history. If you keep your "money" in currency, it will be worthless.

I understand your frustration and a lot of people who own physical precious metals share it.But there are a few things to consider. You say that it could be another 5 years of the suppression circus but it could just as easily be 5 months or 5 days. I gave up trying to time the market a long time ago (c'mon guys we've all tried it!) And as many people much smarter than me have said before, it's better to be years too early than an hour to late. Yes the manipulators can play their games but this cannot continue indefinitely.Look at the suppression as an opportunity to continue adding to your position at ridiculously low prices. Don't overleverage,don't buy paper promises, do keep buying physical and do keep the faith. The day of reckoning approaches!

But the question is what are the viable alternatives to precious metals at this stage of the game? I'm not saying there are none, but the options can be obscure, expensive (like buying a farm), or have other problems, such as soveriegn or counter-party risk.

Do you look for returns on your balance sheet by monitoring your so-called 'paper' investments, or real estate holdings? Does the fact that precious metals sitting in a safe don't multiply in numbers mean that they are not increasing in purchasing power?

Don't be fooled by official numbers coming out of your government, stock indices and so on. In 2008 my retirement account went from $241k to $169k practically overnight. So whatever the indices were the day before that became suddenly irrelevant. On the other hand, precious metals do not care whether it is day, night, the sky is falling or anything else. They preserve purchasing power, and are a proven store of value and wealth, throughout millennia.

I can see where you are coming from. I see holding precious metals like an insurance policy that I am confident I will be cashing in at some point. There is nothing stopping you from investing some of your capital elsewhere whilst you are waiting. Be aware that sentiment can change very quickly and I believe in the near future this sentiment will be in favour of precious metals... if you wait for this sign then you've already missed the opportunity.

Diversify.

It is a good argument for not using leveraged money in a long term investment.
But if you have conviction that preciousl metals is the safe harbour for a financial storm, do you dare not to have a substantial saving in this asset class?
Would you know otherwise WHEN to get in? When the price of gold breaks $1800? $2000?
And would you be able to get in? Would climbing prices keep you waiting for a pullback that doesn't come? Would the availability of physical metal dry up or carry massive premium in order to acquire?

I sleep well knowing I have a core of my investments in unleverage fully paid physical metal.

Okay, question taken at face value. By your preceding sentences, you are ready for an overnight dollar devaluation a la FDR, you are done saving?

So here are the choices:

1. Save in silver and gold, and appreciate the time and low prices we are given to accumulate

2. Divest of silver and gold, and earn a return over the 8% price inflation rate

Kyle Bass just said non-agency MBS yields 6-12%, perhaps locate cash in that asset class and you might beat break-even.

Perhaps saving in silver and gold, considering the rate of real and ongoing devaluation of the dollar, is already earning you 8% in real terms... or whatever CPI metric you believe (we like the 1980 version of the government CPI)

Or if you want risk (meaning you lend out your $$), vault your silver at an institution that pays silver interest in ounces (kinda like a CD)...