I've been around silver since about $20, but still I have queries about COMEX. Reading another thread debating open interest, contracts, defaults etc etc etc, I'll admit my eyes glazed over. Please can someone, anyone, explain in plain English what is happening with COMEX? What is open interest? What is a contract worth? What is the duration of a contract? How can it default? Who runs it? Who owns it? How can they increase margin requirements at a whim? Will it default? In the event that it does, in fact, default, what then? I've been hearing since mid last year that the COMEX will default. Nothing has happened. Someone, anyone more educated on these things....please?!
http://en.wikipedia.org/wiki/Open_interest Open interest (also known as open contracts or open commitments) refers to the total number of derivative contracts, like futures and options, that have not been settled in the immediately previous time period for a specific underlying security. A large open interest indicates more activity and liquidity for the contract. Depends entirely on what was written at the time, in COMEX's case it is 5000 troy oZ per contract as per http://www.cmegroup.com/trading/metals/precious/silver_contract_specifications.html I think that means how long the futures contract is valid for. When you try to exercise the contract and the other party defaults then..it defaults. The existence of an exchange such as COMEX is to prevent counter party risk so basically I think they underwrite the contract in case of a default? Usually banks write contracts and then they are traded with whoever needs them on the open market. Anyone can own futures contracts as all it really is, is just a contract that says "you can or you must sell/buy this asset at price X at this point in the future!" They run the exchange, they can do whatever they want . People are saying COMEX is running low on physical silver so probably or maybe default who knows. People will realize their paper is worthless sack of sh*t and everyone holding the contracts will rush for physical silver which their paper represents. Of course COMEX will fail to deliver this and sudden massive demand for this silver will probably drive prices up. COMEX will need to cover these paper by either giving up silver or giving up money, either way it's good for physical holders and bad for paper holders. Their reserves dwindled a lot...the time will come apparently! (trends say so anyway) Hope that clears some stuff up, correct me if anyone sees anything wrong
The failure to deliver, aka default, is covered by 7B Chapter of COMEX/NYMEX rulebook. You can find it on the Net: http://www.cmegroup.com/rulebook/NYMEX/1/7B.pdf If the counterparty or its clearer goes bust, the exchange will at best pay the difference in price between "reasonable" silver market price and delivery price. This is negotiable figure - what is reasonable? What is the relevant market price? If exchange goes bust, you'll get whatever proceedings from receivership process as per above formula, which I reckon will be nothing or cents in the dollar at best. As for the prices, I'm not sure if such defaults will drive metal prices up. It will make paper silver drop like a stone for sure, as nobody will want to take their chances with options above. Physical silver may drop with it, perhaps significantly. Why not?
@ MelbBrad - good question... @ For the above replies - GREAT responses! @ MelbBrad - I would only like to add when this type of 'naked short' happens there is likely to be a decoupling of the physical to paper spot price. Meaning even if the spot is $50 but you have physical, you can talk in multiples higher. Simply, thanks to the COMEX physical ownership really will be with is weight. Massive overselling (known as 'shorts') is the ticket to ride this puppy all the way out of here What you and I do is buy ('Longs') but in physical form. Sorry if I'm preaching to the choir...
