The LME defaulted on nickel in 2006. The price shot up, then quickly collapsed by over 50% in months. About 2 years later, nickel price had fallen by over 75%, and the LME is still the exchange it always was.
If a default were to occur, wouldn’t many cash settlements be arranged at a price agreeable to the buyers, and interest will be charged daily on the short contracts until those shorts can deliver. Those shorts who still need to deliver could simply buy shares of SLV, take delivery, and pay off their Comex contracts. The SLV is so massive, it is a new depository, of sorts.
A COMEX silver default will be similar to the nickel default you mentioned, yet different in many ways.
You will see cash settlement like you described.
SLV does hold a decent amount of silver, but it is fraudulent (massively sold short, and does not hold the amount of silver it claims) as well. In actuality, it appears that what you described about the SLV being used in a COMEX default as a source to meet silver for the COMEX is already happening. See JP Morgue Increases Physical Silver in New Vault 39% in 2 Days (it appears that one of the main objectives of silver’s intense take-down in May was to liquidate physical silver from SLV inventories)
The main difference between the default you described in nickel and the coming one in silver is that 4 large US banks are naked short 113 million ounces of silver, and yet only 27.9 million ounces remain on the COMEX. this means they are short 4 times the deliverable physical silver supply remaining on the COMEX.
In a panic, all 113 million of these corresponding longs are going to be in a mad rush to obtain whatever physical silver they can get their hands on.
This will cause the price of physical silver to leap to multiples of its current valuation. The cold hard fact is that the COMEX does not have the silver, and cash settlements will be required and instituted. This would clearly be a silver default.
Hope this helps.