A”default” can occur if too many longs stand for delivery. This very well could happen and the likelihood has risen in just the last 2 trading days as open interest has increased rather than decreased. If 10% of the longs stood for delivery in Silver, the inventory would be wiped out. The fact that the “drop” in price was CAUSED by new shorts opening positions rather than longs scurrying away tends support the case that the long position is a resolute buyer with deep, VERY DEEP pockets. If they hold in and meet the margin calls created by the price drop AND higher (18+%) margin requirements as of yesterday, the shorts and the exchange itself have a very big problem on their hands as the availability to deliver on the open interest just does not exist.
If open interest does not decline after the drop in price and this latest margin hike (and maybe more to come) the odds of longs standing in a big way for delivery increases exponentially.
Submitted By Bill Holter, Miles Franklin Ltd,:
When there are more buyers than sellers…the “price” goes up, when there are more sellers than buyers…the “price” goes down…right? This is the way it works? Or is supposed to? As you know, we live in a world where nearly everything real has 2 markets, the paper market and the physical market. Originally the paper markets were created so that farmers could “hedge” their crop and outright buyers or speculators could have access to the commodity. This has morphed into a situation where the paper markets have outsized the real physical markets and become more important to “price”. It is a “Wag the Dog” scenario where in Gold for example there are at least 100 “paper” ounces for every real ounce (thank you Jeffery Christian for this admission) and the paper markets have “made” the price for years now. We knew all of this before and what has happened since last Wednesday only supports this view and confirms it.