Refiners buying from the COMEX

According to market insider Andrew MacGuire, a precious metals refiner has started buying October silver futures contracts with the intention of taking delivery. Typically, the major clearing houses of the LBMA (London) and COMEX (New York) buy from refiners - not the other way around. 

Major refiners are where miners deliver ‘dore’ bars (ore) that are most often a blend of gold, silver and base metals. The dore bars are put through a series of industrial chemical procedures to refine the metal to 99.99% pure gold and 99.9% or 99.99% pure silver. After this the refiner can then produce 400oz “good delivery” gold bars and 1,000 oz silver bars for the LBMA. On the other side of the Atlantic, refiners produce 100oz or 1kg gold bars and approximately 1,000oz silver bars for deliveries for the COMEX. Alternatively, refiners can provide metal for gold bullion dealers just like Ainslie Bullion. 

Traditionally, refiners buy the raw material from miners below the spot price, and then sell at or just above spot, plus a barring charge for retail bars. Given the nature of the traditional flow of metal, it is surprising to hear that refiners are now standing for delivery of silver on the Comex 

McGuire argues that the price must be attractive enough for the refiner to ‘buy back’ the metal so that they can fulfill outstanding wholesale orders. This suggests that refiners may be struggling to source enough silver from miners to fulfill orders that they have already committed to. In short, demand is outstripping supply. 

It isn’t surprising that it is silver in the spotlight. While the price of gold has been stutter-stepping up from the 9 August “smack-down”, silver has recovered from it’s brief stint under $23, but has continued to meander at or underneath $24 resistance. 

This unequal recovery between the two monetary metals is reflected in the grind higher in the Gold-to-Silver Ratio (GSR) we have seen over the last few months. At time of writing a sole oz of gold demanding 75 full troy ounces of silver in return. Not all customers may be aware, but we are able to facilitate bullion swaps (buy silver with gold or vice versa) for anyone who wants to trade directly between the two metals.  Don’t forget too that CoinSpot offer our Gold Silver Ratio bundle which optimises your purchase based on the GSR (as we explained here).

Another possibility is that miners are now asking for more than spot, making deliveries from futures contracts the most cost effective way for refiners to access the metal. It stands to reason, if said refiner is struggling to fulfill orders, it would be natural to buy more from miners, there are certainly enough producers around to choose from.  

There is some support for this second point, with miner First Majestic (NYSE:AG) selling directly to the public at generous premiums. The significant amount of extra effort a miner would need to go to to sell their own product would be prohibitive unless there were enough physical demand from retail buyers to justify the capital outlay. We do need to take this with a grain of salt though, as this is one of the companies holding back production waiting for higher prices, a story we covered in April. 

While this may well be a rare contradiction of an estimated $5 trillion market, if the trend continues, it would certainly be a big driver of demand for physical silver and bode well for silver-bulls worldwide.