Large SLV Deposit of 16 Jan 2013

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Summary

On 16 Jan 2013, there was a deposit of 18.3Moz of silver into the SLV ETF (which iShares reflected on its website at approximately 8:00PM). This was by far the largest deposit in years, with the only other deposit of its size being quickly reversed. We were likely the first to discover this, around 8:30PM that evening after the SLV data was updated.

As we predicted when we mentioned it, this quickly became big news in the silver world.

How Much was Added Unexpectedly?

The iShares stats page is updated daily around 8PM EST. At that time on 16 Jan 2013, it showed a deposit of 18,378,092.0 ounces of silver (technically, the number of ounces in the trust was 18,378,092.0 higher than it was the day before).

iShares also publishes a bar list each day that lists all the bars in the trust. The bar list published the next day (dated 17 Jan 2013) showed a deposit of 1,934,561.9 ounces of silver, which almost certainly included the 967,280.0 ounces that had been added the day before (reflected on the iShares stats page on 15 Jan 2013 around 8PM). That leaves only 967,881.6 ounces of the large 18.3Moz deposit on that bar list. It is not uncommon for deposits to be split like this. The most likely reason is that there were two separate deposits.

The 967,881.6 ounces on the 17 Jan 2013 bar list was comprised of bars from the "usual suspects" of refiners (bars that normally are seen in deposits each week). So I'm guessing that the 967,881.6 ounces was a separate normal deposit made earlier in the day (and hence was in time for that days' bar list).

So in reality, the unusual deposit was 17,410,210.4 ounces (18,378,092.0 minus 967,881.6).

JPM's New Vault

The bar list released on Monday morning (dated 18 Jan 2013; we discovered it around 7AM EST and announced it around 11AM EST) provides many more details -- including the addition of a new vault.

The new bar list shows a vault run by JPM in New York (almost certainly the same one that JPM uses for COMEX, as JPM started running a COMEX-approved warehouse in 2011). It had almost exactly 10Moz in it (10,000,998.7 ounces -- 1 extra bar to get it over the 10Moz mark).

This was not completely unexpected, as the prospectus was updated recently to reflect that silver could be delivered by Authorized Participants to either London or New York (or other locations to be authorized in the future), hinting that a New York warehouse would be opened.

SLV and COMEX

SLV allows any bars that are from LBMA acceptable ("London Good Delivery"), which includes bars from many different refiners. COMEX has its own list of approved refiners, which has a lot of overlap with the LBMA list.

A couple years back, I discovered that one of the unusual SLV withdrawals appeared to be bars that were "hand-picked" to be of only certain refiners, that were LBMA acceptable. This suggests silver that was being taken out of SLV to go to COMEX (via someone buying shares of SLV and using an Authorized Participant to exchange the shares for physical silver).

We now know that 10.0MOz of silver was deposited to the JPM vault in New York. Oddly, 30 of the bars (29,738oz worth) were not from COMEX approved refiners. So we know that the SLV silver in the JPM vault is not all from COMEX. However, there are about 2Moz worth of SLV bars in the new JPM New York warehouse that have the refiner name appended with "(CME)".

CME is the Chicago Mercantile Exchange, which owns COMEX. So it is fairly safe to say that the bars so marked came from COMEX (most likely, the JPM vault, carried from the COMEX section to the new SLV section), and are marked so that they can go straight back to the COMEX section of the vault if needed (via the redemption of shares of SLV).

Normally, once silver is removed from COMEX vaults, it has to go through a special process to be re-entered (as is the case with bars in the London "Good Delivery" system). However, it appears that JPM has found a way to bypass the re-entry process, making the transfer of bars from SLV to COMEX and vice-versa extremely simple.

What Can Be Said About the 10,000,998.7 Ounces in the New JPM Warehouse?

The bars were from the following refiners:

Refiner					# Bars	# Ounces	COMEX approved?
Johnson Matthey USA			8234	~8,150,909	YES	

Cominco Ltd Tadanac Canada		926	976,708		YES
KGHM Poland				280	283,156		YES
Met-Mex Penoles Mexico			535	559,421		YES
Noranda Canada				30	29,738		NO

Approximately 450,000oz of the Johnson Matthey bars were listed with "(CME)", the rest were not.

Approximately 7.7Moz of the Johnson Matthey bars had serial numbers ranging from 4965705 to 5301610, suggesting that this 7.7Moz of silver was amassed at the same time. In other words, JM likely stockpiled the 7.7Moz of silver (either because they could not or did not want to sell, or more likely they had an order from JPM that they were filling). It is also possible that JPM purchased this from someone else that had accumulated it previously; however, not many people have nearly $250M worth of silver lying around. None of those bars had the "(CME)" marking, so they presumably came from outside of COMEX.

One unusual aspect is that there are 30 bars that are not from COMEX approved refiners. So at least 29,738 ounces of the silver were obtained from somewhere other than COMEX, that have never been in COMEX warehouses, and are never expected to end up in them.

What Can Be Said About the Remaining 7,409,211.7 Ounces That Were Added?

As mentioned, 17,410,210.4oz of the 18,378,092.0oz deposited on 16 Jan 2013 was unexpected. Of that, 10,000,998.7 was deposited to the new JPM vault in New York, leaving 7,409,211.7 ounces that needs further explanation.

Of that 7,409,211.7, less than 500,000oz is from refiners that are COMEX acceptable. In other words, most of the 18.3MOz of silver that was added that could someday end up at COMEX in its current form went to the New York warehouse where it sits next to other COMEX silver, and the rest of the silver went to London vaults.

The silver comes from the following refiners:

Refiner					# Bars	# Ounces	COMEX approved?
Aurubis AG Germany			3342	2,901,380	No
Henan Yuguang Gold and Lead Co Ltd	1695	1,673,547	No
Inner Mongolia Qiankun Gold & Silver	1250	1,224,350	No
Shui Kou Shan Mining China		382	381,157		No
Britannia Refined Metals U.K		324	301,369		Yes
Solar Applied Materials Corp Taiwan	252	254,587		No
Nordeutsche Germany			180	159,323		Yes
John Betts UK				150	156,164		No
Novosibrisk Refinery Russia		120	117,185		No		
Zhuzhou Smelter China			84	84,097		No
Met Precieux Switzerland		83	78,144		Maybe
Russian State Refineries		47	45,293		No
Johnson Matthey USA			30	~30,000		Yes
Prioksky Russia				4	3,936		No

The most silver came from Aurubis, which we have only seen recently add silver to SLV on 29 Aug 2012 (972 bars). Some of those bars have serial numbers that are in the ranges of those that were added in 29 Aug 2012 (meaning that the bars were likely minted at least 6 months ago).

The next was Henan Yuguang, which commonly adds silver to SLV. The same holds true for Qiankun, Shui Kou Shan, Britannia, Zhuzhou, Nordeutsche, and Russian State Refineries.

We've seen occasional deposits from John Betts, Novosibrisk, Met Precieux.

So of the 7.4Moz, about 3.25Moz came from 'unexpected' refiners, and the rest came from refiners that quite often supply silver to SLV (and most likely are under contract to supply a certain amount of silver to SLV each month).

At first, we suspected that most of this silver was from freshly minted bars. We believe that JPM or another SLV Authorized Participant has contracted with several refiners to provide a certain amount of silver each month, and that much of the silver entering SLV comes from these sources. However, about 2.9Moz of the silver are bars that had been in SLV previously (most of which were removed in the first quarter of 2012).

Why Was 18.3Moz Deposited, and Who Did It?

The obvious answer is "JPM opened a new warehouse!".

However, that does not answer the question, as only 10Moz went into their new warehouse. Here are some possibilities:

[1] One possible explanation is that JPM closed out their short position in SLV. One or more people have 17,016,600 shares of SLV short (about 16,458,115oz) at last count (which could be a couple weeks old). Some people believe that JPM is responsible for much of that short position. The unexplained addition of 17,410,210.4oz to SLV (remember, 967,881.6oz are considered a 'normal deposit') would cover the entire short position and then some. Or if another 967,881.6oz (1M shares) were a normal deposit, that would leave 16,442,329.4oz unaccounted for, almost exactly matching the short position. For this theory to hold, JPM (or one or more other entities collaborating) would need to have held most of the short position prior to January 16.

[2] Another possibility is that someone wanted to purchase about $500M of silver, using SLV, with minimal change to the price of silver. Since it would be cheaper to store $500M of silver directly in warehouses (rather than via SLV), such a buyer would likely be a mutual fund (or similar) that is allowed to invest in ETFs, but not in silver directly. However, this theory seems less plausible given that the silver was all deposited on the day that the new JPM SLV warehouse was introduced (I.E. did JPM wait for an unexpectedly large purchase to open the warehouse?).

[3] Someone wanted to purchase $500M of silver that could have done so elsewhere (as opposed to a fund that cannot buy physical). This seems unlikely, since the SLV fees would likely cost more than warehouse fees. However, the price of silver in London closed higher every day for about 2 weeks before this deposit, which would help support this theory.

On February 11, 2013, the new short interest report will be released. This will either eliminate the possibility that the short position was closed out, or confirm it.

Why Did This Not Affect the Price of Silver?

This part is easy to answer.

It was all done 'off the books'. Someone collected the 18.4Moz of silver over a period of time (likely some directly from refiners they have contracts with, some via COMEX contracts), during which the price of silver may have been affected somewhat.

But on the day of the deposit, the Authorized Participant that added the silver simply traded it for shares of SLV. The volume for SLV that day was normal, so they didn't dump the shares on the market (which could have caused SLV to have a significant discount from the spot price, which could have caused arbitrageurs to lower the price at COMEX).

26 Jan 2013 UPDATE on Short Position

According to shortsqueeze.com, the short interest in SLV went up from 17,016,600 shares (16,457,434oz) to 17,866,500 shares (17,279,406oz). But, when creating SLV shares, you must do so in "Basket" amounts (multiples of 50,000). So to wipe out the entire short position would require 17,900,000 shares, not 17,866,500 shares. That's 17,311,806oz of silver, darn close to the 17,410,210.4 mystery deposit (less than 1% away).

Unfortunately, when we contacted iShares to ask if the short position was wiped out with the unusual deposit, their answer was "No Comment." Perhaps this is because if the short position was wiped out, it pretty much proves that JPM (the SLV Custodian) was behind the short position (given the addition of their new vault to cover the short position).

13 Feb 2013 UPDATE on Short Position

shortsqueeze.com shows that between January 16, 2013 and January 31, 2013, the SLV short interest had a record drop from 17,866,500 shares (17,279,406oz) to 7,297,500 shares (7,055,952oz).

Given that this was likely a record reduction in SLV short interest (it is a record for the 2 years' worth of SLV short interest data we could find), it is almost certainly related to the 18.3Moz deposit. Given how close the size is to the 10.0Moz of silver JPM deposited in their new SLV vault in New York, it is nearly certain that J.P. Morgan was short 10Moz worth of SLV while they collected silver to add to their new New York vault, and closed out the short position when opening the vault.

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