We talk of longs and shorts but when it comes to the current front month contract we should talk of buyers and sellers because at that point there must be a delivery process instigated. The current front month contract is SEP. Anybody who held contracts long going into what is known as "First Notice Day" (August 31 for SEP) is now OBLIGATED to take delivery and anybody holding contracts short is OBLIGATED to make delivery to the longs. (There can always be agreements to settle in cash but only if both parties agree but the obligation is for delivery). If you don't want to take delivery or you don't want to make delivery you have to roll or sell or cover your position BEFORE First Notice day.

The process is that if you are still holding a long contract on First Notice day you are "standing for delivery". You have to pay in full for your contract to your broker. The sellers (the shorts) must now issue "delivery notices" to inform the buyers that they will deliver bullion to them. Let's take SEP. On first notice day there were 3,002 contracts long and the same number short. But those holding the longs don't know who the holders of the 3002 short contracts are. So the delivery notice process is to match up the buyers with the sellers. Let's say you are holding 100 contracts. You need some one to tell you where your silver is going to come from. So the sellers of the 3,002 contracts have to issue a delivery notice to the clearing house to let them know they are a seller and they are ready to hand over the appropriate amount of silver. The sellers have 30 days to issue these notices. In theory the holders of 3,002 should ALL have received a delivery notice by the end of the 30 day notice period (Last Notice Day). These are assigned by the clearing house to the longs who are said to have "stopped" the notice while the seller has "issued" the notice. The delivery notice is sent by the clearing house to your broker. The clearing house assigns them in proportion to the holding. Once you have the delivery notice your broker will then transfer the money you have paid in full for your contract to the account of the seller at his broker. Now that he has confirmed his readiness to deliver and the money has been transferred you will then receive a "Warehouse receipt" with specific bar numbers and weights and with that you can collect your metal and take it away from the designated Comex depository. You can not take delivery with a "delivery notice" you have to pay the money and get the warehouse receipt.

Until the warehouse receipt has been issued the silver storage and insurance is paid by the seller. So they should want to start the process as soon as possible and issue delivery notices on the first notice day. Delaying issuing delivery notices indicates that the sellers don't have metal in the "registered inventory" of the Comex. If a delivery notice is issued and money is transferred the Warehouse receipt MUST be issued but if the seller doesn't have registered metal he can not enter specific weights and serial numbers on the warehouse receipt because he doesn't have any warehouse metal. So the seller delays issuing the delivery notice (which he can do because he has 30 days to issue). He then has to find some metal to put on the exchange or see if he can lease metal from an investor who has metal on the exchange or see if he can offer cash to buy a delivery notice from a long who has already received one. So a "dearth of delivery notices" means that the sellers don't have the bullion available because if they did the notices would be instantly issued on First Notice day. For example if we had seen 2600 delivery notices issued on first notice day this would have been bearish because it would mean there is plenty of bullion to meet deliveries and a large proportion is being offloaded to the buyers at the first opportunity.

Taken to the limit, if the seller FAILS to issue a delivery notice by last notice day then that is a "default". The seller is obligated to deliver and he has failed in his obligation to start the transfer of metal from him to a buyer.

It doesn't mean we will see a default this month but it suggests that the sellers are in trouble and scrambling for supply as signaled by the reluctance to issue delivery notices and the price action.

Adrian Douglas

end.

Even with warehouse receipts being issued, we are witnessing a lack of metal entering the dealer and then onto the customer.

As Jim Willie suspects, that many of these contracts are settled by cash and/or GLD shares or someother exotic method of settlement.

In other physical news, the premium on one of our ETF's continue at lofty levels:

the Central Fund of Canada registered a 9.6% premium to NAV Friday and PHYS website was down.

Strangely with huge demand for gold coming from all directions, the GLD decided to shed some gold equal to .46 tonnes. This vehicle now

has 1294.44 tonnes of gold. As we pointed out last week, all the directors of GLD have zero shares to its credit but they do own physical gold.

I guess they know that their vehicle is a fraud!