In August 2006 Ted Butler observed the London Metal Exchange default (excerpts below). As we get closer to the inevitable fall of the Crimex, it seems proper to recall how the nickel default of 2006 went down.
The investment world witnessed an event that has only occurred rarely in the past. I am referring to the extraordinary developments in the nickel market on the London Metals Exchange (LME), the largest base metals exchange in the world. Due to an unprecedented scarcity of metal, the LME was forced to revise the delivery terms of its nickel contracts. In return for allowing short sellers to delay delivery of metal, a daily penalty fee of around 1% of the contract value was payable by the shorts to long holders.
Excerpts from the LME’s press release of August 16, 2006:
Those with short positions in nickel falling prompt on Friday 18 August 2006, and on subsequent prompt dates until further notice, who are unable to effect physical delivery an/or unable to borrow metal at a backwardation of no more than $300.00 per tonne per day, shall be able to defer delivery for a day at a penalty of $300.00 per tonne. Those with long positions for prompt on those days who are subject to deferred delivery shall be entitled to compensation of $300.00 per tonne per day.
Commenting on the announcement, Simon Heale, LME Chief Executive said:
“Nickel stocks are at historically low levels and we now have a genuine material shortage. Our first priority is to ensure that trading remains orderly and to prevent the risk of settlement defaults.”
Although there has been widespread reporting of this event in all the popular media and news services, I have been thunderstruck by how mostly all of the reports have danced around the key fact at the heart of this matter. That key fact is that the LME declared that its nickel contract has gone into default.
While Mr. Heale states that the action by the exchange is designed to prevent default, the action taken is nothing but a declaration of default, rendering his statement as absurd. Default is a simple word. Any time you unilaterally violate or negate the terms and conditions of any legal contract, that contract is in default. Period.
Moreover, a simple analysis of the situation reveals that the LME is aligning itself with the interests of the naked shorts in nickel, as common sense should tell you that no long holder asked the exchange to suspend the delivery obligation of the shorts.
What You Can Do
Fortunately, there is something you can do. You can take the debacle in LME nickel as yet another confirmation as what will happen in silver and position yourself accordingly. If there has ever been an exclamation point given to “buy and hold real silver”, it has been given to you by the LME actions in nickel. If an exchange that has been in existence for hundreds of years can suddenly terminate delivery obligations in its contracts, how hard do you think it will be for those issuing pool and leveraged accounts in silver to do exactly the same thing? I think anyone holding such accounts needs to have their heads examined.
But the strongest message of the LME default is being sent to the silver industrial consumers of the world, because the biggest potential losers in nickel are the industrial users. If the LME can get away with suspending delivery requirements in nickel, how hard will it be for the COMEX to suspend delivery requirements in silver? Do you think the CFTC will come to your defense? The same CFTC that is stalling on the concentrated short issue in silver? Even more than those investors and speculators dealing in paper contracts, any user who is not stockpiling real silver inventories, in light of what just occurred on the LME, is missing the boat.
I hope the CFTC and the NYMEX does the right thing with this concentrated silver short position and moves against the manipulators. But even if they don’t, there is no good reason for investors and industrial users to not protect themselves and buy real silver. How many wake-up calls are necessary?
~Ted Bulter, First Nickel, Then Silver?
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