I rarely have compliments for Adam Hamilton but I have to thank him for bringing some news of the SLV ETF to light. It turns out that since March 1 SLV has reduced its silver holdings by 6%, or over 17 million ounces. This occurred as the price of the metal rose from $16.50 to $18.00. This huge drawdown as silver’s price rose is unprecedented. Hamilton posits this occurred when investors bought relatively less of the ETF than they did of bullion, although that has never happened before.

If that’s true than maybe people have recognized what a stacked deck the ETF is, but I doubt that is the case.

It is beyond dispute that silver has left the ETF’s vaults — SLV admits it. The big question is where is it going? Here are a few possibilities to chew on. Could it have been delivered to the COMEX to avert widespread defaults? Adrian has often commented on smoke rising from the COMEX. Here we may be looking at the tire tracks left by the fire trucks.

Another thought is that some major buyer of silver has used the ETF to take delivery of bullion in a way that doesn’t run up the "open" market price. If this is the case than at 10 million ounces a month it will not be too long before the ETF is reduced to nothing — which would deliver the kind of jolt to investor psychology that the Eyjafjallajokull volcano delivered to aviation.

It’s also possible that insiders with knowledge of looming defaults decided to take the bullion and run while they still could.

Than there is the possibility of a kind of bank robbery/fraud that I think the ETF is vulnerable to. Because SLV does not prevent its shares from being shorted consider this scenario: Hedge Fund A naked shorts 20 million shares of SLV. Its co-conspirator Hedge Fund B buys all 20 million shares. Hedge Fund B now turns around and presents their shares to SLV and takes delivery of the corresponding silver (which can be done in large "baskets"). What happens next? If anyone ever pursues Hedge Fund A — which is doubtful — the best they can get is a cash settlement. Hedge Fund A could fold, too, in which case there is no settlement ever. Or perhaps the porno-obsessed bureaucrats in D.C. never even notice. If so, you have just witnessed one of the greatest bank heists of all time and no one even called the cops.

Whatever is going on, this type of divergence is extraordinary. The demand for physical silver is overwhelming the demand for paper silver. I think it is a harbinger of a major move in metal prices in the near future.