Info on CME contractsThere is indeed a possibilty for default and it is the CME's job is to assure that there wont be one. The 5 ultramanipulative margins hikes in a short time may have staved off a possible default , so they did their job.
However because it is the INTENTION of the CME contracts to supply excessive leverage to the actual physical supply of the commodity , there exists a possibility of default in a commodity that is in very tight supply.
Depending on who you listen to there is either a tight supply or a huge glut of silver.
I suspect here is no huge glut since the mints around the globe had trouble getting access to physical silver as did Sprott for his fund.
Anyways here is a good read for those who dont understand the mechanics.
What Are Precious Metals Futures Contracts?
A
precious metals futures contract is a legally binding agreement for
delivery of gold or silver in the future at an agreed-upon price. The contracts are standardized by a futures exchange as to quantity, quality, time and place of delivery. Only the price is variable. (For more insight, see the
Futures Fundamentals tutorial.)
Hedgers use these contracts as a way to manage their price risk on an expected purchase or sale of the physical metal. They also provide speculators with an opportunity to participate in the markets without any physical backing.
There are two different positions that can be taken: A
long (buy) position is an obligation to accept delivery of the physical metal, while a
short (sell) position is the obligation to make delivery. The great majority of futures contracts are
offset prior to the
delivery date. For example, this occurs when an investor with a long position initiates a short position in the same contract, effectively eliminating the original long position.
Advantages of Futures Contracts
Because they trade at
centralized exchanges, trading futures contracts offers more
financialleverage, flexibility and financial integrity than trading the
commodities themselves. (For related reading, check out
Commodities: The Portfolio Hedge.)
Financial leverage is the ability to trade and manage a high market value product with a fraction of the total value. Trading futures contracts is done with performance
margin. It requires considerably less capital than the physical market. The leverage provides speculators a higher risk/higher return investment. (For related reading, see
The Leverage Cliff: Watch Your Step.)
For example, one futures contract for gold controls 100
t ounces, or one brick of gold. The dollar value of this contract is 100 times the market price for one ounce of gold. If the market is trading at $600 per ounce, the value of the contract is $60,000 ($600 x 100 ounces). Based on exchange margin rules, the margin required to control one contract is only $4,050. So for $4,050, one can control $60,000 worth of gold. As an investor, this gives you the ability to leverage $1 to control roughly $15.
In the futures markets, it is just as easy to initiate a short position as a long position, giving participants a great amount of flexibility. This flexibility provides hedgers with an ability to protect their physical positions and for speculators to take positions based on market expectations. (For related reading, see
What is the difference between a hedger and a speculator?)
The exchanges in which gold/silver futures are traded offer participants no
counterparty risks; this is ensured by the exchanges' clearing services. The exchange acts as a buyer to every seller and vice versa, decreasing the risk should either party
default on its responsibilities.
Futures Contract Specifications
There are a few different gold contracts traded on exchanges: One at
COMEX and two on eCBOT. There is a 100-tounce contract that is traded at both exchanges and a mini contract (33.2 t ounces) traded only at the eCBOT.
Silver also has two contracts trading at the eCBOT and one at the COMEX. The "big" contract is for 5,000 ounces, which is traded at both exchanges, while the eCBOT has a mini for 1,000 ounces.
GoldFutures
Gold is traded in dollars and cents per ounce. For example, when gold is trading at $600 per ounce, the contract has a value of $60,000 (600 x 100 ounces). A trader that is long at 600 and sells at 610 will make $1,000 (610 – 600 = $10 profit, 10 x 100 ounces = $1,000). Conversely, a trader who is long at 600 and sells at 590 will lose $1,000.
The minimum price movement or
tick size is 10 cents. The market may have a wide range, but it must move in increments of at least 10 cents.
Both the eCBOT and COMEX specify delivery to area vaults. These vaults are subject to change by the exchange.
The most active months traded (according to volume and open interest) are February, April, June, August, October and December.
To maintain an orderly market, the exchanges will set position limits. A position limit is the maximum number of contracts a single participant can hold. There are different position limits for hedgers and speculators.
Silver Futures
Silver is traded in dollars and cents per ounce like gold. For example, if silver is trading at $10 per ounce, the "big" contract has a value of $50,000 (5,000 ounces x $10 per ounce), while the mini would be $10,000 (1,000 ounces x $10 per ounce).
The tick size is
.001 per ounce, which equates to $5 per big contract and $1 for the mini contract. The market may not trade in a smaller increment, but it can trade larger multiples, like pennies.
Like gold, the delivery requirements for both exchanges specify vaults in the area.
The most active months for delivery (according to volume and open interests) are March, May, July, September and December.
Silver, like gold, also has position limits set by the exchanges.