NEW YORK (TheStreet) -- A significant decline in levels of registered silver suggests major investors are taking a defensive stance when it comes to the metal.

There are two kind of inventories on the Comex -- registered and eligible. Registered is available silver not yet spoken for. Eligible is silver that investors have purchased, but is stored by the CME for them, otherwise known as taking phsyical delivery.

Since the beginning of 2011, the amount of registered silver has fallen almost 38% with a steep drop coming in mid April. Registered silver now stands at 28.7 million ounces as of June 8th while eligible silver has risen 23% to 72 million ounces.

Part of the explanation for this shift was that Scotia Mocatta, one of the banks that holds the Comex' silver, reclassified a large portion of their silver from registered to eligible, which means more silver was being taken off the shelf and being claimed by investors.

This shift occurred when the silver price was at $43.26 and continued as silver rallied to nearly $50 an ounce, which means investors might have been scared of supply crunch and grabbed the metal while they could, leaving less silver in the marketplace for everyone else.

"More and more people are taking delivery of the product," says Phil Streible, senior market strategist at Lind-Waldock. The silver futures market is also in backwardation, meaning that the most current month trades higher than future months. Backwardation often indicates that investors are worried about an immediate supply crunch.

Mark O'Byrne, executive director of Goldcore, a bullion dealer, says the small amount of registered silver is dangerous because if a "tiny fraction of those in the futures decide to take delivery, there is the potential to default." If the Comex can't make good on their commitments, O'Byrne predicts there would be a huge rush into the physical metal or allocated storage and out of paper silver. He also wonders if the steep and aggressive margin hikes silver saw in May, which led to a more than 30% correction in the silver price, were a way of the Comex shaking out investors to prevent them from taking physical delivery.

The conspiracy theory doesn't hold much water, however, with Jeffery Christian, managing director of the CPM Group. To put the numbers in perspective, he looks at the 550 million ounces of silver in ETF vaults instead.

"The reality is that the metal has been registered, but still is sitting there ... looking at it in percentage terms gives an outsized 'feeling' of largeness." Christian does agree that there is "strong demand from investors and some fabricators," but that it shouldn't be blown out of proportion.

The inventory drop appears to have subsided for now, suggesting investors are either occupied buying other assets or are waiting for higher prices or a crisis to take physical delivery. The silver price has also stalled out, stuck between $33 and $38 as it has been smacked with slowing global growth. Fifty percent of silver demand comes from industrial and electronic usage.

With the Federal Reserve also taking more stimulus off the table, silver has been less needed as a safe haven asset, an alternative to the U.S. dollar. Many experts think gold and silver investors are in wait and see mode to see what happens after the Fed stops pumping money into the system.

Anthony Neglia, president of Tower Trading, says that the low supply of registered silver and macro environment means lower prices for the short term. "To register is to commit for delivery, so lack thereof means lack of demand ... Its going to be a long summer for the longs and a hot one for the shorts."

But if any crisis breaks out from a default by the U.S. or a European country to a natural disaster, investors might rush to the physical metal. Whether through taking physical delivery or by buying shares of the iShares Silver Trust ( SLV - Get Report), which, according to Streible, stores some of its phyical silver at the Comex, if registered silver supplies on the Comex are still thin, the silver price could see another leg up.

-- Written by Alix Steel in New York.

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