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The commercial shorts
in COMEX silver are now covering in a big way, and they are able to do it
while silver prices remain near their correction lows. In the latest COT
report as of August 26, the gross commercial short position was reduced by
more than 10,000 contracts from the prior week while the gross commercial long
position was also reduced by 6,500 contracts. The large speculators also
reduced their gross long positions by 3,000 contracts but added 1,000
contracts to the short side. Small speculators reduced both long and short
positions by a marginal amount. The net result is that open interest fell by
almost 10,000 contracts from the prior week (August 19).
Since the August 26
COT report, open interest has fallen by another 10,000 contracts or so
to around 115,000 contracts. I’m willing to bet a pig that the cause was
more commercial short covering. The present 115,000 contract level is a
stone’s throw from 100,000, a level which COMEX open interest has
rarely gone much below since the beginning of 2005.
In my opinion, the
above means that speculative hot money has most likely been
completely sidelined in COMEX silver at this point. If true, any further
substantial decline in silver would have to come from long-term players
giving up on the silver bull market. Since such players likely have both
paper and physical positions (I include the ETFs in physical and COMEX in
paper), I think such a fundamental change in market sentiment
would essentially mean there would be significant physical selling
to go along with the paper selling. I’m not seeing that so far (in
fact, quite the opposite) and therefore such dire prospects remain
only a risk for now. If the physical selling does appear, however, it
would have very serious implications for the price of
silver and could very well mean sub-$10 silver prices. Thus, it is
important to keep an eye out for any sign that it is starting to happen.
The above is
particularly important given the news that a hedge fund with big bets in
commodities, the Ospraie Fund, has collapsed (more on this later). No
doubt there are others on the brink. Perhaps this very fund had to sell COMEX
silver due to a margin call during August, although the speculation
is that it was mostly into natural gas and copper (if so, what dopes). In
any case, we have all heard that gold and silver are among the most liquid
of ”commodity” investments and now we have a confirmed
and plausible source for part of the violence in silver and gold prices
in August.
Speaking of which,
the conspiracy talk that silver and gold were cratered by
the ”naked” short selling of commercials, including the
U.S. banks that appeared on the CFTC Bank Participation report, continues to
gather steam. This is despite the fact that the COT reports prove
that the commercials were actually buying during the entire decline. The data
can be summarized as follows:
Gross long and gross
short positions held by commercials:
July 1: 27,495 and
92,817
July 15: 30,013 and 101,164 (top)
August 5: 35,217 and 90,678
August 19: 43,891 and 90,759 (bottom)
August 26: 37,361 and 80,469
From top to bottom,
the commercials added 13,878 contracts and covered 10,405, which means
they bought on a net basis 24,283 contracts. I included a few other
COT dates so I wouldn’t be accused of being selective with
the data. Now, does this prove there was no manipulation during the
price decline? Absolutely not. As I have discussed in excruciating
detail, someone like the Hung Brothers could have played a major
role. My allegation, as crazy as it might be, has at least one
thing going for it: consistency with the COT data. By
contrast, the allegation that “naked” commercials pounded the
silver price down by excessive selling is not supported by COT data or
anything else.
I see Ted Butler
has now come around to the idea that the big short position
of the 2 U.S. Banks in COMEX silver (being JPMorgan and HSBC as I revealed
last week) needs to be reconciled to the COT reports. I have already
provided two theories that attempted to do that: (1) JPMorgan took over the
Bear Stearns silver position when it acquired the troubled investment bank in
June*; and (2) The large COMEX short position was already held by JPMorgan at
the dealer level (JPMorgan Futures) but was moved to the bank level (JPMorgan
Chase Bank, National Association) for some reason such as regulatory capital
ratios. Mr. Butler went with theory #1 but he also went ahead and threw
another wrench into the works by somehow tying in the U.S. government. Now that’s a true conspiracy! Alas, I don’t see how the U.S. government had to be involved. JPMorgan acquired Bear Stearns for a few bucks per
share while about $30 billion of the riskiest Bear assets and related
liabilities were put into Maiden Lane LLC, an entity that is fully
backed by a Federal Reserve credit extension and guarantee. If Bear
Stearns had really toxic silver short positions, why not just put them into
Maiden Lane LLC or a similar outfit? I think the more reasonable, though less
entertaining, answer is that Bear Stearns may have had some COMEX silver
short positions held against some forward (over-the-counter) booked
silver long positions. In other words, Bear Stearns was not
“naked” short in silver but rather hedging OTC paper with COMEX
paper. Just a theory, but at least it’s one that doesn’t rely
on a massive conspiracy.
[*Here is my comment
from August 22: For example, if we really wanted to play connect-the-dots,
we might observe that Bear Stearns was acquired by JPMorgan in this same
timeframe and it is very possible that if BS held large COMEX silver and gold
short positions, those might have been transferred to one of the 2
“U.S. banks” so as to keep the positions off JPMorgan’s own
books. What I’m saying is that one or both of the “U.S. banks” might actually be a subsidiary of JPMorgan and could have received an
intercompany guarantee to offset any exposure to loss. Of course this is all
rank speculation, but I would consider any explanation deficient if it ignores
how these “U.S. banks” managed to put on such large short
positions without leaving a footprint in open interest.]
Back to the markets.
From a technical perspective, both silver and gold are now facing some very
heavy headwinds as the charts look like quite a mess. It is very possible
this condition alone accounts for the lack of any significant bounce so far
from what otherwise might have been exhaustion lows such as yesterday’s
price action (which is no longer one based on today’s price
action). What I’m saying is that there might be some technical selling
into rallies by pure and disciplined technicians. I suppose the good news is
that the truly disciplined technicians are rare birds
and their selling could be over pretty quickly.
Some more good and
bad news.
Bad news: At this
point we are unlikely to get a sustained short-covering rally in silver
because most of the covering has already taken place. Unfortunately,
that covering hasn’t meant squat for the silver price. As a result,
I’d be careful with buying near-dated call options for now.
Good news: Those
who are now covering in COMEX silver have just made a pile of money.
Assuming most of them were not “naked” short (I am joined in
having such crazy thoughts by intellectual lightweights such as Prof. Antal
Fekete and Jim Sinclair), they are in a position to comfortably
maintain their physical holdings. It could be very important to
have such strong hands in the market should the current malaise in the
monetary metals last for a significant period of time. Indeed, something like
this could mean silver prices holding up pretty well going forward even if
the commodity sector keeps getting pounded.
Tom Szabo
Silveraxis.com
Tom Szabo was born in Hungary
during the Communist era and escaped to the West with his family, eventually
settling in California. After graduating from the University of California at Berkeley with a Bachelor’s Degree in Business Administration, he spent 8
years as a financial statement auditor with Deloitte & Touche, focusing
on financial institutions. He has co-founded several
precious metal related businesses and investment funds, invests for his own
account and runs the website at www.silveraxis.com. His specialty is
original, controversial, unpopular and contrarian thinking.
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