|
There was a
degree of predictability about the knockdown in gold and silver at the US
futures market (Comex) last Wednesday. The reason is
that the Commercials (together the producers, processers, fabricators,
bullion banks and swap dealers) have large short positions, so they have a
vested interest in lower prices. This is particularly noticeable in silver,
which is shown below.
 
The chart
is of Commercials’ shorts and longs as of Tuesday November 27. The
Commercial shorts (the red line) now stand at 99,317 contracts, or 496,585,000
ounces, about two thirds of 2011’s worldwide mine production, and is
the highest level of exposure since 2009. Because the longs have ticked up
(the blue line), the net figure is not yet at record levels, but is only
9,212 contracts away from it.
The
justification for looking at the gross short commercial position is that the
shorts are mostly the bullion banks, and producers hedging future costs
(whose business is channelled through the bullion
banks). The long commercials are more genuine, being manufacturers satisfying
physical demand and locking in current prices to secure their margins. Swap
dealers, again mostly the bullion banks, have positions both ways. The gross
short position is therefore a better indicator of the futures market position
of the “liquidity providers” than the net balance.
In a
properly functioning market, net public demand is always long, so liquidity
providers, such as market makers, or in this case the bullion banks on their
own account, are always short between them in a bull market. The skill
required is to make trading profits in excess of losses on the underlying
position. The proviso always is that you never become so short that in an
emergency you cannot cover your position. The bullion banks in the silver
market are ignoring this overriding principal.
They now
have a problem. Instead of having record short positions against an
over-bought market, there is only moderate managed fund interest. This
interest is shown in the next chart.
While money
managers (mostly hedge funds) have nearly doubled their longs and slashed
their shorts since July, their longs are still only a little more than
average: this hardly represents the overbought conditions suitable for a
major bear raid.
On this
evidence, the bullion banks which are short in the silver market are
potentially in serious trouble, unless somewhere there is a pot of physical
silver they can dip into. There isn’t, if we assume that iShares Silver Trust’s 315 million ounces is
unavailable. There is no other identifiable source of silver, other perhaps
than some producer supply, and there is anecdotal evidence that on every dip,
cash silver migrates from West to East, confirmed by silver being constantly
in backwardation.
The odds
now favour a substantial bear squeeze. And as the
managed funds which lost money on their shorts in June-July sniff sweet
revenge, this could rapidly escalate. At the moment, every dollar move upwards
in the silver price costs the shorts nearly half a billion dollars. And there
is no way it can be covered, because the cash silver simply does not exist.
When the
shorts finally run for cover, the effect on the silver price is going to be
spectacular.
|
