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"Gold is hard, apolitical, and global money, supported by an unparalleled history and tradition. That is the asset I want to own when our assorted finance PhDs in the central banks, the bureaucrats in the Treasuries and Ministries of Finance, and our sociopathic welfare politicians have maneuvered the system to the edge of the abyss. Which is now." By Detlev Schlichter.

In this report, we are going to take a very close look at COT report for the silver market as of December 10, 2012. The Commitments of Traders (COT) reports provide a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.

Silver

While there is a large stock of gold that can theoretically become available at higher prices, the same cannot be said for silver. We shall look at the position of the U.S. banks first. The first silver chart shows that even though silver is trading well below its 2011 highs, U.S. banks' net shorts are substantially higher than might be expected. The long figure is down to only 625 contracts, while the shorts are 40,198, so these less-than-four-banks that reported have a net short exposure of nearly 200,000,000 ounces, or twice the estimated annual supply of silver available to investors after industrial demand is allowed for.

Courtesy of Finance And Economics

The next chart is of Non-U.S. banks' net shorts, which tells a very different story. From October 2011, these banks increased their short positions, with a sudden jump between August and October, before sharply reducing their net positions to 44,707 contracts this month. It appears that some of the shorts have ended up on the U.S. banks' books, pushing their shorts to uncomfortable levels as shown in the first chart.

Courtesy of Finance And Economics

The final chart shows the non-U.S. banks' net shorts. Unlike their exposure to gold, these banks are in the same deep trouble as the U.S. banks, having made the mistake of turning a broadly level book as recently as the August BPR into a record net short position on the August-October price rise. This is a vicious bear squeeze, which added to the U.S. banks' position, amounts to a total short of 290,000,000 ounces. This figure compares with net shorts of only 120,000,000 ounces when the price was successfully taken down from its all-time highs early last year.

Courtesy of Finance And Economics

Conclusion

The silver does not exist to cover these short positions, and it will take very little further buying to set off a crisis in this important market. In the case of gold, there have always been central banks with physical bullion available to ease market shortages, but so far as we are aware, the strategic silver stockpiles of previous decades are exhausted. There is therefore no price at which these shorts can be closed.

Bank positions in both silver and gold seem to have been adversely affected by "events unknown" from the August BPR onwards. All attempts by the banking community to regain control of these important markets appear to have failed.

Since the date of the latest BPR (December 4), there have been three serious attempts to reduce these short positions and each time the same $32.60 level has held firm, until the market came down to the $30's recently. This suggests that a buyer or buyers larger than the banks are prepared to take them on by buying the dips just under $30. This price action supports anecdotal evidence that physical bullion in important markets such as London is in short supply. These levels also completes a Golden Ratio Fibonacci Retracement.

One of the most useful methods for trading the silver markets is through the identification of reoccurring price patterns, and using the Fibonacci ruler is the simplest way of identifying one of our most powerful reoccurring price patterns, known as the Fibonacci Retracement.

One such retracement level that we as technical analysts watch for, more than any other level, is the 61.8% level. This level was accomplished on December 20, 2012 at $29.67.

On this evidence, and assuming the trend continues, there will shortly come a time where NYMEX will be forced to declare force majeure in this market, which they can do under their rule book. The consequences of this extreme action could well be destabilizing not only for the price and demand for silver but also disruptive for gold.

Therefore, we must add the breakdown of precious metals markets to the list of systemic dangers we face in the New Year.

Source: Silver Shorts Crisis In 2013?

Additional disclosure: Additional disclosure: *Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.