Shorts Unable to Stop Silver Rise

Much of the blame for the price of silver has been laid at the foot of a few commercial banks that take extreme short positions regarding silver. The fact that the two large commercial US banks, which the COMEX refuses to identify, have positioned themselves to bet against the silver price has been seen as a major cap on the precious metal. Apparently it is being left to the pressure of inflation to blow the lid off the cap and allow the price to rise.

The Commercial Silver Shorts were short 101,000 contracts July 18, 2008, when silver was $18.55 per ounce. They reduced their position to 51,000 contracts as silver prices collapsed to $10.07 on December 12, 2008. Since then, the price of silver has jumped to $14.66 as of May 22, 2009, while the Commercial short position has jumped back to nearly 65,000 contracts.

Back in July, the Commercial Short/Long ratio was 3.37 to 1, By December the spread was 1.9 to 1 and on May 22, it was back to 2.78 to 1

In effect, these Commercial Banks held short positions that were the opposite of the rest of the market, selling silver to offset the long positions of the small and large traders. While there must be a seller for every buyer of a contract, the sheer size of the Commercial Short position drew attention to the matter. On July 18, the Commercial Short position amounted to 84% of all short positions in the COMEX; by December, that number was down to 75%; on May 22, it was back to 82% of all short positions.

The July 18 short was 101,000 contracts, or nearly 506 Million ounces. When there were only 680 Million ounces mined in all of 2008, this indicated a short position that was nearly an entire years worth of production for the entire world. This was reduced to only 258 Moz in December, but has since rebounded to 324 Moz or nearly half the entire year’s world production of silver. If all those shorts were called for delivery, or even a small percentage of them, the COMEX would have no choice but to default or force delivery in cash rather than silver, which itcan do thanks to a recent rule change.

Of particular interest is the recent reversal in the spread between the Commercial Shorts and the price of silver. From May of 2008 through early January of 2009, this spread was negative for every week except one. During that period, the price of silver fell from $16.85 to $11.22. In Mid-January of 2009, the spread turned positive with silver at $10.76 and with only a single exception, has remained positive to today with prices Thursday, breaking the $15 ounce level. Most of these positive indicators are below 50 cents, but the last five weeks have seen spreads between 1.27 and 1.82 and a rise of 15% in the price of silver during the same period. This change has occurred even with the Commercial Shorts reinforcing their short position by 8600 contracts in just the last month.

With Silver now over $15 per ounce, the Commercial Short position would have to add another ten thousand contracts short just to come even with the current silver price. The Commercial Short position did add nearly 5,000 contracts as of May 15, but only 1600 more on May 22 to get to the current position of 64,000.

Given the recent push of inflationary fears, the increase in precious metals as a whole will likely continue and silver could see even more of a boost if portions of the manufacturing/industrial sector begin to pick up. Unless the shorts begin to make serious and meaningful increases in their short position, silver is likely to continue to rise, a boost to investors who are holding these stocks.

One final note: It would appear that increasing their short position has forced the Commercial Shorts to bet against silver to the tune of nearly half a billion dollars. While not much in the overall scheme of things, considering the bank bailouts, it could prove troublesome as further rises would place these banks in the position of having to cover their shorts at significantly higher prices as the contracts come due.

...

This estimate is based on the weekly changes in the Commercial Short Position in the Commitment of Traders Report from the COMEX.

Disclosure: Long positions in GLD, SLV, physical holdings in silver and gold, retirement funds investment.

Comments

[yellowhoard:]

Oh yeah!

Shorts are getting squeezed.

May 29 08:34 AM

[doubleguns:]

Seems they do this every year. They usually pull off a price plunge in teh summer. I HOPE they get thier a$$ burnt this time.

Big banks manipulating the market. The thievery never stops with these guys. Why did we have to bail them out!!!

They should be kissing our feet thankful they are still alive.

May 29 08:55 AM

[History Buf...:]

OK, everybody, let's take a deep breath, buy physical silver, and pile on -- can anybody say DOGPILE!

May 29 11:28 AM

[5142152-337:]

Yessssssss!
This is PERFECT! Appreciate the article, Ed! Actually, I had to look twice to see who wrote this lucid, and factual piece on silver. I'm used to see these type articles from Ted Butler butlerresearch.com.

One question: What was the change that allows dollars to be doled out INSTEAD of silver?????? Is that more of Obama-momma?

May 29 03:47 PM

[O-B-WON:]

It's all becoming so evident of market manipulation, insider trading, and outright fraud that has / is taking place in "ALL" of the markets..


It's not even gambling like in Vegas... at least you know the odds..

It makes me sick to my stomach that this kind of CR@P can be unchecked.. tolerated... and unpunished...

I agree .... let's all dog pile...

May 29 10:23 PM

[PMMaven:]

This is very confusing. Are these "Commercial" shorts banks. I am under the impression that silver resellers acting as merchant bankers would undertake a classic Cash and Carry hedging program. And what does annual silver mining output have to do with above ground inventory?

May 30 10:00 AM

[PeteK:]

Have been getting shares of SLW, HL, CDE etc
since a few months ago.
So far so good.

May 30 11:55 PM

[DmytrenkoArtem:]

why hedge funds bought gold stakes? why not silver or commodities baskets?

Jun 02 08:17 AM

[Brad Zigler:]

Apparently it hasn't occurred to anyone except PM Maven that these banks have offsetting long positions in the physical, forward or derivative markets that are not reflected in the Commodity Futures Trading Commission (CFTC) position reports.

The speculative position limit for silver futures is 6,000 contracts. Any single trader holding more than that must be able to demonstrate a bona fide hedge relationship offseting the futures exposure.

You're only seeing PART of the banks' metals exposure in the CFTC reports.

See: "Has Gold Been Manipulated?" at seekingalpha.com/artic....

On May 30 10:00 AM PMMaven wrote:

> This is very confusing. Are these "Commercial" shorts banks. I am
> under the impression that silver resellers acting as merchant bankers
> would undertake a classic Cash and Carry hedging program. And what
> does annual silver mining output have to do with above ground inventory?

Jun 02 01:44 PM