Silver Shorts Exerting Price Control

Just a month ago, the COMEX silver price was rising, despite mixed economic news and proclamations that the economy was improving. At that time, the commercial positions in silver on COMEX were short 58,000 contracts or 79% of all short positions held (5/8/09). While small and large speculators reduced their short positions since then, the commercial positions ramped up their short stakes to 73,400 contracts or 84.4% of all short positions in the market (6/12/09).

Not surprisingly, the price of silver is finally succumbing to the overwhelming shorts as the short ratio expand. The magnitude of the short position is best understood by multiplying the short position by 5,000 to see that the commercial positions are now short more than 367 million ounces of silver. That is nearly 54% of the yearly mined supply of silver (680 moz in 2008).

Much of this short silver position is held by two US banks, one of which has been identified as JPMorgan, who inherited the Bear Stearns short position when it took over that bank (see Ted Morgan, SilverSeek.com). As of June 2009, the Bank Commitment of Traders indicated the two US banks held 27,500 short contracts out of a total of 69,000 short positions of commercial traders (short positions were on 6/5/09). While these two US banks were short 27,500 contracts, they were long on just 25 contracts.

As a comparison, there were 12 non-US banks with positions in silver in the same report. These 12 banks have a combined short position of just 4,000 contracts, and are long on almost 9,300 contracts.

Given that the commercial positions are the top 8 traders in the market, the two US banks make up 37% of the short position and just three one hundreths of a percent of the long position.

The rapid increase in the short position has allowed the shorts to place downward pressure on the silver price by selling enough paper positions to exceed the price of silver. They last accomplished this in February of 2009 when short positions reached 71,000 contracts and the price of silver was hovering around 14 dollars an ounce. The steady increase in commercial short positions since 4/24/09 has mirrored a rise in the silver price from around 12 to 15 dollars, but remained below levels needed to stop the rise.

Short positions 4/24/09

Small speculator - 9,845

Large speculators - 10,518

Commercial - 56,266

Silver price - 12.78

Commercial short ratio price - 11.25

Difference - 1.53

Short Positions 6/12/09

Small speculator - 8,109

Large speculators - 5,446

Commercial - 73,464

Silver price - 15.07

Commercial short ratio price - 14.69

Difference - .38

The last time the commercial short ratio price difference was negative was on February 27, 2009, when commercial shorts reached over 71,000 contracts short. At that time, commercial short positions were 85.26% of all short positions on COMEX.

Disclosures, Long GLD, SLV, some physical holdings, stock retirement investments

Comments

[kohalakid:]

enviro111--

You make some good points. The Commercial Shorts are hedgers, not speculators. If they were Specs, they'd be in the Non-Commercial category. They typically hedge future output from mines in return for lending capital to the mining companies. So they do "hold down prices", but only to the extent that future silver is available to hedge.
The buyers are willing to take the promise of future delivery.
Those who see some evil manipulation in all this are disregarding the purpose of the futures markets. If the only market available was a cash, spot market, who would buy (and hedge) physical silver when supply exceded demand? Or who would be a physical seller (and futures buyer/hedger) when physical demand exceeds supply?

The liquidity and ease of hedging and arbitrage between the spot/physical market and the futures market does not leave much room for "easy money". There are pennies to be picked up, but it's a grind.

Jun 18 05:03 PM

[bkdc:]

If there is a massive short squeeze that collapses the big boys, the Federal Reserve and the regulators will change the rules to bail out the shorters. The last time this happened was when the Hunts got screwed over as they controlled almost all the physical silver and there was not enough silver in the world to cover the massive short squeeze.

Jun 18 06:04 PM

[User 292572:]

When the spot price was around 12 a few weeks ago, I bought a lot of silver and took physical delivery. For the current price, silver is a better store of value that USD, I believe.

I read somewhere that most gold miners don't hedge gold anymore. I am not sure about silver miners. If silver miners don't hedge, then why would big commercials hedge?

Jun 18 07:27 PM

[kohalakid:]

Part of the reason gold producers don't hedge anymore is the consolidation in the gold mining industry in the last 15 years. Previously, small miners would only get financing from lenders if they hedged their future production, guaranteeing sales prices that could be factored into determining whether an operation would be viable or not. Now, with large, well financed mining companies dominating the gold mining business, the accountability has shifted from the banks to the shareholders, who want upside exposure to gold prices.
With Mexico and Peru producing 1/3 of the world's newly mined silver, I don't see these same shareholder pressures being applied.
Additionally, most silver is a by-product of base metal production, rather than a primary metal as in the case of gold.


On Jun 18 07:27 PM User 292572 wrote:

> When the spot price was around 12 a few weeks ago, I bought a lot
> of silver and took physical delivery. For the current price, silver
> is a better store of value that USD, I believe.
>
> I read somewhere that most gold miners don't hedge gold anymore.
> I am not sure about silver miners. If silver miners don't hedge,
> then why would big commercials hedge?

Jun 18 08:21 PM

[kohalakid:]

Commercial hedgers also use futures to hedge their physical inventories of silver. Dealer/brokers have hundreds of millions of ounces of physical they keep to sell to their industrial customers. They hedge to protect their cost basis and to earn contango.


On Jun 18 07:27 PM User 292572 wrote:

> When the spot price was around 12 a few weeks ago, I bought a lot
> of silver and took physical delivery. For the current price, silver
> is a better store of value that USD, I believe.
>
> I read somewhere that most gold miners don't hedge gold anymore.
> I am not sure about silver miners. If silver miners don't hedge,
> then why would big commercials hedge?

Jun 18 08:25 PM

[The Goy:]

OK, this is getting ridiculous. I have worked on the street for 20 years, having run 2 very active firms. I am telling you there is no evil anti-silver cartel. Stop this insanity.

There is NO reason to keep silver down, no gov't gives a hoot if silver is 5, 10 or even 30. In gold there MIGHT be an issue, but no one gives a s*#? in silver. The large bank shorts are exactly what they seem to be, hedges versus future production.

Jun 18 09:38 PM

[capt Brian:]

The boogie man is gonna get you... watch out.

HEY HEY!!! wake up, remember supply and demand, it exists, stop looking for dragons, yes investors are buying, yes new silver from the mines is slowing, yes industrial and jewelery use is down, but it is about countered by investor buying and insane gold bugs, it is where it should be. Get over it. (and PS BUY THE HELL out of it before things heat up again, and the supply is not nuff for demand)

Capt Brian

Jun 18 10:21 PM

[kohalakid:]

I've got almost 35 years in precious metals, investing, dealing, refining of scrap, coins, bars. I've done futures, physical, forwards,swaps, leases, taken and made deliveries to COMEX and NYMEX etc etc.
Your insistance that there is no conspiracy just won't fly on these sites.
I KNOW THERE ISN'T ONE because I know how the metal markets work, but these guys who have their local coin dealer tell them that silver is rare because 1 ounce rounds are going to cost them $2.50 over spot, or that the Mint is rationing gold Eagles so the United States must be running out of gold, just won't listen to the reality.
Lots easier to think the man behind the curtain is pulling all the strings.


On Jun 18 09:38 PM The Goy wrote:

> OK, this is getting ridiculous. I have worked on the street for 20
> years, having run 2 very active firms. I am telling you there is
> no evil anti-silver cartel. Stop this insanity.
>
> There is NO reason to keep silver down, no gov't gives a hoot if
> silver is 5, 10 or even 30. In gold there MIGHT be an issue, but
> no one gives a s*#? in silver. The large bank shorts are exactly
> what they seem to be, hedges versus future production.

Jun 18 10:42 PM

[The Goy:]

Kohalakid,

Thanks for assuring me that there is some sanity in the world. The funny thing is I can pretty much GUARANTEE no one owns silver at my prices, as I got lucky as hell and pretty much bottom ticked it(PURE luck, but I am taking it as phenominal market timing).

The interesting thing is that I see the same rational to own palladium now as I did with silver at 4. Just an idea( and no, I would not rush out to buy it, but I would definitely learn about it, and find your buy points)

Jun 18 11:52 PM

[Ed Zimmer:]

I'll try to answer several of the points brought up in comments, and also apologize for not getting one point quite right. The settlement outside of contracted metal is apparently a doomsday senario for a default on the COMEX. Despite my searches, I cannot find a default rule listed at Nymex regarding this. I apoligize for getting that wrong.

Comex stocks as of June 18th, 2009 in licensed depositories totalled 119 million ounces. Total shares of silver outstanding as of June 12th were 87,000 contracts for 435 million ounces. In other words, they have 4x the contracts compared to the silver in depositories. If 25% of the longs asked for silver, they would clear out the depositories.

Yes, there is a long for every short in COMEX. However a very small number of Commercial Traders hold nearly 85% of all short contracts. Either they know something or are betting 235 million ounces of silver that they can make money because it will go down in price. (# short contracts - long contracts, Commercial) BTW, that 235 million ounces difference is still twice the supply of silver in COMEX depositories.

Is there a conspiracy? That would be very difficult to prove. Manipulation on the other hand would appear likely given the large positions held by few traders who stand to benefit from those positions when stocks are insufficient to allow for completion of the outstanding contracts.

I don't know if COMEX stocks for other commodities are in a similar leveraged position of 1:4. Some have said that IShares silver trust holds 2/3rds of the worlds silver (about 280 Moz as of June 18, 2009) which would leave another 140 Moz for the rest of the world's disclosed stocks, of which COMEX claims to hold all by 20Moz of that remainder. That would put world stocks around 420 Moz with a yearly deficit between silver demand and mined silver. (Silver Institute Supply and Demand shows a balance by claiming Net Government Sales and Old Silver Scrap, which is coming from world stocks. Fabrication demand outstrips mining nearly 150 Moz each year.)

Again, I apologize for my error on the COMEX. I believe that I read it somewhere, but I cannot document it, therefore I have to apologize for the error.

Jun 19 11:15 AM

[kohalakid:]

Ed--

Thanks for clearing up the COMEX cash settlement question.

As for the notion that Commercial Traders are exerting price influence to profit from their short positions, I think we need to look at the definition of a Commercial Trader. If a precious metal dealer, with physical inventory, hedges his inventory by being short 3,000 contracts, he's a Commercial Trader.
If a hedge fund wants to speculate on silver and short 3,000 contracts, they are a Spec Trader and are listed in the Non-Commercial Trader category.
Being a large bank and having the capital to short 3,000 contracts doesn't automatically make you a Commercial Trader. You need to be actively involved in trading, dealing, mining, refining etc of physical silver. This is by COMEX and CFTC rule as the margin requirements are lower for Commercial Traders who are hedging.

So by COMEX and CFTC definition, the Commercials are not naked shorts who are trying to push the market lower. They are hedgers who sell futures when silver is sold to them and are buyers of futures when fabricators, industrial users or dealers buy from them.
Since those involved in the physical trade have a good feel for the market and see the supply and demand of the "real" metal, they tend to be buyers at market bottoms, as their re-stocking puts a floor on prices, and they tend to provide supply at market tops, as they take advantage of what they consider to be "too high" prices.

Commercials are not big bank speculators. They are hedgers. Do they ever take spec positions?? Of course. But their trading agreement with COMEX defines their business as hedging.

My trading accounts are all hedge accounts because I hedge physical metal. I am not at the level of net position where I need to report my positions to COMEX, but if I was at that level, I'd fall in the Commercial category and be recorded in the weekly report.

Jun 19 01:02 PM

[kohalakid:]

Ed---

You also seem to believe the function of COMEX/NYMEX is to be a cash market. It's not. It's a futures market. Only 1 or 2 % of all contracts result in delivery being taken or made.

NYMEX palladium has open interest of 16,000 lots and warehouse stocks of 4000 lots.

NYMEX platinum has open interest of 23,000 lots and warehouse stocks of 2500 lots.

You also seem to count COMEX and iShares as holding the "world stocks" of silver at 420 million ounces. You are forgetting the London market which is huge and probably holds more than COMEX and you forget dealer and investor inventories. I've owned London pool silver before. It's easy to buy/sell and cheap to store.

There is plenty of silver. It's not rare. They pull almost 2 million ounces out of the ground every single day.

All that being said, I am long silver and short July puts.

Jun 19 01:19 PM

[SoundMoneyman:]

So hedging by mining companys is at an all time low, but these massive short positions are some form of a hedge? um no

Jun 23 08:56 PM

[kohalakid:]

Hedging can be against physical positions held by the banks/dealers. It doesn't all have to represent future production.
If you don't believe me that Commercials are hedgers, go to the CFTC website and look around and you'll see who qualifies as what as far as reporting goes.


On Jun 23 08:56 PM SoundMoneyman wrote:

> So hedging by mining companys is at an all time low, but these massive
> short positions are some form of a hedge? um no

Jun 24 05:41 PM

[SoundMoneyman:]

Strange how the above ground verifiable silver inventories has continued to shrink every year for 40 years, but the unverifiable inventories remain huge. hmmm

Yes they pull almost 2 million ounces of silver out of the ground everyday, this is true.

Problem is industry consumes almost 3 million ounces of silver per day. Hence the drawdown in world VERIFIABLE inventories.

This cant last, and wont last.

Jun 24 06:43 PM

[kohalakid:]

Hmmmmm is right. Those sure aren't the numbers I see out there. COMEX warehouse stocks have been about the same 100 million ounces for the 35 years I've been trading. Add in the holdings of ETFs and there's probably more verifiable above ground stocks now.

And I'm not sure where you get the number 3 million oz of industrial use per day. The Silver Institute number is much lower.
Just because metal gets used by industry doesn't mean it's gone forever. Reclamation and refining of silver scrap is a huge source of supply.

I'm long physical silver and futures and short puts, so I do believe in the stuff, but I've been hearing for decades about dwindling inventories and how the world is running out. We're not.


On Jun 24 06:43 PM SoundMoneyman wrote:

> Strange how the above ground verifiable silver inventories has continued
> to shrink every year for 40 years, but the unverifiable inventories
> remain huge. hmmm
>
> Yes they pull almost 2 million ounces of silver out of the ground
> everyday, this is true.
>
> Problem is industry consumes almost 3 million ounces of silver per
> day. Hence the drawdown in world VERIFIABLE inventories.
>
> This cant last, and wont last.
>

Jun 24 07:35 PM

[SoundMoneyman:]

www.silverinstitute.or...

Well, If your going to call the total mine production of 680.9 million ounces of silver last year 2 million ounces per day, I guess I`ll call the total fabrication demand of 832.6 million ounces 3 million ounces per day, tho both figures are a bit less.

I also find it fishy that the total mine production + scrap recovery etc = total fabrication demand, exactly to the ounce for 10 yrs.

In 1940, after the us government confiscated gold (1933) and silver (1934) the us govt held 5 billion oz of silver. Today they hold Zero.
Where is it. Gone forever. Consumed, never to be recovered.

Silver confiscation info here: cache.silver-investor....

You cannot account for 1 billion ounces of silver on the face of the planet. Period.

Its ok. Your long silver. Your going to profit. You don't need to understand every implication why.

Jun 24 09:25 PM

[kohalakid:]

The supply and demand line items "Implied Net Investment" and "Implied Net Disinvestment are what allow the numbers to balance every year.

Jun 24 10:08 PM

[Ed Zimmer:]

My current estimates of world stocks of silver places available silver around 500 Moz. This would be defined as COMEX stocks and ETF stocks. I don't have figures yet for London, I will try to get them and continue to add the totals up.

As for Silver being plentiful, yes they do mine nearly 2 Moz per day, and consume 2.27 Moz per day. That would put Silver in a deficit position which must be made up from existing stocks (scrap or government sales.) Figures are based on usage reported by GFMS in 2008.

So far this year, the IShares Silver ETF has added 48 Moz of silver to it's holdings. Information that I can derive from sources indicates that the silver going into these ETF's is either not being considered, or is only being partly considered in world consumption numbers (which include industrial, photography, jewelery, coins and medals) The Zurich ETF added a million ounces in 1 month and the London ETF is at 99 Moz at the end of May. IShares currently holds more than 280 Moz.

2008 production vs usage was short between 100-200 Moz. GIven the recent economic downturn, the 2009 figures could be a watershed year, especially given the amount of silver cascading into the ETF's.


On Jun 19 01:19 PM kohalakid wrote:

> Ed---
>
> You also seem to believe the function of COMEX/NYMEX is to be a cash
> market. It's not. It's a futures market. Only 1 or 2 % of all contracts
> result in delivery being taken or made.
>
> NYMEX palladium has open interest of 16,000 lots and warehouse stocks
> of 4000 lots.
>
> NYMEX platinum has open interest of 23,000 lots and warehouse stocks
> of 2500 lots.
>
> You also seem to count COMEX and iShares as holding the "world stocks"
> of silver at 420 million ounces. You are forgetting the London market
> which is huge and probably holds more than COMEX and you forget dealer
> and investor inventories. I've owned London pool silver before. It's
> easy to buy/sell and cheap to store.
>
> There is plenty of silver. It's not rare. They pull almost 2 million
> ounces out of the ground every single day.
>
> All that being said, I am long silver and short July puts.

Jun 25 09:41 AM

[5142152-337:]

WOW! I have learned a LOT in this article AND THE POSTS! Thank you so much! It seems to me that while there is a wealth of information and expertise emanating from these writings, and posts, one thing keeps coming to the surface: manipulation, more pointedly, there is clear disagreement between posters, yet no POSITIVE, CONCRETE evidence can be provided. The one thing that I'm gleaning here is that COMMON SENSE screams that it is happening. All these figures (government) are so much bunk! While some posters have vast experience in PMs, I have 41 years of government expertise in these matters. I can tell you its pure BUNK (I am being sensitive to those who distain profanity). Our illustrious government gins up figures to suit the situation, as it pleases them. The irony is they can't even make the figures APPEAR reasonable. Shoddy work at best. But, then, that it our government at work.

Keep up the good work Ed. And posters, see through the maze, will you?

Jun 28 08:34 AM