Comex Silver - Another Bubble or Desperation?

In the past two weeks, the Commercial Short Position in COMEX silver has increased by 16.2%. The small number of Commercial Traders have basically sold short some 11,500 contracts (57.5 Moz) in just the past two reporting weeks while at the same time, trimming their long positions by nearly 2000 contracts (10 Moz). That's right, Commercial Shorts went further into the negative by some 67 Million ounces of silver, more than the registered silver held by the COMEX as of September 10th (60 Moz). This is the largest two week increase in short positions for the Commercial Category since I began tracking the figures in May of 2008.

While large hedge funds are adding to their long positions in silver, the few Commercial traders are desperately trying to keep a lid on the price. This includes two US banks who were holding a short position of 29,888 contracts as of September 4th, which at the time, amounted to 30% of all Commercial Short Positions. To offset that massive short position, the two US banks held 15 long contracts, combined.

To say the COMEX silver market is out of whack, one needs only look at how much silver is under contract, compared to how much silver COMEX controls. The USGS says total WORLD production was 680 Million ounces in 2008. COMEX contracts are currently in effect for a total of 582 Million ounces or more than ten months of WORLD production of silver. To offset the amount of silver under contract, COMEX reports 60 Million ounces of registered silver (available to back contracts), a ratio of 1 ounce for every ten ounces under contract. Add to the fact that each contract of 5,000 ounces requires $6,000 dollars to purchase or sell (for a contract worth $84,000 dollars as of last friday) and you have another ratio of 1 to 14.

Such speculative levels are what bubbles are made of, where relatively small amounts of money are leveraging large amounts of potential money with very small actual backing. It is what our investment banking system has devolved into and is a large part of why our fiscal crisis is where it is.

And the ratios are climbing as silver stocks on the COMEX are falling. On July 23rd, 2009, registered silver stocks were 62.6 Million ounces compared to 60.3 Moz as of September 10th. Redemptions appear to be on the upswing as total COMEX warehouse stocks (both registered and eligible) have fallen from 134.1 Moz in 2008 to slightly less than 117 Moz as of September 10th (Eligible stocks are owned by other parties, but are counted as part of the COMEX stocks as they are warehoused in COMEX approved sites.)

Not all of the shorting is going on at the Commercial level. Large Speculators have added 1200 short contracts in the past two weeks while Small Speculators have added 600 short contracts. But there are hundreds to thousands of Small and Large Speculators compared with less than ten Commercial players.

I realize that not everything can be pinned on the Commercial Shorts for the change in price, but the significantly large short position held by Commercials creates a significant downward pressure exerted by very few players. In fact, the combined Large and Small short position only totals 16,000 contracts compared to 82,500 contracts for the few Commercial players. In essence, for every 1 contract a small investor sells short, Commercials are selling 5 contracts short.

Having tracked the COT reports now since May of 2008, I have noticed a correlation between the Commercial Short Positions and the price of silver. When the short exceeds the price of silver, silver tends to fall. When the price of silver exceeds the short, the price tends to rise. Since the Commercial Positions apparently have no limit as to the number of shares they can control, they would have more impact than investors who are limited to no more than 1500 shares total.

My feeling is that adding 11,500 short positions in two weeks is a serious bid to keep a lid on the price. Given the willingness to short, I would expect Commercial Short positions to rise again this week to keep the pressure on the price, especially if the dollar continues to lose value and funds continue to seek hard metal as a better investment vehicle.

Disclosures: Long GLD, SLV, Physical metal, retirement accounts

Comments

[Boot:]

Well done. Its an important message for how silver is being held down. Supply and demand shows its colors, then the COMEX puts a lid on it. I hope the CFTC will put a lid on the COMEX. I should think public opinion would support some measure of regulation over banks and our commodity markets in this environment.

Sep 15 06:48 AM

[ManAboutDallas:]

The Banksters only need one of their patented, $1.50-an-ounce manufactured shakeouts to comfortably cover their shorts and send all the price-chasing buttered-up chumps of the past two weeks running for the hills, wiped out of their margin yet again.

Lather, shave, rinse, repeat.

The Banksters don't lose. Ever.

So, what's the answer? Simple. BE a Bankster. Buy weakness, sell strength. Yeah, I know, that's too easy. Ok, do it your way, buy high, sell low.

Sep 15 07:21 AM

[tripleblack:]

I wonder what it would take to split the COMEX majors' solidarity?

Piling up the sandbags that way can be risky. Lots of pent up water back there.

What can pierce the dike?

Sep 15 09:31 AM

[Groundhog Day:]

With all due respect, CFTC should have been there a long time ago. They are complicit. We need less regulation and more laissez faire.


On Sep 15 06:48 AM Boot wrote:

> Well done. Its an important message for how silver is being held
> down. Supply and demand shows its colors, then the COMEX puts a lid
> on it. I hope the CFTC will put a lid on the COMEX. I should think
> public opinion would support some measure of regulation over banks
> and our commodity markets in this environment.

Sep 15 09:41 AM

[5142152-337:]

Thank you Ed for the superb article!

Fortunately, I have been a follower of Ted Butler for some time, therefore, I have seen the solid data you have provided here building for some time.

The answer is to just keep plugging away buying PHYSICAL silver. Of course, Gensler could do wonders if he would just place position limits on the EGBs (elitist greedy b.......ds).

ManAboutDallas: I agree, in principle, with what you say, however, for me personally, my boiling point is too easily reached using your method :)

Sep 15 10:54 AM

[GMiki1:]

Don't forget your silver mining stocks--SLW is great (low overhead, just bought Barrick output), Impact Silver, Sabina Silver, SSRI, Silver Dragon (look at the latest drill results). Silver will break through. China may ban exports, which will be interesting, and is encouraging citizens to buy and hold physical silver (and gold). Longs in the COMEX do take delivery, obviously. The problem with the CFTC now is that, though Butler pins some hopes on him, Gary Gensler is a Goldman graduate.

Sep 15 11:27 AM

[PMMaven:]

What portion of Commercial Shorts are Cash & Carry hedge positions? Are any active silver contracts in backwardation?

Sep 15 11:33 AM

[kohalakid:]

The writer of this article clearly doesn't understand what a Commercial Trader is. A Commercial Trader is, by COMEX and CFTC definition, a dealer/broker who uses the futures market to hedge their position. They don't try to "keep a lid" on the market. They try to hedge their price risk.


oy vey.....

Sep 15 01:34 PM

[MudEngineer:]

By CTFC definition then, the big banks are Speculators. How is it legal for a large bank to be short 10's of thousands of future contracts using taxpayer TARP money? They are truly a pathetic bunch of criminals.


On Sep 15 01:34 PM kohalakid wrote:

> The writer of this article clearly doesn't understand what a Commercial
> Trader is. A Commercial Trader is, by COMEX and CFTC definition,
> a dealer/broker who uses the futures market to hedge their position.
> They don't try to "keep a lid" on the market. They try to hedge their
> price risk.
>
>
> oy vey.....

Sep 15 02:09 PM

[kohalakid:]

What makes you think the big banks are speculators??? HSBC, JP Morgan, UBS etc etc are some of the biggest physical metal traders in the world. Would you not expect them to hedge price risk in the most liquid futures market in the world???


On Sep 15 02:09 PM MudEngineer wrote:

> By CTFC definition then, the big banks are Speculators. How is it
> legal for a large bank to be short 10's of thousands of future contracts
> using taxpayer TARP money? They are truly a pathetic bunch of criminals.
>

Sep 15 02:20 PM

[SW Richmond:]

On Sep 15 07:21 AM ManAboutDallas wrote:

> The Banksters don't lose. Ever.
>
> So, what's the answer? Simple. BE a Bankster. Buy weakness, sell
> strength. Yeah, I know, that's too easy. Ok, do it your way, buy
> high, sell low.

I've an even better idea: Buy, take delivery, and don't sell.

Sep 15 04:59 PM

[Ed Zimmer:]

Part of the problem with classifying Commercial Traders as either Speculators or Hedgers is the fact that the CFTC declines to identify who the Commercial Traders are. It is only through the Bank Particiaption report that we know that two of the massively short positions are held by US banks, which two are again, unidentified by CFTC. Those same two unnamed banks are long just 15 contracts. This massive short position developed in July-August of last year, about the time Bear Sterns imploded. In July of 08, the BPR showed two unnamed banks with a 4.8% short position and 22 long contracts. In August, the BPR showed a short position by 2 banks of 25.4% and zero long positions. (July short was 6,199 contracts, by August, it was 33,805)

CFTC claims that revealing the identities of the few Commercial traders, or just the two US Banks in the BPR would disclose trading strategies and trade secrets.

IMO The Commercial Positions are speculative, they do not produce the item in question, therefore they cannot hedge production as a mine can. COMEX has nowhere near enough metal, whether registered or eligible, to meet the amount of paper it has issued (promised). And no where in the USGS statistics does it reflect COMEX storage as a consumption alongside industrial, photographic, jewelery, silverware and coins and metals.

Sep 16 02:24 PM

[PMMaven:]

The strictest definition of a hedge is to offset risk. People universally use the term incorrectly. Primary producers and consumers can NOT hedge. They however can fix prices by selling futures. How does that eliminate risk. What if a mine sells its future production on COMEX and then the price goes up. They lose out. And what if a consumer buys futures on the COMEX and the price goes down. They lose out. Merchant Banks(Commercials?) are resellers of a commodity. It doesn't matter if they value-add to the commodity or not. They buy in the cash market and sell in the futures market. That is a true hedge. When they sell they cover their short. Hence no market exposure. A contango market pays them a little bit. I could go on w/ how they profit by writing options and managing the hedge ratio. But that's all for now.

Sep 16 05:37 PM

[kohalakid:]

Ed--
You end your reply by saying in your opinion the Commercials are not hedgers but really speculators.
This is not the definition the CFTC and the COMEX have for a Commercial Trader. Go to the NYMEX or CFTC websites to see their definitions. The COMEX has lower margins for hedgers because it figures a true hedger represents a lower default risk. They charge specs a higher initial margin rate. So it's to the exchanges benefit to have them classified as specs and NOT hedgers and any hedge agreement I have ever signed says I will notify the exchange if my trades are not bona fide hedges.
There may well be banks that take large spec positions. But they are not in the Commercial category.


On Sep 16 02:24 PM Ed Zimmer wrote:

> Part of the problem with classifying Commercial Traders as either
> Speculators or Hedgers is the fact that the CFTC declines to identify
> who the Commercial Traders are. It is only through the Bank Particiaption
> report that we know that two of the massively short positions are
> held by US banks, which two are again, unidentified by CFTC. Those
> same two unnamed banks are long just 15 contracts. This massive short
> position developed in July-August of last year, about the time Bear
> Sterns imploded. In July of 08, the BPR showed two unnamed banks
> with a 4.8% short position and 22 long contracts. In August, the
> BPR showed a short position by 2 banks of 25.4% and zero long positions.
> (July short was 6,199 contracts, by August, it was 33,805)
>
> CFTC claims that revealing the identities of the few Commercial traders,
> or just the two US Banks in the BPR would disclose trading strategies
> and trade secrets.
>
> IMO The Commercial Positions are speculative, they do not produce
> the item in question, therefore they cannot hedge production as a
> mine can. COMEX has nowhere near enough metal, whether registered
> or eligible, to meet the amount of paper it has issued (promised).
> And no where in the USGS statistics does it reflect COMEX storage
> as a consumption alongside industrial, photographic, jewelery, silverware
> and coins and metals.

Sep 16 06:47 PM