Trading the Big Dips in Silver

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Includes: CEF, HL, HSBC, JPM, PAAS, PSLV, SIVR, SLV, SLW
by: Avery Goodman

The latest COMEX silver warehouse report is interesting. On March 3, 2011, clearing members of the COMEX futures exchange transferred 1,458,391 troy ounces of silver at Scottia Mocatta warehouse from “registered” to “eligible” metal. Registered silver is titled in the name of the clearing members themselves. It represents a pool of metal from which deliveries of silver can be made to long buyers who demand it. Eligible silver, in contrast, is titled directly in the name of an entity or person who is not a clearing member. Another 59,529 ounces and 10,076 ounces were removed from registered metal at Brinks and HSBC, respectively. 25,273 and 956 ounces worth of “eligible” metal were physically removed from the Delaware Depository and HSBC respectively.

Most metal that is delivered pursuant to COMEX futures contracts is first transferred to the “eligible” category, before it leaves the warehouse. It may also be transferred into the eligible category, kept at a licensed warehouse, if titled is held by a non-exchange affiliated person. Out of about 2,100 matured contracts this month, the clearing members have delivered 303 COMEX “contracts”, each representing 5,000 troy ounces of silver.

If we multiply 303 by 5,000, the result is 1,515,000. 1,458,391 plus 59,529 plus 10,076 minus a Brinks’ adjustment of 19,899 of eligible metal back to registered status (for unknown reasons) adds up to a total of 1,508,097 ounces. The small difference is probably the result of the variation allowed in the weight of COMEX "good delivery" bars, which on average have a + or – 6% variation from 1,000 ounces. COMEX clearing members are delivering silver out of existing stocks, but are running them down quickly as they do so.

Most likely, the heaviest demand is by existing customers for delivery of non-allocated silver the LBMA banks were supposed to be storing for them. The nexus of demand is clearly in London, and not in New York. Add to that heavy demand from new investors and industrial users, and the fact that LBMA bullion bankers are operating at a 100 to 1 ratio, and you've got the makings of some serious losses for bullion banks. As they go into the market to buy silver, trying desperately to disprove the fact that they scammed their clients, it drives the price sharply upward.

The extreme backwardation indicates that claims are very high. Most mass media organizations cited rising stock prices, a falling dollar, rising Euro, mediation offers in Libya by Venezuelan Presidents, and other nonsense, as the cause of the price drops on the 24th and the 3rd. Most market participants accept this nonsense without thinking it through. They fail to note that many of the same reasons given for falling silver prices are given to explain why silver prices rise! The real reason prices were able to fall sharply in the midst of heavy demand, and limited supply, is that banks need not deliver physical metal all on one day.

During periods of severe shortage, bank buying heavily pressures prices upward in spite of the best efforts of the most skilled market manipulators. A skilled manipulator can induce a big one or two day price drop by coordinating his actions with other market dominant players. A prerequisite key to success is cessation of purchases in preparation for downward manipulation days. With that caveat, the same old tactics that have been successfully used to control prices in the past, are more than sufficient to recreate a transient price crash.

We saw transient price crashes-- which I believe were intentionally induced-- on February 24, 2011, and again, to a lesser degree on March 3, 2011. Prices recovered and soared further in both cases, within the very next day or two. This can be explained by the issuance of reams of paper, for hours at a time, or as long as a day or two, and / or use influence on exchange committees willing to alter performance bond levels at request. Such manuevers trigger speculative long stop loss orders and / or margin calls and / or both. They can be especially effective during periods of light trading.

The dirty work can be watched quietly, as it plays havoc during the subsequent heavier trading period. As margin calls are sent out and not immediately met, massive involuntary liquidation orders are filled at lower and lower price points, more and more stops are triggered, and the price is sent into a temporary downward spiral. Even if the primary aim is to manipulate silver prices, it is beneficial to apply the same techniques to all the precious metals, to preserve plausible deniability. So, we often see the metals moving at the same time, though at vastly different rates.

What is most interesting is that February 24th was a combination of performance bond committee action and a papering over of the market. March 3rd seems not to have involved the changing of any silver performance bond. Until very recently, honest market participants, including even some very large institutions, did not know what was going on. The media releases misinformation as described above, intentionally or unintentionally, and people get the wrong ideas in their heads. Even now, many market participants still have doubts-- despite the ability of whistle-blower, Andrew McGuire, to give a moment by moment description of a planned silver manipulation weeks before it actually happened.

Logical men and women, of course, will be convinced by his ability to describe exactly what would happen so far in advance. They will take this as proof positive of the manipulation. But, not everyone thinks logically, and some have mental blocks that prevent acceptance of the truth when it conflicts with long held beliefs. Continued-- though illogical-- skepticism about the existence of market manipulation in the silver market is allowing an abbreviated form of the manipulation to continue even now.

Only the manipulators know exactly what is going on at all times. As prices drop dramatically, even market participants who know better become fearful. A percentage bail out. This drops the price further. The market becomes temporarily shell-shocked. Manipulators use this market condition to unload over-the-counter and exchange regulated derivative short positions at relatively favorable prices. They can even start buying physical metal, at cheaper prices than they should be able to get. The smartest non-connected investors, however, will buy along with the manipulators, at discounted prices, at such times.

The key to manipulating a market is making sure that honest market participants erroneously believe that the artificial price is a legitimate one. But, more and more people are catching on and that makes it more difficult. Silver producers, as well as physical silver bullion owners should NOT sell or lease metal immediately after a price attack. Any producer not under a restrictive contract or a set pricing arrangement should delay sales until prices have recovered. Every opportunity should be taken to withhold bullion until prices normalize. No honest market participant should transfer ownership of physical precious metal at less than real market value.

As a general rule, we do not approve of day trading in the stock, bond or commodities markets. We usually don't like financial market gambling, except to the extent that it is akin to an occasional fun trip to Las Vegas. Even then, our gambles usually have a duration of weeks or months rather than days. For those who do want to day trade, there are incredible opportunities now being created week after week, as increasingly desperate silver short seller-manipulators create artificial prices in a continuing attempt to regain control over the market.

Because of the implications of backwardation, after every artificial price attack, the price of silver inevitably zooms back. The manipulative short sellers still achieve their purpose, of course, since the market usually stays shell-shocked long enough for them to unload some of their positions, and buy some physical metal Because of this, there is every reason to believe that they will continue the activity. That enables ultra-short-term speculators to engage in a trading game. You can buy and sell, day by day, as you perceive the depth of a price attack and recognize the extreme probability of a quick rebound. You won't get the absolute bottom or top, because you are not privy to the conspirators private conversations. However, you can set stop loss orders low enough to be sure you won't be thrown out of your positions, and profit-taking sell orders low enough to insure that you are not caught in a second attempt to artificially control prices before you've booked a profit.

You can set a buy order at the same time as you set a contingent sell order at a preset higher price. The sell order becomes active only if the buy order was successful. The orders will execute sequentially, automatically, contingent upon the price first dropping enough to trigger the purchase, and then rising high enough to trigger the sale. After the buy, it may only take a few days, or even the next day, before you collect your profits. You’ll earn a tidy profit by simply following the "rinse and repeat" of the scammers, and the continued stupidity of so many other investors. Your account can be credited with profits very quickly.

As ultra high-risk bets go, this is a fairly "safe" one. Until such time as silver exits backwardation, it will be very difficult for anyone, even the biggest banks, to engineer a long term crash unless they are willing to crash the price of all other asset classes.ii Every price attack this month is likely to be followed by a strong price recovery. That means big bucks for those willing to take on the manipulators, turning their actions against them.

For people who like high-stakes gambling (which we do not), silver can be day traded using either options on SLV and mining stocks, or the futures markets. [i] Both methods allow for high leverage. For lower stakes gambles, the stock market and ETF or mining company stocks will also work. Whatever method is chosen, day traders have a unique opportunity to help the silver market manipulators lose money, while earning a tidy profit. Just remember to gamble only with money you can afford to lose.



[i] We recommended in the previous article that persons who want to take physical delivery of silver could deposit 100% of the purchase price of their silver futures contract and avoid being forced out by a margin call. Since then, an alleged historical incident has come to our attention. According to a reliable source, back in 2000, the NYMEX performance bond committee forced long position holders to put up 170% of the value of palladium contracts.

Everyone, including every judge and jury, knows that a buyer can default only if he is unable to come up with the money he promised to pay. The principles of law and equity do NOT allow performance bonds on long position holders that exceed 100% of the purchase price on maturity. If that happened, long buyers were defrauded by the exchange and committee members were probably engaged in corrupt activities.

Lawyers are already heavily involved in filing multiple lawsuits involving silver price manipulation. If silver performance bonds ever exceed 100% of contract prices, the exchange and its individual committee members will be named as additional defendants in multiple civil lawsuits. They will face the prospect of huge damage awards levied in their personal capacity as well as against the exchange as a corporate entity. With the scandal forcing changes in management at various banks, judgments would not be reimbursed, and insurance coverage would not be available for culpable conduct. Such judgments would follow them for the rest of their lives. Punitive and triple damages for fraud and/or RICO are not even subject to discharge in bankruptcy.

The rising price of silver is driven by the physical market, not speculation at COMEX. Such shenanigans would accomplish little more than a few days worth of falling prices. They would prove the silver price fraud without question. Big wins and multi-billion dollar payments would be in store for class action plaintiffs. The committee would have done more to catapult the price of silver to $100 or $200+ per troy ounce than anything else.

Aside from punitive and / or triple damages, attorneys’ fees and costs under various fraud and RICO statutes, Congress could be persuaded by the loud hue and cry of overt corruption, to remove CFTC’s exclusive jurisdiction on criminal prosecution. With honest prosecutors given the chance to prosecute futures related frauds, casino-bankers wouldn’t stand a chance. Felony charges could be brought. Main Street jurors would like nothing better than to put corrupt financial players into jail cells.

Certain bankers have succeeded, for many years, in the most astounding worldwide scam ever perpetrated. These people are not so overtly stupid as to intentionally put themselves into harm's way, when the attention of so many lawyers and judges is now directly upon them. We were not following palladium 11 years ago. However, a repeat of what allegedly happened is not likely.

[ii] I have no doubt that this might happen some day but it would require cooperation from many other dominant players with no short side involvement in the silver market. Even if the manipulators managed to mount an operation of that magnitude, it might backfire if escapees from the stock and general commodity markets flocked to precious metals.



Disclosure: I have long positions in silver. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.