Ed Zimmer's  Instablog

    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