Silver Net Short Positions Rising: Prepare Yourself For A Coming Silver Bull Market

Includes: AGQ, PSLV
by: Katchum

On Monday August 6, the Financial Times reported that the silver manipulation probe is likely to be dropped by the CFTC. It turned out that this news was premature. On August 8, one of the 5 CFTC commissioners, Bart Chilton, said the investigation will continue. The silver manipulation probe was initiated in 2008 following a number of allegations of silver manipulation. Bart Chilton already found evidence of silver manipulation in 2010 and intends to search for additional evidence of this manipulation of the silver price.

Chart 1: LCNS Positions

What this means is that a possible breakout in silver is still on. The reason is that when manipulation is confirmed, it will immediately push the silver price higher due to a possible ban on short selling of the silver market. The investigation is set to be completed as soon as September this year and is focusing on litigation against J.P. Morgan for silver manipulation. J.P. Morgan holds the largest silver short position (around 40% of the silver market) of all commercials and has been winding down its short positions at a massive loss in the past years. This is also evident from the declining graph on chart 1, which shows the Large Commercial Net Short Positions from the CFTC report. Eric Sprott recently said in an interview with "If silver weren't manipulated, it would be at $US 150/ounce right now".

This little introduction takes me to the recently published CFTC numbers for Large Commercial Net Short Positions (LCNS) this July 2012 (Chart 1). A significant rise in short positions has been found in the month of July, going from 13614 short positions end June to 23025 short positions end July. This means that we will probably get a rise in silver price in the next few months. The reason for this is that the silver price will go up with a delay of a few months after the LCNS rises upwards, as pointed out in this article.

Countless economists including David Morgan have indicated that silver miners have bottomed out a few weeks ago. Just recently he also said that physical silver has bottomed out now.

QE3 wasn't announced on 01 August 2012, but this makes the odds for QE3 even greater for the next federal reserve meeting, which is on 12-13 September 2012. The federal reserve will probably support the mortgage market and there is a high probability that they will need to support the bond market too as 10 year U.S. bond yields are rapidly rising (Chart 2).

Chart 2: 10 Year U.S. bond yields

As Zerohedge reports, numerous indicators are signaling a decline in U.S. bonds. QE3 is a 100% certainty, as gold moves upwards with QE3, so will silver go up as well. The best way to fully benefit from this rise is to double your positions in Proshares Ultra Silver (NYSEARCA:AGQ) as most economists predict that the silver price will be at $US 40/ounce at the end of this year. After the quick run up, I would roll over these AGQ shares into the Sprott Silver Trust (NYSEARCA:PSLV) which is at a record low premium of 3% today (Chart 3) after the $US 220,190,610 offering in July 2012.

Chart 3: Sprott Silver Trust Premium (PSLV)

Disclosure: I am long AGQ, PSLV.