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SILVER: How much longer can they possibly continue this farce?

May 17, 2011 6:14 PM ET
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Seeking Alpha Analyst Since 2007

I am an active Precious Metals trader and blog writer. I post regularly on my blog: Gold harvest Under A Silver Moon [ http://goldharvest.blogspot.com/ ]. A blog dedicated to commentary, technical analysis, and the general machinations of the global gold and silver bullion markets with additional commentary on the global economy and related commodity markets. I have been employeed in the retail grocery busines for over 30 years.
Following the CRIMEX close Monday, Silver and Gold traded over night last night mostly flat, with a small upward bias.  At 8:30 AM this morning "news" that building permits and housing starts for April were "less than expected" was released.  This "news" only adds to the fact that the economy is NOT growing, and is likely heading back into recession.  This negative economic "news" promptly forced a sell-off in the Precious Metals.  What?  No, seriously, you should always sell your Silver and Gold when there is bad economic news!  Do you need more proof the Precious Metals markets are rigged?

I knew you did... 

Does anybody find it a bit odd, if not alarming, that the price of Silver can drop 30% in one week, but the number of ounces in the CRIMEX warehouses did not rise along with this huge drop in price?  In a real market, we should have seen huge inflows of real silver into the vaults.  Where is all this Silver that is being sold?  If supply is so overwhelming that the price of Silver must collapse, why have the warehouse inventories at the CRIMEX dropped in the midst of a flood of selling?  Shouldn't the warehouse inventories be skyrocketing?

Going into Bloody Monday, May 2, the CRIMEX warehouses claimed to hold 103,312,224 ounces of Silver ["registered" and "eligible" combined].  At the close of business on Friday, May 13, the CRIMEX warehouses held only 100,906,732 ounces of Silver.  The price of Silver dropped 30% as the supply of CRIMEX Silver fell by 2.4 MILLION ounces with demand at record highs?  So much for "price discovery" based on supply and demand. 

Does any body find it a bit odd, if not alarming, that our CRIMEX banking cartel is struggling to meet May SILVER delivery demands, yet they can flood the market with orders to sell Silver to force the price down?  If they have SO MUCH Silver to sell, how come they couldn't even come up with 5000 ounces to make good on one contract waiting for delivery yesterday?  If they have so much Silver to sell this morning, how come they can only come up with 30,000 ounces to make good on just six contracts today?  After today's tiny deliveries, 319 contract holders are STILL WAITING for delivery they asked, and paid in full, for on APRIL 30.  If they have so much Silver to sell EVERYDAY this month on the CRIMEX to force the price down, why are 319 May contract holders representing 1,595,000 of Silver STILL WAITING FOR DELIVERY of their metal?

As of the close of business Monday, May 16, the TOTAL open interest in Silver at the CRIMEX was 123,086.  At 5000 ounces per contract, 615,340,000 ounces of Silver were "in play" on the CRIMEX futures exchange.

At the close of business Monday, May 16, open in interest in the July contract [the next nearest Silver delivery month] was 65,595.  At 5000 ounces per contract, 327,975,000 ounce of Silver were "in play" on the CRIMEX futures exchange.

The CRIMEX has ONLY 32.75 MILLION ounces of "registered Silver" available to meet July delivery in their warehouses.  As of Monday, May 16, the CRIMEX only has enough Silver to cover 10% of the Silver that is currently "in play" under the July futures contract.  ONLY 10%!!!  Clearly the "potential demand" for Silver far outstrips available supply.  How can the price have fallen by 30%?  The market is rigged...

The Silver market in New York, The CIMEX division of the CME, is a blatant lie supported, and encouraged, by the US Government, the US Treasury, the US Federal Reserve, the CFTC, and the SEC.   We are on the verge of a mathematically inevitable  default by the CRIMEX banking cartel.  How much longer can they possibly continue this farce?

As per Adrian Douglas in his March 26, 2007 essay: Silver Defies the Laws of Economics

The function of the futures exchange is to allow commodity producers to establish a contract to sell their future production at a fixed price to a buyer who needs the commodity in the future. This affords producers the security of knowing there is a purchaser for his future produce and it enables the purchaser of the commodity to guarantee a stable supply. The production of commodities is fraught with uncertainties. For example, a farmer can not predict the weather; a miner can not predict a mine shaft collapse, power outage or general strike. In order for contractual commitments to be honored for delivery it is essential for the futures exchange to carry inventory. This acts to buffer the variations in supply
and demand.

If this inventory is truly buffering supply and demand variations then the Laws of Economics would require that as the inventory goes down the price must go up and as the inventory levels go up the price should drop.

The question as to why the CRIMEX banksters are dragging their feet to meet the remaining May Delivery demands remains unanswered.  If The CRIMEX warehouses contain 32.75 MILLION ounces, why has the remaining 1,595,000 of Silver contracted for May delivery still not been delivered?  Perhaps the owners of that 32.75 MILLION ounces of "registered" CRIMEX Silver have no intention of using that Silver for delivery.

Perhaps this brief explanation, courtesy of  SilverAxis, of "registered" and  "eligible" CRIMEX Silver might shed some light on the burden of our CRIMEX banking cartel to make good on contractual deliver demands:

For those who aren’t familiar with the terminology, the registered category of COMEX warehouse bullion stocks generally refers to gold and silver bars against which COMEX warehouse receipts are outstanding. The COMEX publishes these stocks on a daily basis and they can be found here: Silver | Gold. The registered category is the total pool of gold and silver available at any time to meet delivery requirements under expiring futures contracts or to establish initial futures contract positions through a transaction called exchange-for-physicals (I’ll explain this another time). It is important to realize, however, that many parties holding COMEX gold and silver in registered form have no intention of making their holdings available for delivery. By this I mean that such parties are neither (1) holding a short futures position against the warehouse receipt nor (2) willing to sell their registered metal (warehouse receipts) to a party with a short futures position. Indeed, a substantial portion of those holding registered metal would have acquired the COMEX warehouse receipts by holding long futures positions for delivery. In other words, these registered stocks are held for investment and not for commercial purposes.

In comparison, the eligible category of COMEX warehouse bullion stocks generally refers to bullion held in the warehouses that meets the specifications of an acceptable COMEX bar (proper weight, size, purity and refiner) but does not have a COMEX warehouse receipt issued against it. For example, an investor might purchase several 1,000 oz. bars of silver from a dealer and then deliver the bars for allocated storage at a COMEX warehouse. This is a private arrangement and has nothing to do with the COMEX. Unless these bars are officially registered (the easiest way to do this is through the aforementioned exchange-for-physicals), they will remain in the eligible category until withdrawn from the warehouse by the investor. Thus, the appropriate way to treat eligible COMEX warehouse bullion stocks is that they represent metal that could potentially be registered at some point in the future but cannot presently be used to make delivery under a short futures contract.

This explanation of the "registered" CRIMEX supply raises yet another question:  What if the Silver that is available in the CRIMEX warehouses to meet delivery demand is NOT OWNED by the banks that are short Silver and subject to contracted delivery demands? 

It is not profitable for a bank to sit on Silver that has been contracted for delivery because of the financing and storage costs to hold it.  When the holder of a futures contract stands for delivery, he pays in cash the total cost of the 5000 ounces in each contract at the time of purchase.  Why wouldn't the bank quickly accept the cash payment for 5000 ounces of Silver and deliver it promptly?  I guess the answer to that would depend on whether the bank possessed or could gain possession of that 5000 ounces of Silver to make delivery.

This small "glitch" in the "registered" Silver supply may be just the straw that is about to break the back of our perpetually short criminal banking entity JP Morgan, and it's little brother HSBC.  It might also explain the river of rumours circulating that JP Morgan is paying up to 80% cash premiums to settle contract demands absent delivery.  Just because there might be enough Silver at the CRIMEX to meet monthly delivery demands, should they remain below 10% of current open interest, it doesn't guarantee delivery will be made or even possible to be made, if the banks that are required to contractually make delivery do not own a portion of that "registered" CRIMEX warehouse Silver.

Have delivery demands cornered our perpetually short criminal bankers JP Morgan and HSBC?  Are we witnessing a 180 degree reversal of the corner the Hunt Brothers had on the Silver market in 1980?  In 1980 the Hunt Brothers corner on the Silver market was ended when the government demanded that the CRIMEX only allow selling in futures contracts and no more buying...Silver prices crashed.  The reverse of that would see only buying in the futures markets to end JP Morgan's manipulative short position in the Silver Market.  As unlikely as a declaration by the government "to allow buys only in the futures market" might be, have we already witnessed the consequences of JP Morgan's dilemma? 

As Silver soared in price from the late February breakout at $31 towards $50, sellers in the markets were almost completely absent.  The Silver market was primarily all buy, buy, buy once Silver broke free at $31.  If market participants, and holders of actual "registered" CRIMEX Silver, recognized that JP Morgan needed Silver to cover it's short positions and meet growing delivery demands ahead of May delivery, they were going to make them pay up to get it.  That or they were going to buy up every Silver contract they could get their hands on in the hopes of graciously accepting a 50% to 80% cash premium to settle from JP Morgan, and then use these proceeds to roll to the next delivery month in hopes of fleecing the cornered JP Morgan rat again just as they had done in December 2010 and March this year.

The CRIMEX may not itself  be "technically in default" at this time, but it appears more so each day that JP Morgan [and likely HSBC] are technically in default now.  These "cash settlements" are an admission of this fact.  JP Morgan and HSBC do not control the necessary Silver inventory to meet the demands against their short positions.  The CRIMEX, the CME, and the CFTC no doubt DO RECOGNIZE that these two banks are "in default" and are threatening the credibility and the existence of the CRIMEX.  Perhaps these regulators are allowing some sort of "backdoor escape" to these banksters by way of this "managed" take down of the Silver market.  One would assume that there has been some agreed upon price at which the CME, CFTC, and CRIMEX expect JP Morgan to clean up this mess and allow the Silver markets to move forward with soon to be imposed new position limits that hopefully will put a stop to the nonsense that JP Morgan has been conducting at the CRIMEX for the past 10-15 years.  We can hope so anyways...

Jesse in his blog Jesse's Café Américain commented about the potential for a CRIMEX default in a post yesterday:

Someone asked me what it might be like if the Comex was unable to meet its deliveries, and there was a cascading effect to the metals encumbered by counterparty risk in the two big ETFs, if they were hit by a wave of redemptions as large shareholders sought to lock in supply.

I did not see their scenario of multiple days of up limits until the market clears, simply because it seems to be a few large members important to the exchange who seem to be 'holding the bag' in this case. Market solutions are for the little people and relative outsiders like the Hunt Brothers.

Rather, I would anticipate a declaration of force majeure, and a forced settlement in cash and shares of SLV, which themselves are probably representations of bullion rather than the metal itself. I do not know what the rationale for this might be, and it is not quite clear to me that they would even need one except for cosmetic purposes.

When you have power and have learned to use it with ruthless hypocrisy, the only thing you need to respond to is a greater force of power that calls you to accounts. This is one of the great lessons from the recent financial crisis. When the government and the regulators do not uphold their responsibilities, fraud becomes fashionable.

The Comex has about 32 million ounces of deliverable silver on their books, and they are dragging out the delivery process each month, as virtually no new inventory becomes available to replenish their supply.

I was a little shocked that the parabolic rise in price and the subsequent calculated smackdown in conjunction with the increased margin requirements shook no new significant inventory loose for the dealers, only more paper profits. Customer withdrawals continue as well, with almost 3.5 million ounces leaving this month.

However it transpires, if it does, it will be memorable. I am looking at the supply and demand as the numbers are published, and not at anything esoteric or private. So I would imagine that the CFTC and the least sophisticated traders in the market can see the same things unfolding. I hear things from time to time about back room discussions about the resolution of all this, and have to work to separate them from the tide disinformation, of which there is quite a bit more than you might imagine. People are very concerned about a potential shock to the credibility of the system. Of course, they may be utterly out of touch with current reality. Trust is in short supply, and the natives are growing restless.

Rumours, and disparaging talk, and theoretical discussions are well and good, but as they say, show me the money, or in this case, the bullion.

Where is it, how much of there is it, and what are they going to do when and if the supply of silver bullion drops below 30 million ounces deliverable, which is really a pittance given the size of the market? A silver futures contract on Comex is 5,000 ounces, and so that represents a mere 6,000 contracts. There are a total of 123,000 contracts open today. Last Friday the volume was an eye popping 126,000 contracts! This at times seems less a market, and more a game of musical chairs, or a shell game. And if the allegations are true about the LBMA, and their leverage, then what we have here may be a recipe for a severe market dislocation.

And this is why I expect the silver market to remain highly volatile, with some amazing moves ahead, both up and down. And stretchers perhaps, to carry out some players from the pits, as they get caught offside in high frequency moves, and an increasingly disorderly trade. And this due to the failure to reform the financial system.

Seriously...How much longer can they possibly continue this farce?

Consider this:  If JP Morgan is willing to pay up to an 80% cash premium to settle a silver contract, what does that say about the "real" price of Silver?  At $50 an ounce, an 80% premium would equal $90 an ounce Silver.  With Gold at $1575 dollars, a 17:1 Gold to Silver ratio, equal to that of the 1980 tops in Gold and Silver, would equate to $92 Silver.  Is JP Morgan telling us that Silver is underpriced by $40 an ounce?

Consider this also:  With 32.75 MILLION ounces of "registered" Silver in the CRIMEX warehouses, and 372.9 MILLION ouces of Silver "in play" in the July Silver contract, Silver availble for delivery at the CRIMEX is equal to only 10% of the Silver promised for delivery.  At that ratio then, Silver should be 10 times todays current price, or $330 an ounce.

Either way you measure it, Silver is STILL VERY CHEAP, and the path of least resistance for price under the markets present metrics, ...is UP.

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

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