Silver update, news and rumours

The email inbox is full of silver questions so I'll make today another post on Silver.

As we wait for the contracts on the COMEX standing for March delivery to be settled to finish Part 6 in our series on "Silver, The Opportunity of the Decade", lets take a look a were things stand.

First off, if you have missed them, you can the first five parts by following these links:

Part 1: Shrinking Supply and Rising Demand.
Part 2: The Comex, what is it?.
Part 3: The Comex Silver Cartel.
Part 4: Evidence of Gold and Silver manipulation surfaces.
And Part 5: The Short Squeeze

To summarize, when JPMorgan Chase bought Bear Stearns in March 2008, it inherited Bear Stearns’ large bet that the price of silver would fall. Over time, it added to that bet, and then the international bank HSBC got into the market heavily on the bear side as well. These actions “artificially depressed the price of silver dramatically downward,” according to a class-action lawsuit initiated by a Florida futures trader and filed against both banks.

“The conspiracy and scheme was enormously successful, netting the defendants substantial illegal profits” in the billions of dollars between June 2008 and March 2010, according to the suit. The suit claims that JPMorgan and HSBC together “controlled over 85 percent the commercial net short positions” in silvers futures contracts at Comex, a Chicago-based exchange on which silver is traded, along with “25 percent of all open interest short positions” and a “a market share in excess of 9o percent of all precious metals derivative contracts, excluding gold.”

In September 2008, after receiving hundreds of complaints that silver future prices were being manipulated downward by JPMorgan and HSBC, the Commodity Futures Trading Commission (CFTC) launched an investigation. The CFTC found that evidence strongly supports the contention that JP Morgan is “flooding the market” with “short positions” every time the price of silver starts to creep upward. By unloading its short positions like a time-released capsule, JPMorgan’s traders were keeping the price of silver artificially low and reaping tremendous profits. The CFTC is in the process of drafting position limits to address this.

In Spring/Summer 2010, JP Morgan dismissed or terminated a number of traders in their commodities division which is lead by Blythe Masters. The rumor is that a number of these disgruntled ex-employees have organized a group that is harnessing the resources of some hedge funds to buy up futures contracts and stand down for delivery. They demand physical delivery of silver, hoping to score a big cash settlement premium if the silver cannot be delivered.

It has been suggested that this was tried, very successfully, for the December contract, executed again (on a larger scale) for the March contract and is a large factor behind Silver's stunning doubling of price since August 2010.

This rumor was brought to different forums and message boards by someone calling himself/herself Wynter_Benton.

The group recently claimed they settled their March contracts in excess of an 80% premium ($60.40 per ounce).

This may sound utterly ridiculous, but the rumor is being taken seriously in many corners and the data from the COMEX regarding outstanding contracts (not to mention the surging price of silver) somewhat supports this theory.

It is clear that the COMEX is stressed to provide physical delivery of the March contracts and that there have been a large number of cash premium payouts.

As last week ended, analyst Harvey Organ provided this update:

• The front delivery month of March saw its Open Interest mysteriously drop from 2040 to 1876. This was done with zero deliveries on Friday and zero deliveries on Thursday. There is now no question that cash settlements in silver are the order of the day. When you have silver longs who pluck over $150,000 per contract into their brokerage accounts waiting for settlement, and then have some of these longs disappear, you can rightly assume that the only explanation is cash settlements. The next front month of May saw its OI fall a bit from 83,718 to 83,398. This was a mixture of some bankers trying to cover some of their shorts and some of the cash settlers picking up more of the May contract with their new found fiat wealth. Word has it that the options in the April month are also high

Harvey also offered up another observation that reflects the massive demand for silver that has been going on.

• What is fascinating is that the March delivery month at 10,895,000 oz is close to the two prior non delivery month of January and February (4.5 million oz + 2.8 million= 7.3 million ). Usually the two months of January and Feb silver totals are anywhere from 10-30% of March's deliveries.

Another interesting tidbit I came across this week (and I can't find the link right now), has to do with the record number of silver eagle sales from the US Mint in January. Over 6 million silver eagles were sold... but apparently 3 million went to ONE buyer.

Recall that in January there was a huge amount of paper shorts issued and the price dropped over $5/oz. The suggestion was that JP Morgan was desperately attempting to drive the price downward in order to facilitate the procurement of silver in preparation of a March squeeze. Were they the buyers of over 3 million silver eagles in January?

Finally Friday brought some interesting observations that could make March/April a wild ride. While pouring over the Commitment of Traders Report from Ed Steerwas moved to observe:

• The Commitment of Traders report didn't show as much improvement in the silver short position as I was hoping. The bullion banks reduced their short position by only 1,333 contracts. The Commercial net short position in silver now sits at 282.3 million ounces. The '4 or less' bullion banks are short 220.0 million ounces...and the '8 or less' bullion banks are short 281.8 million ounces of the stuff.
  
  The other big surprise [was in the] latest Bank Participation Report... The report itself came out late on Friday afternoon...and the first hint that there was something odd about it came in an e-mail from Ted Butler where said there was a "big increase in the Bank Participation report of 6,000 net contracts short in silver by US banks from 19,000 to 25,000."
  
  Both Ted and I were expecting a decrease...and what we got instead was the exact opposite. I must admit that I don't pretend to understand why, because all the signs pointed to a month-over-month decline.

JP Morgan has been gradually decreasing it's short exposure. In the past few months it has been covering to the tune of 11,000 contracts. But now "The Morgue" has suddenly ramped up it's activity by adding 6,000 shorts in February?

This is setting off alarm bells. 6,000 short contracts is 30,000,000 ounces.

Another blogger was moved to comment on this by saying:

• 1. They have to keep shorting... it's their mandate to keep the price of silver and gold down.
  2. They will NEVER take losses on these shorts as they are Too Big To Fail (TBTF) and have offset these in other derivatives and copper etc.
  3. Shorting for 20 years is like an heroin addict going cold turkey - they just can't stop all at once.
  4. Technically speaking, they are shorting into a middle round number in which usually will have weakness or sellers and options to sell, especially after a run like that.
  5. Look at a chart. The RSI and MACD are trending into a reversal soon. You think Silver will straight to $75 in a straight line? Are you nuts?
  6. Get your ball caps on, we are starting the 2nd inning folks.

All signs point to another looming battle like we saw after December when Silver shot up to $31.75 and then was beaten down to $26.20 in January/February.

Where's my popcorn?

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