Saturday, July 2, 2011

Sat Post #2: On the topic of Silver

There are some interesting developments brewing in the precious metals arena which are worth noting.

As faithful readers know, we have devoted considerable time to covering the COMEX, which has owned an effective monopoly on silver price discovery for decades.

The COMEX churned out over 800 million ounces of silver futures and options on average each day in April, a level of trade volume which dwarfs both the physical and the other (known) paper silver markets, combined.

One cannot help but take note of the obvious disconnect now emerging between the manipulated COMEX price discovery and the physical market for Silver.

There are now only 28 million ounces of registered Silver inventory in the COMEX to back up all of that paper trading. Demand for physical Silver is rapidly depleting the actual amount of available Silver.

(And it is placing the COMEX is a dire situation.  If a mere 5% of all of that buying actually stood for delivery; the entire inventories would be more than wiped out.)

The US Mint recently stated that, "demand for American Silver Eagle Coins remains at unprecedented high levels." Similar reports have been received from Australia's Perth Mint, the Austrian Mint and the Royal Canadian Mint.

The US mint just released their report on silver for the month of June and the total silver eagles sold amounted to 3.4 million oz. At this rate the mint sales for all of 2011 would equate to 40.8 million oz.

The USA nation only produces approximately 40 million oz a year so the entire production must go to the mint first - just to produce silver eagles. This means the COMEX and others must import silver from England, Canada, Mexico and other places to fulfil their duties.

The Chinese, who were net exporters of silver only four years ago, imported 300% more silver in 2010 than 2009 and such large quantities of imports are expected to continue.

Last year, Indian silver imports increased nearly six-fold, and this year consumption is expected to rise nearly 43% according to the Bombay Bullion Association.

So what we have is a continuing, worldwide, surging demand for phyiscal Silver.  Yet the paper price of is being manipulated downward?

Which brings us to the paper market, aka the COMEX.

The positions this week of the infamous 'shorts'- whom are responsible for that paper price manipulation of both Silver and Gold - made some noteworthy moves that are setting off alarm bells for those who follow these markets.

There has been a truly historic one-week plunge in the commercial net short positioning for Gold and Silver futures traded in New York on the COMEX division of the CME this past week. 

In Gold, commercials got out of nearly 17% of their short exposure. That is the largest nominal one-week reduction in commercial net short positioning in New York Gold futures since August 12, 2008, during the depths of the Great 2008 Panic (just before Gold started to rise significantly).

In Silver, the commercials covered or offset a very large 6,398 contracts or 18% of their net short positioning from 35,564 to 29,166 COMEX contracts net short. The open interest for silver futures dropped 5,908 lots to just 114,330 contracts open, the lowest level of open interest for silver futures since March of 2010.

More importantly the relative commercial net short positioning for silver plunged from an already quite low 29.6% to a very low 25.5%.  That is the lowest relative commercial net short positioning for silver futures since October 28, 2008 when Silver traded at it's 2008 Great Panic low of $9.19.

All of this comes a month after massive short covering during the month of May when the price of Silver was systematically taken down over 30% by the unprecedented margin hikes by the CME.

So while many pundits are calling for Silver to drop back to $25 or $20 per ounce, it would appear that the commercials - the largest, best funded and presumably the best informed traders of gold and silver futures on the planet - are positioning themselves for something entirely different.

September is shaping up to be the month where things could move dramatically.

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