The Silver Accident?

Hi Gang.

Been away from the blogging computer for a couple of days but am back at it today with a lengthy post about Silver.

We left things off on Friday noting how the much anticipated meeting of the Federal Open Market Committee (FMOC) put off a lengthy discussion of the easing options available to the US Federal Reserve until the next FMOC meeting late next month.

Today the highly influential Goldman Sachs is making policy recommendations for the Fed and noted that: "There are three main ways in which the Fed could be more radical: (1) an extension of the QE program into markets other than Treasuries and agency MBS, e.g., private sector securities, (2) a much bigger QE program, up to the extreme version of a promise to buy as many securities as needed to hit a specific yield target (i.e. a "rate cap" further out on the yield curve as then-Governor Bernanke suggested back in 2002), and (3) an explicit or implicit change in the Fed's policy targets."

Combine that with the Chicago Federal Reserve Bank president Charles Evans stating on CNBC that he would be in favor of more easing, and saying he believes in "room for accommodation" and that we "still need to do more on monetary policy" and speculation on QE 3 is now running rampant.

This news sent Gold spiking up $40 within an hour, back to the mid $1,800's.

(Note: Friday is the non-farm payrolls report and heavy shorting of both Silver and Gold is expected Wednesday/Thursday)

For those fans of Silver, the past few months have been somewhat frustrating.  While back above the $40/ounce mark ($41.51 when this was written), Silver seems to have languished since the May beatdown in comparison to Gold.

But there are many who believe Silver is now setting up for a huge breakout as the stage is set for what trader's call 'a Silver Accident'.

An 'accident' occurs when some sort of event (like a financial meltdown or a currency crash) suddenly drive the price of an item exponentially higher.

When these events happen in commodities, world governments often move to flood the market with reserves of that commodity to extinguish a price explosion.

Theodore Butler is recognized as one of the foremost silver analysts and he took a close look at the developing conditions around Silver this week.

He believes all the pieces are now in place for a significant Silver Accident.

More importantly, because world governments have already sold their Silver reserves into the market (and ended holding Silver as a reserve asset) they do not own enough silver to quell a price explosion.

Here are his thoughts for your consideration...

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THE COMING SILVER ACCIDENT
The Biggest Factor in the Future Price of Silver

By Theodore Butler

The primary factors mandating a silver accident are excessive naked short selling and leasing. Silver has the largest short position that’s ever existed in anything. This is the key component to the coming silver accident. The total naked short position in silver measures into the billions of ounces and towers over real world supplies. This combined short position includes the COMEX, all other exchanges, forward selling and leasing, the cumulative issuance of unbacked silver bank certificates, unallocated storage programs and pool accounts. No other commodity has such a huge naked short position.

It is, basically, this bloated short position that’s at the heart of the coming silver accident. It is this same excessive short position that guarantees a financial windfall for your family. A naked short sale is the sale of something you don’t own. While common in financial markets, more than 99% of the world’s population will never sell short anything in their lifetimes. That’s because it’s an unusual and unnatural financial transaction.

Unbridled short selling can artificially depress the price. That is why we have restrictions on short selling that date back to the great stock market crash of 1929. In commodities, there must be a short for every long on every futures contract. Regulations are supposed to preclude excessive long and short speculation via speculative position limits, but these regulations have been abandoned in COMEX silver, despite the efforts of many of us to correct that.

There is one other aspect about short selling that is important to grasp. Whereas the word “sale” means closure or finality in all the billions of daily world business and financial transactions, a short sale is always an open or incomplete transaction. A normal sale marks the end of a transaction. A short sale makes the beginning of a transaction. A short sale must be completed at some point, in some way. There is no exception to this rule. Either the short sale is repurchased and closed out, or that which has been sold short is actually delivered and the open short sale is closed.

Precisely because all short sales must be closed out guarantees a silver accident. When I say that silver has the largest short position in history, I am also saying that silver has the largest number of incomplete transactions in history. Forget, for the moment, the manipulative and depressing effect this monumental short position has had on the price.

All short sales must be closed out in someway. With silver, could it be by delivering silver? Against the billions of ounces of silver sold short, how much do we have to deliver to close out these incomplete transactions? In the COMEX

That’s why I’ve made such a big deal about the uniqueness of a silver short position that’s larger than existing world inventories. It eliminates one of the only two legitimate ways in which a short sale can be closed out. That’s why we’ve never seen any other commodity with a short position greater than what actually exists. How can you have a short position in anything greater than what actually exists?

The only remaining legitimate way a silver short position can be closed out is if it were bought back by the short sellers. From whom are these short sellers going to buy hundreds of millions and billions of silver ounces from? Or more correctly, at what price? Since actual delivery is out of the question, the only way the short sellers can buy back their bloated silver short position is to get every owner of real silver and every owner of paper silver to sell out. The price that would be necessary to accomplish that feat would qualify in any reasonable definition as an accident.

While there is no way to determine when the silver shorts will spook and rush to cover, time is not on the shorts’ side. They must try, at some point, to buy back and cover the silver they can’t possibly deliver. It is not important to know in advance what the actual trigger for the silver accident will be. All you need know is that with the critical and long-term physical deficit in silver, the short selling charade must end. Since we can’t determine when, don’t focus on the timing, focus on the inevitability of a delivery crunch.

From 2000 to 2004, the silver price averaged between four and five dollars. Since then, the silver price has been six, seven or eight dollars. Does this increase mean that the price has finally responded to the law of supply and demand, and therefore eliminated the chance of a silver accident?

Normally, a price increase of 50% or 100% in a commodity should be sufficient to balance any consumption deficit. That’s a big move in any commodity. But not for silver. That’s because the consumption deficit in silver is unlike any other commodity deficit. Silver has been in a structural deficit stretching back for more than a half-century. You don’t undo the damage of 60 years with a 50% or 100% gain.

There is zero evidence that production or consumption has been impacted by the price, or that the silver deficit has been cured. There has been no worldwide rush to find new silver mines in response to higher prices. Silver may have increased in price, but there has been zero effect on near-term production increases or substitutions in demand. No one has switched to gold or platinum jewelry because silver is up in price. The law of supply and demand hasn’t been affected one bit as a result of the recent price increases. The first prerequisite for the coming silver accident is very much intact. However, it takes more than a bullish supply and demand equation to cause a violent price event. Bullish fundamentals point to higher prices but not necessarily a price accident. In the silver short position, we have the needed reason, in spades, for an accident.

As a result of the 60-year structural deficit, we have exhausted just about all the world’s previously existing silver inventory. That includes just about all world governments’ silver inventory. When the unavoidable silver accident occurs, there will be no one to douse the price fire. This can’t be said about any other commodity.

This fact distinguishes between a gold and a silver accident. In gold, in a financial meltdown or currency crash (popular reasons given for a gold price accident), world governments own enough gold to extinguish a price explosion. In silver, they don’t own enough silver to put out a fire.

It’s rare to be presented with an unavoidable financial accident that you can personally benefit from. If you find my argument has merit, then position yourself in silver before the coming accident. If you wait until the accident happens, it will be too late.

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Email: village_whisperer@live.ca
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Is a desperate JP Morgan now the only large institution shorting the Silver market?

At the end of yesterday's post, I pointed out that I had come across some interesting observations that could make March/April a wild ride.

After gradually decreasing it's short exposure to Silver over the past few months by covering to the tune of 11,000 contracts, it was being suggested that JP Morgan had suddenly ramped up it's activity by adding 6,000 shorts in February.

Today Ted Butler, a silver market analyst whose company Butler Reseach Ltd has been publishing unique precious metals commentary on the Internet since 1996 and has been instrumental in bringing the issue of Silver manipulation to the forefront of the CFTC, has came out with a shocking allegation.

Butler confirms yesterday's observations and has issued a report that states JPMorganChase apparently has greatly increased its short-selling in silver. In doing so, JP Morgan has increased the concentration of the market's short position which is, by definition, a manipulation.

• The big surprise was in the silver COT (Commitment of Traders Report), where the big 4 increased their net short position by 3000 contracts on the previously mentioned reduction of 1300 contracts in the total commercial net short position. This increase in the big four’s short position broke the pattern of a reduction in the concentrated short silver position that had been in force for months. The increase in the concentrated short silver position was so unexpected by me that I thought, at first, it must have been a mistake.
  
  Since the Bank Participation Report was released late yesterday, an hour or two after the COT, my first thought in the interim was that it would not be JPMorgan increasing its concentrated short position, but most likely the other three entities in the big four. After all, with all the negative attention (and losses) accruing to JPMorgan and its big silver short position, there would be no way JPM would have accounted for the 3000 contract increase in the COT for the big four.
  
  If the silver COT was a surprise, then the Bank Participation Report was a shocker.
  
  There was a net increase in the US bank category of 6000 contracts to 25,000 held net short in silver.
  
  JPMorgan’s net silver short position, which had decreased by 11,000 contracts over the preceding three months to 19,000, had suddenly ballooned to 25,000 contracts (125 million ounces). From my reading of both these reports, it appears that the big increase in silver short selling by JPM took place during the last COT reporting week, even for the Bank Participation Report.
  
  Before I continue, let me explain that I consider JPMorgan to effectively account for all or the bulk of the entire US bank category in the Bank Participation Report for a variety of mathematical reasons. However, it matters little if there is another US bank also holding a significant net short position in COMEX silver, as all that would mean is that two US banks are colluding to manipulate the price of silver and not just one bank acting alone.
  
  Two and a half years ago, I had a very similar experience of shock over a Bank Participation Report. This was before anyone knew that the Bank Participation Report even existed. The August 2008 Report caused me to write a series of articles that started with “The Smoking Gun” in the fall of that year.
  
  In turn, my analysis and writing led to the current CFTC silver investigation (still unresolved) and the revelation that JPMorgan was the big COMEX silver short by way of taking over Bear Stearns. I further believe that the revelation of the true size and nature of the concentrated silver short position has contributed to the current movement towards position limits by the CFTC.
  
  As much as the August 2008 Bank Participation Report was shocking, the current one is even more so. That’s because we know so much more today than we did back then.
  
  We have waited two and half years to hear anyone legitimately explain how a US bank holding a short position equal to 25% of world production isn’t manipulation.
  
  No explanation has been forthcoming, nor is it likely to ever be offered. We know now that concentration is the prime requisite for manipulation. To witness the most concentrated participant suddenly increase its silver short position by more than 30% is something almost beyond comprehension.
  
  Let me walk you through the mechanics of what just took place and then I’ll speculate on the motivation of JPMorgan increasing its silver short position so dramatically.
  
  Over the past two COT reporting weeks, it has been primarily a commercial versus commercial type affair. The big technical funds have largely refrained from adding to their net long silver position, even though prices have climbed very sharply. Two weeks ago the raptors (the smaller commercials away from the big 8) increased their net short position to 4000 contracts, the highest level in four years. The raptors were selling to the smaller unreported category traders who were buying. This week, the raptors bolted from their entire short position, buying it back completely and leaving them flat (not net long or short). JPMorgan was the sole seller to the raptors’ buying, resulting in the big increase in JPM’s short position.
  
  As far as the motivations behind this trading, the most plausible explanation for the raptors running from their newly initiated big short position is the stark reality that shorting silver has been a very bad deal.
  
  My guess is that the raptors did their homework on silver only after they put on the big short and started to lose money on rising prices. That homework persuaded them to get off the short side of silver pronto, which they did.
  
  JPMorgan’s motivation for suddenly and greatly increasing its silver short position is less clear and more troubling. My own guess is that the JPMorgan silver trader thought he had no choice but to sell many more contracts short in order to control the price and protect their existing short position. That’s because there was no one else left to sell. If JPMorgan didn’t sell, no one else would have (at prevailing prices).
  
  That’s the problem and it goes to the heart of the crime. The raptors didn’t want to sell, nor did the 5 thru 8 large traders. Ditto for basically all the other silver traders. That left JPMorgan as the sole silver seller, as the COT and Bank Participation Reports clearly document.
  
  Please think about this.
  
  We know that concentration in any market is to be avoided. The whole thrust of commodity law goes towards preventing concentration. We know that the ideal profile of a free market is where a wide diversity of market participants competes on both the buy and sell sides of the market. We also know that the most extreme state of concentration possible is where there is, effectively, only one buyer or one seller. Therefore, what the latest COT and Bank Participation Reports just confirmed was that the most extreme form of concentration possible just occurred during the latest reporting week.
  
  This is the key point – what would have happened if JPMorgan hadn’t sold short the additional 6,000 silver contracts (30 million oz) when they did? Asked differently, in the current market conditions, what price would have been required to induce other market participants to sell the 6,000 contracts if JPMorgan hadn’t sold? My guess is that would have taken a price over $40 or $50 to attract that much legitimate selling. The fact that JPMorgan was the sole seller is the clearest proof possible that silver has been manipulated.
  
  So egregious was this latest increase in JPMorgan’s short position that I am inclined to think that it may have been done on an unauthorized or rogue trader basis. Perhaps JPM management and the CFTC are not yet aware of it, seeing how recently it occurred. After all, the COT and Bank Participation Reports were only published less than 24 hours ago. (As is my custom, I will be sending this article to the Commission and JPMorgan and the CME Group).
  
  I realize that I am making serious allegations of violations of commodity law, as there is no market crime more serious than manipulation. At the very least, this new government data release is so disturbing that it should be addressed immediately. Silence on the part of JPMorgan, the exchange and the CFTC is no longer constructive. If my accusations are off-base, then I should be set straight. I’m not out to cause trouble; I am trying to help correct what I see as a very serious market problem.
  
  I can’t help but think that Chairman Gensler of the CFTC will be troubled by this recent action by JPMorgan to substantially increase its already concentrated silver short position. In recent speeches he has indicated his support for position limits to guard against concentration. Please scroll down to the section on position limits in this recent speech to see what I mean.
  
  Chairman Gensler also solicits your public comments on this issue, as I have done previously. I found it interesting that he singled out position limits in this speech for encouraging you to comment. By the way, the number of public comments on position limits is now close to 3,000, a truly remarkable outpouring of public sentiment.
  
  Please don’t assume that the sharp increase in short selling by JPMorgan is automatically bearish for the price of silver. Yes, such manipulative short selling in the past has led to sharp sell-offs and could again. But things do change and current conditions in silver are vastly different than they have been in the past. While we must be prepared for a sell-off (by not holding on margin), this situation could (and should) blow up in JPM’s face.
  
  They are increasingly isolated which makes them both dangerous and vulnerable. Most of you are holding silver from prices much below the current levels. This bestows on you a power that few newcomers to silver possess, namely, the power of a long term perspective and the ability to withstand short term price gyrations. You have a price cushion and the power of knowledge that should enable you to persevere against any short term manipulation. The proper approach is to hold silver to go much higher and not to lose your position, just as it has been all along.
  
  That aside, you should be disturbed enough about the revelations in the new COT and Bank Participation Reports to rattle on the cages of JPM, the CME and the CFTC. Just as a head’s up, I may make portions of this report available in the public domain if I conclude it will benefit subscribers. Let me think about it a bit. In the interim, please contact these parties if you feel so inclined. You know I will.
  
  Ted Butler
  March 7, 2011

Email addresses for those who wish to contact the regulators:

• ggensler@cftc.gov (Chairman)
  
  mdunn@cftc.gov (Commissioner)
  
  bchilton@cftc.gov (Commissioner)
  
  jsommers@cftc.gov (Commissioner)
  
  somalia@cftc.gov (Commissioner)
  
  jamie.dimon@jpmchase.com
  
  executive.office@chase.com
  
  thomas.lasala@cmegroup.com
  
  dean.payton@cmegroup.com

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Email: village_whisperer@live.ca

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Please read disclaimer at bottom of blog.

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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Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.