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Shorts Unable to Stop Silver Rise
The Commercial Silver Shorts were short 101,000 contracts July 18, 2008, when silver was $18.55 per ounce. They reduced their position to 51,000 contracts as silver prices collapsed to $10.07 on December 12, 2008. Since then, the price of silver has jumped to $14.66 as of May 22, 2009, while the Commercial short position has jumped back to nearly 65,000 contracts. Back in July, the Commercial Short/Long ratio was 3.37 to 1, By December the spread was 1.9 to 1 and on May 22, it was back to 2.78 to 1 In effect, these Commercial Banks held short positions that were the opposite of the rest of the market, selling silver to offset the long positions of the small and large traders. While there must be a seller for every buyer of a contract, the sheer size of the Commercial Short position drew attention to the matter. On July 18, the Commercial Short position amounted to 84% of all short positions in the COMEX; by December, that number was down to 75%; on May 22, it was back to 82% of all short positions. The July 18 short was 101,000 contracts, or nearly 506 Million ounces. When there were only 680 Million ounces mined in all of 2008, this indicated a short position that was nearly an entire years worth of production for the entire world. This was reduced to only 258 Moz in December, but has since rebounded to 324 Moz or nearly half the entire year's world production of silver. If all those shorts were called for delivery, or even a small percentage of them, the COMEX would have no choice but to default or force delivery in cash rather than silver, which it can do thanks to a recent rule change. Of particular interest is the recent reversal in the spread between the Commercial Shorts and the price of silver. From May of 2008 through early January of 2009, this spread was negative for every week except one. During that period, the price of silver fell from $16.85 to $11.22. In Mid-January of 2009, the spread turned positive with silver at $10.76 and with only a single exception, has remained positive to today with prices Thursday, breaking the $15 ounce level. Most of these positive indicators are below 50 cents, but the last five weeks have seen spreads between 1.27 and 1.82 and a rise of 15% in the price of silver during the same period. This change has occurred even with the Commercial Shorts reinforcing their short position by 8600 contracts in just the last month. With Silver now over $15 per ounce, the Commercial Short position would have to add another ten thousand contracts short just to come even with the current silver price. The Commercial Short position did add nearly 5,000 contracts as of May 15, but only 1600 more on May 22 to get to the current position of 64,000. Given the recent push of inflationary fears, the increase in precious metals as a whole will likely continue and silver could see even more of a boost if portions of the manufacturing/industrial sector begin to pick up. Unless the shorts begin to make serious and meaningful increases in their short position, silver is likely to continue to rise, a boost to investors who are holding these stocks. One final note: It would appear that increasing their short position has forced the Commercial Shorts to bet against silver to the tune of nearly half a billion dollars. While not much in the overall scheme of things, considering the bank bailouts, it could prove troublesome as further rises would place these banks in the position of having to cover their shorts at significantly higher prices as the contracts come due. Disclosure: Long positions in GLD, SLV, physical holdings in silver and gold, retirement funds investment. |
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Much of the blame for the price of silver has been laid at the foot of a few commercial banks that take extreme short positions regarding silver. The fact that the two large commercial US banks, which the COMEX refuses to identify, have positioned themselves to bet against the silver price has been seen as a major cap on the precious metal. Apparently it is being left to the pressure of inflation to blow the lid off the cap and allow the price to rise.