Send this article to a friend:


Code Red
Ted Butler

As a result of data released over the past week (mostly, the last 3 days), it seems clear to me that we may be facing a clear market emergency in COMEX silver futures. I am trying hard not to be alarmist, but what I see alarms the heck out of me – to the point that I believe we are at the most critical juncture in COMEX silver since the peak of prices back in early 1980, when all sorts of emergency measures were enacted to deal with the Hunt Brothers that are debated to this day, 43 years later.

Trading in silver, both on the COMEX and in shares of SLV and other silver ETFs, since the close of business on Tuesday, July 11, has created what appears to me to be a “Code Red” situation, in that prices must soon move sharply higher or lower (or both). I’m not trying to be cagey and describe it in a manner where no matter what happens, I’ll appear to be correct. I’m motivated by something else entirely, namely, I’m almost stupefied by the changes in the official data over the past three trading days and how these changes portend a market that could lose its bearings.

First, there are the changes related to the pronounced ongoing physical silver shortage, starting with the new short report on securities released late Wednesday and which indicated that the short position on SLV rose by 3.8 million shares to 22.6 million shares (20.7 million oz), as of June 30.

Over the past two reporting periods (4 weeks in all), the short position on SLV has increased by 8.5 million shares (7.8 million oz), at the same time that the much larger total commercial net short position on the COMEX had contracted notably (by roughly 45 million oz) over the same approximate time period. Over the years, generally, the short position on SLV and the commercial short position on the COMEX rose and fell in unison (although not always). The most plausible explanation for the divergence in the two short positions this time around would appear to be that shares of SLV were shorted because the physical metal was not available for deposit, as required by the prospectus, leaving the short sellers no choice but to sell short. The only other reasonable explanation was a conversion of shares of SLV for actual metal which suggests the converter was seeking to buy more and avoid reporting requirements. Both explanations are bullish.

This was compounded and confirmed by the redemption of more than 6 million oz from the SLV this week, instead of a large deposit – also highly-indicative of pronounced physical silver tightness. The sharpest short-term price rally in some time on increased trading volume strongly suggested there would be big net new investment buying, which should have resulted in metal deposits, not redemptions. Again, the most plausible explanation is that physical metal was withdrawn from the SLV to satisfy more urgent needs elsewhere.

But, by far, the most urgent factor pointing to a code red situation was the almost-unbelievable increase in total open interest in COMEX silver futures since Tuesday. Over just three days, the total open interest in COMEX silver futures rose by a massive 23,000 contracts, with at least 20,000  contracts being of the true and non-spread related increase in net new buying and net new selling

The way the futures derivatives market works is that a large increase in total open interest means an equally large increase in new long contracts as well as an equivalent increase in the number of new short positions (one new long plus one new short equals an increase of one contract of new open interest). Often times, a large increase in total open interest involves the creation of new spread positions, which are market neutral transactions (as phony as a three-dollar bill) and is not at all representative of actual price-moving trade positioning.

The sharp increase in total silver open interest over the past few days doesn’t look related to phony spread activity – it looks very much like the real deal, namely, massive new bets on price direction. This is at the heart of my code red premise. The very last thing the silver market needs right now, in its current state of confirmed physical shortage, is another 100 million ounces added to a derivatives’ bet already too large at hundreds of millions of ounces on the COMEX and more than a billion oz in OTC derivatives. It’s like throwing a hundred million barrels of gasoline on a fire already raging.

While we have to wait until next Friday’s COT report to know for sure what the actual positioning changes might be, that’s an eternity from now in terms of a possible market emergency and is why I’m sounding the alarm now. I’m hopeful that the CFTC and CME Group (owners of the COMEX) are on top of this, but fear they are not. Simply stated, this is the greatest market emergency in COMEX silver since the Hunt Brothers emergency in 1980. As far as possible regulatory actions, I would imagine some type of trading restrictions of the kind initiated back then. If this was analogous to a real war setting, the nuclear weapons would already have started to have been deployed.

On the buy side of the 100 million silver oz purchased over the past three days, the leading candidates would appear to be the managed money technical fund traders, as just last week I estimated they could buy 25,000 contracts (125 million oz or more) on higher prices. Certainly, we did get the type of buy signals associated with managed money buying – upside penetrations of key moving averages.

We also know for sure that the silver futures buyers were the initiators of the transactions on the COMEX, because when the price of any asset moves higher, it is always due to buyers initiating the transaction and with the sellers accommodating the buyers. Therefore, the question is not who were the buyers or what their motivation might have been, because that’s obvious – the buyers bought in the expectation of even higher prices (in order to make a profit). The real question is who were the sellers and what was their motivation. One might quickly counter that the sellers’ motivation was the same as the buyers, namely, to make a profit on the expectations of lower prices – but it isn’t as simple (and pure) as that.

The amount of buying over the past three days in COMEX silver was so large that prices should have carried much further than they did – and not just by $2. I’d estimate that if the sellers were purely motivated by a profit incentive, they would have demanded and extracted from the buyers much higher prices, say to well-over $30 or $35. Instead, the sellers accommodated the buyers by selling to them at way lower prices than the buyers would have paid. In other words, the sellers -  all new short sellers at that – had a different motivation in mind. Without question, the short sellers’ motive was to keep silver prices from surging higher, so as to cool and cutoff even further buying.

This is as sure as the nose on your face and is the same manipulative motivation deployed by the COMEX commercials over the past 4 decades. And while I had high expectations that 4 and 8 big former commercial shorts were done capping and controlling silver prices by aggressive and practically unlimited new and highly-illegitimate short selling, it’s hard for me to come up any conclusion other than these big former shorts being the big short sellers over the past three days.

While it’s true that the 4 big COMEX silver shorts didn’t add to their short positions on the $6 rally in March, it looks extremely likely they added aggressively on the $2 rally over the past three days. Why? What else could it be over than a blatant attempt to cap and control silver prices before they got out of hand and began to reflect tight physical market conditions? This in-your-face and uneconomic short selling is what has created extreme market emergency conditions in COMEX silver.

The newly-created 100 million oz of new longs and shorts are very much open positions that must be resolved or closed out in time – along with any new positions still yet to be created. The most obvious thing is that it makes compelling sense to be a silver buyer – whether that buyer was the big reporting trader which bought just before prices jumped or whether it was technical fund buying over the past three days on the technical signals created by higher prices. Flip that around and ask how much sense it makes to be an aggressive short seller at $25 silver (or less) and see what you come up with - away from another attempt to cap and eventually rig prices lower?

While I am hopeful that the regulators are fully abreast of the current extreme conditions that exist in COMEX silver futures, my fear is that they are not. There is a lot more blame and fault that can be assigned to the short sellers than the buyers, but that’s no guarantee or indication the regulators will see it that way. Regardless, the emergency looks to be fully in place, even if it is obvious to only a few, so we already have in place the conditions for extreme price violence.

The problem is that there’s no way I can tell if that price violence is to the downside first, followed by even greater price violence to the upside or if we explode straightaway – even more strongly than I have been suggesting previously. Yes, I know that the commercials have never been overrun to the upside, as my late friend and silver mentor, Izzy Friedman, always insisted they would, but then again, current conditions are more extreme than Izzy ever imagined, starting with all the signs of the intensifying physical shortage. Let me fully-acknowledge that Izzy’s full pants down premise looks more plausible to me than ever.

Knowing full-well and agreeing with the motivations of the silver buyers, be those motivations fundamental or technical in nature and believing I understand the motivations of the short sellers to be purely illegitimate and manipulative, it’s impossible for me to see how silver prices won’t explode in the end – even if they do flop first. I also can’t help envisioning the profile of a big bank short as 30-year-old kids running the books and shorting aggressively and where if they guess wrong and prices explode, they lose their jobs but not their money, as the losses will accrue to the banks, not the kid traders. I also have trouble thinking that JPMorgan is a big silver short in light of its yet to expire deferred criminal prosecution agreement.

Yes, I am convinced a real and present danger and emergency exists in COMEX silver, mainly as a result of the new 100 million oz long and short position created over the past three days which can’t help but result in extreme price volatility dead ahead. But in the end the result will be sharply higher prices – regardless whether we see lower prices first (or not).

Ted Butler


After publishing unique precious metals commentary on the Internet since 1996, I have decided to offer a subscription service. The main reason for the change is that I felt somewhat restricted by my weekly format. It is my intention to publish some commentary at least twice a week.

The commentary will include detailed analysis of the Commitment of Traders Report, regulatory developments, supply/demand considerations, and topics of interest to investors in precious metals, with an emphasis on silver. Subscribers will also be able to ask questions.

The service is intended to be source of market information for serious observers of the silver and gold markets, delivered in a no-nonsense manner. No bells and whistles, just unique and valuable content. Always outside the box.

Please note - this is not intended as investment advice and I am not an investment advisor. The service is solely for informational purposes

Send this article to a friend: