TradePlacer.com Blog - shorts tag

Silver Shorts Cover Nearly Half Their Position In One Week

Sun, 02 Oct 2011 21:38:00 GMT

As we anticipated earlier this year, commercial shorts including JPM are finally within grasping reach of covering their positions and transitioning to net long. For more than a decade, the large commercial trading banks have been trapped with an enormous short position in silver as the price has risen from its lows near $3 to its May high of nearly $50. Most analysts expected the commercial shorts to be broken in a short squeeze, likely launching silver above $100. However, this short squeeze will not occur.

In September 2010 these traders began to aggressively cover their short positions. Since then, commercial net short positions in silver have been reduced from over 65,000 contracts to 24,262 as of September 27, 2011 - and falling from 40,708 just one week earlier.

The large September take down from the $40 price level to the $30 price level has completely wiped out the small leveraged speculators, which saw their net long positions crash from 18,170 the previous week to 8,837. Meanwhile, open interest is threatening to break below the 100,000 level - indicating that speculative money has abandoned silver and sentiment is extremely low amongst investors. The combinational one-two punch of the May takedown and September takedown served to transition contracts from speculators to the commercial shorts at a much lower average price than most analysts ever expected.

The bullish trend line in silver that began in 2009 remains intact. However commercial shorts are now within a few weeks of trading their way out of an impossibly large short position to go net long. We expect the remaining positions to be covered within the $26 to $32 price range under the guise of bearish speculator sentiment.

This is extremely bullish for silver's long term trend, as the commercial banks will capture more profits from the bull market in precious metals than any other trading group. Once the commercial banks have a net long position their financial incentive will reverse from using takedowns to take-ups. This will likely coincide with the next round of monetary intervention by the Federal Reserve and the beginning of the third phase in the silver bull market - in which waves of retail investors push silver to its destined triple digit price level.

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Commercial Banks to Cover Their Silver Short Positions

Sat, 02 Jul 2011 17:34:00 GMT

After an extended period of consolidation, the price of silver launched from $17 in August 2010 to just under $50 in April 2011. The fuel behind this move was not speculative buying, but instead short covering by large commercial short traders including JP Morgan.

As short covering buyers pushed the silver price up to its all time historic high of $50, several factors led to the large selloff in May. A breakout of $50 would remove technical resistance and attract fast money speculative traders that could quickly spike the price of silver to $100. Knowing this, JP Morgan likely hit the panic button. Readers can fill in the blanks, but what is public knowledge is that the CME embarked on an unprecedented series of increases in margin hikes which forced a liquidation of leveraged traders positions before they had the chance to put up more capital. One round of margin hikes was actually made on a Sunday.

Smart money investors who had purchased the majority of their long silver positions below $10 anticipated this move and aggressively sold into the short term peak. The $50 level is a key pivot point in silver because it represents a 10x gain in price for early investors who purchased below $5 prior to 2005. Silver was also 70 percent above its 200 dma which has defined silver spike peaks historically. Even most silver analysts who have been long term bullish on the metal sold large tranches of their positions. This profit taking was natural and healthy.

These paper silver contracts that were sold went directly into the hands of the commercial shorts. The resulting consequence is that the open interest in silver has collapsed from a peak of 158,000 on October 2010 to 114,000. Meanwhile the banks that were trapped in their large commercial short positions have been able to successfully cover more than half of their short positions at an average price of less than $40. As of last Tuesday, the net commercial short position in silver stood at a mere 29,166 in the fundamental vicinity of silver's major low in 2008 when it was in the $8-$9 range. If the trend continues at this pace, the commercial shorts will be able to successfully cover their positions and go net long by the end of the year.

We expect this likely scenario to occur, mostly due to the fact that even smart money investors are afraid to stand and take delivery. The implication is that the commercial banks will indeed profit more than any other group from the rise in silver. This is extremely bullish for the long term price of silver because once the commercial banks are net long, there will no longer be a financial incentive to cap the price. A similar, but not as powerful, pattern occurred in oil before its run from $50 to $150 during 2007 and 2008.

Silver will likely remain week for the remainder of the summer while it consolidates down to a major support level at $30, and its 200 dma near $31. Clearly, the selloff in positions from smart money investors to institutions shows that silver is in the mid to later stage of the second phase in the silver bull market. The next push to and above $50 will not see the same resistance, and will likely be launched with the next round of quantitative easing as the US fends off its own bankruptcy.

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Will the CFTC Actually Act to Protect Silver Investors?

Tue, 26 Oct 2010 17:59:00 GMT

The silver market has seen a lot of surprises this year, and the statement today made by CFTC Commissioner Bart Chilton is probably the most unexpected yet. After more than two years of "investigation" into the silver market with no acknowledgment of structural issues, Chilten gave a public meeting in which he was quoted as saying "There have been fraudulent efforts to persuade and deviously control that price... the public deserves some answers to their concerns that silver markets are being, and have been, manipulated." He went on to state that the CFTC would be introducing new regulations to curb manipulation in the precious metals markets. Silver rose nearly 80 cents from its intraday low on the news.

Silver analyst Ted Butler has been writing letters and warning the CFTC of the consequences of manipulation in the silver market for more than 20 years. Not many people would bother to warn of these issues when ignored and ridiculed, however Butler persisted with his call for action to remove manipulators from the market. Up until recently, these warnings have been completely ignored.

As Butler and others have documented, a concentrated group of four to eight traders have been responsible for nearly 70 percent of all short positions in silver on the COMEX. These traders have consistently traded in unison to move prices while collecting large profits along the way. It is suspected that JP Morgan holds the majority of these short positions; however the CTFC has refused to acknowledge this and trading positions are not publicly disclosed.

Why Now? What does the CFTC and the short commercial banks know that we don't?

It doesn't take 20 years, or 2 years for that matter, to realize that there are obvious structural problems with the silver market - especially when the issues are spoon fed by letters from thousands of individuals. Given the reactive nature of the CFTC, it is unlikely that Chilten is acting preemptively to protect the small investor. It is more likely that the CFTC position is changing due to the structural change in the silver market. In 2008 weak long speculators were categorically replaced with blood thirsty hedge funds, wealthy investors, and developing nations who buy in cash.

As previously documented on Tradeplacer.com, the commercial banks began to cover their short positions in a rising market about four weeks ago which is highly unusual. While silver has oscillated between $23 and $25 over the last month, the banks have continued to quietly cover. Perhaps Chilten means what he says and the banks began to cover in anticipation of further regulation by the CFTC.

Is it too late?

As of October 19th, the commercial traders were still net short 58,150 contracts - roughly 290 million ounces of silver. There are currently only 52 million registered ounces and 59 million eligible ounces held in COMEX warehouses. It would not be possible to remove the short commercials from the silver market in an orderly fashion. The majority of contracts would have to be settled in paper at much higher prices. As pointed out by Butler, the worst case scenario - and increasingly likely - would be a closure of the paper precious metals markets. If that occurs physical silver would likely trade in multiples of its previous paper price and would be unavailable to most buyers. The apparent choice by the CFTC to act is most likely no choice at all. It is a desperate move to maintain the status quo and a reaction to an eminent emergence of either physical shortages or dollar devaluation instigated by a wave of quantitative easing.