***** watch silver!!!!!!!! *****

  1. dub
    29,544 Posts.
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    The market wrap-up by Puplava today was (as usual) very interesting. It included a significcant section on silver, particilarly the matter of short vs long positions on Comex.

    I just had a look at the lease rates for silver.

    The URL is http://www.kitco.com/lease.chart.silv.html -and the sudden rise in the short term rate is clear.

    To my simple mind, this ties in with the main thrust of the article.

    The full article can be found at
    http://www.financialsense.com/Market/wrapup.htm . I believe it is really worth reading. However, for those with an interest in silver but without the inclination for a full read here's the relevant section (highlighting is Puplava's).

    "Since the vaults of central banks are now half empty of gold, central bankers are having a harder problem in keeping the price of gold suppressed. The main way prices are capped these days is through paper gold and silver, otherwise known as derivative contracts. This is nowhere more obvious than what is going on with the COMEX in silver. Recently the price of silver has broken out of its long-term downtrend and consolidation pattern as reflected in the chart of silver below. While the price of gold has risen for three consecutive years until recently the price of silver has failed to confirm gold’s move. That is until recently when the price of silver has broken above its top line resistance channel at $5. For well over a decade now, shorting silver has been a one-way trade. Silver has been kept within a narrow channel of $4-$5 an ounce. Despite the fact that silver supply has not been able to keep up with demand now for 14 years, the price of silver has languished. Silver markets have been in deficits for 14 years. That deficit shows no sign of improving soon. No amount of price increase will be able to increase the supply in the short-term outside existing owners of silver bringing their coins, silverware, and jewelry to market, an event that is unlikely unless prices explode to the upside. The simple fact that silver is a by-product of other mining limits its supply. Gold, copper, lead, and zinc supplies will have to increase before the supply of silver increases. At the moment there is no visible sign of that happening outside a major breakout in base metal prices.

    Given the fact that silver is in short supply and is a monetary metal, it is surprising that its price has been kept so low. You will find this oddity in no other commodity except the price of gold during the mid-90’s when central banks were dumping the precious metal. The fact that the financial markets and investors can so readily accept this oddity is surprising. In an era when speculative capital dominates the global financial markets looking to arbitrage and exploit discrepancies, this is one discrepancy that has gone largely unnoticed. The silver/gold imbalance and the gold/Dow imbalance is one of the best opportunities in the financial markets, especially when you consider the vulnerable position of the silver markets.

    The recent breakout in silver prices has brought into play large short positions by commercial players on the COMEX. Like clockwork the commercials have gone short as the price of silver has risen. This is a game they are accustomed to playing and winning. For the last decade they have played this game and won. However, things aren’t going as planned for the commercial short players. Despite the largest short position in silver in over a decade the price of silver has not fallen but in fact has risen and broken out of its long-term trend channel.

    The Short Sellers Achilles Heel

    The silver market has awoken out of its decade-long slumber much to the consternation of the short sellers who now remain extremely vulnerable to a short squeeze if the trading funds and the small trader ever awaken to their own strategic advantage. The simple fact remains the commercial shorts don’t have the silver to back up their short position. I’ll say that again. They don’t have the silver to back up their short positions. The short position is so huge now that all it would take to initiate a squeeze is for small traders to begin demanding delivery or for the trading funds to stand for delivery. Things have became so desperate for the commercials it has become necessary for the commercials to take out more short contracts last week and bring their short positions to a decade-long record. Last week alone commercials went short a net 8,235 contracts, equal to 41,175,000 ounces of silver. The amount of registered silver in the COMEX warehouse is only 43,732,784 ounces of silver. In other words, in one week alone the commercial short sellers have gone short almost the entire amount of silver ready for delivery on the COMEX.

    It gets worse and more intriguing when you consider that their entire net short position is 81,755 contracts representing 408,775,000 ounces short. That is almost 10 times the amount of silver that is registered and available for delivery. It is also close to 4 times the entire amount of silver held as inventory on the COMEX. At a time when the officials of exchanges are coming under close public scrutiny for their actions and behavior one can only wonder if the officials that run the COMEX are asleep or in bed with the short sellers. What is known is that the short sellers represent big financial interests and not commodity producers. This makes their position that much more perilous. Unlike a farmer who is a producer of a commodity, a financial firm can only honor their contract by having possession of the metal. What we have here is a very speculative position that can only end in default if the holders of long possessions press their demand or take delivery. The real value or price of a derivative is that it, in a real sense, is not an option on the right to buy or sell something. In reality it represents the right to default in a forward. This is exactly the position of the commercial short sellers today. Plain and simple, the commercial shorts don’t have the silver to back up their short position. All they can do to keep from defaulting is to increase their paper short position in the hopes they can drive the price down low enough to cover their short position. It has become a game of nerves. The commercials are hoping the technical trading funds will retreat along with the little guy so that they may get out of their desperate situation. They have played this game numerous times before and always walked away winners. The game is working out much differently this time. Perhaps the technical trading firms and the little guy see that the financial beast as been wounded and smell blood. At least for the moment they are standing up to the commercials who have always won this game. Maybe it is revenge for all of the money the commercials have taken away from the fund traders and small specs. Or perhaps it is the sense that a new trend has begun a transition from a bull market in paper to a bull market in hard assets.

    As a reader and observer of military history it is fascinating to observe the apparent weakness and vulnerability of the commercial short sellers. Battles are sometimes won by an unexpected event, a sudden change in tactics, or the loss of morale and spirit of one of the armed combatants. Perhaps that is what the commercial short seller is waiting for. It has been a tactic that has always been used in the past to win the short seller game. Eventually, the other side’s resolve is weakened and the longs abandon the battle. What the longs may not realize and what is becoming the commercial’s worst fear is that if the longs awaken to the fact that the battle is theirs for the taking. All it would take to end this battle with overwhelming force is if longs switch their position to the nearest month contract and start taking delivery. The battle would be over instantly. In military terms the commercials don’t have the troop strength to back up their bluff. In this case it means they don’t have the silver to cover their short position. Not unless they have discovered a secret unknown hoard of silver such as the Lost Dutchman’s mine, they simply can’t cover their position. They are relying on what they have always relied on which is the ignorance of longs and their inability to exploit their own strength and the weakness of the commercials. Sometimes Goliath looks bigger and stronger than he really is. Goliath was brought down by a stone. In the case of the commercials all it would take is delivery.


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