The Silver Short Bubble
Here is a fascinating article from our friend Craig Hemke over at TF Metals Report. Tune into the weekend show for a discussion with Craig about this very topic.
Click here to visit Craig’s site for some other great articles.
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For the first time ever, total Comex silver open interest exceeded 200M contracts yesterday, settling at 200,273. This means that the coming Spec short squeeze is going to be violent and substantial. And why isn’t anyone calling this a “bubble”?
The final open interest numbers for yesterday are in and they are truly remarkable. Gold, which declined by $7, saw its OI rise by over 11,000 contracts to 430,978. This is the highest Comex gold OI since late March. Since yesterday was a CoT survey day, there’s no doubt in my mind that this week’s report will show another substantial and bullish improvement in the gold CoT structure. Why? For the Wed-Tue “CoT week”, gold was down $5 but total Comex OI ROSE by over 15,000 contracts with 2/3 of the rise coming Fri-Tue when price was declining by over $25. That’s A LOT of fresh Spec shorting in gold and it will likely move the gold CoT to a bullish structure not seen since the early November lows last year.
That’s all well and good but, obviously, the point of this post is silver so let’s get right to it…
Yesterday, as price was being smashed nearly 2.5% or 40¢, total Comex silver OI rose by another 4,909 contracts to close at 200,273. That’s the first time in the history of the Comex that total OI has exceeded 200,000 contracts.
- First of all, why now? Why is silver OI at record highs when price is at 5-year lows? And where are all the “bubble callers”? They were out in force four years ago with price in the $40s and total OI at 140,000. Why can’t this current time be called a “short bubble”? It clearly is. I guess it’s only a “bubble” when it fits the narrative you’re trying to promote.
- Let’s do some math. There are 5,000 ounces of paper silver behind every Comex contract. Multiply 5,000 X 200,000 and you get a total Comex obligation of over 1,000,000,000 ounces of silver. Hmmm. Last year’s global mine supply was just under 900,000,000 ounces and the TOTAL Comex vault shows holdings of 181,000,000 ounces. How is it even legal to print 200,000 contracts when there’s only enough silver in the vaults to cover less than 40,000?
- On the topic of mine supply, the WGC estimates total global gold mine supply at about 92,000,000 ounces. Total Comex gold OI at 430,978 represents 43,000,000 ounces or about 47% of total annual mine supply. In silver, as noted above the percentage is about 112% of total annual mine supply.
From a CoT standpoint, this is all extraordinarily bullish for paper silver. As mentioned earlier, the next report is due Friday and it will be based upon these numbers from last evening. For the CoT week, silver was down 21¢. Remarkably, over this same period, total silver OI spiked by 9,500 contracts from 191,774 to yesterday’s 200,273. From a CoT perspective, we are back to a very bullish extreme in silver, too.
And what about the short squeeze that we’ve been expecting. OH, IT’S DEFINITELY COMING and the growth of Spec short open interest this week only adds more fuel for the fire. All we need is a spark. We almost had that spark last week after the Fedlines but silver failed to cross its 50-day moving average and fell back. The “doubling-down” on Spec short positions this week is simply accelerant for the fire once it begins. The chart below can’t make it much more clear for everyone:
In other news today, the Greek situation is reaching a true crisis point (http://www.theautomaticearth.com/2015/06/the-only-good-deal-for-greece-is-no-deal/) and the US economy is slipping into recession (http://www.zerohedge.com/news/2015-06-24/excluding-obamacare-and-harsh-winter-q1-gdp-tumbled-14) Meh, whatever. The HFT algos don’t give a damn about such arcane notions as fundamentals, all they see is a declining yen and they sell “gold” accordingly:
I need to get this posted so I’ll just leave you with this…
In the 3.5 years since MFingGlobal when I officially quit trading, rarely have I been so tempted to wander full force into The Casino. This current situation is so extreme and the “short bubble” so HUGE that it is very difficult for me to remain on the sidelines. However, on the sidelines I shall remain. This personal restriction does not apply to you, however, my dear reader. Best of luck, be patient and prepare accordingly.
TF
Why can’t this current time be called a “short bubble”?
Massive short positions in PMs is considered to be normal and healthy and essential to protecting the nonexistent value of fiat currencies. Massive long positions in PMs is considered to be abnormal, subversive and dangerous. The big lie that fiat currency is worth something must be protected at all costs or else all could be lost. Profiting from short selling is a fringe benefit from it all.
That is the best explanation I can think of for now.
Well some people believe it is normal like Bob M.:
“Futures markets are to set prices, not deliver products. That’s how it works with the SPY and how it works for gold.
Anyone talking about naked shorts or paper gold simply does not understand the purpose of futures markets. It’s a zero sum market, one buyer and one seller.
You can use your head and think for yourself. If you need to, cheat and use a calculator.
Scam artists like Ted Butler are running around saying stuff like JPM bought 350 million ounces of silver so they could tank the price.
Is he insane? If anyone bought 350 million ounces, the price would go up. You can’t make prices go down by buying stuff.”
Until someone ask for delivery …
It IS zero sum is it not?
Could they not just as easily say its the first time for “X” long contracts?
Until someone asks for delivery? They will just get paid cash no? No problem.
Every time someone insists “for every short there is a long” I yell at the radio/TV/computer “NOT WITH NAKED SHORTING!” The evil in the world make more money on the way down than on the way up, they make more money with fear than they do greed. And they’re not afraid to use fraud (naked shorting) to do it. Every stock with a high valuation ratio is seen like a pinata on a tree limb, and the evil ones are holding a big stick to get the candy inside at the cost of the other stockholders.
China will have to break the COMEX.
They will have to take delivery of every available ounce of physical that the exchange can find and then demand more until the exchange settle in fiat.
China has deeper pockets than the Hunt Brothers and they have much more muscle.
They will likely not do this until they achieve at least partial reserve currency status. That will do the trick to secure complete reserve currency status, then they state how much gold they own as the trump card.
Guess I don’t know how it works, I thought here had to be a buyer for someone to sell.
No sarcasm, I don’t understand how something can be sold with no buyer.
There is no naked shorting in commodities. It is a zero sum game no matter if you understand it or not. For every short there is a long. For every long there is a short.
Bob M. – I posted a few silver miner charts at the top of Gary’s blog and the 4th one down has Defiance Silver on it, and it definitely outperformed its peers over the last 200 days, but it is has been kind of a murky silver market. I just wanted to say thank you again for the heads up on it, as I like the fundamental of the land they have and resource that they’ll continue to define as the markets improve.
Much appreciated!
Shad:
That’s the easiest call you will ever make on silver. Obviously we need prices to go up for the juniors to start breathing but Defiance has a 5.6 km structure that a monkey could drill. They can have as many ounces as they want. For that project to be skipped over in the last 15 years was criminal.
Since COMEX alone has 120% of total WORLD silver production (mine and recycling) shorted. Some of these have to have no metal behind it. This is only one exchange and there more exchanges. LBMA has more shorted. For every long there is short, yes for sure. But for every ounce shorted, there might not be metal with it. It is the definition of naked shorting. It has nothing to do with the buyer. It is whether seller has metal or not. It is the same with shares. If seller borrows the shares and sell, he have shorted. If seller does not borrow and still shorted, he is naked shorted. This action is illegal.
I’m pretty sure it isn’t illegal if you settle before the settlement date. It’s the same as selling a put on an equity you don’t own. It may be playing with fire, but it isn’t illegal.
I mean in stocks it is illegal not in futures.
Naked short is illegal in stock market. You have to borrow and deliver shares within 72 hours I think. However, exchange sometime does not enforce the rule, especially TSX.
You can have naked short selling with shares. You cannot with commodities. Don’t warp the facts to fit your opinion, just change your opinion to fit the facts.
Bob,
Please don’t accuse me of making thing up. My friend tried to short a 3X and could not find shares so he could not short. If he can naked short, why does he have to borrow shares. I never tried to short but I hear all the advisers mentioning borrowing share to short. IT is specifically defined in the InvestorPedia.com
“when you short sell a stock, your broker will lend it to you. The stock will come from the brokerage’s own inventory, from another one of the firm’s customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must “close” the short by buying back the same number of shares (called covering) and returning them to your broker. ”
Link
http://www.investopedia.com/university/shortselling/shortselling1.asp
As I know of, you can naked short futures (commodities or stocks alike) but you cannot short spot (commodity and shares).
I am sure a lot of people have experience in this blog. Hope someone can say something.
I mean naked short spot
I am not sure whether you are Bob Moriarty. If you are wrong , please clarify it.
Lawrence, if you “borrowed” the shares to sell them, have you not sold them?
Someone bought them yes?
Sure, you have to return them, you buy them and someone sold them to you.
Then you return them to the originl owner, but it still works out for every short/sell, there is a long/buyer.
Zero sum, no?
Yes BB. For every seller there is a buyer, no argument. The question is whether the sell is naked or not naked. When dealing stock in which you borrow and sell, you are not naked shorting shares. You delivered the share to the buyer. Bob said it is legal to naked short stocks. I disagree on that. Not for every seller ther is a buyer. My argument is that your short on stocks cannot be naked. The shares you are selling have to be delivered.
Kinda what I thought Bob, thx
All futures contracts dwarf the underlying market. The S&P futures are many times the size of the S&P market. So it’s not at all unusual for the derivitives market to exceed the underlying physical market. Most contracts are settled in cash.
Also high open interest is usually more indicative of a top, not a bottom. At bottoms open interest dries up as everyone gives up on the market. So I’m not sure I would read the high OI levels as bullish.
That is typically correct, but silver has been different for awhile. It is almost as if there is a large hedge here against something else. Most likely derivative based. This could be an upside hedge, figuring silver would gain much more % than gold.
Since silver is physical, at some point there is no metal to be delivered if open contracts far exceed the physical metal. The exchange has to force people settle in cash. This is a default in real sense. The exchange has to make sure, if a buyer want to get real metal he will get it, instead of forced to settle in cash. Otherwise, it does not qualify as a physical exchange and has no right to set price.
Good article!
I see a major pop, and then the drop.
Bye bye comex…..
I wouldn’t buy DSLV just yet.
I posted a ton of Silver stock composite charts, and the holdings of both (SILJ) and (SIL) if anyone is interested on today’s Gary Savage blog.
We have a nice Silver discussion going on over there if anyone would like to weigh in on which Silver producers, explorers, ETFS, Streamers that they are watching for when prices recover. Any insights, tips, thoughts, or charts would be appreciated.
Good luck to all in their investing!
shad… I am on the blog and I do not see them??
The first 4 charts at the top of Gary’s blog have 4 Silver composite charts with 10 stocks on each…..and no, Wildcat (AZ mining) would not load correctly, but I did try 🙂
There are several other Silver mining breakout discussions further down Gary’s blog as well. I’d love to hear any updates you have Dan.
oh i get it… the blog here at Korelin Economics… I thought you meant his blog over at SMT
Correct. The KER one today has a lot of Silver content. Yes, sorry about that, it does read a little confusing on which Gary blog in reference.
Either way I just sold my Silver Weaton dog.
Probably wise for the next month or so, because you can likely buy it back for a better price if we get a continued grind down. SLW should do well for the long haul though for later in 2015-2018 in my opinion, because they have so many favorable streaming and royalty agreements that will be magnified with higher prices.
Silver price is force to stay as a strainght line for a long time, look at 5 year chart. SIlver never behaves this way. It is called a restless metal. I believe the price is squeezed by two forces, massive buying and push down. Since it has not gone down for a long time as the manipulators want, its room of downside is already exhausted. Next move is up.
What is the rule on taking physical delivery of Comex futures?
In other words, so many argue that the paper market is pricing silver below it’s actual cost of production, so why don’t miners supplement their supply by purchasing futures and taking delivery? Or is it that they will be forced to settle in cash by COMEX? According to COT data, producers are actually lowering their long positions.
Producer should have short position since they sell metal. Comex limit the daily delievry to 7 million ounces I think.
There will be no game changing silver short squeeze anytime soon as Craig has perpetually been claiming that’s just around the corner.
If the COT isn’t relevant, verifiable, timely or even trustworthy then why is it being used as a believable tool to perpetuate the whole JPM silver short squeeze myth to continue on and on year after year?
If JPM has an allegedly oftmentioned huge stack of phyz silver as Ted Butler insists upon then any alleged massive short position JPM might have isn’t a problem at all if they can indeed cover their positions.
No matter what we’re still talking about a market that is mainly settled in cash month after month. The short squeeze oftmentioned is baloney and hasn’t even come close to materializing.
In fact, the Greece deathwatch and long anticipated and expected spike in the metals hasn’t materialized at all in a classic buy the rumor/sell the news situation.
One last point regarding the unfairness or criminality of the Comex. What is so hard to understand about how it’s LEGAL for some firms to crazily short certain markets?
It’s the law and it’s been legal for many decades regardless of how some people can’t handle the advantage others have that they themselves would love to engage in if it meant they could massively go long in gold/silver to the point it moved the market up.
There’s little question those who constantly whine about criminal manipulation do so because it gives them an excuse why their annual price predictions aren’t panning out.
Interest rates will go up in the fall of 2015 and they’re will be no massive silver squeeze as currently and perpetually mentioned.
Andrew Maguire is a misleading shill who has been far, far more wrong then right.
China is far more likely to short the metals now that metals trading denominated in yuan has begun. Why doesn’t a spike in metals usually occur during the Asian trading hours if demand there is so insatiable???
It’s not the Yen that’s holding gold back as the correlation between gold/yen doesn’t nearly always hold true UNLESS it’s supportive of someone’s assertions on any given day. Otherwise that lack of correlation is never mentioned like so many other missed predictions.
If gold doesn’t hit $1230 or silver hit $18 and hold those levels while this Greek situation unfolds then look out below once the Greece drama subsides.
It’s a bit perplexing how some smart folks are stuck in the rut of someone else’s beliefs and outlooks that are based on some type of wished for fairness instead of the harsh market realities that actually exist.
Trade the market that exists (long or short) and stop wishing that some other market conditions existed that would mainly fulfill your delusions of gold and silver grandeur.
Disclosure: I still have a massive stack and I’m not metals negative. What I’m negative about is the perpetual golden or silver calf (or bull) that some folks have erected in their gold/silver fever minds that have seemingly blotted out common sense or open minded logic that has them waiting on or hoping for a market that diesn’t CURRENTLY exist.
On some level you’re being misled intentionally for profit or unwittingly because someone’ else’s belief system has overwhelmed your ability to recognize or accept the market cards you have been dealt.
Waiting for that magic, game changing ace of a situation to show up isn’t a strategy…it’s a hope based deer in the market headlights approach that might take a decade or more to resolve.
Trust your gut and be wary of the salesmen among you who are always trying to spin something as bullish or use the manipulation crutch year after year.
thought he spelled his name Hemke.
“How is it even legal to print 200,000 contracts when there’s only enough silver in the vaults to cover less than 40,000?”
Free n Fair U.S.A,promoting democracy and amicable relations as far as the eye can see.