Monday, June 25, 2012

Very Unusual Activity In Silver

"Who else would recklessly dog-pile on a market like that?" - long time Comex silver trader

I didn't realize Obama's new campaign slogan was "Forward" until I saw an Obama ad while I was watching the 60 Minutes piece on Novak Djokovic (which was very well done, by the way).  It added even more humor to the above "bumper sticker."  I hope someone produces it because, even though I never put stickers on my car, I would put that one proudly on my rear bumper.

I also found this fundraising campaign by Obama to be quite appalling:  LINK  The message from the TOTUS (Teleprompter of the United States) is this:  "Hey people, while y'all pay for my wife Michelle to take extravagant trips to exotic places that you'll never be able to afford like Spain, Aspen and Hawaii, instead of getting your daughter a wedding gift - or a your wife a 50th anniversary gift - why don't you contribute money to my re-election campaign in their name."

Atlas just shrugs, Orwell smiles in his grave.

I wanted to put some thoughts down about the trading action in silver since the FOMC last Wednesday.  As everyone is aware, the metals initially ran higher after it sounded like - based on a "between the lines" reading of the FOMC's statement - that the FOMC had become more receptive to implementing more QE, although not until at least next meeting.

The stock market tanked hard on Thursday, as the momentum hedge funds unloaded all of the the "risk on" positions they had put on in the 4 weeks leading up to the June FOMC meeting, anticipating that QE had to happen in June or it wouldn't happen until after the election.

Silver was absolutely annihilated on Thursday.  It was down over 5%.  There have been very few days over the past 11 years during this precious metals bull market in which a move like that has occurred.  Initially most analysts attributed it to JP Morgan - with its absurdly universally, illegal short position - selling short into a market that was cliff-diving.  After all, the metals held firm overnight and did not begin selling off hard until 7:30 a.m. Thursday NY time, with no news to act as a fundamental trigger for the selling.

Without going to into a bone-dry, boring analysis of the commitment of traders reports and the Comex open interest reports, the selling on Thursday, and intense buying in silver today, has all the signs of large hedge fund momentum-based computer driven trading all over it.  What this means is that the hedge fund "black boxes" start selling and short-selling silver - which is a characteristically small, easy to manipulate market - into the downward momentum.  The selling was non-stop and reckless - it did not have the characteristics of a skilled trader who was trying to trade out of a big position without disturbing the market too much.

While JP Morgan's market manipulating episodes often behave the same the way, the Commitment of Trader reports have been reflecting the fact that JP Morgan has been working to reduce its overall short position in silver and the smaller commercial bank Comex players have actually been increasing their net long positions in silver.  The latter players have a track record of good market timing.  The hedge funds, however, have been building up their short positions in silver - this was especially true during the latter stages of the silver sell off in April and early May.

Finally, I believe today's snap-back move in silver, in which silver is up $1.20 from its overnight lows - most of which includes a near straight-up move of 70 cents starting at 11:10 NY time - confirms my view that Thursday's unexplained activity was largely the result of reckless hedge fund trading.  To put an exclamation point on this, someone I know who is a long-time Comex silver trader (I traded Comex silver exclusively for awhile myself and my partner and I trade it for our fund) remarked on Friday regarding the trading of hedge funds:  "who else would recklessly dog-pile on a market like that?"

The point of this explanation is that the activity in the precious metals market on Thursday and Friday does not reflect fundamentals or a deteriorating sentiment.  Hell, the sentiment in the sector really can not get any lower.  Rather, it reflects the volatility that is characteristic of a market getting ready to change direction.  Since late April 2011, the volatility in the precious metals market has been mostly to the downside.  On average, the major price corrections during this gold/silver bull market have lasted 12-18 months.  We're right about at the mid-point of that range.  The difference this time around is the enormous global demand for physical gold and silver.  The physical component was not in place during the last three major price corrections like it is now.  That will help provide a major launching pad for the paper price when the volatility swings back to the upside, which I expect will happen before Labor Day.

One more point regarding physical demand.  On Friday the silver open interest increased by 416 contracts, with 160 in June.  That's unusual given that this Friday is June's last delivery day. Right now there are 172 open June contracts representing 860,000 ozs of silver open for delivery.  This is an unusually large amount 4 days before the final delivery day.  Assuming the buyer(s) of the 160 contracts are interested in taking delivery, at this point deliveries are likely being stalled by reluctance on the part of the entities required to make delivery, for whatever reason.  I can only see this as being bullish for the price.


  1. Hey Dave, Hadn't seen that late add on the June AG, another 800K in silver is more than was open all month.
    Would appreciate any of your perspective on the 170,000,000 oz of AG that were hanging tight as of last Friday for the July. Wouldn't that rock the silver world. If even 50,000,000 of that stands for the month that would clean out all the registered silver by 20,000,000 oz. I never underestimate the power of the Crooksters to engineer a pillage but this looks like it could be our kind of fun! Best KC

    1. I wouldn't read too much into the July open interest until we see how many contracts are left standing after Thursday, on Friday. Friday is 1st notice for July so we could see quite a bit of "roll" or liquidation this week. Probably we'll see a lot of roll, which is what happened Friday as 3300 dropped from July and 3400 rolled into Sept.

  2. Dave, I follow Harvey Organ, and I was wondering if you could verify something he says. Lets say we enter July and we have 5000 silver contract standing. It is my understanding that means, people who hold these contracts now have to come up with the full $ amount of the contract. So then lets say 15 days go by and we start losing standing contracts, Harvey suggests they have agreed to a nice incentivised cash settlement. Isn't that supposed to be illegal? But, what other reason would they then settle to get their money back?

    Can you really take any of these "transactions" and conclude anything?

    1. Contracts have to be funded by the day before 1st notice. Once the dust has settled, the open contracts during the delivery period can be settled in one of several ways: 1) if you haven't been "noticed" yet, you can just sell it. 2) if you have been noticed but decide you don't want delivery, you sell it with the warehouse receipt and the contract either gets delivered to the next buyer or, more likely, the bank that originally sold the contract and bought it back probably tears up the contract and the receipt. 3) the contract gets settled with either actual physical, SLV or GLD, or cash. There's nothing wrong if the deliveror offers to settle a contract for cash at some premium above the contract price if the deliveree is willing to accept cash in lieu of physical.

      There have been reports over the past few years that banks have been aggressively settling contracts for cash at high premiums. I have no way of proving or disproving this.

      Ultimately, it is likely that eventually the Comex will default by forcing cash settlement. But I think that won't happen for quite some time.

    2. I'm curious about something regarding this statement: "There have been reports over the past few years that banks have been aggressively settling contracts for cash at high premiums. I have no way of proving or disproving this."

      I know that Harvey Organ states this as well and my question is with as many close contacts that I am certain you two have that are in silver investing it is hard to believe that neither of you know anyone that has first hand knowledge of this or at least could find out for certain. Of course I do not know how all this works but it would seem if anyone would know someone that trades silver on the Comex you two would. Am I missing something?

    3. That fact the rumors are out there probably mean they are true. It is likely that hedge funds are taking cash in lieu of metals and I dono't personally know anyone at the big hedge funds who trade this stuff and neither does Harvey. You have to personally know someone who does that deal in order to get 1st hand confirmation. We take delivery of physical only when we buy silver on the Comex. It has taken HSBC several weeks beyond the stated contract period twice to get us our silver and we are small. I can easily see HSBC or JPM offering cash at a premium to the contract price when very large size is involved.