I’m going to write this to not only answer some questions, but to pose questions to those much more involved in the sector than I. After writing an article that got some attention a month back, I have been flooded with massive amounts of questions. I was honest in that many of these, I could not answer. I laid out a potential strategy that could happen – and may still play out – but it was a set of events. Many of you reading this may have 10-20 years in this sector and just your mere usage of certain acronyms would make me look like a stupid child trying to explain quantum physics.
My goal here is to put a lot of these pieces together for the lay person, as I understand them, and help those who run the daily YouTube shows in metals what types of big picture questions are out there.
You hear this time and time again. The shorts are short 400m ounces. Where? Why? How? WTF???
OK, let me refer you to the king of a lot of this, Ted Butler. Him and many others claim that the “big 8 shorts” are short 400m ounces. That is, 400m oz short on the COMEX. This means, they drew up contracts to sell (went short) and other people bought (went long). Early on in my research for this, I wondered how they were going short? Naked short? Covered? What?
Silverseek.com puts out a weekly Commitment of Traders (COT) report, which puts together all of this.
Each contracts is 5,000 ounces, so this shows that there is Open Interest (OI) in 158,349 contracts. Or, to do some quick math, 791,745,00. Mining supplies in a year are about 800m oz. So all of the OI right now on the COMEX is equal to an entire years’ mine supply.
This means, people have sold almost 800m oz on the futures exchange. Put another way, let’s take a look at the daily COMEX reports found on the CME web page. You can see these numbers are close, and it is broken down by month.
This shows you in the top row, the current open interest for this delivery month is 1,402 at this moment. This means, that 1,402 contracts need to be delivered silver. Or, by the end of this month, 7,010,000 (1,402 * 5,000) oz of silver needs to be delivered to the buyer of the contract. The buyer can opt out for a cash settlement instead, or the seller could offer cash settlements as well. What many people talk about with “breaking the COMEX” usually refers to obscene numbers needed for delivery, and the hope of the suppliers not being able to hand over the silver, thus forcing a “force majeure” of cash settlements.
When you look at the COMEX repositories on this site, you see the below:
So the warehouse has 386m oz. However, 127m of that is registered, or “for sale” and the other 259m is in “eligible” – which may or may not be for sale. This could be your rich uncle owning these bars with serial numbers assigned to him. Someday, he could sell if he wants. But these are not available for “shorts” to take and give away.
So why don’t you just hand over the 7m oz right now and be done with it? They could. As you can see, there’s metal there. But what you see every delivery month is that those “selling” don’t actually want to hand over what they have. Additionally, it appears you had Goldman recently take 15m out of SLV and then hand this over at the beginning of this month. The oz may not have actually been registered. So it gets confusing to people like me – when deliveries were 2m oz, why doesn’t the COMEX go down 2m oz?
This is where it gets fun. It APPEARS that over the course of this month, they try and source the best they can from the spot market, leaving their stores intact in SLV, COMEX, etc. If you have 15m shares of SLV, perhaps this means you can short 15m oz. This also confuses someone like me. We hear, “there is a 1500 contract position limit on the COMEX”. I hear this often in regards to buying. So, Elon Musk just couldn’t walk up to the COMEX window and buy 100m oz of silver. However, Elon and each of his kids could walk up and buy 1500 contracts each (7.5 m oz each).
When you see the big 8 are short 400m oz, and the top 4 of them are short 320m oz, the math works out to be short about 80m each. Or, 16,000 contracts each. Isn’t that above the 1,500 contract minimum? Yes. But then it seems each of these banks have their “house accounts” which is in their personal interest, and then customer accounts. Like Elon walking up to the window with each of his kids, these banks appear to be representing a lot of interests.
When pressed about this, they discuss this as a concept of “hedging”. So you are led to believe that 400m oz is continuously hedged. There’s your big explanation.
I listed a Seeking Alpha article where Austrolib points out WHY the banks are short. Apparently, according to him, this has to do with protecting bond prices. Who are these “children” of the banks? Could one of the accounts, or more, be on behalf of government institutions? The idea is that to be able to strategically suppress the price of silver, you would disenfranchise users from investing in it in a monetary sense and thus help protect the value of the dollar. I have run this idea by many of you YouTubers and haven’t gotten any commentary back. This is something to tug on. Sure, they make money by shorting silver and buying back cheaper – but WHY in the bigger picture?
By continuously “hedging” these items to the tune of 200 days or so production, daily, this has the net effect of suppressing the price of this based on the commodity price just above the cost of production. If the price dips too much, futures prices increase to entice more production. During times of surplus, sell more futures contracts to suppress the price. They do this with gold, as well, and right now gold trades about double of what it costs to pull it out of the ground. Silver, perhaps close to that as well – depending on your miner.
However, gold and silver are money. And in times of financial distress, currency debasement, and potential inflation – the monetary value of these metals roar to life. With gold, you see immediately react as money. With silver, it is first an industrial commodity, and then later the light switches on for that as a monetary metal. Think of jewelry for gold and solar panels for silver – which then transforms in investors minds as coins and bars.
While the futures market exists to allow these items to produce at above their production costs, you now have a base cost built in by monetary demand which changes that value and “re-rates” it. The futures market, which is geared towards one value of the commodity, has a lag to now be re-valued as money.
Those who have shorted to protect the value of their bonds, now risk utter financial ruin if they do not un-ring this bell.
As mentioned above, these sellers may have shares in SLV or piles of metal in the COMEX. Some hedge funds or speculators may be “naked short” and not have any metals to back them up. Some of these smaller players may then be on the hook for delivery and then have to go into the “spot” market to buy.
The “big 8” have these metals they do NOT want to give up. While they are sitting in the COMEX with a “for sale” sign on them, it’s a sham. They do not want to hand this over. Having this metal allows them to short millions of ounces, at will, on the COMEX, driving prices down.
Why would you WANT to drive the price down? These banks called it “running the stops” where they could SEE where their customers had stop losses set. Perhaps price was at $26.05, and they knew 80% of THEIR customers had the stops set at $26. They then short at will to nudge it past $26, and all of these now trigger automatic selling, which then may trip those at $25.90, and $25.80, and so on. This is how we could see wicked price moves of $.50 in minutes at 8AM every day. Price would move up overnight in Asia, then BAM. Hit at 2AM, or BAM, hit at 8AM.
Another reason they may short is to knock down spot price. If you have 15m oz in SLV, but don’t want to hand it over, you simply “run the stops” to knock down price a dollar. You then buy it off of spot and hand it over to the customer. You probably sold it at $26, ran the stops and bought at $25, then handed over. So by selling metal you do not have, you then were able to push the price down more. If you look above, this is how you see 125,000 contracts for May sitting there.
If you notice, each of the last 6 months, right at the end of the month, you have price smack downs, as traders sold off and closed their books on profits. They wash out the amateurs and hedge funds. If they have to deliver metals, they smash more, and then at the beginning of the next month, they source it from spot (after they literally just set the price THEY were willing to pay) and you see the price rise.
Except this month, the pattern stopped. Price is recovering now, but this typically happened near the first trading days of the month. Why the delay here? With an impending squeeze incoming, to me, it appears this is an Alamo moment. A last stand. Scotia is out. Now the question is, which one of the remaining 8 wants to become Bear Sterns and bought by JP Morgan?
What I laid out in my article dealt with a squeeze of sorts. I discussed 4 phases –
- Retail sells out and gets people involved and media attention
- Cannot find product or high premiums have ETFs flooded and they consume 1,000 oz bars
- Industrial users feeling pinch and up orders, get more involved in sourcing
- Shorts start covering
This past week, Rick Rule confirmed they were having difficulty getting bars. He said they source from Ottawa, then Chicago, then NY. He also mentioned if he wanted to wait and get paper receipts, they could go to Singapore or the East. PSLV added 30m oz in a month, and in my article in early February, my projections had them buying 40-50m oz by end of March to cause what was needed to happen. If they continue at this pace through the end of March, they could hit 50m oz. Additionally, they increased their shelf offering I believe to another $3b. Maybe another 100m oz this means they could buy, if the demand was there (depending on price, of course).
While the price rise at the beginning of March did not happen, this took some of the wind out of the sails of the silver investors. However, if you look closely, this appears to be pretty much engineered. YES, the 10yr went up. But what many of you casual observers see is a legitimate reason for silver to go down. But what you aren’t seeing is yet another excuse to paper the markets.
You can pretty much ask any bullion dealer in this country, and they will tell you NO ONE IS SELLING TO THEM. Maybe small quantities, but no one is walking in with boxes of eagles and selling.
None of the fundamentals changed.
- Supply of 1000 oz bars is tight. Higher premiums.
- Retail is thin. It’s getting reloaded, but slowly.
- We are still $28 trillion in debt.
- The 10yr is 1.5, but shadow stats has our inflation rates MUCH higher – meaning there is a significant negative real yield.
- About to pass a $1.9T stimulus bill
- Knowledge that 10yr cannot go up or else it takes the whole system down. Yield Curve Control incoming.
- “Green” means to need a LOT of silver, and many new regulations may call for EVs, solar – only bolstering demand
- Silver had a 350m oz deficit last year.
- Silver investment demand last year eclipsed industrial demand, and looks like it will again this year. High investment demand is what ultimately moves silver
- Silver grades are declining. Mine lives are running out. Exploration budgets for silver were virtually non-existent
- Most silver is a byproduct of other minerals, so you just can’t “turn up” production 50%
So what you end up with, is that “selling paper” silver appeared to be needed to protect bond prices, which collapsed. This was a function of trying to protect values of bonds, at the expense of going further underwater with silver. This is sort of like a ship sinking and someone coming at you with a knife. You have to address the knife attack first, and may get wounded in the process. But the sinking boat thing is next week.
Now, what I am HOPING to see over the next few weeks is “shadow contracts” picking up. If people cannot find lots of silver on the spot market, and if so, it’s at a $1 premium, why wouldn’t you just buy a same-day futures contract that is immediately deliverable?
I believe this will pick up. Maybe it won’t, and people continue to buy spot. But I’ll be watching this daily.
Where the squeeze comes into play, is this…
I also mentioned in my article and my video that if I was in the risk departments of these banks, I’d be very nervous. Rick Rule just also mentioned the exact same thing. My mother was a compliance officer for one of the big banks in Manhattan – and often we’d talk about risk. Of course she would not provide details or specifics, I know from a compliance and risk management standpoint – these banks have people breathing down their necks.
Now, to tie all of this together.
Assuming you are Samsung, and you are coming up to the end of a contract and your buyer wants to source more and starts calling around and having issues. This might get the attention of a COO. Name your company. This tightness has now existed for some time. Now these guys are sweating bullets, so when they DO find bars, they may buy a bit extra. Maybe a double order? Maybe they have been made aware of the “Reddit Rascals” and have understood a little of what’s going on. Maybe they just ran into a chip shortage due to tin and realized their supply chain is not strong? Silver is in thousands of products and procured by tens of thousands of companies.
And my theory is we are now in phase three. I have ZERO WAY of confirming this. YouTubers – this may be a nice question to continue to ask. Anyone talk to Samsung lately? Or any one of thousands of companies about their silver supplies?
What I am expecting here is more of these shadow contracts to pop up. Purchasing on the futures market would have an effect of driving up the price.
Furthermore – you had Goldman recently take 15m oz out of SLV and hand over. SLV recently changed their prospectus to essentially state, and I’m paraphrasing, “all of your silver might not be here”. To ME, this told me that a risk department of Goldman saw this threat of their long not being there – and they took the metals, while they could. I believe over time, a good old fashioned bank run may happen on SLV. But if you are a Goldman and hand over this – this means it’s 15m oz you can’t short now. This closes some of that 400m oz short, to an extent.
So a big bank’s risk department, in my eyes, told them to take their metal and get out, while they could.
On the flip side – IF big industrial players are indeed buying now, you will see more and more and more pressure on 1,000 oz bars.
While there may be 127m oz in the COMEX, these guys are apparently 400m oz short. Where is the rest? Do they own a lot of the eligible? Probably. SLV? Probably.
What I’m seeing is price moving up. They shorted at will to drag price down, but with all of the paper they have fired, people keep buying. It is true that most of these futures contracts don’t exchange metals.
But what if instead of 1% did, what about if 5% did? 10%?
The risk here is that over the next few weeks, prices rise. The contracts that were to be in May – they may have sold at $26, but now with price rising to $35 and moving up, the risk departments of these banks see massive, massive, massive land mines coming up ahead. Could silver be $50 in May? As these prices rise, these banks will be under significant pressure to “get out of their shorts” for April/May, etc. This most likely would have to be a sort of cash settlement – at perhaps $5, $10 per ounce losses to avoid a runaway price to $50 per ounce.
What this does is close a lot of open interest. And, this will have a lot less SELL orders being made. This, in turn, has futures price rising. Which then triggers other banks to scramble to cover.
If I’m a risk officer or compliance officer of one of these 8 banks, the idea is that my metals desk is on a very, very, very short leash and I’d start to try and close out some of these positions before price runs. And when price runs, they may lose billions. So I will be also watching the OI closely over the next few weeks.
How does this end?
Not well for banks. They have been continuing to push futures prices down, but there’s now a disconnect between that price and physical. IF you are talking $1 premium for spot price on 1,000 oz bars, you can now make a legitimate claim the base price of silver is $1 more than futures price. This is the arbitrage opportunity which then forces prices higher. You may have major players then buy on the futures, turn around and sell on spot. This arb opportunity may happen with hedge funds. Remember the -$37 oil? These guys are the guys to play these numbers and find these opportunities.
As the physical IS drained using this method, this HAS to force futures prices higher. See – the items being sold are being sourced by spot. I don’t know about you, but selling something for $26 that I have to pay $27 for to source may get old, quickly. By forcing more sell contracts, you only open up the arb deeper to exploit. The only way to stop this bleeding is to stop selling short, or hand over metals. And we know they don’t want to hand over metals.
If they DO hand over metals, this also means they can’t short anymore. This means no 8AM smash downs daily. Meaning, price rises without a braking system. And – as we all know, silver is in the asset class that people buy more of when it is more expensive. So as silver goes over $30, then we have more of the casual person getting involved.
In the next few weeks/months, we should also see billboards going up in a lot of densely populated places. Could this have people rushing more into PSLV or retail silver? Perhaps! Ultimately – all of this will result in far higher silver prices that are based on what investors price silver at, not what they feel the industrial value is worth. This could overshoot in the near term, when price starts to move violently.