I put out a Tweet the other day which got over 47,000 views and wanted to put this in a blog to track and analyze. Why? Because I like the idea of trying to make money off of this and with that, sharing something we all might make some money off of. We’ll see if the pattern holds up.

What did I find?

If you had bought SILJ last July and held until now, you’d be down like 20%. It occurred to me that there are really big entities making a LOT of money off of the volatility. My buddies have been all over me because they are upset silver isn’t $600 an ounce. My trading account last year doubled, and this year is hurting a lot on the pullbacks.

What I wanted to do was to try and understand some mechanics of how this is going. Let’s see if what I found makes any sense.

One thing I’d do is I’d watch the charts, you’d see a breakout, then I’d buy options. Then, I’d get smashed. How is everyone else making money? Let’s take a look.

As many of you know, I’m an amateur. Not a pro trader. I never pretended to be. I do, however, have a background in math, stats, charts as part of my career in IT management, as well as have an MBA so I had a lot of the schooling on economics and finance, etc. I’m not trying to get into a pissing contest with your favorite analyst. I’m watching these guys sitting around a round table, I’m in a chair on the outside of this ring and am raising my hand asking a question to those smarter than me in this.

What am I seeing?

First, let’s look at the pattern I saw.

What I noticed was every month, it seemed that price was getting attacked. I didn’t know why. I’m not a futures trader. I’m not in this business. However, I’ve heard Chris Marcus talk about the options getting attacked, starting maybe 4 months ago. This chart I first did around 6 months ago and put out on Twitter, and it was lost forever on a tradingview free account I used that I accidentally signed back into last week, and it came up to this. I decided to complete it with a different look.

When I first did the chart, I didn’t even know there was a monthly options for futures. When you look at it like that, you can potentially see that this is an “attack” on call options, leading right into the options expiration. Essentially, people buy call options on the silver futures, the positions are public, and entities can then shape the price by “selling paper” into the market with velocity. This triggers stop losses, which then further cascades the sell off.

If you go to the CME website, you can look at silver futures and they list out all of the call options. To me, this looks like Sept 2021 calls at 2650 will be attacked.

Now, during the beginning of the months, it appears there is a lot less shorting, perhaps there are entities that shorted the price down are then taking that opportunity to buy the short back at a lower price. To me, this also may be when we see price rise and news stories coming out that make metals seem bullish to some degree – this almost seems like a collection dish to get more fools to buy in.

Once they get the fools to buy in, and perhaps entice price movement higher by not shorting, they then unleash fury with paper sell offs that are sustained attacks over days. Just look at the above charts, and you can see how they lasso dopes in, and then pull the rug out from under them every month.

Open Interest

Each contract has a buyer and a seller. With my discussion with Jim Hunter, a futures broker, a few weeks ago, he discussed the futures markets are two distinct events:

  1. Prior to delivery. This does not require anyone to have metals to sell, nor does it require someone to want to take possession of metals. This can be 100% speculative, and the speculation is needed to offset the legit hedging. And yes, a portion of these contracts are intended to be legit selling and legit buying.
  2. Delivery period. If you don’t have the metal to sell or not want to take possession of silver, here is where you can settle in cash. Those who INTEND to deliver/take possession then stay in the game.

Of interest here is the short position. Many have talked about this, but many don’t get into details about what it is, and why it is evil. I know Ted Butler had spoken a few months ago about the big 8 had 400m oz concentrated short, and of those, the big 4 were 320m oz short. At THAT time, you can see on my chart as recent as May 26th, there were 905m oz short in paper contracts total on the exchange. In my conversation with Jim, he also said in the industry they don’t talk about oz short, but rather contracts.

He did mention also that a lot of this could be legit selling. For example, if you are a bullion bank, you are buying silver from miners, perhaps in dore form, and then it is refined and delivered to the bank vaults. At the same time they are buying, it is perhaps reasonable to suggest they are hedging against downside risk.

Let’s take ABC bank who buys 5 million oz of silver from Second provincial silver. They buy the silver at $26 per oz. Immediately, they hedge it by shorting it for $26 on the exchange. They may hold this metal for a few weeks before selling to Toshiba or the like.

At the time it was $26, ABC worries that price may fall so the short on the futures exchange placed there ensures they do not lose value before they sell. If the price dips to $25, they win on the futures bet $1 and lose on the value of the metal taking that value to $25. So if they then sell to Toshiba for $25, they recover the $25 from them and the $1 from futures. If the price goes to $27, they lose $1 on the futures and gain $1 on the sale.

In this case, we need to then examine how much mine production is in a year. 800m in a year? What about the recycled silver banks may buy from refineries? Maybe another 150m? We have 6 primary “delivery” months where the most volumes are sold. Obviously, you can buy every month, but we watch the primary delivery months for volume. Let’s say 90% of the deliveries occur in those 6 months.

950m * .9 = 855m to be “delivered”. Now, the COMEX isn’t the only exchange, it’s one of several. I’m talking world production here. For argument’s sake, let’s just give them 75% of the physical metal coming out of the ground and from the refineries. Takes you to 641m oz. We divide that by 6 and you get about 106m oz in each of those delivery months.

At any given time, you may have contracts on the table of ABC buying future production from Second Provincial. So maybe they have pledged 6 months of buying at $26 for up to 10m oz. It would stand to reason that they may have hedges on for several months at a time.

All in all, I can see how major banks may, at any time, have 200-300m oz in “shorts” through legit hedging. While the miners may no longer be hedging their production, the middle man that is buying the silver may be doing most of the hedging.

Currently, I’m seeing a lot less than the 905m oz on the futures board.

As of yesterday, I’m seeing 175m less oz “short” than only 8 weeks ago.

Now, I have a question for the Jeff Christians of the world.

If you are toshiba and buy this silver at $26, why would you hedge the metal? This is inventory like if you were to buy sugar for a cake mix. It is a consumable commodity put in their products. It probably is a line item under “inventory”. He made mention about how perhaps 10 businesses in that supply chain may also hedge that same oz. It doesn’t make a lot of sense, to me.

The ONLY OTHER POSSIBLE explanation I see for the two charts at the top are each month, BB make their purchases of silver right before silver options expiration. Perhaps a coincidence. On the 17th or 18th of each month, second provincial and other silver miners see the price is the highest it’s been in a month (see the chart with the green recoveries) and it makes sense for them to sell inventory to the banks at THIS TIME. There then is a mad rush to sell inventory quickly to capitalize on the high price of silver in the last 30 days. Perhaps when NY opens on the 18th of each month, buyers rush to hedge their metals because they know all the mines are unleashing product at this time of the month and the hedges protect against downside moves before they can sell to Sony.

The evidence AGAINST this theory is the overnight smashes in low volume times.

Playing this wave

If you are a surfer, or a boogey boarder, how do you ride a wave in? I’d posit here that we can potentially make money from this by….buying low and selling high. Shocking!

The evidence on the chart suggests those who like to short or put would start to get a position on the 18th. It would also stand to reason that those who like to go long to play the move up would get a position at the very end of the month after options expiration or at the start of the next month.

I have a ton of mining options out there, and perhaps towards the 18th of the month I sell options into the rise, and buy more options when the bottom is in?

The system is broken?

The pattern works until it doesn’t, right?

What if everything I’m saying above is coming to an end? There’s another way of looking at my COMEX charts. I once sent an email about a year ago to someone suggesting perhaps an Eric Sprott or the like might set up a silver exchange. Aside from COMEX. Miners use this exchange to then buy/sell their physical product. The response was more like Eric Sprott is mostly retired and probably not in his wheelhouse at the moment. Fair enough.

You then saw miners like Keith Neumeyer holding back some silver. I believe I saw the same thing with Endeavor silver as well. However, many of these miners, collectively, are at the margins of silver supply globally. KN’s First Majestic sells 24m “SEO” (silver equivalent ounces) each year, and I think this was in the ballpark of 15m silver ounces with gold credits. We are talking 800m that comes out of a mine? That means one of the largest silver primary producers on the planet sells only 1.8% of the silver supply each year.

If they hold back ALL of the silver, it makes virtually no difference in price.

What you need then is for the BIG miners to then curtail supply. Everyone knows Newmont is the largest gold producer, but when I looked under the hood, I BELIEVE I saw they also produce like 50m silver ounces as a byproduct.

The question then you ask is….are they ACTUALLY curtailing supply?

Remember, in only 2 months, we now see 175m less oz being shorted.

This also suggests another possibility: Big miners are reducing silver supply.

How can you do these mental gymnastics? IF we assume the “concentrated short position” is legit hedging, AND the big 8 WERE at 400m oz and are now at 250m oz or so, do we think banks are:

  1. Shorting less because they are scaredy cats?
  2. Shorting less because less is being offered to them for sale?

There’s a third explanation. Mines are being directly approached by manufacturers and bypassing the banks. This would allow mine production to run flawlessly, without cuts, but also have the effect of reducing the flow to bullion banks.

What we are seeing right now is massive amounts of shortages everywhere. Yet silver continues to flow?

IF there is less being offered to the BB via COMEX, this is what you would see. Less concentrated shorting. Those on the INSIDE (not me) would also see that there is less being offered to them, which would curtail wild speculation each month on the short side of paper.

Meaning, if those every month who knew this pattern were going in wild short knowing the sales of silver were driving the bank shorts for hedging, are now knowing that cash cow is drying up, it might stand to reason they may not be AS bullish short.

Meaning, we can still see a continuation of this pattern IF this is when sales are happening each month, BUT the price knock downs would be less – and IF there is less supply coming in – it could stand to reason that the LONGS may soon run with stronger recoveries each month.

This narrative could ALSO be a reasonable explanation for the ascending triangle pattern. Each month, less and less product is coming in, which means less shorting into price rises.

What you also now see is the commercial shorting is at a low since 2015, according to Ted Butler. Take a look at the latest COT report. I have to admit, I’ve had a tough time interpreting this chart.

But, IF the narrative above IS true, it shows the red line going down – they are less short. With the yellow line going up, it shows they are less net short. My assumption is IF mines are supplying less and less to BB, then the blue may overtake the red in the coming weeks/months. Why?

IF there’s less physical coming IN to the BB, they cannot physically sell as much. Once this is known, the wild speculators which sell paper every month also slows.

Conclusion

I’m an outsider. I’m NOT on the inside on ANY of this. This is the forensic type of stuff where you have work around the crime scene to look at clues to piece together what is going on. I have heard miners like Aya talk about contracts. I have heard others as well, where they are bypassing the BB.

IF the COMEX is the key to pricing, and less and less product is going in to the vaults, then less and less people will short. It would also stand to reason then that once manufacturers realize all of the miners have contracts and they have been missed, the COMEX IS the buying of last resort. Here is your long which then drives prices up.

To the best of my understanding, once this is understood, those who have been spec shorts for years will flip to spec longs.

The ultimate question then is….who will be the other side of the contract if no one wants to sell at low prices?

And here is….”the answer to low prices…is low prices”.

To me, this then knocks a lot of supply loose with the eligible at $35-$40 silver, but once the world available float is understood, along with how ETFs sucked up most 1,000 oz bars in the world, with no miners left to get supply from, the COMEX is where this starts to get really interesting.

Then, you have to consider the silver metrics – I score this as a Red+, and the ONLY thing right now keeping silver in check is the DXY. Once this is sub 89.5, silver runs like a thoroughbred.

I also see the DXY in a lot of trouble and this could get nuts inside of a month.

Overall – the monthly price smash downs ahead of options may become less and less effective. So – maybe this next month price never smashes – but continues up??? If so, you understand why now.