I don’t know. This is a head scratcher.
What I do want to have some fun with here is the pontification as to why. Meaning, I’m going to guess here, so no one should be writing books on this shit. Someone just asked me on Twitter if the beat down has gone on longer than usual.
Yes, but I have seen it go into the next month at times. This is why my trading of this is USUALLY waiting until I see a big green recovery candle. This month, I did not do that and BEGGED people not to follow me down the rabbit hole. Most of those items are long term options and I’m down like 20%. So I’m not cutting bait yet as I was expecting the recovery to start this month. But it hasn’t – yet.
For February’s beat down, it ended March the 5th. For October, it ended Nov 3rd. But other than that, most conclude their beat downs by the end of the month. I’m going to zoom in here with some screen shots so you can see.
I can tell you that in the 16 months I’ve been tracking this, this is the longest DURATION beat down in time, but not in price. We have seen about a $3.15 move this month, but if you look above, you see 3 that are worse and one on par. So out of the 16 months, about 5 have beat down over $3. That means in any given month, that’s a 31.25% chance we lose well over $3 on the silver price – which is great if you do puts.
But this duration is the LONGEST I’ve seen. 3 have gone 10 days and one has gone 9. Now we are at 13 or so So that’s a 31.25% also of a 9+ day beating.
I am going to make a guess here. And with this, you need to take a leap with me.
I was going to write a whole piece on the short position on COMEX, but I just don’t know enough, and there’s not enough out there for us to get our arms around. Some former insiders could probably tell you a lot more, but let me at least discuss what I DO know.
Back in February when I was writing about this around the silver squeeze, there was, at the time, 900m oz of open interest on the COMEX. Now, futures guys want to correct me and talk in contracts. They want you to separate out the physical from the contract. I cannot do that, because the contract is what sets the price for the physical, and, in many cases, these contracts now actually result in delivery.
At the time, there were also 8 commercial shorts who had a reported 400m oz short position, with 4 of them having 320m oz. My understanding since then has matured, but the issue I was presenting is the same. What if price gapped up $4 in a day? $5? There are limit ups, I’m aware, but the reality is a lot of the traders in futures are speculators – and for each contract they would be short, they’d be rung up $20,000-$25,000 in a single day. IF they had a futures account with a $14,000 starting value, they’d get blown up. Take $25,000 times 1500-2000 contracts (depending on position limits) and you are dealing with potentially $37.5-$50m a single entity could be blown up in a day. IF you are a BB with many different accounts doing the same thing directionally – that could be serious and grave. Let alone if this happened 2-3 days in a row?
At issue here is that contrary to popular thinking, I do not think the “concentrated short” is the problem. I know Ted Butler talks about this a lot, but something bothers me about this. The “evil” mustache twirling banksters who have this massive short position – what else could it be?
Well, we all know there’s 800m oz mined every year, and 200m or so scrapped or “recycled”. I got into a bit of a spat with a well known Twitter user in the silver world last week who called the 200m recycling number “bullshit” because it cannot be proven and no one is recycling at the cost of $75 per ounce. I pointed out that the recycling listed on the silver institute reports has to do with “scrap” – such as 90% coinage, tea sets, silverware, photography, medical waste, etc. This is turned into a refinery. This user conflated this common scrap which is done with the concept of “recovery” where you try and get silver out of circuit boards, stretchy pants, band aids, etc – which isn’t economic until silver is over $75 per ounce. The fact that this well known account confused this told me there’s a lot more education that needs to go around our community.
Well, the refineries can track where this came from, as reported on the silver institute’s numbers.
So with this, the people who buy the metal, like bullion banks, who want to sell this to manufacturing and to mints for making stuff will hedge what they buy. They own this silver they bought for $25 per ounce (example), and they want to sell it for $25 per ounce to a manufacturer. So they short their metal on the COMEX as a hedge until they sell it. IF the price of the metal goes up, they lose the cash on the short but sell the metal for a profit to break even on the $25 (they have profit per oz added). If the metal goes down in price, the short position wins and they break even on the $25.
While First Majestic has come out and said they don’t hedge production, most people don’t realize that primary silver miners barely exist anymore and they make up only a tiny fraction of the entire silver supply. First Majestic mined 15m silver ounces (they report 25m SEO, but that has gold in it), and they are just behind Hecla and PAAS. First Majestic is now like 50%-50% silver to gold, or 55%-45% depending on when I read it. PAAS is 27% silver. Hecla I think was 45% from my reporting. But all of these guys combined as primary producers (Including FSM, Endeavor, etc) may make up about 75-100m oz per year. The other 700m comes as a byproduct of gold (Newmont had 54m silver oz I believe last year), copper, lead, and zinc. I would bet at least SOME of these miners hedge their metals for future production to lock in prices.
So it is possible that at any given time, you might have miners hedging 50-100m silver ounce future production and bullion banks who bought the metal hedging 100-200m oz. If you are a refinery and buying 200m oz of scrap over the year, you are probably hedging 15m oz per month.
The point is, I can see 300-400m oz on the COMEX open interest as LEGITIMATE HEDGING activities. Meaning, every month, some of these hedges are closed as others are opened up.
What got me mostly in February was the 500m oz or so that was NOT commercial. Since then, open interest has been reduced to 700m oz, so to me, that leaves roughly 300-400m oz that are not really accounted for.
If you look at the much hated Jeff Christian (I actually like the guy and love his shit talking), the dude likes to tell people they don’t know what they are talking about. There can be a lot of truth in this – in that his job is to provide hedging strategies to companies – meaning, he sells them on the idea of shorting their metals (or going long if needed) to preserve the value of those metals. Of those 300-400m oz unaccounted for, my bet is he has a pretty good idea of the breakdown of these. What portion may be speculators? Who knows. I know I do NOT know.
But taking a step back, let’s look at this month’s beat down.
This is one for the record books. I made note to all of you here that I closed my options positions on Nov 15th. Did well. I didn’t do well in waiting to buy. I have the Op Ex price listed there as a bar, so the selling has continued past that. So what is it?
With position limits, these banks cannot just print contracts to infinity. There are buy and sell limits monthly, and even weekly. So you might see them “square the books” after dumping a billion ounces in a day to buy that billion back over a week. I’m using rough numbers here, but you get the idea. This has to do with Tuesday reporting, so within these fence posts, if you see a billion dumped on a Weds, they may have until Tues to square it up or be over limits.
This link has all of the position limits if you want to look. This is above my pay grade, but I’ll leave it there for you to look at.
But when you see all of this selling, for now 13 days, you start to ask yourself when it’s going to stop? And, most importantly, why so much selling?
- Are miners hedging more?
- Did bullion banks buy more and hedge more – by a lot?
- Are more people turning in candle sticks at these low prices and forcing more refineries to hedge?
- Did we suddenly get new mines online that flooded the market with silver?
- Is there a directional push here for some reason by futures speculators?
Actually, it seems to be more the last one here. Why?
Last month, I made some good money buying in on my options right before the CPI print. The next day, my screen was green up and down. We all know Powell was re-nominated, which was then used for cover to smash metals. They also did more talk about accelerating the taper, which also dinged metals. None of this changed the fundamentals though, and both were items I felt already priced into metals.
What you see by the speculators, and I use that term loosely, is that they use news stories like this to dump and dump and dump paper into the abyss. Flooding the market with so many sell orders that it is hard for the market to keep up with buying, which drops the price significantly. I’ve “filmed” this a few times from my phone watching the attacks, and posted it on Twitter.
I believe that ultimately there may be panic selling right now. Yesterday had a massive down move before any talk about omicron in New York. Gold was up $12 or so, DXY flat, 10y was flat, and Dow was up 300 or so. So silver either follows gold up or the Dow up – or both. This time, dow and gold were both well up and silver was WAY down. WAY down. On no particular reason, which is why this article was written.
Something was afoot. I put out the feelers – WTF was going on? Hours later, someone mentioned the omicron, but this was day 12 or 13 of selling, and it felt like a capitulation bottom. When I looked at the charts, I saw a possible inverse head and shoulders getting formed – OR it was possible we were heading to $21.50 for a double bottom?
This capitulation move, it seemed was desperate. Having seen all of the clubbings of the last 16 months, I hadn’t seen one stretch this long.
Then the thought occurred to me about the Non Farm Payrolls (NFP) on Friday and next week is the CPI. One thing I had written about the CPI is rents are now being added in slowly to the CPI. We all saw the 24% YoY house price increase, yet we saw the rents only go up 2-3% during this time. Apparently, it’s a rolling 12 month average or so, and the 6.2% number only had 2 of the last 12 months reflected in with higher housing costs. It is quite possible over the next 3-8 months we will see these rents take the CPI number much higher, perhaps as some of these production bottlenecks wear off.
I believe THIS is why we then had Powell come out to retire “transitory”. My bet is they are starting to see the rents creep up the CPI and they are bracing for impact. And when Powell said this, I believe this triggered panic amongst the spec shorts who are about to get obliterated.
IF the CPI number is over 6, yet again – or I’ve seen a few people write “7” in front – what could that do to the shorts who are speculating? What if the NFP misses again, wildly like it has a few times? What if the economy is shown to be not as good as they want to tell you? What if the government goes into default on Friday? What if the CPI print is 7? What will those things do to metals prices?
Yeah. There’s that bus bearing down on the shorts.
So what if the commercials are hedging this? When they actually sell the metals, they break even. The problem is many feel perhaps they may not have the metals – they leased them out. So they have a short on something they don’t have? There’s one (BoA) that is THOUGHT to be in this boat – but it is wild internet speculation and not “fact”. Well, the entity they leased it to should be providing them rents on this, and at some point return the metals. A lot of this rollover could perhaps be that – these constant hedges on a metal they don’t necessarily own at the moment – but they have the hedge there to be neutral on the price, but make money off of the leasing? I don’t think leasing metals is THAT lucrative. I could be wrong, but those rates are somewhat lean – why would someone hold 100-200m oz on their ledgers and in vaults to lease at anemic rates and pay all of these costs and hedges? Makes little sense for a large scale operation.
My big issue is the speculators. IF they had shorted with zero metals, they could wake up one day $2-$3 up on silver and be blown out of thousands of contracts. Again, futures guys want to play a jedi mind trick and tell you there are no “naked shorts” on paper contracts because they aren’t silver. However, I also am keenly aware of risk and compliance, and can tell you that if you HAVE 5,000 oz of silver and want to hedge it, if the price soars by $10 per ounce in a week, you lose on the short but sell your metal to break even and your loss risk is mitigated 100%. The ISSUE is perhaps a large bank that borrowed metals to lease out – they are short millions of ounces, hedge it, and if and when the silver price explodes up, they physically don’t have the metal to sell. That is where I was shouting about the risk departments of banks – who would allow such a potential vulnerability?
So WTF was yesterday? To me, if I had to guess, there are large entities that leased out or speculated on silver and shorted it that need to buy back. If you look at the chart above, there is a BIG red candle going back to Oct below $22. My thinking is that the price action of the last 12 or so trading sessions with silver have been to force people out of their longs, to then buy back cheap.
This is why my hypothesis here has V bottom. All of this fuel spent on COMEX position limits of selling need to be balanced with buying. Whoever, the hell is pushing this down cannot breach position limits monthly.
Likewise, at the end of the year, you’d expect selling off for people to close the books at quarter and year end in the green. However, look at Dec last year. You had a big green candle on Dec 1st
When options came, they took it down $2.40 and in like 2 days, but then lots of buy back to end at $27.50. We risk ending this year $5 down from last year? On record investment demand? On increased physical demand? There’s your paper price coming through….
And right now, COMEX deliveries are starting. Yesterday I saw 2500 or so contracts delivered. Today 500+ with 6,000 yet to be delivered. Last I checked, they had 99m in registered, and while these deliveries may not leave the COMEX, in the upcoming weeks or months they very well may.
I feel there’s a lot of fear right now with those who are short given a CPI print is a week away. All of these guys have spent as many bullets as they can on sell position limits, and need to buy back any day now.
I’m expecting this can’t last much longer and expecting green days ahead. We may not recover $5 this month, but we sure as hell won’t be seeing $20 silver in a 7% CPI print.
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