I might be on a show this week to discuss this, and I wanted to put out some full analysis ahead of this in order to have my thinking explained with visuals. I’m a kind of guy on these shows that loves to create a slide show of a few things with charts for 4 days to then walk someone through what I’m thinking in 20-30 mins. These guys that can talk, unscripted, without any visuals forever – I commend you. Not my talent. I’m going to go over some main points here.

Pattern broken

We had a trading channel for the last year and a half or so for silver. We have bounced off the top and bottom of this – and during this time, we have had an average closing price of $25. My chart popped that out for me. I had been tracking beat downs and recoveries – meaning, every month a few days prior to metals monthly options, you would see the price get clubbed. I’m not talking $.14. I’m talking at 8:30, you see “retail sales improved by .001%” and silver gets smashed a dollar. They would often tend to use these things as cover. Then, you hear the muppets on CNBC say things like, “silver took a beating today, as investors feared strong retail sales could ding the luster of the white metal”.

Get the fuck out.

Yes. This is the shit slinging they have been doing. I’d watch this every day for months. Eventually, you’d see patterns evolving on the chart. First, let’s look at the beatings.

If you’re reading this on a cell phone, good luck. I at least wanted to put this out there so people could zoom in and check my work. I was tracking the exact averages and days of duration of this, but you can eyeball that this beating period usually involves over $2 in beatings, and starts usually around the 18th-20th of the month – but that can vary depending on a few things. The options expiration is the 4th to last trading day of the month, unless that is a Friday OR ends on a holiday. So some months this might be a little later than others, but other months price ran up a lot and they need to short over a longer period to bring the price down.

This month, we had a late buyer who pushed up silver I think on Tuesday when everything else was smashed with the beginning of stock market woes. To me, this threw a bit of a monkey wrench into the shorting. Many seemed to pontificate that a big buyer came in, and this buyer created a bit of a short squeeze. At the same time, we had seen 150 contracts come on the board for in-month delivery – someone asking for 600,000 oz, immediately. At the exact same time, we are seeing newspaper clippings where smelters may be shutting down in Europe do to stupid high gas prices.

We now look at the “recoveries” – that is, after prices are smashed down every month, we then tend to have a period of time where these shorts tend to buy back their positions cheaper after flushing out a lot of specs and weak hands. This pattern was broken in December – as they continued to short all the way to the 15th.

To me, I saw THIS as a final low. It seemed to hit exactly on double bottom territory. A hard wall was hit, and buying has been good since then at $21.44 – recovering about $3. So right now, we might be a little higher on the RSI and could use a trim of sorts coming into expirations.

Expirations – where are they?

When you go to the CME page, you can look up volume and open interest, and then find silver options. When you bring up the page, it looks like this…

What I and others do is take that, throw it into Excel, trim a lot of columns, and remove a lot of the calls that are way low or way high. Additionally, for calls within $2, towards the lower side of that I’ll only go after every $.25 or so. Here’s what it looks like. I then put some analysis in here to accompany what I’m seeing.

How much of a smash?

I think it’s pretty damn risky trying to conjure up a crystal ball and say like, “I see it at $23.76”. I don’t care if you are using charts, graphs, COMEX numbers, etc. It’s DANGEROUS because no matter how much you tell fools not to listen to you for financial advice, they go play the roulette at $23.76 and when it is $23.78 and they lose money, they want to come after you. Unless you hit something PRECISELY on, which is unknowable unless you are Biff from Back to the Future traveling back in time to hit the number – it’s not able to be known.

What you CAN do is provide ANALYSIS. I will try and do that here…

  1. You can see that every month for 18 months there was a smash of $2-3 right before options. The pattern was broken last month, but IF that pattern holds, it would be a $22.25-$21.25 number. I do not see that as likely. I am speaking in probabilities here.
  2. IF they chase after higher numbers of calls for a smash and grab, $24 seems like a likely target. You can see a high number of calls at $23. And, that is within the $2 smash range. So, it is possible they can smash $1.30 or so in 3 days to take it under $23.
  3. With stock market chaos, you can see the potential for “safe haven” assets being sought after. You mostly associate people selling stocks and going to the dollar. Meaning, you could see strength in the DXY. However, we have 7% inflation. Every moment they hold the dollar, its value is decreased. It is possible money moves to bonds, and the peak at 1.84 for the 10yr has topped for now. You can see with charts below that gold can move up with the DXY as the 10yr is falling.

4. IF safe haven assets are sought on stock market selling this week, silver shorts could get their doors blown in by going massively short to chase $23 strike price call options.

5. The fed minutes are at 1400 on Weds, 35 minutes after close of options. If you are concerned that he fed may be a little dovish, and perhaps delay an interest rate hike from March to June, shorts could get obliterated with a strong move in gold and silver instantly.

6. A whale presented themselves last week, and we don’t know if the whale has friends. That happened on….the 18th. That’s usually around the day smashing starts. Could have been an interesting shot across the bow. I’m not in this game, but if I was able to do my usual shorting and hit the EZ button, and someone fires 4,000 contracts to buy in, I pay attention. There are position limits. Last I checked it was 1500 contracts, unless you had legitimate hedging. In my piece about Ted Butler’s claim on BoA being 800m oz short, one thing I mentioned was that if you were selling the physical short, you would probably want to hedge long on the futures to prevent getting blown out on price moves up. I ALSO made mention that they COULD have leased 800m oz, but there’s no evidence, ANYWHERE they sold that short. Could they have leased this and kept a big warehouse of this to then sell to those who needed in a hurry? To me, this LOOKED like someone who COULD breach position limits by….going LONG futures on a physical sell. They may HAVE the 800m oz, but perhaps they JUST sold 20m short and put the long hedge on. That could be that 4,000 contracts.

7. With the potential for more supply chain issues, NOW we are dealing with high nat gas prices in Europe and smelters now closing shop. This threatens new supply coming to market, and King New Network (yes, permabears, I know) are reporting on very little physical available. Yes, there are warehouses of this stuff in ETFs and vaults – but people continue, constantly, to mistake supply and AVAILABLE SUPPLY AT THIS PRICE. Now, if you are looking at REAL silver shortages, where are you buying? IF BOA is sitting on a massive pile they leased, they could be willing to part with this at much higher prices than spot – perhaps sell for $27-$30, then put a long hedge on at $24.25. They make $3-$6 per oz and are protected against upside losses on the physical short. This could have been BoA figuring there were significant metals shortages coming and front running. Point is – do you REALLY want to go balls deep shorting to $23 when it’s very well possible the COMEX will continue to get pummeled and physical supply really is in jeopardy? I don’t contend BoA is sitting on a pile of 800m now, but it is very possible they have a large hoard they are able to sell at a premium for desperate clients in a pinch.

Conclusion

IF you are a BoA with a very large leased hoard of metals in a time where metals are hard to get, at any given time you can be putting on long hedges on the future. To me, it makes sense to put the hedges on when price is lowest. If they sold the metals at $27 but can put a hedge on at $24.27, that’s a nice profit for a metals desk. Meaning, if you are perhaps a player like HSBC and you want to run the stops down to $23, someone with virtually no position limits with legit long hedging can come in and blow your doors off. Literally every time. To me, I believe that shot across the bow on Tuesday, along with Butler’s pointing out of the potential of 800m oz leased (no evidence they sold it), you could have BoA actually push prices up as they sell this pile short.

Now, IF BoA has this pile leased and is sitting on it, it’s a nuke to anyone who wants to massively short into a $24 silver price. Meaning, they COULD sell millions of ounces a month, and legitimately hedge this on the futures. Anyone who pushes silver down to $21 and is sitting stupid short – THOSE are the ones about to get hammered. I think Ted was on to something, but I don’t think he had the evidence to conclude they sold 800m oz into the market short. With how tight the market was, you could not have hid 800m oz. Now, he did show enough evidence to make many of us believe there is a combination of gold/silver leased metal SOMEWHERE.

Why would you do this if you were BoA?

If you leased this metal at a $26 price, or $22 price, whatever, and you could sell this at $30 or $40, and then eventually buy it back for $25 or pay the cash price plus a premium, why not? Their metals people could have concluded that given everything happening, a $50 silver price is coming. If they could get their hands on 800m oz and sit and wait, why wouldn’t you? If price cratered, you could essentially give it back at the end of the lease duration. It also seems with these leases, often they have negative rates. Interesting. They will pay you to lease?

I bring up all of this because the consolidation may be over. The December bottoming to me was very interesting, as it destroyed a 16 month pattern. It felt like a “final bottom”. With this, it stands to reason that at any given time, BoA could sell millions of ounces to a customer in dire straits and at that moment, hedge what they just sold short physical by going long on COMEX. If they sold for $27 and bought long at $24, why wouldn’t BoA then take delivery of the metal? That’s a $3 profit. That $24 metal they just took off the COMEX then can go to pay back the metals leased.

So, I think BoA is the entity that bought the 4,000 contracts last week. I have zero evidence, and I’m probably wrong – but if you were HSBC or one of the shorting brigade, wouldn’t you worry about an 800m oz gorilla in the room?

Overall, I’d be very cautious if I was a bank looking to take out $23. Risk/Reward? $24 might be easy pickings and they call it a day.

In future months, we might see this price pushed UP at options. This is what I saw last month. That was the pattern broken. Can we see price increase into options? For now, I’m leaning towards $24 taken out and prices rising a lot after that.