this may be HUGE - Silver lease rates

[Spartacus]

or it may be nothing

http://www.kitcosilver.com/charts/silverleaserate.html

Silver lease rates are decisively negative (I'm assuming this is not a software glitch), entry error, and so on - it may be one of those.

NOTE that the lease rate is not an absolute amount, but a discount to LIBOR - (negative lease rates, If my figuring is correct, means that Silver leases are at a premium to LIBOR).

Kitco used to have a 20 year chart, which never, ever went negative.

thebulliondesk.com is sort of confirming
http://www.thebulliondesk.com/tbdchart.aspx?code=XAG&chart=D

(one of the selectable charts is for lease rates)

[Lukester]

Spartacus -

I posted on that too (very much interested in the issue as well) -

See 09-14-07 post - time stamped 05.02 PM here:

http://www.itulip.com/forums/showthread.php?p=16009#poststop

I've noticed the silver lease rates are DIVING also.

Good catch.

[Spartacus]

I have to get in the habit of searching before posting

I had this post ready last week butI didn't want to post because Kitco charts have sometimes had significant short term errors in various numbers, in Gold, Pt and Silver.

And the source of the numbers, LBMA, completely disavows any responsibility for the numbers -
the lease rates are charted from the bottom right hand numbres here

http://www.lbma.org.uk/statistics_current.htm

what's charted is "libor - sifo"

Since this is the first day that thebulliondesk.com kind of confirms, I thought it would be a good time to post, and it's a big enough issue to be at top level.


Spartacus -

I posted on that too (very much interested in the issue as well) -

See 09-14-07 post - time stamped 05.02 PM here:

http://www.itulip.com/forums/showthread.php?p=16009#poststop

I've noticed the silver lease rates are DIVING also.

Good catch.

[Lukester]

Spartacus -

There was a reference to this guy Tom Szabo [silveraxis.com] who goes on a bit about the silver 'basis'. He's pointed out that a plunging silver lease rate and / or a rapidly shrinking 'basis' are closely associated with nearby large potential movements in the metal.

Bart looked at it and found the correlation equivocal at best, at least as it involves 'basis' correlation with price moves.

I don't fully grok all of this, but my sense is there's something tucked away here that's quite relevant indeed. Certainly in the silver market, leasing is a very big deal. Remove incentives for leasing and you destablize the paper silver trade.

The lease rate is moving down very sharply, in curious synchronicity to some very significant breakouts in the metals last week. What's your read (or are you keeping it under your hat)?

[Spartacus]

IMHO, Something is rotten in the state of Denmark.

The big 20 (?) year chart I mentioned showed that the 1997 Buffett purchase forced charted lease rates to 80%.

And when the ETF was just coming in, lease rates went up to 6%, from a decades long 1% base (except for the Buffett incident)

Something weird is going on. Buffett's purchase obviously put stress on the system and Silver should have become less available. If it was less available, why would Silver owners be lending it out at LIBOR minus 80%, or LIBOR minus 8,000 basis points?

One would have thought that at a time when silver supply seemed to be in severe crunch mode, the lease rates would soar far above LIBOR

so I don't know - what Szabo wrote did make sense, and the LBMA site numbers I've been following for 2 years match the charts.

if he turns out to be correct and negative rates indicate extremely tight physical supply then those earlier episodes make absolutely no sense.

OTOH, there are reports of physical silver being withdrawn from the ETF for industrial use, which backs up the tight supply theory.


Spartacus -

There was a reference to this guy Tom Szabo [silveraxis.com] who goes on a bit about the silver 'basis'. He's pointed out that a plunging silver lease rate and / or a rapidly shrinking 'basis' are closely associated with nearby large potential movements in the metal.

Bart looked at it and found the correlation equivocal at best, at least as it involves 'basis' correlation with price moves.


Looking at the site, it looks like basis is something wholesalers and actual industrial users may actually use - but since a huge (perhaps the vast majority?) of traders are not insiders with warehoused stock, I don't get why Szabo thinks this should apply to the industry as a whole. looks like fallacy of composition


I don't fully grok all of this, but my sense is there's something tucked away here that's quite relevant indeed. Certainly in the silver market, leasing is a very big deal. Remove incentives for leasing and you destablize the paper silver trade.

The lease rate is moving down very sharply, in curious synchronicity to some very significant breakouts in the metals last week. What's your read (or are you keeping it under your hat)?

absolute lease rates are going up - the chart is going down ; )

I have lots of Silver investments - I've written before I'm very nervous about it (and you replied I shouldn't be) - this is what makes me nervous about Gold and especially about Silver - so many conundrums and dilemmas, like there are metaphorical trap-door spiders about to jump out and grab you at any moment.


I'll just paraphrase one point within their debate - SZABO points out that when a significant credit crisis really kicks in systemically, you will need to see the lease rates on Gold and Silver DROP, not RISE. Food enough for thought?

I can't see how they make a blanket statement like this.
IMHO You need a decision tree to draw this conclusion -

if credit becomes tight, AND IF there is lots of leverage long Gold ( AND IF that will be forced to de-leverage) in Gold and Silver then ...
if credit becomes tight, AND there is little leverage long Gold and Silver ...
if credit becomes tight, AND there is lots of leverage short Gold and Silver ...
if physical supply becomes tight at the same time as credit, AND there is lots of leverage ....
and so on

EDIT: adding
OK, having read the Szabo stuff, it seems to me that with respect to GOFO/SIFO he's making too big a deal out of future gold prices. I would think that lease contracts have a built in mechanism to account for changes in the value of the underlying. It's pretty common to have adjustments of this type. Why leave that kind of thing to fortune telling when you can easily write contractual terms to allow for it?

And Szabo does not make enough of a deal out of expectations of default. These are banks and other financial institutions we're talking about, after all - if Gold lease rates are rising, my first expectation is that the leasers think they won't get their Gold back, not necessarily that they expect the price of Gold to rise in the near future. Just like house prices - higher risk of foreclosure, higher rate.

[raja]

Can someone please explain what silver lease rates are, and the possible significance of these lease rates diving?

Coincidentally, I bought some SLV just today . . . and I'm wondering if diving lease rates is a good or bad omen.

[Spartacus]

you can borrow Silver from a bullion bank (or from Kitco, I believe) for let's say a month

At the end of the month you give the Silver back plus a certain payment for the month-long use of the Silver. Express that "plus" payment as a percent and you have a rate, XXX% . Libor minus this XXX% is the "lease rate" that you see in the Kitco charts,

So the "lease rate" charts are misleading

So if actual Silver lease rate goes up above LIBOR, the charts will show "lease rates" as negative.

The actual lease rate for Gold and Silver are on this page.

http://www.lbma.org.uk/statistics_current.htm

The actual lease rates that the industry apparently uses are the SIFO and GOFO

The number that gets put on the "lease rate " charts is either
LIBOR - SIFO (for Silver)
LIBOR - GOFO (for Gold)


Can someone please explain what silver lease rates are, and the possible significance of these lease rates diving?

Coincidentally, I bought some SLV just today . . . and I'm wondering if diving lease rates is a good or bad omen.

The lease rates (GOFO and SIFO) are not diving, they're rising - the charted number is diving -

The significance is that maybe lots of Silver users want Silver to lease, and the leasing houses can't find enough, so they' re raising the interest rates.
OR
Silver is money, and exactly like the inter-bank rates (for electronic and paper money) are going higher, Silver, being money, is also getting higher rates

So to answer your question, IMHO buying SLV is probably a good thing ... (I'm not a financial advisor, etc ...)

[raja]

Thanks for the explanation.

I was comparing GLD to SLV this morning, and SLV has not had the same relatively steady rise as GLD.

To me, this seemed like a good time to invest, because I expect silver to perform the same as gold in the long run . . . .

[Lukester]

Spartacus -

Quote:
<TABLE cellSpacing=0 cellPadding=6 width="100%" border=0><TBODY><TR><TD class=alt2 style="BORDER-RIGHT: 1px inset; BORDER-TOP: 1px inset; BORDER-LEFT: 1px inset; BORDER-BOTTOM: 1px inset">Originally Posted by Lukester http://www.itulip.com/forums/images/buttons/viewpost.gif (http://www.itulip.com/forums/showthread.php?p=16579#post16579)
I'll just paraphrase one point within their debate - SZABO points out that when a significant credit crisis really kicks in systemically, you will need to see the lease rates on Gold and Silver DROP, not RISE. Food enough for thought?
</TD></TR></TBODY></TABLE>
I can't see how they make a blanket statement like this.

______________

I didn't say I understand it. In fact I still don't. Thanks for your input.

[Spartacus]

Are you overweight Gold or Silver?

Spartacus -

Quote:
<TABLE cellSpacing=0 cellPadding=6 width="100%" border=0><TBODY><TR><TD class=alt2 style="BORDER-RIGHT: 1px inset; BORDER-TOP: 1px inset; BORDER-LEFT: 1px inset; BORDER-BOTTOM: 1px inset">Originally Posted by Lukester http://www.itulip.com/forums/images/buttons/viewpost.gif (http://www.itulip.com/forums/showthread.php?p=16579#post16579)
I'll just paraphrase one point within their debate - SZABO points out that when a significant credit crisis really kicks in systemically, you will need to see the lease rates on Gold and Silver DROP, not RISE. Food enough for thought?
</TD></TR></TBODY></TABLE>
I can't see how they make a blanket statement like this.

______________

I didn't say I understand it. In fact I still don't. Thanks for your input.

[idianov]

The way I see it is that lease rate is the relative indicator between cost of money for paper and physical metal as collateral in money markets. Both collaterals must compete for yield with markets setting LIBOR and GOFO interest rates based on supply and demand for money.

Another words, higher GOFO interest rate should follow lower LIBOR resulting in lower metal prices and vice versa, because lower LIBOR for a given term makes it cheaper for money market players to borrow cash using paper as collateral. The higher GOFO rate for the same term should attract more physical metal supply seeking higher return on asset which will bring the metal price down.

Right now, the lease rates for silver going negative indicate lower prices in the future unless money markets go crazy again.

[Lukester]

Idianov -

Hard to conclude Silver is used primarily for it's collateral function. I tend to think little of the silver is being employed for that purpose. That is primarily the Gold market's function. Silver offtake is constant and substantial for industrial use. Therefore it's not reliable as is Gold for collateral?

What's your read if you provisionally assume Silver were NOT being employed as collateral?

[ Note: Another large offtake from the Comex is bullion sequestered to ETF's, which is indeed a collateral but it's private small investor held, therefore behaves possibly independently of what you describe? This segment is permanently sequestering ever larger amounts of bullion each year. ]

[FRED]

The way I see it is that lease rate is the relative indicator between cost of money for paper and physical metal as collateral in money markets. Both collaterals must compete for yield with markets setting LIBOR and GOFO interest rates based on supply and demand for money.

Another words, higher GOFO interest rate should follow lower LIBOR resulting in lower metal prices and vice versa, because lower LIBOR for a given term makes it cheaper for money market players to borrow cash using paper as collateral. The higher GOFO rate for the same term should attract more physical metal supply seeking higher return on asset which will bring the metal price down.

Right now, the lease rates for silver going negative indicate lower prices in the future unless money markets go crazy again.

Way back in April you said (http://itulip.com/forums/showpost.php?p=9687&postcount=40):

This is true if there is a growth recession in consumer spending and slower business cycle without excessive debt. The asset rotation happens from stocks into bonds with inflation in real economy contained. Bonds will outperform stocks. The gold will suffer. Lower rates will help to refinance consumer debt, money will move into stocks again for the next leg up.

BUT, there is debt deflation in financial economy because of RE bubble, which will be hyper inflationary in real world economy. The smart money will not move into bonds and it will take a long time to unwind. For example, the leg down in subprime ABX at the beginning of the year has wiped out 5 years of income.

There are signs of slowing foreign capital inflows into US in anticipation of debt deflation. The falling US dollar against other currencies could be a sign of orderly capital outflows. The money are looking for assets around the world causing asset inflation in both real and financial economies. The parabolic M3 growth, world stock bubbles and accumulation of forex reserves abroad is the confirmation of the stress in the US financial system and accelerated inflation world wide. I expect the foreign investors and institutions (including CBs) to drive the gold demand in exchange for cash.

The correlation between US bond and gold is based on my observations of RE and US bond tops in June 2005 which started the KA and the major leg up in gold into May 2006. At the end of KA, the bonds rallied while gold fell hard and have been consolidating until Dec 06. The bonds fell in Dec 2006, which coincided with the start of subprime defaults. At the same time, the gold rose from $600 to $690 until Feb 27th. The recent hesitation at $700 is not a surprise, because the bond has been rallying on retail investor demand in anticipation of a normal slow down.

The debt defaults are far from over and they will accelerate with rising unemployment in US recession, rising inflation, ARM resets in the summer 2007. I could be wrong, so I am closely watching US 30 year bond for further direction.

Looks darned prescient to me!

[idianov]

Lukester,

Any asset can be used to raise cash by selling it or borrowing money against it. When credit party stops, the most liquid assets will be used by banks to borrow cash (i.e. T-note, Gold, Silver) while less luiqud and more risky assets (i.e. Stocks, Junk Bonds, ABX, CP) will be sold into market.

There are so many players in the market driving supply and demand for Silver, so the Silver ETF alone cannot be used in isolation. For example, CEF buying physical Silver early September had an impact by driving the spot price higher before the announcement.

Gold and Silver lease rates also seem to behave in a different way. The Gold lease rates hardly buldged during the previous top in May 2006, while Silver lease rates shot up to 7%, reflecting backwardation in price structure (higher spot price and negative GOSO yield probably due to Silver ETF IPO demand) and rising LIBOR rates while the FED was on the rate hike campaign. Since May 2006, silver lease rate was falling leading metal prices lower. Silver also underperformed compared to Gold since May 2006, which is a trend until it is reversed.

GOFO, on the other hand, better tracks LIBOR being liquid monetary metal used by banks. The lower GOFO yield agains LIBOR is indicating lower risk premum compared to money markets. In normal "speculative" markets, lower yielding assets fail to attract capital causing depressed prices.

During credit rout, due to extreme risk aversion, Gold will apreciate as one of the lowest risk assets which will be used by banks to borrow cash against metal as collateral.

This process has already started in 2001 and reinforced with the crash in the secondary MBS market in 2006 where falling prices and higher yields failed to attract capital, thus, making paper worthless for anything but toilet. Watch CP, CMBS and long bond for further gold and silver market direction. Falling CP and long bond will indicate further risk aversion in paper assets which will lead the metal price higher.

Igor

[Lukester]

Idianov -

Thank you for your clarification.

You wrote: << During credit rout, due to extreme risk aversion, Gold will apreciate as one of the lowest risk assets which will be used by banks to borrow cash against metal as collateral. >>

In your view, what happens to Silver in such an environment? Does it remain coupled to Gold bullion, but with wider swings, or has it on occasion decoupled from Gold's preferred collateral function?

[Spartacus]

Most Silver trading volume is for monetary use

800 million ounces is used annually for industrial use, but just last July for example, 114 million ounces PER DAY was used for LBMA clearing - IMHO mostly for monetary purposes.

Also note, the 114 million is end-of-day remaining balances - 10 billion ounces could trade daily, but if the trade is closed out before day's end, it's not counted in these clearing statistics

http://www.lbma.org.uk/clearing_table.htm

Idianov -

Hard to conclude Silver is used primarily for it's collateral function. I tend to think little of the silver is being employed for that purpose. That is primarily the Gold market's function. Silver offtake is constant and substantial for industrial use. Therefore it's not reliable as is Gold for collateral?

What's your read if you provisionally assume Silver were NOT being employed as collateral?

[ Note: Another large offtake from the Comex is bullion sequestered to ETF's, which is indeed a collateral but it's private small investor held, therefore behaves possibly independently of what you describe? This segment is permanently sequestering ever larger amounts of bullion each year. ]

Those statistics are only London, BTW - India and China and the middle east may be doing more monetary exchange in Silver, if not now then soon as those markets break free of the historically dominant NY and London exchanges

[Lukester]

Spartacus -

Fascinating info about possible monetization. Thanks very much.

[idianov]

IMO, silver is less liquid than Gold and T-bill, therefore more risky to use as collateral to raise cash in open market. But it is still better than overvalued paper priced in overvalued d0llars.

In the short term, the negative silver lease rates suggest lower metal prices for 6 months down the road on the outlook of lower LIBOR rates while CBs provide liquidity to restart lending between banks.

Of course, the thesis will be wrong should the silver price continue higher due to dollar devaluation in ongoing debt deflation rout.

Igor

[Lukester]

Posted for general interest -

Antal Fekete argues that Teb Butler's theories about "naked shorting" of silver are incorrect. Those ideas have gained very wide acceptance, so a plausible invalidation of that would be quite informative.

He puts forward his view of leasing, and the correct resulting interpretation of negative lease rates.


______________


September 25, 2007

Exploding the Myth of Silver Shortage

by Antal E. Fekete
On Thursday, September 20, 2007, the lease rate of silver suddenly dipped into negative territory. It fell to minus 0.1 percent per annum. I wish Ted Butler stopped bitching about silver manipulation, and instead explained the behavior of silver lease rates and the silver basis to his readers. In particular, he should explain negative lease rates, and negative basis or backwardation. It may be more helpful in promoting an understanding of the silver market than telling fairy tales about raptors and dinosaurs.

I have a long-standing disagreement with this silver analyst. I hold the view, in opposition to Butler's, that silver is a monetary metal second only to gold in importance. Supply-demand analysis of price is not applicable to silver, still less to gold. The reason is that both supply and demand are undefinable in case of a monetary metal. There is no way to quantify speculative supply and demand. Speculators make split-second decisions and from sellers may become buyers, or the other way round.

Making predictions for the silver price on the assumption that it is allegedly scarcer than gold does not make sense. Silver has been, is, and will continue to be cheaper than gold for a monetary reason that is the very opposite of the scarcity argument. The monetary stockpiles of gold are much larger than that of silver. Therefore there is less of a threat for the value to drop on account of new additions to the stockpile in the case of gold than in the case of silver.

It is not the absolute change in mine output that has an impact on the value of a monetary metal, but the relative change as a percentage of existing stockpiles. For this reason gold is more valuable than silver: the huge stockpiles of gold make the impact of a change negligible. Ergo the value of gold is more stable. In technical language, the marginal utility of gold declines more slowly than that of silver.

As a consequence, the specific value of gold is higher. This means that the value of the unit weight of gold is higher than that of the same weight of silver. Once this fact has been firmly established by the markets, it is not likely to change. The monetary metal with the higher specific value is more portable both in space and time. In more details, the cost of transporting the unit of value as represented by gold is lower.

For example, if the bimetallic ratio is 15, then the cost of transporting the unit of value as represented by silver is about 15 times higher. Roughly the same rule applies to the cost of storage as well. This makes gold superior to silver as a monetary metal. It is more suitable as a vehicle to transfer value over space as well as over time.

But silver is still a monetary metal, and for certain application such as parcelling out value in ever smaller bits, for example, silver could be superior to gold. And, of course, when it comes to enumerating industrial applications, silver has a very impressive list. In many cases there is no substitution for silver. However, do not make the mistake to think that gold has no industrial applications. It does but, because of its high specific value, these applications are mostly submarginal and as such they are ignored.

In 1922 Lenin gave a textbook example of such a submarginal application of gold. At a meeting of Communist party activists he famously said that, after the final victory of Communism world-wide, gold will be used for the purpose for which it is so superbly fitted, namely, to plate the walls of public urinals. He did not say that his plan could not be realized in the workers' paradise because workers would pick the gold plate of urinals just as fast as the government was installing them.

Another common mistake people make when comparing gold and silver is to say that gold is "not consumed" and therefore practically all the gold ever produced is still available while silver is "consumed" and, hence, is getting scarcer relative to gold all the time. The truth is that both gold and silver are consumed, for example, in the arts (including jewelry).

The difference is in the cost of recovery, recycling, and refining relative to the underlying value. Precisely because the specific value of gold is higher, the cost of recovery for gold is lower, so much so that gold in the form of jewelry is often lumped together with monetary gold for statistical purposes. By contrast, silver plate could not be lumped together with monetary silver because of the substantial cost of recycling expressed as a percentage of the underlying value.

Returning to the silver lease rate, this was not the first time it dipped into negative territory. The 30-day lease rate was pretty consistently negative between May 25 and August 4, when it shot up and reached a high of plus 0.4 percent on August 31.

The fact that negative silver lease rates are not impossible but a well-observed fact of the silver market has exploded the myth of a world-wide shortage of silver. Come to think of it: lessors of silver are willing to pay lessees a premium for borrowing the metal. But before you rush over to ask lessors for free silver, you had better come to a correct understanding what negative lease rate means. The collapse of the silver lease rate on September 20 to negative territory meant panic short covering in silver. The shorts anticipated an imminent and substantial rise in the price of silver and were running for cover.

How did they know that the silver price was poised to rise? They were not led by crystal balls. They acted on the historic correlation between gold and silver prices which customarily move "in sympathy" with one another. On September 10 the gold price was getting ready to break the resistance level at $700, while the silver price lagged far behind in relative terms.

The peak price of gold for the past 27 years, $730 an ounce, established in July, 2006, was well within earshot. The corresponding peak price for silver, $15, established at the same time, was not. Thus gold was well-placed to make a new high soon, silver selling at $12.75 was not. Nevertheless, if gold moved, it was reasonable to assume that silver would play catch-up. In the event the price of silver moved some (on Friday, September 21, it closed at $13.50) and, according to analyst Clive Maund, "was set to go through the roof" (www.safehaven.com (http://www.safehaven.com/showarticle.cfm?id=8451), September 19, 2007).

The point is that if this happens, as it very well might, the price move will not have been caused by any kind of shortage. The notion that we have a silver shortage is preposterous. Most of the silver produced by the mines and sold by the U.S. Treasury during the past 60 or so years still exists in monetary form.

Monetary silver is owned by private individuals who entrust it to commercials skilled in making monetary silver yield a return. This is the reason why silver and gold are monetary metals: they can yield a (more or less consistent) return to their holder if traded adroitly and professionally. This fact may not be too well known, but it is true nevertheless.

"Demonetization" has done nothing to destroy the unique ability of monetary metals to earn a return. Without a doubt, the best way of making this happen is through playing the short side of the market. Sitting on a long position of silver will not hatch the silver egg, nor is it a very intelligent way to make silver yield a profit. A better way is covered short selling which to the uninitiated appears to be naked short selling. It is not.

The commercials are neither stupid nor suicidal. They are professionals who make it their business to call the tops and bottoms in the price moves of monetary metals. It is well-known that they have an excellent track record in calling the market. This is not because they are vicious people who manipulate the market to their own advantage enticing the poor bulls to enter the slaughter-house. They use methods that are well-known, pretty standard among professionals, and can be learned from textbooks.

Using these methods they can turn the variable silver price to their advantage (or to the advantage of their clients on whose behalf they trade). It is not a cabal. You can join their ranks if you are willing to study those methods and go through the training which may be too rigorous to your taste.

If you are envious, or have moral objections against other people being able to make money consistently by trading the monetary metals, then you should lodge your complaint with the government which is responsible for "demonetizing" first silver (1873) and, a hundred years later, gold (1973). Before "demonetization" there were no commercials, no speculators, and no scalpers who made money by betting on the variation in the price of monetary metals. Those who had tried to make a living that way went hungry. The prices of monetary metals were stable.

Whenever the price of silver significantly lags the rising price of gold, there may be panic short covering and the leased silver will be returned to the lessors in a hurry. If the lessors were not prepared for this avalanche of silver (because they expected that the leases would be rolled over), then they may not be able to absorb the silver flowing back to them. In this case the silver lease rate drops dramatically and may even dip into negative territory.

It is important to be able to interpret this correctly. As I said, silver is delivered faster by the lessees than the lessors are able or willing to absorb it. Admittedly it is a market aberration, but whatever it means, it does not mean a shortage of silver. Far from it. It indicates a relative redundance of silver that momentarily cannot find lessees in view of an impending rise in the silver price.

The verbiage about silver manipulation is just so much tilting against the windmill. In his latest commentary dated September 18 Butler distinguishes between upside price manipulation or cornering the shorts, and downside price manipulation or cornering the longs. He adds that while the former is fairly common, the latter is exceedingly rare. Downside manipulation results in much lower prices than would otherwise prevail and, when it ends, the price explodes upwards. Butler is right on. A corner on the longs is in fact so rare that it does not even exist, except as a figment of the imagination of some analysts. The longs cannot be cornered, especially in a corner lasting for years.

Rumor-mongering about present or future silver shortages do not bring credit to the analyst. He should go back to his textbooks and study the market in greater depth. Above all, he should learn the elementary differences between monetary metals and non-monetary commodities.

We have had a torrent of short covering recently. It should have caused a meteoric rise in the price of silver, as predicted by the analysts. It just did not happen Yet it may still happen. Suppose it does. Will then the case for market manipulation be established? Of course not. What it would show is not that the commercials can and do manipulate the market and control the silver price that way. It would only confirm what we have known all along, that the commercials have a superb understanding of the silver market and can correctly anticipate impending significant price moves.

[Spartacus]

EDIT: I loved Prof. F's Real Bills debate, and was looking for some insight when I read this - I've read it several times now and just find it amazing.
It's unproven assertion after bald, unproven assertion after ... well, you get the point
Just a couple of points ....

assertion (sans proof) This is not because they are vicious people who manipulate the market to their own advantage enticing the poor bulls to enter the slaughter-house. They use methods that are well-known, pretty standard among professionals, and can be learned from textbooks

Not one link? Amazon? Abe's books? website?

assertion: (sans proof) A better way is covered short selling which to the uninitiated appears to be naked short selling. It is not ...

It looks like he's claiming there's no naked shorting going on in Silver, and anyone who thinks there is is dumb (calling Butler "uninitiated")

look for "naked" here:
http://www.financialsense.com/fsu/editorials/2007/0423.html


assertion: (sans proof) How did they know that the silver price was poised to rise? They were not led by crystal balls. They acted on the historic correlation between gold and

A guess about what the commercials did, worded as proof of "smart money"

My personal thinking on the commercials was set a long time before I ever read Butler -
http://www.alibris.com/search/search.cfm?qwork=6088752&wauth=Sarnoff%2C%20Paul&matches=24&qsort=r&cm_re=works*listing*title

Silver bulls / by Paul Sarnoff. --
by Sarnoff, Paul.
Westport, Conn. : Arlington House, c1980.
Description: 199 p. ; 24 cm.
ISBN: 0870004808 :

The Silver commercials have privilege (at the very least, they had more than enough in 1980) - lots and lots of it.
END EDIT

he seems to think the chart numbers are the actual price of leasing (or "lease rate")

the commercials have a superb understanding of the silver market and can correctly anticipate impending significant price moves.

can this possibly be right? Insider knowledge of markets that lets you make money consistently is not proof of manipulation, it's proof of good fortune-telling?

He prefers ESP (precognition) as a better explanation than market manipulation?

this "smart money" point of view has been discredited many times. if you have All the money in the world, you can buy better tax and legal advice - you can't buy accurate predictions of the future.

[friendly_jacek]

this "smart money" point of view has been discredited many times.

Is that so? I missed the memo. Can you elaborate?

[Spartacus]

Is that so? I missed the memo. Can you elaborate?

Make sure we're talking about the same thing - separate privileged money (like the guys who got stocks pre-IPO for free during the internet boom) from "the smart money"

Every bond blowup in history is proof - the big bond trading houses have more money than god but experience regular blowups.

If you had a billion dollars, could you go out and buy GUARANTEED investment picks, advice better than anything the rest of us can afford, without being an insider? Without privilege?

Also, there are short periods where somebody finds a trick that works for a while, then fails - many times, fails spectacularly. Was this "smart money" or luck?

The largest profits of course, come from entities like MS and Dell and Google. Most of these in the initial stages have enormous problems securing capital. Where is the "smart money" in this arena? Nowhere to be found.

Another example - all the big brokerages / investment banks pushing internet stocks - even to the richest of rich clients. Why did the brokerages make out like bandits - because of intelligence, because they are the "smart money"? Nope - privilege and insider information, playing both sides of the fence, etc ...

But getting back to the article at hand - read it - in one part he claims the smart money knows the tops and bottoms with certainty. In another part he writes they're writing covered shorts. If you can reliably call tops and bottoms, Why bother? You're throwing away profits over and above what you could make with naked shorting.

I just searched for an interview on financialsense where the guest commented on this - I think it was a commodities trading book - if I remember which one it was I'll post a link

[Mega]

Can you explain WHAT the hell your talking about!
In English as well please!
Mike

[Lukester]

Spartacus -

I don't know at all whether Fekete's theory has truth or not, and I only posted it to get your opinion and that of others.

However your main objection seems to be that covered shorts (i.e. silver long holders who are shorting solely to derive an income while they continue to hold large quantities of the bullion long term) can't be the real reason for the short positions on silver because this would involve some kind of "clairvoyance" or reliable predictions as to how to trade the market moves in bullion? You say "no one can predict market moves so this thesis makes no sense".

I am certainly not convinced of Antal Fekete's thesis, but your objection does not sound definitive to me. Look at the Forex market. It is huge, and the reason it's huge is because traders are arbitraging quite predictable moves in Forex reliably enough to make fat profits from it and have been doing so for decades - the big trading houses are making a lot of money trading currencies, and we know Jack Crooks does very profitably.

These parties do so by predicting approximate moves very reliably long term, and being good technicians in that specialty.

Tradeable trends in commodities are no different than Forex. They are eminently and entirely tradeable. Therefore your objection that big bullion holders cannot be deriving a very active income from covered short positions because no trader can be clairvoyant seems to not be borne out by looking around at other trading, in my view.

To me Fekete's theory actually makes a fair bit of sense. Why? Because the massive naked short position in silver which Ted Butler postulates relies on these naked shorts being extraordinarily rash and foolish by placing massive naked positions within a well established bull market and then doubling down on them to retain a quite shaky control!

So according to Ted Butler's theories, massive naked shorting of silver this far into a bull market is probably one of two things, or both combined:

A) Ready and willing collusive shorting to extract fat profits by regularly cornering longs - while also - critical to risk - being backed and underwritten by "larger interests" (aka government / bullion banks, or Silver Users Assoc.) who have an interest to cap the price

or

B) All of the above in A, but without the government / bullion bank indiscriminate backing. This scenario would involve these massive naked shorts, betting on their own dime, having at some point in the past two or three years suddenly understood that they were playing an increasingly risky game in an increasingly bullish market for Precious Metals - i.e. realising they were trapped and looking for a resolution or way out .

In this B scenario, these shorts would now understand their very large positions (2/3+ of global silver production) were beginning to trap them because there would be insufficient bullion on the spot market to even buy these shorts out.

If they wanted out, I cannot understand why the massive accumulated short position which has been growing in recent years has not at least been reduced. Rather, it increases. This implies doubling down in desperation, and seems a quite strained logic to me. The idea of doubling down on massive short positions in an obvious and well established silver bull market frankly seems contrived as a rationale.

Therefore the thesis of naked shorts who don't have the deep pockets of government backing begins to seem by no means a more plausible theory than that which Fekete is proposing as an alternative explanation. The only way a huge and growing naked short position in silver makes sense in terms of any concievable risk / reward is if it's backed by government money with an agenda to cap.

When you compare the two theories, one begins to seem more plausible than the other, because it's grown naturally over time, and is purely market driven.

Here's another question. Why such a massive collusion? Such a massive short position in silver - as an imagined secretive collusion between government and bullion banks - to cap the SILVER price? Why? The market the government needs to cap is the GOLD price. The Silver market is tiny, and cannot by itself subvert any fiat currency.

If these are naked short positions on such a massive scale, any intelligent participant knows full well if they are ever squeezed terminally, this could bankrupt some very large players. The only way these parties would engage in such extreme risk is if they were insured by discreet government backing.

Compare this tortuous logic with the simple market logic Antal Fekete proposes - silver shorting is profitable! But it's only an acceptable profit on such a scale if your shorting is covered by a long position! Very simple - the ever larger short positions are driven by exactly the same market logic as drives all commodity trading - a favorable ratio of risk to reward.

This theory has no logical stresses or strains in it. There is no massive naked short risk, with two or three gargantuan players trapped within it who have not only declined to exit those positions in the past two years, but have actively doubled down on them. That kind of theory strains the logic until the rivets start popping out of the structure altogether.

I am by no means convinced of Antal Fekete's argument - but by no means does it appear absurd either.

Respectfully,

[Spartacus]

I read Butler's claim as the commercials have found a way to take money from the technical trading funds, and the trick's held for years.

They do it because it's profitable, and no back-room dealing is necessary for "collusion" - the large shorts just watch each other and at some point they see an opening and pile on the short covering - the shorts need no back room communication - if they're ever investigated, no smoking gun emails will be found - they don't need any such email, they just watch each others' actions.

Spartacus -

I don't know at all whether Fekete's theory has truth or not, and I only posted it to get your opinion and that of others.
that's what I thought, no worries

However your main objection seems to be that covered shorts (i.e. silver long holders who are shorting solely to derive an income while they continue to hold large quantities of the bullion long term) can't be the real reason for the short positions on silver because this would involve some kind of "clairvoyance" or reliable predictions as to how to trade the market moves in bullion? You say "no one can predict market moves so this thesis makes no sense".


I don't know the answer. I'm just objecting to Prof. F's
1. lack of proof in the article
2. ignoring proof that contradicts him (see end)
3. and ignoring solid arguments on the other side - brushing them aside with no argument - not "no reasonable argument", but in fact, NO argument

I don't agree with Butler either, but at least he tries to provide facts.


So according to Ted Butler's theories, massive naked shorting of silver this far into a bull market is probably one of two things, or both combined:

A) Ready and willing collusive shorting to extract fat profits by regularly cornering longs - while also - critical to risk - being backed and underwritten by "larger interests" (aka government / bullion banks, or Silver Users Assoc.) who have an interest to cap the price

or

B) All of the above in A, but without the government / bullion bank indiscriminate backing. This scenario would involve these massive naked shorts, betting on their own dime, having at some point in the past two or three years suddenly understood that they were playing an increasingly risky game in an increasingly bullish market for Precious Metals - i.e. realising they were trapped and looking for a resolution or way out .


Or D: Each party found a strategy years ago that made them some money. They're still using it. They'll keep using it until it stops making money - the bull market has not yet affected how they make money on this strategy, why would they stop until it does?

No collusion is necessary - each party is making money without secretly communicating with any other party .

The Silver leasers don't have to know anything about what the commercials do on COMEX. They're making money by leasing.

The COMEX commercials may know, but don't need to know, anything about the other commercials or about the leasers - they just know that when the COT reaches certain levels, they can short and when the COT gets to certain other levels, they cover their shorts.

No collusion needed.

They're like the bond traders that make billions for 10 years then lose 50 billion in a week.

f they wanted out, I cannot understand why ...

This is mind reading. Or rather negative mind reading. It assumes the dealers believe certain things and assumes they wouldn't act certain ways based on those beliefs.

We don't know if they think we're in a bull market. We don't know if they're "doubling down out of desperation". They're making money - what desperation?

all that we know for certain is that the commercials have sold short at certain points and covered at certain points. they probably made money doing this.


the ever larger short positions are driven by exactly the same market logic as drives all commodity trading - a favorable ratio of risk to reward.
This theory has no logical stresses or strains in it. There is no massive naked short risk, with two or three gargantuan players trapped within it who have not only declined to exit those


look for "naked" here:
http://www.financialsense.com/fsu/ed...2007/0423.html

I've read some more Szabo, by the way - after calling Butler a conspiracy theorist for some time,

http://seekingalpha.com/article/7663-silver-wheaton-and-coeur-d-alene-mines-turned-silver-market-on-its-head-slw-cde

he realized Butler's at the very least partially right, and goes on to defend the naked short selling (WHICH HE SAID NEVER HAPPENED, and anyone who believed it happened must be dismissed as a conspiracy theorist)

Cognitive dissonance can be SO MUCH FUN ; ) - deny that something illegal is happening, and when you find out it IS happening, DEFEND IT !!!!

[Lukester]

Spartacus -

Nowhere do you factor gargantuan risk into your analsysis. "Commodity trading business as usual" is what you describe. Yet that "business as usual" in this configuration actually would be a rare bird indeed, when one can clearly discern truly enormous, company bankrupting liability on the downside of the naked short position being employed for a merely pedestrian profit.

You discard the entire 'collusive' idea, and suggest the trade back and forth between commercials and specs is typical market action in commodities, a 'profit for both'. Last time I checked, such a phenomenon does not exist. For one to profit regularly over time, the other must pay - regularly, over time. I mean, how could they be handing the 'profit' back and forth between them?

If it's 'business as usual', which of these parties is skating over monumental risk with the blithe confidence that the modest cash profits from the buying and selling of silver bullion short positions provides a decent risk / reward ratio compared to the liability of having to deliver 250 million ounces in the event their bet went bad?

[Spartacus]

Am I sure Butler is right? absolutely not. I don't have all the answers.

Do I agree with Butler? NO NO NO .... I'm convinced there is some hidden information we don't see yet. I've written this many times, you replied to this at one time - I'm nervous about my Gold investment, but especially about my Silver investments.

BUT ... I just know BAD arguments when I see them.

All Fekete presents is hand-waving, mind reading, "argument from incredulity" and name-calling (conspiracy theorists, "uninitiated"), etc ... . He never addresses the meat of Butler's arguments.

Why do you think it's impossible for Silver traders to blow up?

We iTulipers discuss this kind of thing every day - hedge fund blowups, Amaranth, Enron, the airplane fuel blowup in Singapore a couple of years ago, the huge copper short blow-up a while ago.

There IS naked shorting - can't be denied - even a former Butler critic/name-caller admitted it After calling Butler names, Szabo admits Butler was right and then defends the COMEX.

No one even bothers to deny the COMEX's numbers show a massive short position. Fekete never even mentions it.

Again, I have Silver investments.

Also, I think I'm missing something, some crucial fact and Butler's missing something -

BUT

Fekete's arguments are non-arguments.

For one to profit regularly over time, the other must pay - regularly, over time. I mean, how could they be handing the 'profit' back and forth between them?

EDIT: sorry, I goofed on this one point

[acrabbe]

Spartacus -


If it's 'business as usual', which of these parties is skating over monumental risk with the blithe confidence that the modest cash profits from the buying and selling of silver bullion short positions provides a decent risk / reward ratio compared to the liability of having to deliver 250 million ounces in the event their bet went bad?

ScotiaMocatta seems to be the bank representing the majority of these concentrated massive short positions in the silver market. This all makes perfect sense if you first keep an open mind, and remember that silver has industrial as well as investment purposes. Important to note is that in some of its industrial uses, silver is considered an irreplaceable commodity due to its unique properties - thereby making it indispensible to certain large commercial manufacturing interests who use (relatively) large amounts of physical silver purely for production purposes.

Ok, so given all that, it doesn't seem far fetched that these commercials are shorting the hell out of silver to keep the price down so as to protect their bottom line and margins in their core manufacturing business. The easiest way to do this is in the actual silver trading market since it's 1) so small, 2) has alot of nice derivative products that allow you to short into it so naked that you might as well be skinny dipping on the exchange floor, and 3) an inflation hedge and safehaven during times of uncertainty (second only to gold) so much so that governments and central banks welcome its price suppression mainly because this price suppression aids them in their information and propaganda war on joe sixpack. Why do they manipulate CPI numbers to an almost laughable, and now completely ridiculous degree? The same reason they allow massive deriv positions on the precious metals complex to suppress the price appreciation.

We can get into more minutia, like "are they selling and buying back and forth between themselves?" well, no. Due to the size and volatility of the silver market, technical levels are extrememly important. A savvy manipulator can whipsaw large specs and retail traders into panic selling/buying using a combination of massive derivatives firepower and good knowledge of key technical levels. This is not farfetched in the least.

However, there's no need for discussion of minutia like that. It's a pretty straightforward situation. If it walks, talks, acts like a duck. It's a duck. Look at the massive hedge books of some of these gold producers. So massive in fact that their hedgebooks threaten to completely destroy the profitability of their businesses in the event of a price increase in gold. Doesn't make sense. Oh, but wait. Barrick CEO and CFO both just unloaded ALL OF THEIR STOCK OPTIONS (CEO kept minimum he is required to, something like 47,500 shares). Why would they do that? Well, look at gold over past few months, then look at their MASSIVE hedge book exposure.

It's not farfetched to think the gov + CB's were using gold producers as proxies to cap the price. This is not tinfoil or conspiracy stuff. Why do CB's sell tons of gold bullion into the market in hopes of damaging gold sentiment when that sentiment begins to crescendo? And everytime they do it they fail, and the price breaks out soon after anyway! The ultimate contrarian indicators - desperate central bankers trying to protect their reason for existing. Fiat.

A conspiracy is merely a secretive plot between two or more people. Yeah, THAT'S not likely to happen, eh???? :cool:

Sometimes it's better to read the writing on the wall in front of us rather than search for an explanation as to why the writing shouldn't exist, couldn't possibly exist, can't possibly apply to us, etc. See what I'm getting at here?

Look at the gold/silver ratio. Based on gold, silver is extremely undervalued right now. What else could be suppressing price in such a small market during wildly inflationary times? And growing ever more inflationary by the week.

Silver is in the late stages of a bull market began in 2002 from $4. We'll probably see $30 silver by Dec 2008, and that's not farfetched at all. Not even close to the inflation adjusted all time highs.

Based on the insane amount of fiat money creation over the past 25 years, gold and silver should (be) trade(ing) at or above their inflation adjusted highs of $2300 and $130 an ounce respectively. Why aren't they? I'm sure the massive cloud of derivatives hanging over the PM complex has something to do with it. To hint or imply that the effect of this monstrous cloud of derivatives is a net neutral position or had a negligable effect on the price of the PM's seems utter denial, which is the first stage of death/enlightenment.

BTW - I trade precious metals options professionally and have a great deal of vested interest in the market. Hence the attention and research. FWIW.

respectfully

[Lukester]

Acrabbe -

Thanks very much for your input, and I'd personally welcome more of it here. Also thanks to Spartacus for his well considered views. FWIW Spartacus, I'd be very pleased indeed if Butler were the more correct of the two pundits discussed on silver (and I bet I own a fair deal more silver than you, my friend! :o )

Acrabbe, I'll resume this discussion tomorrow as I'm getting by on five hours sleep from last night. Just one comment of yours struck me:

<< Silver is in the late stages of a bull market began in 2002 from $4.>>

At $13 silver and five years out, I'm curious as to why you describe this as a "late stage" market in silver today? You see this market going up like a Roman Candle and burning itself out in two years? Curious because I've heard this from one other source as well.

Thanks.

[Spartacus]

Thanks from me too

Think these are related?

http://www.reuters.com/article/hotStocksNews/idUSN2622174420070926
http://communities.canada.com/nationalpost/blogs/tradingdesk/archive/2007/09/17/barrick-gold-insiders.aspx



Sometimes it's better to read the writing on the wall in front of us rather than search for an explanation as to why the writing shouldn't exist, couldn't possibly exist, can't possibly apply to us, etc. See what I'm getting at here?


Yes, "argument from incredulity"

I definitely agree with this, and, at the same time IMHO it's very important to read good critiques - if your original reason for getting in is disproved, you may want to get out, post-haste.


Why aren't they? I'm sure the massive cloud of derivatives hanging over the PM complex has something to do with it. To hint or imply that the effect of this monstrous cloud of derivatives is a net neutral position or had a negligable effect on the price of the PM's seems utter denial, which is the first stage of death/enlightenment.


This is one of my guesses as to what is invisible to us - that thing that Butler is missing - that there may not be shiny metallic stuff backing the shorts, but the shorts think they're protected by some derivative position or other

FWIW Spartacus, I'd be very pleased indeed if Butler were the more correct of the two pundits discussed on silver (and I bet I own a fair deal more silver than you, my friend!

No worries, mate - I want to find that hidden information and it won't help to get pissy when anyone tries to give me the information.

[jacobdcoates]

I think he is saying that the production users of gold and silver are using MASSIVE derivative shorts to try and keep the price down, and fighting basically a rearguard action on the price now, with the CB's providing some help, but also failing. Please correct me if I am wrong

[Spartacus]

When you lease a car you get a car for a while and at the end you return the car plus you pay some money for possessing the car.

Same with Silver and Gold. You get Gold or Silver - at the end of the lease you return the Gold or Silver PLUS you pay a fee for possessing it.

This whole thread had been about the price the industry has been setting for those leases.

Follow some of the URLs. There's a link to the lease rate for Silver.

I don't think any of this has been too technical, but to follow the discussion you should be familiar with these peoples' writings

http://www.silveraxis.com/index.html
http://www.butlerresearch.com/archive_free.html

Can you explain WHAT the hell your talking about!
In English as well please!
Mike

[acrabbe]

Acrabbe -

Acrabbe, I'll resume this discussion tomorrow as I'm getting by on five hours sleep from last night. Just one comment of yours struck me:

<< Silver is in the late stages of a bull market began in 2002 from $4.>>

At $13 silver and five years out, I'm curious as to why you describe this as a "late stage" market in silver today? You see this market going up like a Roman Candle and burning itself out in two years? Curious because I've heard this from one other source as well.

Thanks.

I wasn't being totally clear with that statement. If I had to guess I'd say we're in the middle stages of the PM bull. Over the past century we've had about 4 real bull markets in PM's (this one included) and they last about 10 years each, give or take a few years. We're 5 years into this one, so you can say we're entering the mid to late stage, all depending on whether this turns out to be a 7-8 yr or 12-13 year bull. Hard to say.

I think the inflation adjusted highs have an excellent chance of being hit before the run is over, the big question is when, and how quickly. There's no resistance above the nominal highs, and with inflation so out of control, and with OTC derivatives currently imploding and bringing banks to their knees, who knows how high the PM's could get in the late stages. And this is all just based on the inflation/debt monetization factor. If the geopolitical situation continues to deteriorate, that could take us into very uncomfortable territory. Even if you're long the whole way! (i.e OMG, when do I sell??? :eek:)

Crazy thing is, Putin just told his CB to allocate more of their reserves to gold. I'm sure other countries will follow suit, and the Chinese still haven't gotten involved full force. It could be the entrance of these large players that catalyze the "adjustment" in the PM prices relative to the actual dollar supply and spark a buying panic.

Of course, the wildcard here is deflation. Even though they'd fight it to the bitter end, if it takes hold firmly, I have no idea what happens to any of PM's. Someone else would be better suited to offer an opinion on this aspect of the debate.

[Lukester]

Acrabbe -

Very solid, hard headed comment. I'm gonna buy you and ol' Spartacus a long cold (virtual) beer and soothe your frazzled nerves. :D

[Lukester]

I'd like to make a thousand word or so technical comment about this chart (http://www.investmentrarities.com/10-09-07.html) on the short position in silver futures compared to other commodities and gold. If you are interested in studying the mechanics of the silver market, I urge you to read ahead, but those who are supremely confident that silver prices are heading up in the future because naked manipulators will be forced to cover at much higher prices may want to skip the following dose of reality.

CHART IS FROM TED BUTLER'S POST "A PICTURE IS WORTH A THOUSAND WORDS"

http://www.investmentrarities.com/Image36.jpg


First, the chart apparently does not consider recycling in the "days of production" figures, understating the true supply of silver. Every metal is recycled to one degree or another, unlike agricultural commodities and fossil fuels.

Silver happens to have one of the highest rates of recycling and this should not be ignored: according to GFMS, the annual recycling rate for silver is 29% of mine production while VM Group believes silver recycling is more like 66% of annual mine supply. Second, the chart also ignores supplies made available by the secondary market such as private and government dishoarding.

According to both GFMS and VM Group, governments continued to dishoard silver as recently as 2006. And of course we know that around 500 tonnes of gold is dishoarded annually under the Central Bank Gold Sale Agreement. Dishoarding, on the other hand, is not a regular feature of any other commodity except perhaps palladium.

Third, some markets like metals can draw supply from all over the world, but others like orange juice, pork and milk tend not to include much international supply or demand in U.S. futures trading. Thus, it may be inappropriate to include "world" production figures for some of these commodities when making comparisons to silver or gold. In other words, it would be appropriate to include only those production figures that have a reasonable chance of being hedged via the futures market.

Fourth, a number of commodities included in the chart have a larger concentrated long position than short, virtually eliminating the possibility of short covering through physical delivery. For such commodities, comparing the concentrated net short position to annual production is meaningless.

Let's consider the quantitative and qualitative effects of these factors in terms of the chart.

COMEX Silver Open Interest on 10/2/07: 117,498 contracts, futures only

4 Largest Traders By Net Position: 38.1% Short = 44,767 contracts or 223.8 million ounces

8 Largest Traders By Net Position: 49.1% Short = 57,692 contracts or 288.5 million ounces

Annual Mine Supply, GFMS (2006): 646 million ounces

Annual Mine Supply, VM Group (2006): 672 million ounces

Days of World Production to Cover Concentrated Net Short Contracts, 4 Largest Traders: 223.8 / 646 * 365 = 126 days

Days of World Production to Cover Concentrated Net Short Contracts, 8 Largest Traders: 288.5 / 646 * 365 = 163 days

So far, so good. But now let's look at what happens when we include recycling.

Annual Silver Recycling, GFMS (2006): 188 million ounces

Annual Silver Recycling, VM Group (2006): 446 million ounces

Days of World Production Plus Recycling to Cover Concentrated Short Contracts, 4 Largest Traders: 223.8 / 834 * 365 = 98 days (using GFMS figures; but 75 days when using VM Group figures)

Days of World Production Plus Recycling to Cover Concentrated Short Contracts, 8 Largest Traders: 288.5 / 834 * 365 = 126 days (using GFMS figures; but 96 days when using VM Group figures).

So, if we include recycling in the production figures, we can see that the concentrated net short position in silver may be 30-40% smaller than the bar shown on the graph. In effect, the bar for silver would be more like the one for gold. There is, however, a similar amount of recycling in the gold market, and thus the bar representing gold would also shrink proportionally. This would make the bar size for gold about the same as the one for cocoa.

But hold your horses please. We haven't included any dishoarding as yet. For example, GFMS claims that government sales accounted for 78 million ounces of silver supply in 2006; if this is true, it would shave another 5 days production off the above figures. Similarly, the near 500 tonnes of central bank gold sales would shrink the bar for gold as well, making it just slightly larger than the one for coffee.

Next, let's consider another problem with this graph: 'world production' is not an appropriate measuring stick for all commodities. Milk, pork and orange juice, as well as to a lesser extent wheat, oats, soybeans and some other agricultural commodities, are not traded internationally at the same rate as are silver, gold, crude oil, copper, sugar, coffee, etc.

Futures positions for commodities traded predominantly in regional markets will necessarily be much smaller than those for commodities traded internationally. In fact, the chart seems to confirm that the more international trade there is in a commodity, the larger the concentrated short position is in terms of global production. If you think about it, this makes sense. The more accessible the cash market is for a particular commodity, the more likely that someone will use the U.S. futures market to hedge or speculate.

Certainly nobody is going to be trading milk futures in the U.S. based on milk production in India. On the other hand, Indian trading in silver is a key factor in the hedging and speculating decision of COMEX traders. This can also work in reverse when the global cash market is so large that there is insufficient speculative capital to provide much of an opportunity for commercial hedging. I am talking about crude oil of course. It should come as no surprise that the chart has oil on the far left side of the list opposite silver.

Now, let's examine the implications of a concentrated short position in a commodity. One reason to measure it in the first place, as explained by Ted Butler, is to gauge the ability of shorts to cover their positions by making physical delivery.

Assuming the concentrated short trader is not already in possession of the commodity being shorted, there are two sources that can be 'raided' in order to acquire a physical position to be used in settlement of any outstanding futures contract that cannot be rolled over. The first is the subject matter of the graph: annual production. To this we have added recycling and dishoarding.

Before we move on to the second source, let's examine a concept that may be just as important as annual production: "settlement of any outstanding futures contract that cannot be rolled over". What does this mean?

Well, we know that a short futures position can be closed out in one of three ways: (1) acquiring an offsetting long position (covering), (2) making a delivery of the commodity in a so-called exchange-for-physical or (3) rolling over the contract to a future date by acquiring a short calendar spread (in effect, matching the need of longs who want to remain long but must also roll over their positions before contract expiration). Interestingly, the ability to conduct (1) or (3) is directly related to the size of the concentrated long position in a commodity.

This is because exchange rules prohibit cornering attempts and therefore large concentrations of long positions cannot possible stand for delivery: they must roll or sell their contracts near expiration. Thus, when we see a large concentrated long position in a particular commodity, we can pretty much rule out the possibility that large short traders will be forced to settle using exchange-for-physical.

The implication of this is that the concentrated short position is largely irrelevant in commodities that also have a concentrated long position of equal or greater size. Which commodities are these? Out of the ones on the graph, they include crude oil, sugar, wheat, corn, copper and palladium.

To take it a step further, it would be even more appropriate to subtract the concentrated net long position from the concentrated net short position when analyzing concentration ratios. This is precisely the advice the CFTC offered to Ted Butler many moons ago, and there was a reason for it other than obfuscation. In effect, the regulators were telling Mr. Butler that large shorts need not fear delivery requests from large longs.

Any potential problem is limited to the extent the large shorts exceed the large longs. I'm not going to try quantifying this effect here, but let's just say that offsetting the large shorts and large longs in silver will result in a net short exposure about half the size shown on the graph. In fact, there have even been periods when large longs briefly exceeded large shorts in COMEX silver, such as April 2003 and September 2001.

Okay, let's now look at the second way to acquire physical supply to cover a short position: existing stocks. Interestingly, the commodities remaining on the graph -- after removing those with either small local markets or huge global ones as well as those with little risk of being covered by exchange-for-physical -- seem to share a common feature: they all have stockpiles of various size that can be drawn down in order to satisfy rising demand.

In the case of silver, approximately 60% of the concentrated net short position of the 4 largest traders is held at the COMEX warehouses. This compares very favorably to gold at 54%. Of course, much more gold and silver exist in readily available form in London, Switzerland, Tokyo, Dubai and elsewhere. There are hundreds of millions of ounces out there if the price is right, starting with the ETFs.

For cocoa, the percentage is much higher at around 375% (3.75 times the concentrated net short position is stored in central warehouses). By contrast, the ratio for coffee is around 62% based on coffee stored in approved U.S. coffee warehouses. On the other hand, less than 1% of the concentrated net short position in platinum is held at COMEX warehouses. It seems that when we add existing stocks to annual production, it is none other than platinum that may have the most outsized concentration of net short positions.

In conclusion, it is true that silver may be an outlier when we narrowly construe commodity supply to include only annual production in the form of mineral extraction or agricultural harvest, but when we add all of the possible sources of supply, silver may end up somewhere in the middle of the pack. The only way to know for sure is to redraw the graph so that it is a more accurate reflection of the commodity markets. The existing picture may very well be worth a thousand words, but it is definitely worthless without those thousand words.

[rabot10]

Way back in April you said (http://itulip.com/forums/showpost.php?p=9687&postcount=40):



Looks darned prescient to me!

Fred how do U remember this stuff? All i want to know is silver going up based on this anyone anyone?

[Lukester]

Rick -

I think a lot of the lemming money that has flooded into bonds will prove to be a massive sucker's bet - when it wakes up, which is *very slowly*, it will pile into precious metals as concerted global monetary debasement becomes ever more evident. Ditto for the whole myopic crowd that claims precious metals are "only money when or if the government allows it to be". LOL !!

Bonds, and even short term treasuries, were one of the worst bets imaginable in the 1970's. It's amazing how many highly educated investors today still think bonds will offer protection in the recession that's blowing in.

When even a fraction of the lemming money that piled gloatingly into treasuries in August, thinking they were being so sophisticated, wakes up to the inflation beginning to seep in worldwide, the precious metals will get a bid that will make today's effervescence in the PM markets look puny in comparison.

The lemming money was jeering at precious metals investors six months ago as being slow witted, flat footed, and simplistic in their adherence to metals as the true asset haven. Now US bonds are being shown up as the swiss cheese investment they really are in the coming global inflationary era. Watch as oil prices spiral inexorably upwards. And take note five years from now, as it becomes evident that oil crisis has become one of the biggest drivers of inflation, rather than inflation driving oil. That will be a moment of lucid revelation - but it's still regarded as a simpleton's idea on iTulip.

I've had those guys proclaiming gold was for fools, and bonds for the sophisticated and world-wise conservative investors - bending my ear for five years now. Let them hang onto their bond 'safe havens' and rot - I could care less if they want to hang onto yesterday's life-raft until the water is up to their ears.

[c1ue]

Lukester,

I may not share you PM tunnel vision, but I completely agree with your bond sentiment.

We may both be wrong, but at least we are both looking at how to survive should the secular market conditions of the past 25 years change.