Extreme Liquidation
The stock bubble and the real estate bubble better move over, because I'm going to tell you about a bubble that will be talked about for as long as mankind exists; the silver bubble. At the epicenter of reasons for launching silver to the heavens is the coming end of artificially depressed silver prices. There is no legitimate free market explanation for such extremely depressed prices in the face of greater demand and depleted world inventories.
The current market structure in both gold and silver,
according to the Commitment of Traders Report (COT), is excellent. That’s one
of the benefits of sharp sell-offs. I am not denying that these sell-offs cause
extreme pain and damage to leveraged holders, as that would be to deny reality.
Because there has already been a significant liquidation of speculative long
positions and corresponding dealer buying to cover shorts, there appears to be
little risk of a meaningful sell-off from current levels (just under $11 on
silver). Instead, the path of least resistance from here should be to the
upside. I know it doesn’t feel like that, but that’s the way markets, even
manipulated markets, work.
Just so no one becomes confused by what I am saying, let me
be as clear as possible. The total dealer net short position in gold and silver
is low by any recent measurement, as the corresponding speculative (gross) long
position, particularly in silver, is at lows not seen in years. This is good,
as the likelihood of significant further speculative long liquidation is
diminished. After all, you can only liquidate that which is capable of being
forcibly liquidated, namely margined positions. People holding fully paid for
positions get angry, upset, worried, and maybe even happy (if they can buy
more), but very rarely do they sell into sharply declining prices. These
sell-offs are designed to force sales from leveraged holders. Sadly, it works.
Yet, paradoxically, the concentrated net short position in
silver held by the largest dealers has never been greater, relative to the
total net dealer short position. The latest COT indicated the 4 largest traders
still hold almost 97% of the total commercial net short position on the COMEX.
This situation, small total dealer overall short position,
but super-extreme dealer concentrated short position is unprecedented. In fact,
I am amazed that this concentrated position has become more concentrated
precisely at the same time there have been so many public complaints about the
concentration. If there were anything that could shut me up and prove me wrong
it would be for the concentrated short position to be covered without an
explosion in the silver price.
This short position is so large, relative to real world
supplies, that it defies economic justification. It is so concentrated, that it
is impossible for it not to be manipulative. I claim it cannot just quietly go
away, as it is too dominant a market factor. If it does go quietly away at near
current price levels, I will have been wrong on this issue. But I’m not wrong
yet.
Long time readers know I have highlighted the COMEX short
position consistently. It is not the only thing I write about, but it is
certainly a central theme. Even the CFTC has repeatedly and publicly
acknowledged that I have been alone in raising the issue with them for two
decades. They deny it is evidence of manipulation, but they are forced to
address the issue, because it is so glaring. As time goes on, more observers,
not less, have come to understand the short position’s role in the silver
manipulation and have rejected the CFTC’s denials of
manipulation.
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Get While The Getting Is Good.
Much has been written lately about the commodity bubble
having burst, and how we’re about to enter a prolonged period of commodity
weakness. This is especially true after days like today, when prices plunge
across the board. But I don’t think this is a commodity bubble bursting. I
don’t think we had a bubble to start with in most commodities. Yes, prices did
move dramatically higher (measured from the lows), and speculative buying did
get overdone at times. Nevertheless, the classic definition of a bubble was
never met, namely, widespread involvement by the public.
When prices drop, many assume we are sliding into the abyss.
I think we confuse the reasons behind the tremendous price volatility that has
engulfed our commodity markets. We want to read deep meaning into short-term
moves. A sharp daily move, up or down, in oil, silver, gold or copper does not
mean there is so much less or more of that commodity suddenly available. It
just means the speculative and leveraged forces that day (or week or month)
dictated the short-term price moves. I think these speculative trading forces
have gotten over done. Nowhere is this truer than in silver, with its
verifiable concentrated short position.
That said, I think the prices of most resources,
particularly metals, moved higher over the past few years on fundamentals. I
don’t deny that speculation goosed prices (and caused sell-offs), but it was
the fundamentals, persistent industrial demand from
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Certainly, it wasn’t speculative demand that resulted in the
shocking inventory declines in copper, nickel and zinc. It was not speculative
demand that caused the LME to default on its nickel contract.
The evidence does not suggest immediate production increases
that will result in rebuilding those inventories. The only way for inventories
of base metals and silver to build is a fall-off in demand. That may occur, but
then again, it may not. Yes, there appears to be a slowdown at hand in the
I’d like to pass along an observation from my silver mentor,
Izzy. Over the past five or six years we have seen
world mine production increases in most metals and resources. Certainly we have
witnessed the Chinese scouring the earth for all types of scrap supplies. (I
remember Jim Cook’s story of the scrap yard owner’s sale of his inventory to
the Chinese, where they even dug up the dirt to ship back to
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What we do know is that there is not a large, speculative long presence in commodities currently. There has been a flush out of epic proportions of speculative positions in most commodities. Some, like copper, actually show speculators net short (basis COMEX) for the first time in years. So, even if there was a bubble in commodities, there’s no bubble now. And with such low speculative interest, it’s hard to imagine significant long liquidation and waterfall declines.
We have witnessed sharp speculative liquidation and severe
price sell-offs in the resource segment several times over the past few years.
Each time it looked like the commodity boom was over. Each time after those
sell-offs we have achieved new highs. Each time we were presented with terrific
buying opportunities Will that be the case this time?
I don’t know, but with collective inventories so low and no dramatic production
increases on the horizon, the markets seem to be pricing in a world recession,
or worse. If we don’t get that recession, prices will surprise on the upside.
The ironic aspect is that I think there will eventually be a
slowdown in demand for silver, but it will not come from a world recession. The
demand fall-off will come from price-induced rationing due to extremely high
prices. When that occurs, the sharp sell-offs of the past (like now) will be
looked upon differently than they are looked at today. Then, they will be
remembered as the opportunities that too many people missed. Today, world silver inventories are at the lowest point in 200 years. All the known and recorded silver in commodity warehouses, and elsewhere, only comes to 250 million ounces, and most of that is tied up and unavailable. Industry requires over 900 million ounces each year. Mining and recycling fall short of providing the necessary silver.
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