As the December 2010 COMEX silver contracts approached maturity, a higher than normal number of contracts were not closed out before the first day of notice for delivery. In theory, potentially all of these open contracts could have ended up being called for delivery. While a number of short sellers absorbed their losses by purchasing an offsetting long contract, the amount of silver that was needed for physical delivery did stress available COMEX inventories.
As a result, in November and December 2010 the price of silver jumped more than 30%.
This same pattern looks like it will repeat for the maturing March 2011 COMEX silver contracts. This time, however, the potential supply squeeze is much larger.
February 28 is the first day of notice for delivery of the March contracts. Normally, parties not wanting delivery would have closed out their contract long before then. At the COMEX close on February 22, there were still 50,848 open March 2011 silver contracts, representing a potential liability to deliver 254.24 million ounces of silver by the end of March. The COMEX registered silver inventories available to cover deliveries totaled only 41.91 million ounces. Even including customer inventories that are stored at the COMEX, which are only eligible to deliver against COMEX contracts if the owners so choose (and most do not), the total is only 102.35 million ounces.
During COMEX trading hours on February 22, there were 124,000 March 2011 silver contracts traded—almost 2-1/2 times the number of open contracts! This is almost unprecedented volatility!
Here’s what I suspect happened to cause such a huge trading volume that day. The price of silver had been rising significantly for the past several trading days, reaching successive 31-year high price records (ignoring inflation). The US markets were closed on February 21 for Presidents’ Day. In trading in Asian and European markets early on February 22, the price of silver passed $34.00. If this price were maintained, then a large number of short sellers would get margin calls when the COMEX market opened on February 22. That could have forced leveraged short sellers to put up additional cash, physical silver, or to buy long contracts to close out their short positions. Any of these actions would likely have the effect of pushing silver prices up even higher.
It appears that a massive effort was mounted to drive drown COMEX silver prices on February 22 in order to avoid or reduce the margin calls to leveraged short sellers. This strategy was successful to a degree in that the price of silver dropped to just below $33.00 at one point on the COMEX. The temporary drop encouraged some owners of long positions to liquidate and take profits, further helping to push the price down.
However, the price suppression effort was not successful at pushing down the silver price below the February 18 COMEX close. Once it became clear that the manipulation was losing steam, buyers jumped back into the market on February 23. During COMEX trading hours, the price of silver reached as high as $33.75. Trading was extremely volatile, with 1% swings up and down occurring within a matter of minutes.
Several hedge funds, seeing how easy it was to make a short-term profit in silver squeezing COMEX short sellers last November and December, are likely to repeat the tactic with the maturing March contracts—but on a greater scale.
If the price of silver from now through the end of March were to rise by 30% again, that would put the price around $43. But, if there is a larger supply squeeze underway, the price could go much higher.
Already we are seeing several physical silver wholesalers using a two-tier silver spot price system. If you want to sell to them, they are using spot prices derived from COMEX and other markets. On the other side, if you wish to purchase physical metals from them, they are quoting a selling spot price that is 5-10 cents higher than their buying spot price.
The mainstream media is reporting that stock market prices and most commodities (with the exception of gold) fell on February 22 as a result of concerns about unrest in countries in the Middle East and North Africa that could lead to reduced supplies of petroleum. The unrest is sparked in part by soaring food prices (which the US government pretends is not occurring) in addition to political factors. But this news does not give you a clear picture of what is really going on in the silver (and gold) markets.
Expect both gold and silver prices to become much more volatile in the coming weeks. Don’t be surprised if silver prices move across a $2-3 range within a 24-hour period. In the past week, our company has enjoyed a significant increase in demand for physical silver. Thus far we have been able to make immediate or short-term delivery of most forms of silver. That could change quickly. At last report, the Perth Mint was telling buyers that they would have to wait until at least April to receive delivery of newly manufactured silver ingots.
Even though silver prices are now near 31-year highs and gold is near its highest prices ever, I still consider both of them to be at bargain levels compared to what I expect to see by the end of March. Silver will outperform gold, but both will do well versus the US dollar and all currencies.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes "Liberty's Outlook," a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles". His bimonthly columns on collectibles can also be read at http://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.
Good, fresh insight and summary of the silver squeeze. The volatility is unnerving, but your focus is helpful. Thanks!
Keith
While I agree with most that is written, I find it incomplete to discuss what silver is going to do without even mentioning the likes of JPMorgan and the pending lawsuits.
Even the CFTC has openly admitted to Silver ETFs being traded in the multitude of 100s over the actual physical silver that backs it.
Perhaps you view some of this as speculation, but certainly, it is in the minds of many and is a significant component of what is happening.
A major push to demand physical silver is to expose the massive corruption issue despite any action by the CFTC and the likes of supposedly informative articles like this.
Thanks for the information.
Perhaps the “Crash JPMorgan, buy silver” campaign is having effect.
The Silver Short Supply Squeeze is approaching like a Tsunami on steroids! You might like Why You Must BUY SILVER NOW! http://survivalus.blogspot.com/2011/02/why-you-must-buy-silver-now.html as well.
From everything that I read from the people that I trust like Dan Norcini, Ted Butler, Eric Sprott, Etc…. There is a real physical shortage of silver. As Eric Sprott put it recently, there is nothing left! At some point in the near future I would expect the physical market to take over and the paper market to become discredited for the fraud that it is.
CrimeX strikes again. Let’s hope that they get cought with their pants down.
Sooner or later this whole thing will simply boil down to those holding the element and those holding some form of paper.Those who have the element may not have bought it to speculate and may not sell it for some time.This market will become increasingly tight while at the same time the price will become decreasingly important.
Good article, but I agree with Chad that some mention of JPMorgue and silver shorts should be discussed.
Dear Chad and JohnQPublic,
The lawsuits against JPMorgan Chase and HSBC are significant influences on what has happened and will yet happen in the silver markets, which is why I discussed them more fully in my October 31, 2010 CoinUpdate column titled “Class Action Lawsuits Charge JPMorgan Chase and HSBC With Manipulation of Silver Futures Markets.” I have periodically added tidbits of fresh developments. There simply isn’t room to repeat all the details of all the significant influences on precious metals prices in every column, so that’s why nothing was mentioned in this particular column.
Link to that article: http://news.coinupdate.com/class-action-lawsuits-charge-jpmorgan-chase-and-hsbc-with-manipulation-of-silver-futures-markets-0513/
Everything is looking good for silver, If only everyone took a little time to read all this great information online about silver investing there is no way they could pass up the opportunity. Its really too bad the majority will not realize what is happening with the dollar till its too late.
Thanks, Pat.
There are only less than 20k contracts open. And I am sure, on Monday there are even less. So again (I am reading this for ages), there will be no short squeeze problem. At least not yet.
Thanks, Pat. I appreciate you explaining and validating your position. This is the first blog I have read of yours.
Steffen, I tend to agree with you, but that’s only because JPM can’t produce whatever paper it needs to, to try and ride this out. And at this point, those people with contracts have the reigns. They’re thinking, lets ride this beast as long as we can. Why kill it?
I mean can produce.
Open interest is ‘only’ 20k contracts? Monday isn’t here yet. That number could actually grow, but I agree it will probably diminish some. Still, even 10k contracts is 50 million ounces to deliver. Should be interesting.
dave j.—-Great observation. Hold physical silver and do not be concerned with the day to day price. Keep it, hold it, and do not be fooled by CrimeX. Thanks Bill K–Toledo Oh
I keep reading about JP Morgan and price manupulation but if this was the case why is nobody actually doing something about it. Why is Russia, China and India not wanting answers to this? The US always wants countries to show how much oil they produce each day and we would demand answers if somehow oil was being manupulated by a powerful business. To me, it doesn’t make sense, has to be more to the story.
“Why is Russia, China and India not wanting answers to this?”
Because China is part of this. They are taking advantage of the cheap commodities to buy them all up with scraps of pieces of paper we call money. Once the default happens and the dollar soon goes to zero, then all their US dollar holdings will also go to zero. They are milking the system for as long as they can.
Plus, when no one in the west has any more money to buy manufactured Chinese goods, then what will happen to the Chinese economy? They can’t power themselves so if no one is buying their manufactured products then how will they buy energy? Kind of like America’s problems. They have their own problems too.
I guess we will have to wait and see ….again.
We now have only 4200 open contracts on the first notice day. That probably goes further down the next days. And you still can buy it for the same price as the next contract. So I do not see any stress.
who will get caught holding the bag of worthless bonds, repudiated by bankruptcy? and will silver be enough to suppliment your future when gasoline is 6FRN?
I say that silver is better than paper.
3000 contracts left and no stress in the pricning so far. The trading volume also now is down. I am not sure, if contracts that are already asigned for delivery are excluded from the current open interest. But so far, that all looks quite normal. I do not know, what were the numbers in the last months. But what I know, that next month we get the same articles again…
Seems it has now stabilized at around 1500 contracts. But no stress in the pricing.