Tuesday, April 26, 2011

CME Margin Cold Water for Red Hot Silver

Silver cracks, a little.

An excerpt of Sunday’s full Got Gold Report.  

HOUSTON --  Red hot silver got a little official cold water thrown on it by the CME on Monday.  The exchange raised COMEX Silver futures spec and maintenance margins on the big 5,000-ounce contracts by about 9% effective Tuesday, April 26.  It is not all that surprising to see an immediate selloff tied directly to margin hike news, so we cannot be surprised by the harsh reversal in silver.  

20110426SLV Graph A
SLV, 5-day, 30 minute trading bars as a proxy for silver. If any of the images are too small click on them for a larger version. 

The focus now shifts to where silver will end up finding strong support.  

As a reminder, Vultures should log in and check the April/May update for our Vulture Bargains now.  Today we named a new VB, our ninth.    

GGR Excerpt     

Just below is an excerpt of the full 32-page Got Gold Report which was delivered to paying GGR subscribers on Easter Sunday, April 24, 2011.  

Silver COT   

(SLV, 5-day, 30-minute trade bars, as a proxy for silver trading this Easter Week. If any of the images are too small click on them for a larger version.)  

White hot silver motorized higher another $3.88 or 9.7% COT reporting Tues/Tues, from $40.06 to $43.94 (again the highest close on a COT reporting date for this silver bull yet).  Silver bears seem to be in full retreat, the price action confirms it, but curiously there has been little in the way of observable short covering in N.Y. futures.  


The combined COMEX large commercial traders as a group added an astonishingly small 1,413 contracts to 52,692 contracts net short (LCNS).  Recall that the prior week the LCs reduced their net short positioning by a large 5,135 contracts, so with silver powering $3.88 higher this week they did not even replace that which they covered the week before.  Not even close.  The open interest for silver increased by a tiny 311 contracts to 144,981 lots open.  

Just below is the nominal LCNS graph for silver futures.  

Source CFTC for COT data, Cash Market for silver. 

We are at a loss to describe how surreal it is to see the silver price hurtling skyward with so little in the way of opposition coming in from the traditional short side.  Just as we saw in late 2010, silver is screaming higher, but instead of the LCNS rising apace, thus showing confidence by the “COMEX price police” that the price of the metal will move lower (even if perhaps not right away, but relatively soon), the Big Sellers of silver futures have been more in retreat than anything.  

How long can such a situation last?  We think it can last until there is a material amount of silver called back into the market.  

What can call in a material amount of silver back to the market?  Significantly higher prices in USD terms is one answer.  Apparently, as of Thursday, the “magic level” required to produce a flood of silver metal back to the market in amounts sufficient to quell the exploding demand for it has yet to occur.     

As we do with gold, we compare the nominal silver LCNS to the total open interest.  We think that gives us a better idea of the relative positioning of the largest hedgers and short sellers – the Producer/Merchants and the Swap Dealers combined into a single category – compared to all the other traders on the COMEX. 

When compared to all contracts open, the relative commercial net short positioning (LCNS:TO) for silver did actually increase this reporting week, but only by the smallest of margins from 35.5% to 36.3% of all COMEX contracts open.  

If one was looking for a sign of opposition or Big Seller confidence in lower silver prices, then one need look elsewhere for the evidence.  It is not to be found in the relative net short positioning this week.  

The silver LCNS:TO graph is just below.   

Source CFTC for COT data, Cash Market for silver.

Apparently the Big Sellers have been racking up very large net losses with their legacy net short positioning, or they have been “rolling up” by closing out existing short positions and redeploying on up the price ladder in the hopes of catching a top, because otherwise the LCNS would be getting larger if they were simply adding to short positions or it would be getting appreciably smaller if they were doing more covering than new selling.  We find it amazing and perhaps a little bizarre that there has been so little change in the amount of commercial net short positioning or for that matter in the silver futures open interest as silver ran up through the $20s, the $30s and now the $40s.

Indeed, back in August, with silver then in the $18s, the silver LCNS was around 52,000 contracts, or just about what it was this past Tuesday at $43.94 silver (more than double the price).  In September, with silver then in the $20 neighborhood, the open interest was then roughly 145,000 contracts, or roughly what it was this reporting week.

However, this week the pace of advance for silver has accelerated to a parabolic pace and late week we could not help but notice that the COMEX open interest had moved sharply higher, up to 156,641 contracts as of Thursday’s close.  So perhaps with silver having advanced a whopping 8.4% in a single week the usual “opposition” is feeling bold enough to take the short side once again. We’ll see soon enough.  

Having said that, there are other factors that will soon come into focus that the bears need pay attention to.  

Silver Extreme Backwardation 

Just below we are copying the silver futures strip from our own trader’s journal for reference.  

20110426SilverFuturesStripGraph 5
We have chosen to ignore the late electronic trades on Good Friday, as they are suspect given the extremely light liquidity involved.  Instead, we will “go” with the Thursday close of $46.65 as a benchmark (knowing full well that a supply squeeze is underway on silver).    

Note that even with the Thursday $46.65 close, all of the forward futures are well under that price, so backwardation in silver continues.  Note that there is some slight contango in the relationship of all of the 2011 silver contracts (green), but then each successive month falls slightly in price (red).  Note also that although the roll to July has begun in earnest, there remains an open interest in the May contract of 46,839 contracts.  

That figure could become important just ahead if enough of the holders of those silver contracts decide to stand for delivery of physical metal.  Importantly, as of Thursday, the Registered inventory of silver metal in COMEX approved warehouses showed about 35.7 million ounces.  It is the Registered category of metal that literally backs up the COMEX futures contracts.  As of Thursday, there was enough silver metal on hand at the COMEX to cover about 7,144 contracts, or roughly 15% of the May open interest.  (7,144 contracts is less than 5% of the Thursday total open interest.)    

5-Million Ounces Gone from COMEX Registered Inventory – One Week  

What is particularly interesting about the above figures is that this week’s Registered silver inventory at 35.7 million ounces is more than 5.3-million ounces less than what it was when we marked it last week.  The majority of that silver was converted from Registered to the Eligible category at the COMEX, meaning that some large players decided to have their metal allocated and removed from “play.”  

We do not see 5-million ounce changes in the inventory every week, or even very often.  Clearly the rumors of a silver squeeze have put traders into action, rightly or wrongly.  Just as clearly, there are not now sufficient metal resources to cover very much of the COMEX futures action.  It does not strain the imagination one bit to consider the very real possibility of a COMEX supply squeeze for silver at the moment, does it?  Link to the COMEX inventory:


The idea dovetails with the many reports of supply shortages of commercial sized bars of silver in other venues, while at the same time, other, smaller and more “retail” types of material seem relatively plentiful at the moment (such as so-called “junk silver” and smaller retail bars).      

We have noted the very heavy demand for commercial size physical silver and the recent disproportionately high inflow for silver relative to gold reported by dealers and bullion houses.  We have spoken of the conversion of unallocated metal to defined metal, short covering of “paper silver” and a growing realization by the market that physical silver in commercial sized good delivery bars is insufficient to answer the current demand.  We noted that condition has not only led to a rapidly rising price for silver and a plunging gold/silver ratio, it has also apparently discouraged the usual Big Sellers of silver futures from attempting to force the issue to the downside, likening it to stepping in front of a Silver Express freight train.  

How much longer can such a condition last?  It will last until significant amounts of silver appear to answer the now rapidly escalating prices, that’s when, and not a moment before.  Now, witness the flight of over 5-million ounces of silver metal from the COMEX line of fire to the sideline “safety” in the Eligible category.  

Repeating:  We believe that at some point the much higher prices will call latent silver back into the market in elevated enough amounts to temporarily satisfy the burgeoning demand, but as of (Thursday) we can see no sign of that condition in either the price action or in the positioning of futures traders, … but we now suspect that silver could be mobilized very shortly ahead if the parabolic price rise either continues into the $50s, or if it were to reverse suddenly.   Either one might be sufficient to call metal back into the market temporarily, but we think only temporarily as of now.  We are convinced that we are in for a period of wild, trader testing volatility just ahead.  Fasten seat belts, hang on, lash yourself to the railing and man battle stations. We sense heavy weather just ahead for both sides of the price battlefield.    

As we have said here many times, we have no desire to sell any of our own accumulated silver metal.  Rather, we intend to take advantage of the collapsing gold/silver ratio to use our silver as a leveraged way to trade it like-for-like for gold metal.  Vultures already know our plans along those lines, so we won’t repeat them again here, but the time for action – for the first tranche of silver to gold conversion is nigh.  

(End of excerpt) 

We may publish another excerpt of the GGR in the coming days, so stay tuned. 

That is all for now but there is more to come.


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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