Thursday, June 30, 2011

Record Net Short Position for SLV Rally Fuel?

HOUSTON – A record high short interest in the largest silver ETF “says” a bunch of hopeful silver bears are betting that silver has more to go on the downside following its April blow-off-top to near $50. However, so far silver has yet to cut a lower low on a closing basis since the May 16 last-trade of $33.53.  It came pretty close to marking a new low on Monday, June 27, with a close then of $33.59, but has since clawed back up to a $34 handle in two consecutive daily closes after showing persistent “support” in the $33s.   


Silver continuous commodity contract, 18-months, close-only data. no longer has access to daily open-high-low-close data for some commodities. If any of the images are too small click on them for a larger version or click on the title of this post for the full page.  

Vultures note that silver is roughly and sort of following the blow-off top pattern example silver set in the 2003-2004 parabolic blow-off.  Just below is a graph of that parabolic event. 



The first parabolic break of this silver bull market.  


Note please, that the low in the after-parabolic top consolidation came pretty soon after silver ran out of gas in March-April of 2004, about 35 days.  Despite repeated attempted sell-downs following that $5.52 low print, silver merely consolidated with slightly higher lows for the better part of two months before it resumed the prevailing bullish trend.   

It is too soon to say that this current consolidation will definitely begin to show rising lows again and there are any number of trap doors that could spring in the global economy just ahead, but the chart above is one model for how it might play out – if the world manages to hold itself together a while longer.  (It probably will, but can anyone see the future clearly enough to say either way?)  

SLV Short Interest Rally Fuel?  

Speaking of the SLV short interest, apparently someone has written a story about SLV that contains a good deal of misinformation in it. In this world of social media that is not surprising, but what is surprising is that people seem to flock to the ones doing the “misinformating” in greater numbers these days.    

We have received near frantic comments asking about the large short position currently open on iShares Silver Trust (SLV).  As of June 15 the short interest for SLV had reached 37,344,000 shares.  Since SLV shows a total of 317,200,000 shares outstanding (as of June 27), the number of shares borrowed and sold short equals 11.8% of all the shares outstanding.  We believe that to be the largest short interest for SLV yet, but would welcome information to the contrary.  In any event, there are rather large bets that silver is going to fall in price at present.  

We consider the high short interest a contrary bullish condition, especially given the very low relative net short position of the largest hedgers and short sellers of silver futures as Vultures are already aware. As of this past COT report the commercial futures traders came in with less than 30% of the futures open interest net short – historically a very low and quite bullish level. 


However, the high short interest on SLV has given some newsletter writers yet another “cause” to write about, and some of the commentary we have seen is downright embarrassing.  We normally try not to delve into other’s commentary because it causes too much unproductive feedback, but we are going to make an exception this one time.  

Why?  Because some of our readers are concerned enough to write in about it, apparently inflamed by commentary of overzealous writers that should know better. For example, apparently at least one well-known writer actually accused SLV of “selling shares of SLV short” itself.   Apparently, if one of our sources is correct, one popular writer actually went so far as to call BlackRock, the trust’s sponsor, “negligent for continuing this fraud and manipulation.”  We do not have access to the actual piece that was written, so we are relying on a second-hand report, but we have no reason at all to doubt that the quote is accurate.  The quote may be accurate but it is rubbish.        

In the first place SLV has not “sold” shares of SLV short; the reported short interest is the short interest of traders everywhere, but not short sales by SLV itself or its authorized participants.  It represents bets by traders that SLV will fall in price, and after silver’s run up to near $50 and parabolic blow-off it is understandable that quite a few people might think that silver’s price reached bubble status and is now “collapsing,” so in their view it has considerable downside left in it.  We don’t share that view and instead think that silver has more upside potential than the opposite, but that is beside the point.  People are free to make a bet on the downside with most all ETFs and that is part of the price discovery process for the shares. 

We understand this particular writer strained all credibility by suggesting that SLV somehow “had to sell shares short because there is not enough silver available to issue new shares legitimately!”  Ahem… Do we have to point out that because of more selling pressure than buying pressure SLV just got through redeeming shares and selling back into the market over 1,800 tonnes of silver metal since April?  


Metal holdings for SLV peaked in April at 11,390.06 tonnes.  As of June 23 it had fallen to 9,588.19 tonnes.  That’s about 57,931,647 ounces of good-delivery silver bars that had the name tags changed from “SLV” to other owners in the SLV custodian warehouses.  We believe the silver is still sitting in those soccer field sized warehouses managed and operated by JP Morgan Chase, London, and if SLV were to see more buying pressure than selling pressure and needed to add new shares again (to keep the price from running off too high relative to spot silver), they almost certainly could.

Because of a sanctimonious “misinformating” and anti-SLV tirade one of our readers, who by the way is not a Vulture (most Vultures are not so easily swayed),  also voiced concern that these “naked shorted shares of SLV don’t have any silver backing them!”  Oh brother. That canard again? 

We’ve already used “in the first place” so in the second place, shares of SLV are not the same thing as ounces of silver.  Shares of SLV are shares of SLV, a silver-tracking ETF.  Each share represents the “action” of one ounce of silver, less accumulated fees and expenses, and for each share of SLV there is an appropriate amount of silver held by the trust’s custodian, but there is no requirement whatsoever for short sellers to put additional silver up to borrow shares to sell them short.  Nor should there be.  A short seller puts up collateral in the form of cash or margin to borrow the shares from his brokerage or a share locator service and pays a fee, plus interest for doing so. 

In the third place, we are not talking about “naked short sales.”  A naked short sale is where someone sells an issue short without borrowing the shares to do so.  If one will do a little digging they will find that is a practice that is frowned upon. Pretty much all of the shares sold short and reported as such were borrowed, from brokerage accounts held in “street name” or from other holders with permission to do so.  Lenders of shares sometimes earn a fee for allowing their shares to be loaned to short sellers.  There is absolutely nothing wrong with that, by the way.   

We have to regard the contention that the shares of SLV sold short “do not have silver backing them” as not only silly, but a misconstruction of the facts by some people with an anti-ETF agenda, and not much more than that.  If one has bought into that two-dimensional idea, back up a notch and think about it. In order to sell the shares short, the short seller first had to borrow the shares to sell them.  

With us so far?  

Next, all of the shares issued and outstanding already have an appropriate amount of silver backing them.  

Still with us?  

When Mr. Short Seller borrows the shares to sell them short it creates an obligation on the part of Mr. Short Seller to buy the shares back and to return them to the owner he borrowed them from.  The shares sold short actually belong to someone; they are merely lent to the short seller.  

Still with us?  

Okay, so they borrowed shares already have an amount of silver backing them when they were borrowed.  The silver didn’t go anywhere when the shares were borrowed.  When Mr. Short Seller covers his position and returns his shares to the owner the silver will still be there.  It was there all along.  Get that?  

Further, taking the idea to the absurd extreme, requiring a short seller to put up silver to borrow shares would result in double the amount of silver in place for the same shares.  Is anyone suggesting that short sellers put up additional silver to borrow shares that already have silver backing them?  Really?  And if so, when the short seller covers, does he then have to buy back two ounces of silver for each share sold short?  That’s preposterous.  

So readers, please spare us the mail about the “naked short selling of SLV” or anything similarly convoluted.  The only place it is an issue is in the minds of some individuals with a manipulation or anti-ETF agenda. The argument detracts from the credibility of folks that are otherwise doing good work and is embarrassing to read. 

We don’t expect the people that are trying to trump up this issue as “fraudulent” and “manipulation” to “get it.”  They won’t get anything that they don’t want to “get.”  But then most Vultures do know better and are likely laughing out loud at it.     

By the way, ever notice that we never hear of any problem with people who buy SLV on margin only putting up half or a third of the money?  Their use of leverage means that there is artificially more buying pressure than if the people doing the buying had to put up all the money, does it not?  So why aren’t the natives complaining about short sellers not having to put up double the amount of silver for each share sold short also complaining about people buying shares using leverage?

Some people may not “like” the idea that SLV shares can be sold short, but they ought to.  Because shares borrowed and sold short can act like 100-octane rally fuel, especially when the short interest is abnormally high.  The buying pressure of short sellers being forced into covering by a rallying silver price is every bit as real as their selling pressure was when they borrowed the shares and sold them short.  We suspect that short-covering buying pressure will show up at some point as SLV adds back some of the metal that now has other name tags on it.  We’ll see.


Everyone is free to make up their own minds about such things, but we believe there is one thing about the large short interest on SLV that may go unnoticed. The fundamentals for silver are plenty bullish.  If there are that many retail and hedge fund group on the short side of a silver ETF, just remember the rally fuel that represents should silver catch a bid about now … or soon.  

That is all for now, but there is much 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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