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April 18, 2006

SIZZLING SILVER

In the last month or two, the firms who are holding big short positions in silver are out $2 billion or more. This represents a major loss, and I would guess that a few traders have been called on the carpet. I try to talk to Ted Butler every day about these things. We often do some wild theorizing about what’s going on behind the scenes.

Ted points out that to reduce their short position, the big shorts can only cover when silver prices are dropping. When there are sellers, the shorts buy from them and reduce their short position. In other words, when you sell your long position, it releases the matching short. It’s impossible to reduce a short position when prices are rising. As buying comes in, the short positions only get bigger. And if they were to buy in a rising market to cover, then the price would explode, because nobody would be there to take the short side until the price went ballistic. That’s what Ted Butler means when he says the shorts are trapped.

How do they escape? If they can engineer massive selling of silver futures, it lets them off the hook. That’s worked in the past. Ted suspects they’ll somehow manage to pull it off again. If that happens, he sees a great buying opportunity for one important reason. The shorts, having had a big scare, may be reluctant to go that short again. That means a major price rise until at some point they are willing to increase their short positions again.

Ted thinks the ETF is a crazy scheme in light of the fragile silver supply. He has doubted that it would trade. Certainly, the big firms who are short must be concerned about it. Perhaps they have even lobbied against it behind the scenes. The ETF could hurt them in a big way. Imagine the losses if silver were ever to make a new lifetime high. We're talking about the kinds of billions that topple companies and markets.

On the other hand, these Wall Street firms and big banks aren’t stupid. One way out of a big short position would be to have a big chunk of real silver. Ted Butler’s friend Izzy thinks that China might have a supply of silver left. He theorizes that they may be the big short and the brokers and banks are only doing their bidding. Izzy is a shrewd thinker on silver. This is a subject on which little is known and we can only speculate.

Meanwhile, you would think the big industrial users who are watching a price rise in this crucial commodity would want to build up an inventory just in case. Then you have all the silver storage in banks and brokerages that really doesn’t exist, but may have to be delivered if customers ask for it. On top of that, the silver that’s been leased must be squared away either with newly-mined silver or from existing silver supplies. Then you have new investors aggressively buying all types of silver, including 1,000 ounce bars, thus diminishing available silver in the hands of dealers and on the exchanges. All around the world silver is being accumulated for industry, adornment and investment. Now add ETF buying and the possibility of short covering and you have a bullish story that would be hard to duplicate in any other asset on earth. Nothing is guaranteed, and so it is with silver. Risk can’t be dismissed. But so far Ted Butler has been right on the money and he’s just as bullish today as he was at lower prices. Until all of these factors I’ve mentioned get resolved, Ted strongly endorses silver for a percentage of your money.