In Jim Cook's Archive


According to silver analyst Theodore Butler, various hedge funds are currently short 440 million ounces of silver on the COMEX futures market. That’s over half the silver that’s mined in a year. These funds manage money for big investors and they rely on computerized trading programs. Human judgements and emotions don’t enter into trading decisions. Their foremost trading strategy is to buy or sell when moving averages are penetrated. If the price of silver or gold moves upward to the point it goes through the average of prices over the past 50 days, it causes some short selling programs to buy and close out their short positions. A penetration of the more important 200-day moving average sparks major buying and can lift the price significantly.

Ted Butler has always called the big short position “rocket fuel.” When prices penetrate the moving averages to the upside, the programed buying reinforces the price rise. The fact that the current short position is historically huge suggests greater price fireworks to come. We know that will happen again because it’s happened many times in the past. Moving averages inevitably get penetrated by prices moving up or down. In the case of silver the short sellers can’t possibly deliver that much silver so they will have to buy back the futures contracts they have sold short.

Here’s where JPMorgan comes in. If they sell when the hedge funds are buying back their shorts it takes the steam out of the price rise. On numerous occasions over the past eight years JPMorgan has built up its own short position to quell a substantive gain in silver. Will they do it again? We know that higher silver prices would be hugely profitable for them because while they have acted to keep the price down in the futures market, they accumulated a gargantuan hoard of physical silver. Ultimately, they want silver to rise in price. Furthermore, for the first time they do not have a short position in COMEX silver. In fact, they are long silver futures to the tune of 25 million ounces. Mr. Butler thinks the timing is right for JPMorgan to stop sitting on the price and let it go. If so, he claims the price rise will take your breath away.

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