In Ted Butler's Archive


Last fall, for the first time in years, the managed-money technical funds didn’t add to COMEX silver short positions as they always had on similar previous price declines. The managed-money technical funds have hundreds of billions of dollars of investor assets under management. They have well-known industry trade associations in which mutual concerns are addressed. The failure to go short silver a few months ago could only have come from collective deliberation and cooperation on the part of a number of managed-money technical funds. The decision not to add aggressively to COMEX silver short positions may have signaled that the worm has finally turned.

The most logical course of action for the managed-money traders would be to turn the tables. How would the managed money traders do that? By not doing what has always been done and what is expected by the banks. Not going short silver in the fall may have been only the start. From the end of December, the technical funds added 40,000 new silver longs (200 million ounces), a large increase that lifted the total managed money long position to more than 95,000 contracts. By my estimate, the average price at which the technical funds added the 40,000 net silver contracts over the past two months is around $17.30. I don’t think I recall a larger managed-money silver long position at such a low price.

Let’s look at the shorts. JPM has been the big COMEX silver short for the past nine years, but it has also built up the largest physical silver stockpile in history of some 550 million ounces, thus immunizing the bank against any net loss on rising silver prices. There’s no way JPMorgan could not come out way ahead in a silver price rally. But the same can’t be said of the other 7 large commercial shorts on the COMEX, mostly foreign banks.

Subtracting JPM’s short position (30,000 contracts) from the net short position of the 8 largest traders leaves the 7 remaining traders short by 72,000 contracts, the equivalent of 360 million ounces. That’s an average short holding of more than 10,000 contracts or 50 million ounces for each of these 7 short sellers. Every dollar movement in silver has a collective impact of $360 million in open or unrealized gains or losses. A $3 jump in the price of silver would create unrealized losses to the 7 big shorts of nearly $1.1 billion.

If the technical funds don’t sell, it’s hard for me to see how some of the big silver shorts, once they realize that the game has changed, won’t panic and – for the very first time ever – rush to buy back silver short positions. This is my double-cross premise, with both JPMorgan and the newly awakened technical funds putting it to the 7 large COMEX silver shorts. Should this all kick in, it’s hard to see how silver prices won’t explode.

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