In Ted Butler's Archive


My thoughts remain focused on the financial condition of the 7 big shorts in COMEX gold and silver futures. This week’s close increased the open loss to these traders by $400 million, to $5.2 billion. Will these big shorts be able to arrange for the sharply lower prices they desperately need to avert what could be the most pronounced short-covering rally in history?

The resolution of the market structures in COMEX gold and silver depends on whether the 7 big commercial short sellers will be able to drive prices down and induce the managed-money traders to sell aggressively on lower prices. Both factors – lower prices and actual selling by others at those lower prices – are required for the big shorts to eliminate the large open losses and get out of harm’s way. (Why do I keep hearing that background music from the TV cop show – bad boys, bad boys, whatcha gonna do when they come for you?)

Since December 23, the $90 rally in gold has brought the big shorts increasing losses at a much steeper pace than occurred into the previous peak in September. And the environment appears different as well, what with every well-known major investor openly advocating gold and a macroeconomic background more friendly to gold. Importantly, JPMorgan is short much less gold and silver than in the past. Therefore, I’m hard pressed to see how the 7 big shorts come to extricate themselves from a mess they have helped create for decades. Certainly, there is more than enough karma to be repaid should the big shorts start to panic and buy back short positions.

Hundreds of millions and billions of dollars of current open losses is a matter of no small concern to those in charge of such things for these firms. The big shorts are still very much on the hook, as these are open positions. The only effective way to close out these open positions is to buy back the short contracts. The shorts appear to be in real trouble according to my simple mathematical calculations for how much they are out. My only explanation for the massive miscalculation made by the big shorts is their decades of success (in never taking a loss). It lulled them into a false security. So much so that they never considered that they might have to buy back short positions on higher prices.

I would imagine the big shorts have a growing awareness of their predicament because they are required to post sufficient additional collateral to cover open losses. But sensing you might be in trouble and actually doing something about it are two different things.  The only real solution for the big shorts is to not be short gold and silver. But getting to there from where they are now is no simple task. The only legitimate way to close out an open short position is to buy back the position. If that occurs, prices will head sharply higher in a manner that will shock us all.

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