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It’s hard to overlook the tremendous price volatility that occurred on 4/12, when both gold and silver established new recent price highs, only to fall precipitously by the close of trading. At the time of the sharp selloff, the only market open was the COMEX, with markets in London, China and everywhere else closed. Therefore, it is beyond question that the selloff was COMEX-arranged. Since the only beneficiaries of a price selloff are those short futures, it can be concluded these shorts were behind the selloff. Further, it’s no secret that the shorts in COMEX gold and silver futures had been taking it on the chin. Before the selloff the total open loss to the shorts in COMEX gold and silver was $17.5 billion ($13.5 billion in gold and $4 billion in silver).


The shorts were close to the breaking point. A price melt-up might have been coming. The deliberate price smash may have temporarily postponed that melt-up. In silver, prices never got high enough to alter the physical shortage and lower prices certainly won’t do anything but intensify the shortage.


I have gotten into the habit of only studying the COT (Commitment of Traders) report thst covers futures contracts. I’ve ignored the version that includes both futures and options contracts. I’ve done so for simplicity, since the true net positions in either version don’t vary; and to avoid the matter of options expirations, which add a “jerkiness” to total open interest levels. Additionally, the futures and options report includes a “delta adjustment” which largely excludes those options that are way out of the money. These preconceived notions accounted for me not considering the futures-and-options-combined COT report. As a result, when I did review this report in trying to track down what could be impacting gold prices, I was quite surprised.


There was a shockingly large increase in the total open interest in COMEX gold and silver futures and options since Feb 27. This was on top of the already large increase in the total open interest for futures alone. For futures contracts alone, total open interest for gold increased by about 94,000 contracts since Feb 27, while total silver futures open interest increased by about 30,000 contracts. But on futures and options combined, total gold open interest increased by a massive 314,000 contracts (31.4 million ounces) from Feb 27 to April 9, while in silver the increase in combined futures and options total open interest came to 77,000 contracts (385 million ounces). These are among the largest increases in history.  Much of this massive increase is included in the spread category and is due to covered-call selling against futures contracts, and spreads between different strike prices of calls and puts. But the delta-adjustment feature as to how the combined futures and options report is calculated, also means that hundreds of thousands of gold call options weren’t counted back on Feb 27 or currently because they were so far out of the money. But after a rally of several hundred dollars in gold, more of these out of the money options are closer to being in the money. It is now clear that significant additional losses have been taken by the short holders of gold and silver call options to the tune of many billions of dollars.


And while I have been throwing around many billions of dollar losses on short futures contracts over the past few weeks, now to include billions of dollars of additional losses for those short options (think Bonfire of the Shorts), I would remind you that 16 years ago, the major investment bank Bear Stearns became insolvent and was taken over by JPMorgan. I believe the cause of Bear Stearns’ failure was its short position in COMEX gold and silver futures, when the $200 gold and $5 rally from Dec 31, 2007, to mid-March 2008 caused it to sustain a billion-dollar loss in each metal (which it couldn’t cover). We’ve just witnessed a bigger rally in gold and silver over a shorter period of time and it’s hard to see how there haven’t been casualties this time around. I believe significant damage has been recorded, but the bodies haven’t surfaced yet.


The shorts’ backs are still up against the wall and many are fighting for their financial existence and that’s not something to be taken lightly. But even if they do succeed in rigging prices lower (as the regulators stand by), with a physical silver shortage already evident, lower silver prices will only aggravate the shortage. If there is one thing to be certain of it is that silver prices are still cheap as dirt and that won’t stand for long.

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