In Ted Butler's Archive


A theme I haven’t discussed in a while is the workings of SLV, the big silver ETF. I know many feel it may not hold the 317 million ounces said to be held by the trust, but I don’t agree with that. My concerns about SLV have centered on its large short position at times. The physical ownership of silver in one’s own possession or segregated storage is preferable to holding shares of SLV. But as an analyst I can’t ignore the largest visible stockpile of silver in the world.

Very early on my friend Carl Loeb coined the phrase “Death Star” to describe the impact the SLV could have on the silver market. This was due to the open-ended set-up of the trust that required new physical silver be deposited in accord with new shares being bought and created by investors. Obviously, there is no real limit on world investment buying demand, certainly compared to the finite amount of physical silver available for purchase. Therefore, it was easy to see Loeb’s analogy – the collective buying power of the world’s investors could quickly overwhelm the amount of physical silver (in 1,000 ounce bars) in the world.

In fact we saw an unmistakable confirmation of Loeb’s premise, as silver prices rocketed to their highs in April 2011, just as holdings in SLV surged to a record 360 million ounces from zero five years earlier. What drove silver prices to nearly $50 in early 2011 was physical demand, not COMEX paper positioning, and the biggest component in the physical demand was buying in SLV. The Death Star analogy is more critical in silver where the dollar amounts of available physical metal are measured in the billions and not the trillions, as is the case in gold.

Subsequently, JPMorgan was able to break the back of investment buying by rigging silver and gold prices lower from their peaks in 2011. What prompts the revisit to analysis of SLV has been a surge in trading volume over the past few days on the recent price move higher. Even though silver demand has definitely reawakened, I was taken aback by the relative surge in volume in SLV, particularly considering the holiday season. Since the volume occurred on the four days into Dec 31, and no deposits of metal have been forthcoming, we will likely see an increase in short selling.

If there is one single premise I have held during the time of JPMorgan’s leading role over the past near 11 years, it is that if JPM doesn’t add aggressively to shorts on any rally, then silver prices will fly higher. I don’t think silver prices have begun to fly, but they have moved higher at a time when it doesn’t appear JPM has been adding aggressively to shorts. Of course, we must wait until there is official corroboration from CFTC data and, as you know, that data is not available due to the government shutdown.

As recently as June 12, JPMorgan held 40,000 silver contracts short, which was just about equal to its previous maximum silver short position over the years. Not only was it the biggest silver short seller, it was close to being the only commercial shorting silver at all. After covering its short position into the price depths of September, JPMorgan turned around and re-shorted 15,000 new contracts over a piddling rally in October. Then the news broke about the Justice Department’s criminal guilty plea and JPMorgan quickly bought back the 15,000 newly shorted contracts on a hastily arranged price selloff.

JPMorgan appears to have shorted far fewer contracts than it has previously. This confirms my premise that JPMorgan controls silver and gold prices. JPM shorts aggressively, prices get capped; JPM doesn’t short aggressively, prices move higher. This can’t be lost on the Justice Department. Therefore, the preferred approach is to remain fully exposed to the upside, even in the face of potential downdrafts. It is said that they don’t ring a bell at market bottoms or tops. But sometimes they make a press announcement of the sort made by the Justice Department on Nov. 6 and that changes everything. It’s a good time to own silver.

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