In Ted Butler's Archive


The one positive thing about the default in LME nickel is that it serves as a template for what will happen in COMEX silver should the concentrated shorts ever try to buy back short positions on higher prices – something that has never occurred. However, the example in LME nickel woefully understates the actual situation in COMEX silver. For one thing, the concentrated short position in COMEX silver is the most extreme of all commodities, making the equivalent short position in LME nickel look like a joke. Had there been close to an equivalent concentrated short position in LME nickel, the shorts would have been destroyed long before the one-day doubling of price that caused the exchange to default. In COMEX silver, the concentrated short position has existed for nearly 40 years – fully explaining the depressed price over this time. No other commodity, except COMEX silver, has been similarly suppressed for so long.

What’s frustrating is that while most everyone seems to recognize that silver is super-cheap, the sole reason for the depressed price – the concentrated short position – is hardly mentioned. I’m hopeful that the events in LME nickel might contribute to greater appreciation of the concentrated short position in COMEX silver. It’s hard to imagine the persistent and growing physical tightness in both retail and wholesale forms of silver dissipating under the prospect of continued depressed prices. That’s simply not how the law of supply and demand works. Low prices encourage demand and discourage supply. Continued low prices will only exacerbate the current tightness. You don’t increase supply and reduce demand – which is what is needed in silver – with low prices.

Of course, there has to be something accounting for actual supply being sufficient to satisfy demand in silver of late. The explanation has been JPMorgan supplying sufficient quantities of physical silver in the form of deliveries on the COMEX and, most likely, in selling shares of SLV. JPMorgan has issued, in its own house account, 33% of the total silver contracts (3419 out of 10,373) issued this month in the March deliveries, after delivering hardly any in the previous year. That’s more than 17 million ounces in COMEX deliveries (and maybe 30 million ounces in sales of shares of SLV).

I would contend that these physical sales of silver by JPMorgan have prevented the developing physical shortage from resulting in higher prices. In the truest sense possible, the release of physical silver from JPMorgan has enabled the collusive COMEX commercials to have their way with silver prices. Without the physical sales of silver by JPM, prices would have had to rise. In effect, JPM bailed out the concentrated COMEX silver shorts. It’s not hard to see where JPMorgan got the physical silver to deliver, as it spent nearly a decade accumulating physical silver (and gold), and, in effect, is the only entity holding physical silver in sufficient quantities with which to deliver.

More important is trying to understand why JPMorgan would bail out the COMEX shorts and what it intends in the future. From JPM’s perspective, now was not the right time to allow silver to explode in price. With everything going on in the markets and in the world, it appears to me that JPM, for its own reasons, decided that now was not the time to let silver run free. Try to think of this as JPM owning the golden goose (its massive physical silver and gold holdings) and instead of cooking and killing the goose, it seeks to preserve the goose’s laying of golden eggs for as long as possible.

The bottom line on all this is that we are still set up to explode upward in silver, but that one entity, JPMorgan, controls the timing. JPM controls just about everything in every commodity market (with LME nickel being a current example), so I’m not suggesting anything really different in silver.  But the bright side to all this is that any investor, large or small, can do something constructive about this in silver that can’t be done in most things, like nickel. I wouldn’t begin to know how an investor could buy nickel directly. But with silver, there are countless ways to own silver and that is a big positive. Plus, since silver is so cheap, due to the manipulation, it’s available at inflation-adjusted all-time price lows. Try to name a vital commodity trading at 50% of its price high of more than 40 years ago or of 11 years ago.  Any risk seems to be negligible for long-term holders.

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