INCREDIBLE EXTREMES
“Unprecedented” is the magic word this week when it comes to silver and it starts with the new Commitments of Traders (COT) report, which indicates for the first time in history that JPMorgan has eliminated its short position and is long silver in the futures market. Also unprecedented is that the traders classified as commercials are now more long than short for the first time in history. Since June 12, the commercials have been on an unprecedented and documented buying spree of nearly 82,000 net silver contracts, or the equivalent of 410 million ounces, as the price of silver plunged by $3 or 18%. JPMorgan has accounted for 42,000 contracts or 50% of the total commercial buying and is now long 2,000 contracts.
Based on this easy-to-document data, a number of questions arise. If the commercials bought so many silver contracts, how could silver drop so much in price? The alternative question is who the heck was selling as the commercials bought so much? The answer, of course, is that the managed money technical funds were the big sellers. (These are computer-driven funds that automatically buy and sell when the moving averages are penetrated or on other momentum indicators. They have billions of investor and institutional money.) Therefore, if you are looking for an explanation for why the price of silver dropped by close to $3 in less than three months it was due to this managed money selling (mostly new short selling).
Based on the June 12 COT report, I had estimated JPMorgan held a net silver short position of 40,000 contracts (up nearly 20,000 contracts from May 1). The Producer/Merchant category (where JPM is included) of the disaggregated COT report of June 12 indicated a net short position of nearly 54,000 contracts, of which JPM accounted for 40,000 contracts. In this week’s COT report of September 4, the net short position of the Producer/Merchant category is down to 11,000 contracts, 43,000 contracts fewer than on June 12. You can take it to the bank (no pun intended) that this was purely the handiwork of JPMorgan.
Please remember that JPMorgan has spent the last 7 years methodically and almost maniacally accumulating 750 million ounces of physical silver and it is long 2,000 contracts (10 million ounces) as of Tuesday. It was net long 760 million ounces overall, the most it has ever been net long in history.
The 8,300 new contracts sold short by the managed money traders this reporting week brings to 104,400 the total number of short contracts held by the managed money technical funds, the equivalent of more than 520 million ounces of silver. Held by 62 traders in total, this is such a large amount of silver to be held short that it is nothing less than stupefying. Since June 12, managed money traders have added over 61,000 new short contracts. What in the world could ever justify the assumption of such a recklessly dangerous position?
The coming resolution is potentially epic since it pits what has to be single most clueless group of traders on the short side against JPMorgan – hands down, the most powerful, connected and ruthless trader ever to exist. How many more silver contracts can JPMorgan possibly buy from the managed money traders? We are past the point of ridiculously low prices and incredibly large amounts of managed money short selling. We have passed both metrics by such wide margins that it raises the question if anything is impossible. I call this massive short position rocket fuel for an upside move.
The previous all-time record managed money short position of 73,832 contracts was established this past April 3. At $16 it was reasonable to assume such a low price and short position watermark would not be exceeded. Yet here we are, close to $2 lower and more than 30,000 contracts higher than those historic extremes. To my mind, this is just a testament to the cleverness of JPMorgan, master of market manipulation. The current extreme new record means, mathematically, we are much closer to the ultimate record and a reversal to the upside. That means a price rise of monumental proportions – all because that will benefit JPMorgan the most. We are in an unprecedented and monumental set-up not likely to be seen ever again once the price reversal to the upside takes hold.
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