"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, March 9, 2011

AM Silver Comments

The chart pattern on the 4 hour basis shows us pretty much the same thing as yesterday - Silver runs into strong selling whenever it approaches $36. Part of this can be attributed to the vagaries of the crude oil market which is swinging up and down depending on traders' perceptions of the events in MENA. 

When crude dips, silver seems to lose upside stream; when crude rises, it moves up. The problem is the same as yesterday however; there is very little upside volume. All of the volume is on the downside moves. That continues to trouble me. If the bulls cannot muster any more power to the upside, some of the older longs are going to get stale and will probably liquidate unless the metal can take out overhead resistance above $36 and HOLD ABOVE this level.

As noted on last evening's chart, silver has tended to work off the bearish chart signal on the MACD (other indicators not shown as well) by moving sideways above a horizontal support level and thus consolidating while it then builds enough of a base to launch another leg higher. 

What concerns me is the fact that during the last consolidation phase, the dips lower in price were on low volume while the blips higher were where the strong volume was. Clearly buyers were eager to come in. Now we are seeing a change from that pattern where the buyers seem more eager to run on the way down.

It is not the end of the world but as stated above, the bulls will need to hold horizontal support near and just above $35.50 for a repeat of the prior performance the first week of this month.

On the delivery front for the March contract - we finally saw a decent number of deliveries - 79 to be exact - with Morgan and BNS issuing the bulk of those and Barclay's the biggest stopper of the metal. Morgan was issuing for customers and not for the house account. The EFP's were all done in the May once again, 1,612 of them; nothing in the March. If Morgan is supposedly paying a cash premium to longs in lieu of delivering, it is not showing up in the March contract. Could they be doing this in the May? It is unclear at this point. Perhaps we will be able to decipher some of this come Friday's COT report but I doubt it. Incidentially, there are 1,516 contracts still open in March silver.

See the chart for some short term support and resistance levels. The key for silver will be whether or not it can hold $35.50


  1. Hi Dan -
    follow up EFP question from yesterday - where are you getting this data? I mean the 1612 May EFPs. Do you get any more info on that? who is on each side? premium/discount?

  2. KD, I believe Dan's referring to PNT's - "privately negotiated transactions". I'll be corrected if I'm incorrect here.


    3rd column from the left under "SI FUT"

  3. I'm having trouble reconciling silver being in backwardation and, at the same time, faced with heavy (potential) selling. I know it is all (almost all) paper silver, but still......

  4. @Caramel - thanks a lot - that's exactly what I was looking for. Unfortunately, it's very tough to draw conclusions if we don't know the prices.

    All of this "cash premium" nonsense originates from Harvey Organ, who uses deductive reasoning and incomplete understanding of futures markets to draw bad conclusions, and then spread them like wildfire amongst his silver disciples.

    March futures still trade, and they trade for a specific reason - so that traders can close out unassigned positions if they so desire. When they do this, Harvey rants about "Blythe" and "fiat premiums" when in reality, it's how trading works.

    I would love to see Dan explain this to Harvey.

    The reason I care is that I find it much much harder to trade silver when there's so much faulty noise in the community - it makes it really hard to get an accurate sense of what's going on, and what's driving price action.

  5. @Kid Dynamite - Interesting. I am curious, though, as to why a trader would deposit and therefore lock up the full contact value on 1st Notice day, earn nothing on it for a week or two and then just close the contract out without taking delivery. Thousands of contracts have done just that so far this month.

    Seems like a strange thing to do, and I can't see any financial incentive that would explain why so many people would do this.

  6. @Quintus - there are multiple reasons - 1) for professional traders - they are funded anyway, and want flexibility. Don't forget, silver riped during the last two weeks - it's not the slightest bit crazy to think that more traders would want to take profits at higher prices 2) for retail traders: maybe they listened to Harvey ORgan and figured they'd line up to get their big fat cash settlement premium that he told them about. So they funded their account, and then realized that it was a pipe dream and that in reality, nothing of the sort was happening...

  7. tfmetalsreport.blogspot has a post today regarding a november missive from an insider who says $36 is a critical figure, above which JPM's losses from shorting silver market become exponential. Is this why the silver price is stuck?

  8. Dan,
    you refer only to COMEX volume. But shouldn't we look at volume in the aggregate, including spot market volume?

  9. Turdle;

    Quick answer - No,
    We are not trading the spot market but rather the Comex and that is what the volume readings are keyed to.

  10. janrom,

    there is no contradiction between silver being in backwardation and heavy trading volume, even heavy selling.

    If silver is in backwardation, this means that if you swap your silver for US$, you receive interest rather than pay interest. If there were no risk premium, then you would have to pay the risk-free US$ interest rate plus storage expenses, and silver would be in contango.

    Backwardation tells you that the risk premium that you might not get your silver back, is greater than US$ interest plus storage expenses plus the risk premium that your counterparty does not get their US$ back.

    Since there are in excess of 10000 tonnes in the ETFs and probably another 10000 tonnes in allocated silver accounts, there cannot be any shortage of silver. Shortage in this context would mean that there is no silver on offer at arbitrarily high price. Mine will certainly be for sale as soon as someone is willing to pay 1400 US$/oz for it ;)

    Saying that silver is in backwardation because there is a shortage is plain nonsense.


  11. victor "the cleaner", I follow your train of reasoning. My confusion is that I consider silver more to be a monetary metal, just like gold, than commodity. My interpretation of backwardation for monetary metals, such as gold and silver, is that 'longs' want to have theirs now, or as soon as possible, as insurance if the $usd goes hyper. So, the contradiction I struggle with is that these same longs that want protection from the fiat are, at the same time, itching to get rid of (sell) their silver. That is what I struggle with. I have phys silver in my possession, for a reason, and I can not imaging selling it for fiat 'profit' if I dont have the assurance that I can get it back, let alone more of it. (NPV + profit) insilver. Does that make sense?

  12. Dan,
    thanks for your answer, which I understand. If a stock is traded only on the NY stock exchange, then I think volume is a relevant input for technical analysis of that stock. But silver trades in many venues, so isn't aggregate volume the true indicator of buyers' and sellers' convictions? Or, is it the case that COMEX is still the price signalling venue for all other silver trading venues, so studying COMEX volume suffices?

  13. Turdle;

    As a trader of Comex silver, I do not care what the volume might be where silver is trading elsewhere - I am trading that market and therefore the only thing that matters, as a trader, is what is going on in that market. Now, as an investor, that is an entirely different matter because there I am interested in the real physical market for silver. We have learned from watching the Comex that it is more often than not disconnected from what the actual silver market really is doing.

    Again - I am looking at this as a trader and not an investor.
    'Hope this clears it up for you.

  14. janrom,

    > 'longs' want to have theirs now, or as soon as
    > possible, as insurance if the $usd goes hyper.

    In my opinion, the best way of thinking about this is still in terms of the swap.

    Today, you can
    1) sell your silver at spot (US$ 35.95 as we speak)
    2) buy the Dec 2015 future (US$ 35.00)
    and pocket the backwardation of US$ 0.95/oz plus earn interest on the principal plus save storage fees in the meantime.

    You have no inflation risk because your purchase price in Dec 2015 has been fixed at US$ 35.00/oz. So you can just leave your US$ in the bank all the time and ignore how much pizza the US$ buys in the meantime.

    The only reason why you would not do this is because you think there is a chance that your counterparty at the COMEX might not deliver physical on your futures contract in 2015. You can take the numbers and compute how likely the market thinks this is.

    Well, and there is still the doomsday interpretation of backwardation: that the US$ will not exist in 2015 and the banks in which you might have deposited your cash in the meantime, will all have failed by Dec 2015. But then, gold should be in backwardation, too.


  15. Thanks Dan. I wonder how long Comex can maintain its pre-eminent role in the silver market, given that it has a dwindling supply of silver and short positioning by JPM that does not seem to make sense (unless they have offsetting positions elsewhere)

  16. victor, your approach makes sense. your view, as it appears, is that of a professional trader or disinterested party able to evaluate the mechanics of the trade you outlined. The backwardation freaks me right out. For me, not a professional trader, cottage trader, it becomes personal and emotional. How do I evaluate, assess and trust my counter-party? I am thinking that there are other parties (longs) sitting on their stash, happy to forgo the fiat 'profit'. I am thinking, if there is such an easy way to make profit, arbitraging the spread, why is not everybody doing it? The spread should have, in theory, disappeared long time ago. It did not. What do others know that I do not? It makes sense to me that silver, as opposed to gold, is in backwardation first. The CB's dont have silver on their balance sheet, so if we are heading towards the "unknown", then silver would be first to go into backwardation. My feel is that gold will be next - and then game over. Silver is the warning light, would you not consider that scenario?

  17. Victor, I am not a professional trader so thanks a lot for the explanations.

    But I think what you describe is the result of the backwardation but not the cause of it. And if what you describe is what's currently happening, why isn't anyone taking advantage of this seemingly "risk-free" profit opportunity and arbitrage it back to even or contago? Especially when this has happened for quite some time now.

  18. janrom,

    > Silver is the warning light, would you not consider that scenario?

    I agree. For the following reason:

    > I am thinking, if there is such an easy way to make profit,
    > arbitraging the spread, why is not everybody doing it?

    Here is a hypothesis. Some of the bullion banks are experiencing a run on their physical silver reserve, for example, because their account holders request allocation. But the banks have lent their physical silver and cannot recall it quickly enough.

    Since there is no central bank who could swap them some silver, the bullion banks have to synthesize the swap in the market:
    1) buy physical at spot, i.e. cause buying pressure in the physical market
    2) sell the future (matching the maturity of the silver they have lent)
    3) if done under pressure, this will skew the term structure into backwardation.

    Since the other banks know this, they know there is counterparty-risk if the bank initially affected by the run is unable to cover quickly enough. So they won't arbitrage, or at least they won't eliminate the risk premium completely.

    The silverbugs see this and think
    1) I told you so
    2) the banks manipulate the market
    3) silver is scarce
    all three of which miss the point.

    All this can happen without any of the banks being net short or naked short. It is just that their loans are long-term, but their account holders recall the silver immediately. So the bank need not cover a short position, but rather only swap in some silver in order to bridge the maturity mismatch. Of course, such a run may also end badly.

    Backwardation at the LBMA has recently been easing, and so the banks may get away with it this time.


  19. re: Victor

    How is the situation you just described not a manipulation of the market? They lent out allocated silver, isn't that fraud to begin with? I thought allocated meaning that's mine and shouldn't be lent out by the bank? Or maybe I am naive here.

    And one has to wonder why they have to lend out the allocated silver to begin with? And I would imagine this fractional bullion banking must be in quite high a leverage for them to be under such pressure to affect the term structure into backwardation, right?

    Again, didn't you just refute what you originally said "Since there are in excess of 10000 tonnes in the ETFs and probably another 10000 tonnes in allocated silver accounts, there cannot be any shortage of silver"? Now you said the allocated silver might get lent out, so are those there or are those not? If your hypothesis is right (which I suspect so), then at least a large part of those allocated silver is not there. Where have they been and can't be called back equickly enough? Consumed in industry use? Sold in physical market to maintain supply? Or somebody just wanna have fun holding a large chunk of silver?

    IMHO, I think you might not want to dismiss silver bug's claim too qucikly. The point about market manipulation is to create more "supply" than it actually has, swapping metals for different ledgers in different books is exactly that.

  20. Bosco -
    you wrote multiple times in your comment that allocated silver was lent out, but that's not at all what Victor said. He said that customers requested allocation of their silver - which is exactly why it can no longer be lent out.

  21. I was going in debt while I was waiting for my settlement. Thanks to JG Wentworth, they gave me cash for annuity. Now I get monthly payments to help me out with my bills.


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