"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

Trader Dan's Work is NOW AVAILABLE AT WWW.TRADERDAN.NET



Thursday, April 21, 2011

A BRIEF CONSIDERATION OF SILVER'S OPEN INTEREST

Time permitting, I hope to have more on this later but wanted to throw a brief comment or two about silver's rocket move higher.

This has been a strange market to read with what I consider to be confusing CFTC COT reports and various changes in the daily open interest as well as all manner of rumors surrounding the delivery process. If I had nothing to go on but price action, I would say that a large short or shorts are in serious trouble and are attempting to get out but are not being allowed to by some very big and committed buyers who are going after them. I have seen enough cornered shorts being hounded by wolves who smell blood in the water during my trading career to be fairly confident that this is behind some of the price action in silver.



However, based strictly on the changes in open interest it is unclear if this is actually occuring. The sharp push from $34 to $42 was accompanied by a rather sizeable increase in open interest indicating that it was not primarily driven by short covering. If anything, fresh shorts were piling in, each of them attempting to pick a top or with other purposes in mind and kept on coming in as silver moved an incredible $8 higher in less than a month's time.

From $42 to $44 there was short covering occuring as some of the shorts were throwing in the towel and giving up leaving a lot of blood on the floor of the pit as they departed. However, once again the open interest has stabilized and actually ticked up some Wednesday as price soared above $45. Clearly some new shorting is occuring as top pickers are once again trying to strike what they think is paydirt. I am especially eager to see the numbers from today's sharp push through $46.

At some point the top pickers are going to get it right but as long as they keep coming in and the determined buyers keep showing up, we should see more bouts of this sort of change in open interest - namely - it increases as these fresh shorts take on the new buyers only to see the same shorts run for cover and close out their short positions with large losses as the market buying pressure forces them out. The process can then repeat with open interest rising and then subsequently falling and then repeating again.

If we do indeed get a serious short squeeze, and I mean one in which we see a total capitulation of the large short that has ruled this market for many years previously, we are not going to see any increases in open interest but rather a sharp fall in the total OI as they finally and completely give up. Whether that happens is anyone's guess. I would have thought it would already have commenced seeing the enormority of the paper losses that are accruing to those on the short side of this market. The margin calls and the need to constantly raise more cash to maintain these deeply underwater short positions must boggle the mind at this point.  Just the run from $34 to $42 was a loss of $40,000 per single contract! Imagine holding hundreds if not thousands of these!

Having been on the wrong side of a market at various times in my career I can tell you from firsthand experience, the emotions that one deals with run the gamut from fear to despair to panic and total desperation. It is a horrid thing to live through mainly because the losses mount at such a rapid clip. What makes matters worse is that you keep waiting for a setback in price, any setback, to try to buy back those shorts and it never seems to come. Prices just keep going up and up and up and up. You learn very quickly the terrible, awful power of leverage gone awry.

We will just have to wait and see how this all ends but for now, with so many apparently eager top pickers coming in, it is difficult to say that this thing has run out of upside just yet. They are providing the firepower to take it higher as they are forced into buying it all back at a higher level and taking their losses with them. Perhaps when we see an end to efforts to pick a top, this thing will actually top out. Either way, it has been one helluva ride already. The thing is that if you look at silver in inflation adjusted terms, the gray metal is still cheap by comparison to where it was in late 1979, early 1980.

21 comments:

  1. Dan,
    What do you think about large increase in the SLV trading volume? Could it be related to the leasing of SLV by COMEX shorts?

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  2. Hi Dan - Thank you for the post and the blog. Appreciate the time and effort you put in along with the detailed commentary! Enjoy the Easter weekend. Thanks again - Sanjeev

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  3. Thanks for the insight Dan, we appreciate it.


    Any idea why the metals seem to have been trading over night and appear to stll be doing so even if it's really light volume?

    Are these computer programs sorting out late trades or bids Thursday night or in the Asian market?

    Have a nice Easter holiday!

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  4. Hi Dan,
    A long time reader from JSMineset here. Much appreciation for all you work and expert insights. I have couple of quick questions.

    1. It seems from what I can see, that much of what is happening in silver is in the far east. Is there any way of knowing the volumes there and how much the moves in the east will affect our ability to be able to get a good technical picture of what is happening?

    2. I notice that you have been using the Andrews Pitchfork to plot out your trend channels. What are the advantages that you see in this over using a regression channel, and what are the situations where it is best used.
    Many thanks,
    Don de Belle

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  5. Thanks a lot Dan. I learn new things every time I read your blog. And I read you every day. I really do appreciate the time you spend sharing your knowledge and experience. I find it really helpful in understanding what’s happening in this market.

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  6. Hello Dan!
    First time caller... And I am wondering if behind the scenes that the Chinese are behind the big AG move? Is there a way to tell? Could they be trading treasuries for silver?
    Just a crazy thought.
    I'll hang up and listen.

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  7. Well, one can still follow the action on BullionVault for physical stocks, it's always open...Silver was trading around 47.50 $ today.

    Thanks Dan for all this great input. It makes things much clearer now for me, really helpful!

    An academic question : I hear a lot about a historical gold/silver ratio of 16. But the lowest ratio during the peak in the 1980's was about 30. Could be a strong support for the ratio, right? At least on short term...

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  8. Thanks Dan. Great job.
    I would like to share with everyone gold's relationship to other assets.

    http://lonerangersilver.wordpress.com/2011/04/22/john-exter%E2%80%99s-inverted-pyramid-of-assets-2/

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  9. The shorts appear to be in even more trouble come Monday Dan! Silver hit $47.90 today on electronic trading!

    http://silverdoctors.blogspot.com/2011/04/burn-jp-morgue-burn-silver-hits-4790-on.html?showComment=1303494848024#c8800364704101064557

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  10. What's with the silver chart today?

    I'd like to get Dan's opinion on today's chart and what's going on with it.

    Spooky Silver Chart Report

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  11. "....the emotions that one deals with run the gamut from fear to despair to panic and total desperation. It is a horrid thing to live through mainly because the losses mount at such a rapid clip."

    I can attest to that! However as a large bank that receives taxpayer bailout money to speculate with, I'm sure they feel confident that their losses will be covered and their emotions, not to mention their bonuses, are well in check.

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  12. I posted this comment previously & am hoping for some helo!

    Not really sure if I am out of line for asking..so I apologize if that is the case..

    I have an Engelhard 100 oz silver bar... should I sell it? Hold it?

    Should I buy SLV stocks now for a long term investment or should I wait to buy stocks later (if the value of silver goes down?

    I am not an investor - just a gal who happens to have a 100oz bar in this silver-bull-et market and some cash to invest.

    Just trying to figure out a good move to make...

    Your thoughts?

    Thank you!

    Elizabeth

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  13. "I have an Engelhard 100 oz silver bar... should I sell it? Hold it? "

    -Hold it


    "Should I buy SLV stocks now for a long term investment or should I wait to buy stocks later (if the value of silver goes down?"

    - Buy mid-tier, producing miners (EXK, AXU, GPL) - these are the guys that the majors (NEM, ABX) are going to be gobbling up in the next couple years.

    Trader Dan-

    You and Turd are both on your A-Games today....


    Best


    Post


    EVER.

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  14. Absolutely riveting piece, Dan, but I just cannot shed a single tear for a silver short.

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  15. Beware FOMC on 27th.
    Maybe thet'll announce end of QE2?
    Wouldn't it be a sensible next move in terms of communication from the FED?

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  16. Elizabeth,I would keep your bar,wait for prices to chill down a little bit, then buy more physical silver as you can afford.

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  17. there's no covering because the shorts belong to the US Treasury.

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  18. Just found Dan's, thanks for the insights...

    BTW it does not have to be one large seller, it is more likely a good few besides the suspect banks. It can be rouge bank traders, headstrong hedger and even governments.

    Some important decision makers do not exactly know how the futures or forward markets work.

    Is it hard to visualize (just an example) that a Chinese property billionaire - self made man who does not need anyone els's opinion - decided that the easy money would be on the short side of Silver?

    An actual example: as a commodity broker I had an Iranian hedging client in Soymeal in the seventies. This young man was a regular buyer. One day, after a multi week run up, he gave me an order to short a large quantity.
    Within days the patriarch of the family found out about this but by that time markets were limit up and they remained limit up for over two weeks. In the middle of this the father flew to NY to find out if they could PAY SOMEONE OFF to get them out of their position.

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  19. This is from Eric King's Blog:
    KWN’s London source has updated King World News on the massive Asian buyers which have been accumulating gold and silver.  The London source stated, “$3 to $4 dollar days in silver will become common, from now on $2 days will be considered slow.  There will be a great deal of volatility going forward, but more often than not silver will close near the highs.”

    “Right now the silver shorts are being flushed out in Asian trading on light volume and we have options expiration ahead of us.  38,000 silver contracts are in the money and the question is how many will ask for delivery? 

    As I mentioned to you previously, the Asians have also been taking delivery of silver out of SLV and will continue to do so.  You have to understand that these Asian buyers are planning to take delivery of all of the available phyiscal silver they can get their hands on and will continue doing so for the foreseeable future.” 

    When asked at what price the Chinese will stop buying silver the London source replied, “The Chinese want out of dollars and they will continue aggressively purchasing both gold and silver in order to diversify.  They don’t care whether silver is $50, $60 or $100, they will just continue accumulating.  The Chinese may be patient buyers, accumulating on weakness, but you can bet that their relentless purchases of physical silver will eventually push the price well over $100 an ounce.”

    As Dan Norcini and I discussed this weekend on the KWN Weekly Metals Wrap, the Asians are steering the bus in the silver market as the paper shorts lost control some time ago.

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  20. Thanks Dan ! What I think that it is very useful post for me. I am able to know many things about the silver and gold. I enjoyed the throughout post..very well written..

    Vintage rings

    ReplyDelete

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