"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


Sunday, June 24, 2012

Deciphering Silver

The internet has been awash with comments recently about the downdraft in silver and the strong increase in Open Interest on last week's big down day. As usual, the chatter is about an orchestrated attempt by JP Morgan to smash the price of silver lower so that they can cover their "losing short position".

Let me first state that I am a firm believer in the view that the US government has a vested interest in controlling the price of gold. Being a good friend of GATA, we both have ridden through the ups and down of this together for the last decade. However, that being said, not every move lower, particularly in the Silver market, is the result of efforts by Morgan.

Part of the problem that some of the authors have, authors whom I might add see every single move lower in silver the result of price capping by Morgan, is that they do not understand how traders, particularly large traders, react to changes in sentiment and how they will adopt defensive strategies to cushion themselves against further losses until they can better sort out what they want to do next. These would do well to understand the nature of spreads and the ability to use spreads as part of a strategy to cushion against losses while in a defensive posture.

Take a look at the following chart of the CCI, the Continuous Commodity Index, versus the price of Silver. I mentioned not all that long ago, that silver was not going to go anywhere until the chart of the CCI turned solidly bullish. Why? Because Silver, for all of its history as a monetary metal in many places around the globe, is still regarded by large hedge funds and other large investors, as a RISK ASSET; one that performs strongly during periods in which INFLATION is the main concern.

Look at the solid black line which is the CCI. Notice how it has been moving relentlessly lower ever since it topped out near 700 back in April 2011. Now look at the solid red line, which is the closing price of silver. It topped out that same month near $50 and has been headed relentlessly lower also. Why? Because traders increasingly became convinced that the global economy was slowing, being impacted by woes out of Europe as well as near stagnant conditions across the US and elsewhere.

As a matter of fact, the chart patterns between the two, are very similar and have been almost identical since September of last year.

Now take a look at the following chart detailing the Commitments of Traders report.

I have noted the various categories of traders on the Legend below the chart. Look particularly at the blue line in the positive section of the graph. It is important to note here that this is the NET LONG position of the hedge funds. Note how it peaked and then turned lower in September of last year, then moved solidly lower until the beginning of the year when it began to turn higher once again. What was that all about? Once silver peaked near $50 the sentiment shifted across the entire commodity complex and soured all the way into the end of last year. Then, at the beginning of this year, traders began to expect action in the Euro Zone from the ECB with some help from the Fed. They thus started to rebuild long side exposure to the entire commodity complex. That buying drove silver prices $10 higher to start the first two months of this year pushing it to near $37.50 in February. That was it - from then on, it has moved steadily lower on a monthly basis tracking the CCI nearly tick for tick.

What does not show up on this above graph however, is the actual NAKED SHORT POSITION of this same category of traders. For that, take a look at the following graphic. Can you see what is taking place? Hedge funds are building short side exposure to silver. I have only included the last 18 months worth of data but as you see, a mere month ago and this category of traders has been as bearish as they have been in a good while.

 If we draw out the chart a bit longer, it becomes quite insightful. Notice back to the summer of 2008 when the credit crisis first erupted. The outright short position of the hedge funds is now even larger than it was at that point.

If you combine this with the fact that even as hedge funds are LIQUIDATING long positions in silver there is at the same time, some funds in this category whom are now building SHORT positions, it does not take much market understanding to realize why the price of silver is moving lower. It DOES NOT TAKE JP MORGAN 'smashing silver' to knock the price of silver lower. If anything MORGAN is using this hedge fund activity to actually cover their NOT LOSING short positions as some of these commentators keep telling us, but their EXTREMELY PROFITABLE SHORT POSITIONS.

For the sake of time I am not going to put up a chart of the Commitment of Traders of Copper, but suffice it to say, that hedge funds have begun building short copper positions in there this year also. Note the Copper peaked in February of this year, the exact same month as Silver peaked. Was JP Morgan "smashing copper lower to cover their losing short bets"? The answer is obvious - of course they were not - the hedge funds are taking copper lower just as they have been taking silver lower. Why? Because Copper is also viewed primarily as a RISK ASSET, just like silver, and a harbinger of the rate of growth expected in the global economy.

Silver has been finding good buying near and just above the $26 level from some big players. This buying has been of sufficient size that it has been able to absorb this speculative type selling originating not from Morgan, but from the hedge fund community in general. As long as these buyers continue to see this level as a good VALUE, silver will hold. If they pull back for any reason, hedge fund selling is going to take this market lower. It will not be Morgan that does it.

The conclusion to all of this is simple - as long as the environment persists in which traders are more concerned about slowing global growth and/or deflationary pressures, both silver and copper for that matter, will find it difficult to mount any sort of sustained upside activity. Note that I said, "Sustained". That means that we can and will get occasional upside moves higher when sentiment temporarily shifts and traders expect Central Bank actions to be of sufficient size and scope to counter the deflationary forces building in the global economy or economic data looks positive in some instances. But until we get something that occurs that will ACTUALLY produce a more lasting impact in that regards, hedge funds will be selling rallies.

Once again, the ball is firmly in the court of the Central Banks.


  1. Lots and lots of respect to you, Dan, for this post. At last, something sensible on what's moving the silver market.

  2. well done Dan - the silver conspiratorialists will perhaps respect this reality when it comes from your mouth, as opposed to the mouths of those they views as "bankster shills" - a list which I am, strangely, a part of...

    a simple post could also be written on the absurdity of
    "smash the price of silver lower so that they can cover their "losing short position". "

    after all, anyone who has ever actually traded anything knows: yes: large players can indeed influence the price of an asset - by selling it, for example - but then they have the same impact when they go to reverse their trading activity. Which is to say, simply, if you smash the price of something by selling it, you drive the price back up by buying it (covering it)

  3. Very good work .... Finally some common sense and realistic anslysis as to what is driving the silver market. THIS is what the silver investment community needs more of.


    Dan D

  4. Much appreciated. I'd sure like to see a discussion between you and Andy Hoffman of Miles Franklin. I suspect he is one of those you refer to as seeing the hand of JPM in every down draft and provides chart illustrations to make his points. For many - probably most - of us separating the wheat from the chaff is all but impossible. Sneed (of the North)

  5. @KD - I'm often a fan of your comments, as you know, but, on a point of order here, I'd like to push back on your short/long scenario.

    I used to trade Forex and it was all about making money in both directions. So, yes, one would short all the way down and then cover. But then one would flip and go long all the way up, before going short. Provided that one gets the direction of play right (a big 'if', of course), it works beautifully as a strategy. So 'smashing in order to cover' does make sense from a trading perspective. Of course, the corollary is driving price higher in order to short...

    All of which is why I assume that the bullion banks et al. don't really care if the price goes up or down - provided that there is volatility there. The worst nightmare for such traders is a static market.

    1. no Jeanne - you are talking about small traders! if your order has impact - ie, YOU are the one moving the price, you can't just magically cover at the low... the same impact that "smashed" prices will rip prices higher when you buy back your short.

      that's entirely different from "shorting all the way down and then covering" or "going long all the way up before going short"

      next, someone will say "oh, well they trigger stops, forcing longs to sell to them." sure- maybe - that's trading. but no one is forced to do anything: if longs get their stops triggered, that's their own problem. But moreso, shorting to trigger stops and cover is not something any trader would do to REDUCE their net short exposure. at best, you're going to come out even (exposure wise), and still be left with your initial exposure.

    2. further to my other comment, Jeanne, in order to simplify: this has nothing to do with "making money in both directions" which of course all traders try to do. different topic!

    3. @KD - a very fair point. But are we really saying that just one entity is moving the silver market (or Forex or commodity or whatever market)? Of course, if only one entity is in the marketplace then a short of 10 units promptly covered by a long of 10 units will gain no reward.

      But markets are not yet (at least by my understanding) working like that. Let's say, for example, that there are five entities trading, and each will trade ten units at a time. If entity 'a' gets on the right side of the trade and shorts ahead of entities 'b' to 'e', then a profit will be made, no? And vice versa?

      One thing that metals commentators say, which makes some sense, is that markets are reduced to hedgies vs. bullion banks, with smaller investors removed from the scene. Let's assume for the sake of argument that that is correct. In this scenario, entity 'a' becomes, say, JPM or UBS, and entities 'b' to 'e' are witless hedge funds. In this case, JPM/UBS becomes the 'small trader', front-running the bids/asks of the other entities, and they make serious coin. The genuinely small investor wins or loses depending on their ability to follow this flow.

      Just a few thoughts from a very non expert trader... :-)

  6. Dan, excellent articles like this are going to get you kicked out of the metals mafia.

    Interestingly, two of the greatest offenders of the "JPM is responsible for each and every down-tick" nonsense are on your blogroll (Jesse and TF). Perhaps its time to cut them loose?

  7. In may/2011 cartel raised margin requirements 5 times on silver in one week. Tell us more about fair markets and how JPM is not involved in this. This is just ridiculous.

    1. Lots of futures markets margin requirements get raised - copper, bonds and yes silver too. If there is manipulation from hiking margins than it is not just in silver market.

    2. May 1, 2011

      Did a bunch of hedge funds all decide at 6pm on a Sunday evening to sell and short so much silver that it would drop by $6 in a matter of minutes? This is the same evening that Obama announced the killing of Bin Laden.

      I agree with Dan that not all sharp moves are brought about by JPM but one shouldn't ignore the fact that they are the biggest manipulator and have the greatest impact. They do this with impunity and the margin hikes in silver, when done in succession to obviously hammer the price of silver, has JPM's and the fingerprints of the US govt all over them.

  8. Hi Dan, thanks so much for this charting work on silver.
    I appreciate some insight into the broader picture. I have only become interested in the markets late in life but am particularly interested in silver. I would think that with a slow down in the global economy, silver production would slow too as a by product of other metals which I hope would help the price. I think people are losing trust in governments and their policies which is bringing back silvers view as a monitary metal. I've seen it decouple along with gold from the falling stock markets recently too!

    thanks again, derry

  9. Dan, where do you get your charts ?

    Do you hand chart them, or are they computer-generated, e.g. the silver+CCI chart ?

    Thank you for your work.

  10. Another question -

    What is the effect of the US "Strong Dollar Policy" - and the associated gold & silver price manipulation, e.g. Feb 29 - on the CCI ?

  11. Contrary to some of the comments here, I don't think TF attributes every market movement to JP Morgan.

    But, Dan, how does what you present here square with the apparent dumping of, literally, thousands of contracts on the Comex and globex systems in very short time periods as has been seen in some of the waterfall drops? Is it your contention that hedge funds did this? Did they think that doing so what get them the best return? Did they think that it would be wise to do so in the thinly traded post comex hours in the Globex?

  12. That was a great post, thanks for taking the time to put all that information together and sharing it here. The first chart of CCI and Ag is excellent.

  13. A couple other questions that comes naturally to mind, Dan, looking at those charts are to wonder about more precise timing and sequence. You show huge moves in the hedge fund outright short positions. Did these moves cause waterfall declines or did they simply follow them in slight delay?

    And, while I accept that there's a certain ebb and flow in sentiment regarding deflation, these changes in short position are rather abrupt to be simply reflecting fears of deflation, aren't they?

    Finally, the price of silver has been well correlated to the price of gold, not simply an industrial metal, hasn't it?

  14. Dan,

    Great article...Its about time someone wrote something sensible about silver instead of the ongoing conspiracy theories by other silver guru blogs out there... I only wonder what time of Koolaid they are drinking!!!

  15. To what extent do the speculators take their cues from the Cartel/Manipulators, e.g. those responsible for the dump of Feb. 29 ?

    If I was concerned about short term profits, BOOKED IN US $, I would pay close attention to the activities of the Cartel.

    The original article implies that the short-term speculators are somehow independent from the Manipulators.

    The lack of concern for ROI exhibited on Feb. 29 type raids, and the huge volume of paper shorts, be-speak sellers with a motive separate from that of the 'typical' investor.

    I look to both Dan & Harvey O. to illumine these subjects. I would love to see a panel discussion with Erik King and/or Jim Puplava and David Morgan.

    Since I'm asking questions I'll ask one more - how do we gain knowledge of overall silver market activity ? Harvey O. does a great job of parsing the CoT report. However, as Bron Suckecki explains in his recent interview with Jim Puplava, sometimes the CoT report just shows one side of a trade. How do we see the rest of the iceberg ?


  16. This article doesn't explain the smashes that occurred exactly at key events like Ben speaking, JPM testifying. Can you explain coordinated smash downs , that we all witnessed ? Are hedge funds capable of doing so?
    And what about CME margin hikes in 2011 in order to suppress Silver. How hedge funds can direct CME to do so?
    Why CME doesn't loose margin now, when Silver hammered mercilessly???

    Someone wants divert public attention from JPM scam to hedge funds.

  17. Dan, just to add my thanks to the many above, to hear a explanation of why and how silver moves from your experience.


  18. Dan,

    As always... you provide clear and concise information that helps balance the sometimes slanted point of view that all things lie in manipulation. There are some larger macro-economic issues that are starting to influence the market in many ways, but to think that every day JPM has an exclusive finger on the PM market is in of itself creates a normalcy bias that blinds other perspectives. Thanks!

  19. Dan,

    your interpretation of the the net short position chart is not correct. All the net short peaks on the Hedge Fund Short position chart coincide with the lows on the silver chart (July/07, Sep/08, Dec/11 and the current low). This implies that Silver has reached a cyclical low equal to that of July/07. This obviously makes sense as Hedge fund short positions will unwind as Silver Comex begins to climb.



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