The uneconomic short position in COMEX silver is key to the real silver story. It is the
resolution of this outrageous short position that will dictate the major moves in the
price of silver.
This essay was written by silver analyst Theodore Butler, an independent consultant. These
views may or may not prove to be correct.
(In April 2006) Silver (and gold) prices have now climbed to levels not seen in 20+ years.
Volatility has increased proportionately and appears here to stay. As a result of the
price action and expectations for the new silver ETF, more media attention has been
focused on silver and other metals than at anytime in recent memory. I can’t prove
it, but I believe there has been more spoken and written about silver by the mainstream
media in the past few weeks, than the cumulative total for the past five years.
Unfortunately, quantity is not the same as quality.
While the amount of commentary expended on silver has been impressive, the same cannot be
said about the insight and accuracy of that coverage. Of course, some of the reporting has
been good, but I have recently witnessed more incorrect information being disseminated
about silver than ever before. Please don’t misunderstand me – I’m not
complaining, I’m merely observing. In fact, as I hope to demonstrate, the
circumstance that the real silver story is not being adequately delivered and received
holds great promise for the future.
For instance, on one day last week, I watched two well-known commentators on financial
television emphatically state that silver was not an industrial commodity. I have seen
others state that silver should be only considered as an inflation hedge. While I have
witnessed countless public discussions on the coming ETF, the factual misstatements about
the subject were also to numerous to count and I am left with the feeling that very few
have taken the time to read the prospectus. I believe this is great news for long-term
silver investors.
What makes this good news is that the real silver story is not yet even close to being
widely known. I find this remarkable. Please consider that silver prices have almost
tripled in price from the lows of several years ago. While I’m convinced that there
is a much bigger gain yet to come, a double or triple in a commodity is no minor event. We
have witnessed such moves in a number of commodities, such as crude oil, copper, zinc,
sugar and gold, to name some commodities that have doubled or tripled in price. But there
is a difference in the reporting of the price moves in these commodities and the silver
move.
Most market observers are aware of the world demand that has developed in crude oil and
the constraints on production caused by the armed conflict in Iraq and hurricane damage to
the Gulf Coast. Most are aware of the shortfall between industrial consumption and
production and resultant inventory depletions in copper and zinc. Those that follow the
sugar market know that Brazil is busy converting sugar cane into motor fuel, causing a
sudden surge in demand for sugar. Even in gold, most observers see the sudden demand
caused by ETF-related buying and the end of hedging and leasing.
But there has been no comparable and identifiable specific explanation offered for
silver’s price rise. Or at least, I haven’t seen such reports. I do see many
reports that anticipatory ETF buying has propelled the silver price, but there is no
concrete or obvious substantiation of actual ETF buying, just the price rise itself.
Don’t misunderstand me – I’m not claiming to know what the specific reason
has been to account for silver’s price rise. Of course, I think I know the
fundamentals and great value in silver did just about guarantee an eventual price
increase, but I would be lying if I tried to point to the specific reason why silver rose
recently. My point is that there have been no widespread public explanations for the price
increase, that are unique to silver, being widely discussed. In a sense, silver is just
going up like a lot of things and it doesn’t stand out from other items that much
(unless you are invested in it).
I think this is good because silver can hardly be considered over-owned, as long as
practically no one is aware of why it is rising. In fact, it’s the opposite of a
bubble, where there is widespread awareness and broad interest and rampart speculation and
assumed price appreciation. The recent spate of publicity that silver has garnered as a
result of the multi-decade high prices and coming ETF has done little to disseminate the
real silver story.
What is the real silver story and what would it take to proclaim that most observers and
commentators knew that story? In my opinion, you would have to see articles and hear
commentary from the popular media that dealt in the following topics. That silver had been
in a continuous consumption/production deficit for 60 years. That the US government,
formerly the largest holder of silver in history, had none left. That silver had become a
vital industrial commodity with more applications and uses than any other commodity, save
petroleum. That the price had not risen for 20 years in spite of the structural deficit,
in defiance of the very law of supply and demand. That, according to the US Geological
Survey, there were fewer years of production of silver left in the ground than any other
metal or mineral. That, in terms of available world inventories, silver was more rare than
gold.
If I started to hear and read stories in the popular media that included these topics,
then I would conclude that the real silver story was being learned. But there is one topic
that would tell me the word was really getting out, if it were to appear. That topic, of
course, is the out-sized short position; principally the COMEX short position. This is the
subject that first told me, more than 20 years ago, that there was something definitely
wrong in silver. For two decades, I have yet to come across anyone who could take the
other side of the debate, namely, to show that there was anything legitimate about the
COMEX silver short position.
The COMEX silver short position, no matter how you slice it or dice it, stands out from
any other commodity. Let me count the ways. The gross COMEX short position (open
interest), for futures alone, is now over 700 million ounces. This is greater than total
world annual mine production and greater than any world inventory amount than I have seen
published. In no other commodity can this statement be made. The net commercial COMEX
silver short position is also larger, by a disproportionate amount, than any other
commodity when compared to real world production and inventories. Ditto the net
concentrated short position, where a handful of large traders are short more silver than
in any other commodity. In the 20+ year-history of the Commitment of Traders Report (COT),
COMEX silver is the only commodity where the commercial have never been net long.
You must remember, the only reason that the Commodity Futures Trading Commission (CFTC)
even compiles and reports the concentration ratios of the largest traders in all
commodities is as a safeguard against manipulation. But why do they even bother? My point
is that why does the CFTC go the trouble to keep and publish such concentrated positions
if they don’t intend to do anything about those positions, no matter how large and
concentrated they may grow?
Currently, there is a vocal debate about the prospective Barclays silver ETF and what
effect the proposed maximum filing of 130 million ounces, or any amount up to that maximum
filing amount, could have on the market. But why is there no debate about the 4 largest
traders on the COMEX who are already net short more than 200 million ounces and what
effect that has had on prices? Or about the 8 largest traders who are already short almost
300 million ounces?
I know that I have been in a distinct minority in harping on this silver short position. I
know many ignore it or dismiss it with shallow explanations, like "there’s a
long for every short, so what’s the problem?" I know that regulators and
exchange officials have always denied it was the problem that I have claimed it to be.
That doesn’t bother me, and I look forward to being judged on this issue in the
fullness of time.
Along with the 60-year continuous structural deficit, the depleted inventories, the
paucity of below ground remaining resources, and the stunning rarity of silver compared to
gold, the uneconomic short position in COMEX silver is key to the real silver story. It is
the resolution of this outrageous short position that will dictate the major moves in the
price of silver.
Make no mistake; this short position must be resolved. It is not possible for a short
position that is larger than all the silver in the world, or could be produced, to last
indefinitely. The only question is how quickly investors of the world learn the real
silver story and rush to take advantage of it. http://www.investmentrarities.com/weeklycommentary.html
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