****Silver Short Position****
Any comments on:
1. Actual size of silver short position
2. Potential magnitude of effects of short covering on silver price
3. Whether or not there will be a short squeeze
4. Potential synergistic effects with CB metal loans (if they call back loans as shorts are trying to cover)
Any and all comments are appreciated.
THC
THE 800 POUND
GORILLA
by Ted Butler
I really hadn't planned on writing another gold/silver lease scam
piece for awhile, but I happened to read Martin Armstrong's article
of 1/28/98, and I got the feeling he was taking issue with my
contention that the silver lease con was over, or that it ever
existed. If you haven't read his piece (located at the bottom of this
article), please do so, because it is an extremely important
statement on the current predicament that the large industrial
silver users and derivatives shorts face. It very clearly telegraphs
the exit strategy planned by the big users/shorts. That planned
strategy is the single biggest threat to the workings of the free
market in recent history.
Armstrong's agenda is clear - the only hope for the big
users/shorts in silver is for the government, any government, to
come in and confiscate all available physical silver and arbitrarily
terminate all paper contracts of silver. They are obviously
disturbed by the prospect of resolution by the
forces of the free market. If you were in their shoes, you
would also be disturbed. For the sake of the markets, let's hope
they don't succeed in their exit plans.
In classic double-speak, Armstrong rants about the upward
manipulation in silver, while cleverly ignoring that at $6/oz, silver
is cheap. What's also ignored is that whatever amounts of silver
the buyers may own, either in physical or paper contract form, the
sellers of that silver were not coerced into those transactions.
Now, it is clear that the sellers are having second thoughts. Yes,
there has been a manipulation in silver, but it has not been of the
upside variety. The real manipulation has been the fifteen year
downward rigging of silver prices through the leasing scam and
the 800 pound gorilla in the room that everybody is doing their
best to ignore and speak around. But the gorilla is getting tired of
sitting still and is starting to throw his weight around. He will be
ignored no more. You see, the gorilla is the largest
naked short position the world has ever seen,
and its resolution is going to be a monster. Funny,
Armstrong didn't mention that.
You might want to get out a pencil and paper, or calculator, while I
attempt to validate what is a pretty strong statement, that silver
has the largest naked short position ever witnessed in the world's
history. Don't worry, this will be simple math, as I'm no rocket
scientist. The latest available data from the COMEX (Jan 29),
indicates a total open interest in futures and call options (the two
classes of contracts that can result in the ultimate liability of
having to deliver physical silver) of over 170,000 contracts.
Convert that into ounces by multiplying by 5,000 ounces (the
contract unit of trade), and you'll come up with 850 million ounces.
That's the total amount held long and held short on the COMEX.
(Of course, there is an unlisted derivative and lease market,
which could bring the total real short position to 2 or 3 times the
listed exposure, but since the Central Banks or the bullion banks
don't disclose their real books, let's stick with the published
statistics.) Against that 850 million ounces, now measure
available total inventories and world production. Even if you
assume all visible inventories (around 100-200 million ounces)
and total world production (around 500 million ounces) were
somehow available to the COMEX shorts (admittedly ridiculous as
the inventories are owned by someone not necessarily the shorts
and world production can't even satisfy world consumption, so by
axiom isn't available to the shorts), there is no way the shorts
could get their hands on anywhere near enough material to cover
their potential obligations. Are you starting to get an idea of the
dimensions of the silver short position? We're not quite done yet,
because if this were the normal configuration of open (short)
interest to inventory and world production in all, or other,
commodities, my claim of biggest ever short position would be
bogus.
So take out the newspaper again, and test me by going through
the same exercise with other commodities. Let's do two or three
together, and then I'll challenge you to prove me wrong by finding
any commodity that even comes close to the silver short to
inventory/production ratio. Let's start with corn. Total open
interest in corn futures and call options is 540,000 contracts, or
2.7 billion bushels. Forget inventories and world production, US
production alone runs 9 billion bushels. How about oil? Total
open interest for futures and call options runs a whopping
715,000 contracts, but that translates into 715 million barrels of
oil, or only about 10-15 days of world production. Gold has a
combined futures and call option open interest of 435,000
contracts on the COMEX, which translates into 43.5 million
ounces or more than 50% of world production, but that's a very
small fraction compared to known stocks. (I'm aware of the large
off exchange and lease exposure in gold, but remember we are
only comparing known statistics). No, silver is in a class by itself
for having such a lopsided short position to real stuff ratio, and
has for the past fifteen years. And don't think that this skewered
ratio exists only in comparison to other commodities. While in
extreme cases an individual stock may sport a short position
equal to 10 or 15% of shares outstanding, the total short position
for all stocks runs something like a half of 1% compared to all
shares outstanding.
The point of all this is not just to demonstrate that when it comes
to the short position, silver is off the charts when compared to
anything else, but to stimulate your thinking as to what this
means. What it means to me is that we have the
bizarre situation where the size of the derivatives
position of silver towers over the size of the real
market. In silver, not only does the tail wag the dog, the tail is
larger than the dog! How can that be? How can a derivative
market be larger than the host market from which it is derived?
Now here comes the tricky part. If the paper market in silver is
much bigger than the physical market, guess which market
determines the price? As you answer that question,
remember that the paper market setting the
price (not discovering, but dictating) is against
every principal of commodity law. Forget commodity
law, how about common sense? It is impossible to have a short
position larger than what exists or could be produced, yet that's
the condition in the silver market. And if someone sold short more
of something than existed, don't you think that would have a
price-depressive influence?
To those who would say, so what - there are just as many longs
as shorts (I have gotten that response), please consider this; all it
takes for a long to complete his contract obligation (aside from
selling out) is to fill out a check. A short (who doesn't buy back)
must round up and deliver material that doesn't appear to be
available. Besides, the longs aren't the ones wailing.
Now do you have a sense of the real problem in silver? Now do
you understand the screams of alarm at $6 silver, and the
lawsuits and the cries for government intervention? After crushing
this market for 15 years with massive paper shorts, the deficit
balancing supplies from the lease market have dried up, leaving
only a literal paper tiger. The only question is whether the
government says to hell with the free market and bails out the big
users/shorts, and rewards them for manipulating the silver market
for 15 years with their massive and uneconomic short positions by
mandating an artificial settlement. For the sake of free markets,
let's pray they don't.
Ted Butler
1 February 1998
Martin Armstrong's Silver Essay: "Metals Scandal of 1998?"
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