How Gold And Silver’s Price Decline And Short Covering Was Manufactured

This is an excerpt from Ed Steer’s daily gold and silver newsletter (recommended to subscribe):

The analysis by Ted Butler of last week’s Commitment of Traders Report (for the period Wednesday November 5th till Tuesday 11th) revealed an usual evolution.

The real message in Friday’s Commitment of Traders Report were the extraordinary changes among the commercial traders. On the plunge to four year silver price lows over the past two reporting weeks, the raptors the Commercial traders other than the ‘Big 8’ sold 9,700 long contracts and the ‘Big 8’ bought back more than 6,300 short contracts (with the Big 4’s share of that being 4,000 contracts). Never have the commercials, usually thick as thieves, gone in such different directions. Heretofore, it was always the commercials behaving as the three musketeers – you know, all for one, and one for all. Not this time.

From the data, here’s what I think occurred. The big commercial shorts (JPM) knew that some raptors were stretched thin on margin on a massive long position in silver that totaled 42,400 contracts two weeks ago. When the price of silver suddenly plunged an additional two dollars, the margin calls were overwhelming for a number of the raptors and they were forced to liquidate almost 10,000 of their long contracts. A two dollar adverse move on 10,000 contracts means coming up with $100 million on, quite literally, a moment’s notice. If you don’t have the $100 million to deposit immediately, you are sold out immediately.

Since the biggest beneficiaries of the price plunge (apart from the technical funds, which, no matter what, are not running the show like the commercials) were the biggest shorts (including JPMorgan) which bought back 6,300 shorts at immense profits; it stands to reason that these big shorts orchestrated the whole damn thing. Otherwise, I suppose you would have to believe that the commercials are such clean good guys that someone from above rewarded them. Looking at the almost daily settlements for price manipulation [in other areas] by the big banks, it’s not possible they are innocent good guys in any way. – Silver analyst Ted Butler: 15 November 2014

Commercials induced the selling and it was followed by short covering, as is always the case according to Ted Butler. The big difference is that the large commercials have not been acting in accordance with the small commercials. Let’s revisit the manipulation mechanism which Ted Butler has explained a while ago on this site in  JP Morgan’s Perfect Silver Manipulation Cannot Last Forever (October 2013):

I realize that every time the price of silver and gold get smashed down, the intuitive reaction is that JPMorgan or other commercial traders are bombing the market lower by selling thousands of contracts. But that’s only partially true. Yes, JPMorgan rigs the price lower on those big down days, but not by selling enormous quantities of COMEX silver contracts short. JPM does get the price snowball rolling down the hill by selling a small quantity of contracts short at critical times and prices with the intent of inducing the technical funds to sell much larger quantities of contracts short (which JPM and other commercials then buy).

This is an important feature of the perfect market manipulation in silver and the reason it has lasted so long; JPMorgan can always proclaim it was a net buyer of silver (and gold) on the big down days as is consistently proven in Commitment Of Traders reports. By itself, it is a significant defense against allegations that JPMorgan is manipulating the price of silver, as how the heck can you be accused of manipulation if you buy on big down days? More than any other factor, this has been the prime impediment to ending the silver manipulation. But it doesn’t tell the whole story.

JPMorgan’s real crime resides in its ability to sell unlimited quantities of COMEX silver contracts short on the way up in price to the point of creating unprecedented levels of market share and concentration. In December 2009, JPMorgan held more than 40% of the entire short side of COMEX silver and close to that market share on other occasions. To my knowledge, there has never been a greater market share or corner in any major market in history. These unlimited short sales by JPM inevitably satisfy technical buying interest and then that technical buying turns to selling at some point, with JPMorgan then working to induce the tech funds into selling. The buying back by JPMorgan is the illegal ringing of the cash register and closing out of the manipulative silver short positions sold at higher prices.

Now let’s fast forward to today. It is key to watch the futures positions from JP Morgan. Interestingly, JP Morgan seems to have reduced its silver short positions to a historical minimum. This is also from Ted Buter’s latest commentary (November 15th):

I can peg JPMorgan’s formerly manipulative short position in COMEX silver as now being no more than 8000 contracts and quite probably even lower. Never, since acquiring the massive short position of Bear Stearns in 2008, has JPMorgan’s silver short position been lower. Considering how much physical metal I believe JPM has accumulated (SLV, Silver Eagles, etc.), JPMorgan has never been better positioned for a real upside move in silver.

But more than ever, the current setup brings an old theme of mine directly into the crosshairs. To the point of redundancy, I’ve written over the years that the speed and extent of any silver rally would be determined by whether JPMorgan and the other 7 big concentrated shorts added to short positions for the purpose of capping the price of silver. The events of the past two weeks bring that premise into sharper focus than ever before. With an assured reduction of potential raptor long liquidation, if JPMorgan and the other big concentrated shorts don’t add significant new short positions on the next silver rally (possibly begun yesterday) silver will fly like a rocket to the moon.

You got the point? Watch how JP Morgan will add or not to their short positions as prices start rising to know how much fuel the rally has.

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