The Silver Bull Market of 2012

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Tue, Oct 18, 2011 - 10:52pm

No sense in mincing words tonight. The CFTC has finally acted and silver is headed significantly higher. Maybe not tomorrow but soon. Very soon.

Position limits in silver will soon be enforced. Yes, there will be delays. Yes, there may even be legal challenges brought by The Cartel. However, there is a very high likelihood that, on a beautiful day in 2012, JPM et al will finally cede control of the silver market back to legitimate investors, speculators, producers and hedgers. When this happens, silver will finally be freed of its EE-supplied shackles and price will move dramatically higher.

But first, get ready for some craziness. Beginning tomorrow, all bets are off. As of the last Tuesday's CoT survey, the commercial short position in silver was still over 58,000 contracts. Though this is down from a peak of about 90,000 contracts back in April, there's still a long way to go before JPM is compliant with the new limits. At 58,000, the speculation is that the short position of JPM is still between 15,000 and 20,000 contracts. Clearly, they have a lot of work to do to bring themselves into compliance.

As you know, if they go off blindly covering short positions, they'll drive price higher and higher and thereby create for themselves steeper and steeper losses. They are going to want to continue to inspire more selling, similar to what we've seen over the past three weeks, in order to cover at lower prices, instead. The question is: Can they pull this off?

With the limits soon going into effect, no institution is going to want to significantly add to short positions. Therefore, the only selling pressure that can drive silver lower from here will have to come from discouraged spec longs. But here's the rub: Spec longs peaked in early April near 50,000 contracts. In the subsequent decline from $48 to today's $32, we've lost over half of that spec long position. The latest CoT spec long total was just 23,571. How many more specs can be chased from silver to drive price substantially lower from here? 2,000? 5,000?. It's hard to say but this much I do know...get ready for more, even crazier volatility.

Why? There is really no other option. JPM et al need to force silver lower in the days and weeks ahead otherwise they will be faced with covering thousands of contracts at very steep losses. They must drive price lower just as they did three weeks ago. But with open interest and spec long positions so low, how can they get people to sell? The answer: Let the CME do the dirty work!

Remember, the CME allegedly raises margins only in response to volatility. IF The Cartel can create enough volatility, the CME will be forced to act. ​And, as we saw in April, margin hikes when combined with steep selloffs can create the conditions necessary to force spec longs out of the market. So, the formula from here is simple:

1) Violently manipulate silver to create unprecedented volatility.

2) Have the CME raise margins again in response to this volatility.

3) Use dips in price to hurriedly cover short positions.

4) If Cartel buying spikes price back up, this added volatility may inspire additional margin hikes.

Eventually, two things will have been accomplished:

1) JPM will have extricated themselves from the short position and brought themselves into compliance with the position limits mandated today.

2) To help avoid a subsequent run on the CME-owned Comex, margins will have been increased so significantly during the process that Comex leverage will have dropped down to 3:1 or so. This, for all intents and purposes, will make The Comex a physical-only exchange. Making The Comex physical-only will preserve the viability of the exchange and limit the future liability of the CME Group.

Look, I could be wrong. What the hell do I know? I'm just a Turd. But I've thought about this all day and this is the most plausible, short-covering scenario I can envision. So, what does this mean for you, my dear reader?

1) Please do not get caught up in the emotion and the disinformation of the next 3-6 months. The wild swings in price and the inevitable dips will shake you to your core. You must have faith and confidence that you are right and that you will prevail in the end. If it took a 33% drop in price to shake 50% out of the spec long position, how low must price go to get another 25-50% decline in the spec long position? $24? $22? Don't be surprised if it happens.

2) Therefore, now is the time to set up a disciplined, regular physical purchase plan. You should consider buying some physical silver every week or two, regardless of price, until the limits are finally enacted.

3) Though silver will likely become a physical, spot-priced market, you can rightly expect significant price increases in 2012. Unencumbered by EE suppression, price will finally begin to reflect true value. Does this mean that the gold:silver ratio will finally revert to 16 or 12 to 1? Probably. How soon? Too many variables to hazard a guess but the day is definitely coming.

Rejoice and be happy, my friends, for today we have won a great victory in the battle against The Evil Empire. Though the war is not yet won, the end is in sight. Keep the faith and be diligent. Steel yourself for the tremendous volatility that is coming. Use it to your advantage by buying dips and taking delivery.

Sic semper tyrannis! TF

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