What we you doing one year ago this instant? I, for one, was preparing to leave for another one of LT#2's soccer games and a relaxing, birthday dinner with MrsF. Little did I know, or even suspect, that this was coming around the bend:
I set out today to write a retrospective. Too full of brim and bluster for a Sunday, I thought a thorough recapping of last year's events was in order. A funny thing happened along the way, though. As I read through the archives, not only of The Watchtower but of sites like ZH and others, I lost my enthusiasm. The more I read about the past, the more I thought about the present and the near future. So, instead of rehashing the single greatest manipulative theft I'd ever seen, I decided instead to move on.
Look, we all know what happened. The chart above tells the story and what's done is done. All we can do now is use the events of last year as a learning tool. What happened in silver in the days and weeks leading up to Sunday night, April 30, 2011? Are any of the same market conditions prevalent today? Has anything changed? Where do we go from here?
I have always and will always contend that the dramatic price gains made by silver in April 2011 were not the result of a speculative bubble. A simple review of the CoT structure from that time bears this out.
CoT date 4/5/11
Large Specs: 48,890 long and 12,105 short. Net long ratio of 4.04:1
Small Specs: 35,002 long and 15,373 short. Net long ratio of 2.28:1
The Silver Cartel: 89,827 short and 33,413 long. Net short ratio of 2.69:1
CoT date 4/26/11
Price: $49.50 (up 28%)
Large Specs: 43,078 long and 18,083 short. Net long ratio of 2.38:1 (a drop of 54%)
Small Specs: 36,144 long and 18605 short. Net long ratio of 1.94:1 (a drop of 25%)
The Silver Cartel: 78,297 short and 35,763 long. Net short ratio of 2.19:1 (a drop of 29%)
If a speculative bubble had occurred, we should have seen an opposite CoT reaction. Spec long ratios should have been exploding, not contracting, and the net short ratio of The Evil Empire should have expanded.
Instead, price rose dramatically throughout April. "Speculators" were covering positions and adding shorts into the rise that was being induced by the Cartel's covering of 11,530 contracts while simultaneously buying 2,35o new longs.
Why was The Silver Cartel panicking last April? Much of the concern seems to have centered around physical delivery. There was much talk that month about an impending silver Comex default. Was it all hype and mindless speculation or were the bullion banks fully aware of the situation and trying to extricate themselves as quickly as possible? Well, go back and read this:
From the 4/27/11 link directly above, here's the "money paragraph":
"To our (lack of) surprise, a quick glance at today's silver holdings at the Comex confirms that the trend of reclassification is continuing unabated, and total "physical" silver across the entire Comex universe has now plunged by almost 20%, or from 41 million ounces to 33 million ounces, in the span of one week! And while last week it was Scotia Mocatta, today it is HSBC and the Delaware Depository, and the reason given: "Adjustments include reporting classifications of t oz that were moved from Registered to Eligible. Please see Special Executive Report reference 5736 for additional information. https://www.cmegroup.com/tools-information/advisorySearch.html#." And a further drill down reveals the following link. Many have speculated that there could well be a run on physical silver. But for those looking for a smoking gun, this is probably as close as you will get to one, short of JPM actually declaring "force majeure."
By late April, the banks had successfully decreased their net position by 14,000 contracts but had driven price UP by 28% in the process and now all indications were that physical silver for delivery was being hoarded. Then, on Monday, April 25, the CME raised margin requirements for silver by over 10%. Was this move an attempt to coerce May11 contract holders away from taking delivery? By Thursday, April 28, price had not fallen materially and open interest in the May11 was still at 10,963, one day before first notice day. Is this why the CME raised margins again (another 15%) that evening, effective at the close on Friday, the 29th? Regardless, one year ago tonight it was obvious to The Cartel that they couldn't continue on their present course and it was time for dramatic action, consequences be damned.
It's now one year later. Silver has seen additional wild price swings and other dramatic beatdowns but where is price currently? In the days immediately following The Sunday Night Massacre, silver traded as low at $32.60 before rebounding. When trading reopens this evening, silver is at $31.30. (Interestingly, gold over the same time period bottomed at $1471 yet stands tonight at $1665.) Since the paper price of silver hasn't changed much since from those panic lows of early May last year, maybe we should look at the market internals again.
CoT date 4/24/12
Large Specs: 28,913 long and 12,442 short. Net long ratio of 2.32:1
Small Specs: 19,247 long and 13,365 short. Net long ratio of 1.44:1
The Silver Cartel: 70,697 short and 48,344 long. Net short ratio of 1.46:1
From the peak of The Great Cartel Panic of 2011, paper price has fallen almost 40%. Over the same time period, large spec longs have cut their positions by 32% while maintaining a nearly identical net long ratio near 2.3:1. The small specs have trimmed their long exposure nearly in half while decreasing their net long ratio by 25%. The real change in The Cartel position. The total short position has declined from nearly 90,000 in early April 2011, to 78,000 by late April to just 70,697 today. This is a drop of over 20%. Conversely, The Cartel long position has grown from nearly 33,000 in early April last year to 48,344 today for a growth of almost 50%! And the Cartel net short position, which peaked at 2.7:1 last year has been cut nearly in half. WOW! From the perspective of The Silver Bullion Banking Cartel, the past 12 months have been a smashing success!
So, now, let's try to sum this up. I believe that in the spring of 2011, The Silver Cartel began to fear a run on physical silver as evidenced by their moves to reclassify silver in April 2011. Their hasty attempts to cover their long-standing futures positions were causing a spike in price and actually increasing the likelihood of physical stock depletion and a "run" on the Comex. Faced with no other alternative, The Cartel conspired with the Comex-owning CME to rig prices lower through margin hikes (5 in 9 days) and massive price manipulation (The Sunday Night Massacre). The resulting and subsequent paper price declines have allowed The Cartel the time needed to decrease their net paper silver exposure by over 70%.
The question becomes: Are they done? Will price be allowed to rise next time without Cartel interference? Is their ultimate goal to have a 1:1 net short ratio? Time will tell. What's interesting, however, is how the physical delivery picture has not changed. First, this article from Jesse last week showing the dealer inventory changes over time. Note that, last year at this time, in the midst of The Panic, the registered inventory was around 35,000,000 ounces. By late last week, the total registered inventory was under 30,000,000.
Now, as of Thursday, we still have 9,026 open contracts in the May12. Though it's unlikely that more than 2000 or so of these will stand for delivery, what are we to make of this:
Notice that this is silver moving in the opposite direction of last year. Instead of dealers pulling and reducing the stock of registered (used for delivery) silver, here's JPM adding 5,000,000 ounces. That's enough silver to settle 1,000 contracts and the move has left JPM with just under 9,000,000 eligible ounces. What the heck? Why would they do that? Did JPM get wind late last week that someone or something is intent upon taking delivery next month, above and beyond the usual amount? Maybe. Regardless, with only 9,000,000 eligible ounces left to switch to registered if necessary, JPM can only settle another 1,900 contracts with the supply they allegedly have on hand. If Ted Butler is correct in claiming that JPM alone is short at least 18,000 silver contracts, Blythe and Jamie are currently left with only three options:
- Stage another massive raid. However, I believe that the very strong physical demand at $30 precludes this option and even lower paper prices will only serve to increase physical demand.
- Get their hands on millions of ounces of new silver to replenish their inventory. Also unlikely as this would only add to the ongoing "problem" of excess demand.
- Cover. This, really, is the only viable option. They must continue to cover and exit their short position. But can they do this in an orderly manner?
Last April, an 14,000 contract flip moved price 30%. At today's price levels, a similar surge would simply take price back to $40. To me, this is their only viable option. Once flat, they can allow silver to trade freely. The next time it goes back to $50, they will be financially indifferent.
CONCLUSION: It appears to me that the current demand for silver is strong and that the current supply is tight. Even tighter than last year at this time. Equally important, price has fallen 40% while The Silver Cartel has effectively trimmed their net short position by 70%. The only sensible, business option for The Cartel is to continue to cover their short position, regardless of price action going forward. Given the ongoing possibility and continuing concern for delivery default, The Cartel must utilize this final dip in price to flatten their books. If they do, silver will rise through this process and then accelerate, once Cartel price interference has been removed. If The Cartel fails to get flat here (or if they are not allowed to), they ultimately risk a default and collapse that will not only bring down their individual firms but, also, bring about a financial calamity the size and scope of which has not been seen since 2008.