That just sounds painful, doesn't it? Yikes! However, as the title suggests, I am personally in backwardation today as I feel the best way to summarize our current position is to give you my conclusion first and then work backwards from there.
Conclusion: The days of outright Bullion Bank (Cartel) manipulation and suppression of precious metal prices are drawing to a close. By later this year and perhaps as soon as late this summer, The Cartels (particularly silver) will have flattened their books to the point where the metals will finally be allowed to trade toward a price that truly reflects an equilibrium between investor demand and physical supply.
I believe that what we are currently experiencing are the final stages of this "book-flattening" process. In silver, the process began in April of 2011 when a sudden supply squeeze nearly created a commercial signal failure. Stopping there, you should click this link right now and read the entire post linked below:
The one thing the Bankers are NOT is stupid. They KNOW that if they continue down the silver manipulation highway, it is only a matter of time before the situation of Spring 2011 repeats itself. I believe that everything that has happened in silver since 4/29/11 has been for the ultimate purpose of getting out from under this position. Though there have been spikes like last February where the EE short position expanded, these moves were only undertaken to squash and control price until the Silver Cartel is finally ready. To effectively cover and exit the market is a painstaking process that requires time. The good news is: Time is almost up.
The Gold Cartel had a similar, life-altering experience in August of last year after the S&P downgrade of U.S. debt. While the stock market fell, gold soared to all-time highs on the backs of near-frantic short-covering by The Cartel. By Labor Day weekend, the pain was immense and, with news pending that the Swiss were about to devalue the Franc by 10%, dramatic action was demanded. Today's market is still reflecting that 9/5/11 decision.
Just as TARP was a transference of risk from the banks to the general public, the current trend in the metals is allowing the Bullion Banks to transfer their short positions from themselves to the speculators. Seemingly all of the new open interest is coming from new spec short positions being opened and who is on the other (buying) side of those trades, The Cartel of course! Not every trade, mind you, but enough of the trades to make a serious dent in their overall, net short position. Therefore, we must expect this process to continue. Gold may never reach a 1:1 parity of the Cartel net short position but I believe silver will...and soon.
Why, you ask? Because silver is deadly. It truly is the "silver bullet" for the vampires that have suppressed price for decades. Industrial and monetary demand has created a consistent shortfall in availability, as illustrated below by Casey Research:
Looking at this chart, do you see why price has risen from $4 t0 $30? Given that physical demand will only increase as fiat currency is devalued, we can rightly expect price to increase, as well. Throw in the ongoing CFTC investigation, the increased awareness of manipulation, the multiple, price-rigging lawsuits and the impending open of "Ned & Andy's Allocated Silver Exchange" in China and you get an environment that any sensible banker would love to exit...and they are doing just that.
All that said, I would expect lower lows before this is over. Yes, sovereign and central bank physical demand is strong but, in an environment where "the tail continues to wag the dog", price can still head lower. There is considerable headline and liquidity risk here and it will be quite easy for The Silver Cartel to induce more shorting into which they can cover. While it is entirely possible that silver is "compressing the spring" here and will not trade lower than today's lows, I think instead there's a higher probability that the situation in Europe spins out of control. This causes a flight to the dollar and liquidity crush which drives silver to $26 and, if the considerable shorts below $26 can get gunned, maybe even $22-23.
Now, I'm sure that you didn't like reading that any more than I like typing it but it is what it is. If I'm right about JPM et al exiting once and for all their silver short position, it may take a washout of this magnitude to pull it off. HOWEVER, THERE IS VERY GOOD NEWS HERE! If this plays out, you must hold your nose, avert your eyes and buy with both hands. With the manipulation removed, silver will soar. Forty dollars. Fifty dollars, Eighty dollars per ounce. All of those levels will come into view. Those sturdy souls willing to hold AND add to positions here will be richly rewarded in peace of mind AND value.
As mentioned above, The Gold Cartel is going through a similar transition. The difference for them, though, is that I highly doubt they will ever be net long. The Fed, the ECB and the BoE will continue to demand that gold's ascent be managed. That said, rapidly increasing monetary demand makes the net short positions to which we've all become accustomed suicidal. And, as we know from 2008, the TBTF banks must be preserved at all costs. Therefore, gold must be allowed higher but The Cartel must still attempt to control it without catastrophic collapse. The only alternative is for The Gold Cartel top remain in the gold market but a much less visible level. Last week's CoT showed a net short ratio of 2.16:1. This is down from 2.68:1 in late February and 2.86:1 last July. Again, I don't expect that we'll ever see 1:1 but I do think that the ratio is headed well below 2:1. What type of paper price action would bring about this change in the net short ratio? How about a drop to 1525? Maybe the gold sell stops get gunned, too, during a global liquidity crisis and gold falls all the way to 1450? That ought to do it.
(By the way, note that I didn't write my thought onto the charts today. Two reasons: 1) To avoid influencing your opinion outside of the lines drawn and 2) to highlight the risk disclaimer RJO places on every page.)
Anyway, I've been at this all morning so I'm going to stop here. But, first, a couple of things:
- I see that price bounced and rebounded as expected off of 1580. It made it all the way back to near 1600 before getting beaten back. Silver rallied off of 28.60 to near 29.40 before being hammered back. I would advise you against chasing here. Once the trend changes...and it will, eventually...there will be plenty of time to get long. For now, unless you are part of Turd's Army, stay out of the way.
- Please don't go off from here and cite this post without providing context. I hope I don't read somewhere that "the hypocrite Turd Ferguson now says gold is going to 1450". I'm doing my best to keep you informed and a part of that effort is a willingness to accept the situation for what it is. IF we see gold plummet to $1450 and silver at $22, it will only be for a brief moment in time and it will signal your opportunity of a lifetime to get (and stay) long.
- The miners probably aren't done going down, either. As you might imagine, in a renewed global liquidity crisis, all equities will be declining along with the miners. At a 350 HUI, though, even I'll be tempted to finally jump back into the pool.
So, please, hang in there. The next, few weeks and months are likely going to be painfully challenging and the atmosphere in Turdville my become downright toxic. Don't let it get you down. I'm convinced that we are in the final stages of this ruthless, Cartel-position-shifting "correction". Once this is completed, the rallies from the lows will be breathtaking. Keep the faith. Use the continued weakness to add to your stacks. Live your life with joy and be happy.