CTMPR

If you are involved in the markets you need to understand why some of the most dramatic moves in both stocks (Netflix) and commodities (Cotton & Silver) take place. Normally when the markets begin to go vertical it’s because the shorts are scrambling to exit their positions and there are few willing sellers. These moves are usually fairly short lived but are extremely dramatic. The blow off top in the Nasdaq in 2000 is another good example of a short squeeze. This year we have already seen cotton futures blow up to inflation adjusted highs not seen since the civil war. During this time the open interest in cotton dropped by 23,744 contracts which indicates the shorts were being forced to cover their positions. Now I have a feeling we are about to see the same thing in the silver market.

As long as I have been trading silver (22 years) the owners of silver have been talking about market manipulation. Primarily because for much of that time silver was in a horrendous bear market and they were frustrated. However, the past few years there has been reason for concern when it comes to a couple large commercial banks and their huge short positions in Comex Silver Futures. As the economic crisis unfolded in the second half of 2008 there was lots of scrambling taking place commercial banks like JP Morgan and Bank Of America were buying investment banks like Bear Stearns and Merrill Lynch. Along with those acquisitions came lots of existing positions including the short silver position that JP Morgan inherited from Bear Stearns.

However, instead of unwinding the position it appeared that JP Morgan added to an already huge short position in both Gold and Silver. Once the CTFC began publishing the Bank Participation Report in February 2009 everyone could see there were 2 U.S. Banks that were holding a short position in Comex silver futures that was equal to 29% of the entire open interest:

02/03/09 CMX SILVER – Total Open Interest – 93,813

U.S. – 2 banks Long – 0 0.0 Short – 27,189 29.0%
NON U.S. – 13 banks Long – 8,416 9.0% Short – 1,871 2.0%

This shows that 2 U.S. banks were short 27,189 (5000 oz) contracts of silver out of only 93,813 total contracts outstanding. This is an extraordinary concentration that I have never seen in any market in the past. This number actually became even more extreme by the end of 2009.

The 1/05/2010 report showed these banks were now short 37,871 contracts (10000 more) out of a total open interest of 125,391 which was 30.2% of the open interest.

Throughout 2010 there was much talk about JP Morgan and price manipulation in the silver market. During the year they dwindled down their position in silver without causing much of a stir in the market. By August 2010 their position was back down to 26,855 contracts or 21.8% of the open interest.

However, it once again spiked into September as gold rallied but silver failed to follow gold. By September when silver had finally broke out it was revealed their short position was back up to 33,431 or 24.0% of the open interest. This is a staggering position for any institution as 33,431 contracts represents 167,155,000 ounces of silver! From this point, short covering on the part of the banks began in earnest and silver rallied non-stop through the end of the year. I put the numbers from the COT Bank Participation Report on the chart so you can see how this buying has affected prices.

As you can see, the banks continued to buy silver during the January down draft which is the reason the setback was more shallow than market participants though it would be. It also told other participants that despite weakness in silver, the banks still wanted out of that short position!

It didn’t take long for the market to react, silver has been incredibly strong since the February report came out. It appears silver will remain strong until this short position has been covered. Then it will be possible to see a sharp correction in silver prices. Silver is the market to watch for the coming weeks!