CTMPR

Until last Friday, Japan has the 3rd most nuclear reactors in operation at 53 behind only France (59) and the U.S. (100+). However, in the wake of the massive earthquake and tsunami many of those power plants are offline and the fear of a nuclear disaster is running high. The stocks of uranium miners such as Cameco plunged this morning as this is seen as a major setback for the advancement of nuclear power. This could be an initial over reaction as the Uranium ETF (URA) which contains the 23 leading companies in the sector is down almost 20%. However, even if today’s market action is an over reaction there is little doubt that this will cause people to stop and re-evaluate the nuclear option.

Nuclear power has been heralded as the solution for all the Chinese pollution and as a way to rapidly expand that nation’s power supply. But as we watch people (especially children) being screened for radiation poisoning there is little doubt that this is another reality check for the industry. Just as 3 Mile Island scared a generation of Americans and Chernobyl scared a generation of Europeans this will undoubtedly have the same effect on the Asian community.

When push comes to shove people will always make the safe choice which today appears to be coal and natural gas as the coal etf – KOL and the natural gas etf – UNG are two of just a few things in the plus column today.

There is little doubt that there will need to be more nuclear power in the future to meet that fast growing demand for energy, but this will definitely cause a major slow down in progress for 2011 and maybe the next couple years.

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!

After being the #1 performing ETF Sector in 2010 silver took a breather in January. Most seasoned silver traders expected a rather harsh correction that would last several months however last week every silver ETF closed at all time highs. The silver mining etf – SIL failed to hit new highs but all the track the actual metal closed out the week at new highs.

Here is a chart of SLV going back to the initial break out in silver last August and as a comparison the brown line is the Silver Miners ETF – SIL. You can see that at this point the miners are lagging but should hit new highs shortly if the rally continues.

In general there has been under performance on the part of the miners in relation to the price of gold and silver. This is due to the fact that mining costs have been increasing with the rise in energy and machinery costs. Also, most miners are expanding production which adds to cost and suppresses earnings. Since all stocks are driven by bottom line earnings it is possible for the miners to lag for long periods of time. This is the primary reason why stock investors have flocked to the gold and silver commodity etfs to gain exposure to the actual price of the metal. Since a proper portfolio allocation has roughly 5% exposure to metals many are choosing the metal as opposed to the mining stocks.