Anyone following the futures market for silver know that the large commercial traders, banks such as JPM, always win. That is until now.
During the bull market in silver that began in 2001, a pattern of trading similar to the martingale betting strategy emerged in which 8 trading institutions sold short increasingly larger amounts of contracts into rallies until their sales volumes overwhelmed the market into a freefall. The same banking institutions would then purchase those short positions at a profit after the freefall and the rally process would begin again. This process of taking money from precious metals investors has been well documented by analysts such as Ted Butler, David Morgan, and others. The strategy has been so successful that some futures traders began to front run the banks on their own tactics using the COT report and other sentiment indicators.
It has been argued that these large short positions have suppressed the price of silver by a multiple of itself. This may be proven sooner than many expected.
Over the last 6 weeks all was going according to plan. Silver rallied and the commercial banks shorted an ever larger amount of contracts as the open interest swelled to the point at which most silver analysts were expecting a correction. In the last 2 weeks silver rose by nearly $2 dollars and most were expecting to see an even larger commercial short position reflected in the COT report. Instead, the commercials actually covered 2297 contracts, and bought an additional 989 long contracts during the week of September 28th to October 5th when the price of silver rose by $1. The covering was down at what appeared to be a short term top to many.
Image cannot be displayed
If it Bleeds...
Something has drastically changed in the silver market. The banks that once controlled the price of silver are now closing positions at a loss. Traders may begin to speculate on what has changed and why. Some traders have reported that a large buyer is entering the market. Regardless of the actual reason the commercial shorts have begun to bleed money. And when blood spills sharks will circle. Hedge funds and traders that never even thought of silver before will begin to squeeze the shorts. If the big banks don't quickly regain control of the silver market they may lose it forever.
While it can be speculated on how short covering could impact the market, a short squeeze could feed upon itself as it attracts capital. In five trading days of buying a net 3286 contracts the price of silver rose by $1. However the commercial banks are still a net 62,127 contracts short so at that linear rate it would take them 94 trading days to cover with a silver price of roughly $117. The resulting losses would be around $15 billion. Of course markets aren't linear and after the second or third week of covering traders would begin to purposefully front run and squeeze the commercial shorts so its unlikely that the positions could be covered that low or if at all. Unfortunately those who were hoping for a correction to accumulate more silver may not get it here as a price reset may be on the horizon.
