Today In Silver

The Great Gold, Silver Conspiracy Explained
Mike Shedlock
August 27, 2008

Mike “Mish” Shedlock takes no prisoners in his blast at conspiracy theorizing in the gold and silver camp. While much of his logic is dead on, he does flippantly dismiss several factors that deserve more analysis. For example, the large short position by the two “U.S. Banks” constituting Ted Butler’s “naked gun” does not appear merely to be a matter of longs and shorts doing their thing in the futures markets (it could turn out to be that but right now it does not appear that way).

Similarly, what we recently saw in the silver market, where the price traded down dollars at a time in illiquid electronic markets yet market orders were filled with almost no slippage, does not appear to be merely a matter of longs and shorts doing their thing.

Furthermore, Mish states the following: “When a long sells his position, a short automatically covers.” This is either ignorance or gross oversimplification. A long, of course, may sell his position to another long. In fact, the only way to determine whether a long is selling to another long who is establishing a new position or to a short who is covering a short position is by looking at open interest. But since the open interest figure is only available on a daily basis, as an analysis tool it is more often a sledgehammer than a scalpel. Still, that doesn’t mean we should ignore it.

Also, Mish has no answer for why silver “lease” rates are negative, which clearly means he does not understand that these “lease” rates have nothing to do with actual leases at all. As most of my readers know by now, the gold and silver “lease” rates are simply the arithmetic difference between LIBOR (London Interbank Offered Rate) and the LBMA forward rate (the price at which metal can be purchased for delivery on the LBMA in 1, 2, 3, 6 or 12 months). The main reason the silver “lease” rate is negative today is because LIBOR has decreased faster than the forward rate on silver. This has several implications but perhaps the most obvious is that the balance between forward demand and supply of silver has shifted toward the demand side. In other words, there is currently less forward supply of silver to meet forward demand then there was a couple of years ago. That makes the silver forward rate very close to that of gold (whose own low “lease” rate is partially a reflection of gold producers not wishing to sell production forward).

Is the negative “lease” rate due to fraud or manipulation? Not in my opinion. There are a number of reasons that account for the recent shift. One is the reduction in the volume (supply) of silver being “leased”. Another is the buying of “silver streams” by Silver Wheaton which means that a growing number of base metal or gold miners no longer have the “need” to sell forward their by-product silver production. Notice this is a similar situation to the lack of forward selling by gold producers in the past couple of years.

This is rich subject and I can discuss it ad nauseum, but I’ve already done that in the past (see my exposition [PDF] on “leasing”) so I would prefer to answer only specific questions, which I will do in response to any comments on this post.

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