Today In Silver

It didn’t have reserve status, back then most currencies were on a gold standard so it was gold that held the reserve status.

Funny, and right after the Euro pols and publicists stated they won’t be acting desperate like those uncivilized Americans.

You are certainly entitled to your opinion, even if it is wrong.

This is total and utter bullshit. The allegation is coming from the people representing an idiot company (Semgroup) that shorted oil into a historic rise, and they claim that a margin call of several hundred million dollars had anything to do with the July oil price spike. Here is some news for Forbes editors: at its peak the NYMEX WTI contract open interest was near 3 milllion options and futures combined with each contract worth approx. $150,000. In other words, this single oil market had a notional value of $450 billion. The total OTC notional was additional untold billions. From the article:

“When crude oil peaked in July, Semgroup ran out of cash to meet margin requirements on options contracts it had with Aron, contracts on which it had paper losses of $350 million. Desperate to survive, Semgroup asked Aron to pony up $430 million it owed on physical oil. Aron said no, declared Semgroup in default on its contracts and demanded immediate payment of losses.”

Semgroup was a bit player that bet wrong and is now looking for someone else to blame for bad management decisions that drove the company into the ground.

This is old news, I already identified the top 3 players back in August using the Q2 call reports, you can find my commentaries by searching the archives.

dieuwer: It is highly unlikely that SLV silver is held in COMEX warehouses, especially in registered form (the majority of COMEX stocks). Moreover, eligible form of COMEX warehouse holdings do not tend to change hands often and would be an extremely difficult way for SLV to acquire silver. In any case, COMEX warehouses have a different setup and custodial structure from English warehouses and the daily COMEX warehouse reports show no signs of SLV activity. Also it is possible to determine from the SLV’s bar list that the vast majority of silver is sourced from international refiners, many of which do not ship metal to the U.S. or even have COMEX approval (such as Russian State Refineries).

Silver:

“So are we to assume that over the past three months or so that the silver ETF has added a large amount of bullion to its inventory through accumulation and the price did not move up all that much. So when and if this liquidation you speak of commences, that the price of silver should not move down much either.”

I’m surprised you have such a fundamental misunderstanding of the silver market but it has always been the case that prices decline faster on smaller volume in gold and silver than they rise. You can think this is due to manipulation but a perfectly valid reason is that silver and gold are highly emotionally driven markets.

“Or whether the ETF is under accumulation or distribution, this has no effect on the paper comex price.”

It is very likely that buying of SLV and GLD over the past three months has been a major reason for the rise of gold and silver prices and that includes COMEX gold and COMEX silver. It certainly hasn’t been due to retail bullion buying, jewelry demand, industrial demand or Indian demand.

“Over the past few years I see no evidence or relationship between the ETF and paper comex price. Basically the ETF tracks the paper comex price.”

There is convergence more or less between paper and physical price except from time to time in local markets and in premiums on the relatively tiny volumes of retail bullion purchased and sold. The largest volumes are in OTC (both LBMA and derivatives) which are neither COMEX nor ETF. At least there is some price discovery in COMEX and ETF. But the opacity of the OTC market means that neither you nor I, or anybody else for that matter, can accurately determine which market is dictating price and to what extent. The best chance we have is to study the basis and that is why I am doing so.

“The ETF could add another 100 million ounces of silver to its inventory and I believe it would have little effect on the paper comex price. The evidence clearly supports that theory, how is it possible to have a impending physical shortages along with record buying in worldwide ETF’s and the paper price is going back down or sideways. That type of activity defies logic.”

To the extent there is 100 million ounces available for sale at near the current price, there would be little effect on the “paper comex price” or any other silver price. It is possible to have impending physical shortages and record buying in ETFs on the basis of available supply TODAY. Impending shortage is not shortage TODAY and record buying in the ETFs is only relevant TODAY. That is why I stated we could have something happen in 60-90 days. In the meantime, the Hochschild mines have gone back into production and ETF accumulation is flattening out.

“What will happen one day industrial users and investors will wake up and say geeish there is a silver shortage and the price will jump to $25, $35 or $50, I don’t thing so.”

That is not my argument, it is Ted Butler’s. I stated silver could climb to $16-18 if ETF demand remains high as measured by the basis and the supply disruptions continue for 60-90 days. Any larger price move would probably be a short-term phenomenon unless a growing number of new players pour substantial funds into silver on an ongoing basis. While that is certainly possible, it is not what I am talking about.

“Also why if there is a impending silver shortage, ETF investors will start to liquid holdings. Our we to assume then its industrial users redeeming there shares for physical bullion, because the ETF is the only place to get large amounts of physical silver.”

They will sell out of fear or stop losses on a price drop — not considering the potential silver shortage. The ETF at this point is not the only place to get large amounts of physical silver, although it could become that.

“Or is it what I have been saying the ETF’s were designed to suppress silver prices also. Meaning entities, IE large banks are selling ETF shares to keep the price down until the wholesale shortage passes or eases alittle. Like I said before the ETF’s I believe are another vehicle inwhich the big banks can control silver. How does just SLV silver ETF add almost 70 million ounces of silver to its inventory in the last 3 months and the price does very little. This in the face of a impending silver shortage. Something to me is very fishy here.”

You mean, how is it that SLV added 70 million ounces of silver and the price of silver has gone from a low last October of $8.40 to a high of $14.60 this March, or a rise of almost 75% from the low, despite meager speculative interest (on the COMEX and elsewhere) and a global industrial contraction? May I suggest that last year’s decline in the price of silver was due to OTC selling (both physical and paper liquidations — it certainly wasn’t due to COMEX or ETF selling) that was partially absorbed by the bullion banks, and subsequently a portion of the physical positions were offloaded to SLV. In other words, this was mostly a change in silver holdings from hedge funds, leveraged investors and other speculators to ETF holders (many of whom are probably no less speculative). The basis of future price declines, then, would be some of the ETF holders clearing out to the next generation of holders (with hopefully stronger hands).

I don’t think they will have time at the G20 summit to discuss such novel issues as a new reserve currency, much less to “spotlight” it.

As I said before, this is an event not a venue for serious crisis resolution. Everybody airs out their laundry in public beforehand and then they meet to shake hands on what has already been preordained. My prediction: no meaningful discussion of “reserve currency”, some statements on putting together a task force to recommend international banking and financial regulation, being diligent over global economy and considering more rounds of stimulus if things don’t stabilize in the next few months.

You might have this all backwards. From the dealer (seller) perspective the main consideration is getting a premium over market, but there is a risk the market moves against the dealer between submitting the bid and acceptance. If there wasn’t this risk, we would see many more billions of dollars of Treasuries offered to the Fed during each “operation”. In effect the dealers are trying to buy low in the market and sell high to the Fed. Historically (well, at least based on the data going back to 2005, see here: http://www.ny.frb.org/markets/pomo/display/index.cfm ) the “coverage” has tended to be around 10 to 1 which actually means that the current offers are too low by a factor of about 3 and the Fed may actually be overpaying a bit due to there being too few dealer submissions.

sorry I was confused by the word “overwhelm” which implied that supply was greater than demand whereas the issue is that there are too few sellers for the Fed to make purchases at a good price. In any case, the market is not convinced that bonds will surge (even higher) in price and that is why bonds have not surged (even higher) in price. As I already mentioned, the dealers submitting offers to the fed window are trying to make money on spreads, not offloading excess Treasuries. The small number of offers and the Fed’s high coverage ratio indicates that the available spreads are pretty tight meaning that there is hardly much selling pressure at this point in bonds. That in turn means we shouldn’t expect bond prices to fall by a lot in the near future. If and when we see the offers grow by several multiples it will then be time to think about being short bonds.

This is a political move but it is primarily directed at GM bondholders who are refusing to restructure outside bankruptcy. GM debt already trades at a huge discount to par and the CDS exposure has been rationalized and so the bondholders have little hope. I actually believe Obama did the right thing to call the bondholders out, the wimpy management at GM certainly doesn’t appear to have the balls. We’ll have to see what concessions the unions actually make in the end but considering wages is about 10% of GM’s cost the unions are less of an issue than a lot of people think.

Butler’s latest piece assumes without any evidence whatsoever that JPMorgan and other banks have a gross short position in their swap books as reported in their call reports and summarized in the linked OCC report. It is more likely that DEALERS like JPMorgan and the banks are long swaps, OTC paper and forward purchases against short positions on the COMEX. I don’t need the support of somebody who believes the investment case for silver is based on the probability that a long and successful alleged price suppression will be busted at some point in the near or far future.