More on the Friday Spike in Silver
On Friday silver went on a tear starting around noon Eastern time, eventually adding a dollar per ounce and recovering much of the losses suffered earlier in the week. In the meantime gold remained steady above $1,200 per ounce after having caught very impressive flight to safety action while the Greek debt inferno continued to blaze. The fact that silver would have risen strongly on Friday should not be surprising as it was merely recovering its follower status behind gold, which surged pretty much all week and came within a whisker of making a new record high. What is surprising is the nearly vertical lift-off by silver around noon Eastern, and Karl Denninger thinks he knows why:
You don’t think that GOLD was being speculatively shorted beyond intraday position limits, do you? That oval, by the way, is right when the announcement was made.
Or shall we look at SILVER?
Actually Karl, it is very doubtful that gold and silver were “being speculatively shorted beyond intraday position limits”. The reason is simple. As of the Disaggregated COT of May 4, 2010, there were a grand total of 8,627 speculative short futures positions in the reporting category (by definition a non-reporting position cannot exceed position limits). Since the speculative position limit in silver is 6,000 contracts (1,500 in the delivery month but there were only a grand total of 600 contracts outstanding and 418 contracts traded in May COMEX silver on Friday so that limit could not have been exceeded) that means one trader would need to hold the vast majority of speculative short positions. Yes, I know the CFTC warning is about intraday positions but still there are 30 large reporting traders in COMEX silver futures. It is simply inconceivable that a single or even a group of large speculative traders could have each been short more than 6,000 contracts of COMEX silver on an intraday basis especially when we look at the charts and note the trading volume that occurred in the active July 2010 COMEX silver contract during and after the price spike:
That certainly is impressive volume but not nearly enough to allow a single large speculator, much less a group, to scramble out of thousands of speculative short positions in COMEX silver in order to supposedly comply with the CFTC warning.
The speculative short position in COMEX gold appears to be somewhat larger but gold didn’t make anywhere as spectacular a move as did silver on Friday. It turns out that in COMEX gold there were 40,964 short futures held by 66 large speculators as of May 4, 2010. Here is the COMEX gold chart for Friday:
The above volumes in both gold and silver are quite consistent with the volumes we would see when a strong price rise takes place toward the end of the trading session.
So it wasn’t speculative shorts in COMEX Silver or COMEX Gold that the CFTC was warning. Who then was it? Very likely it was aimed at oil and gas traders as part of the CFTC’s ongoing effort to police the energy markets. Some would say those efforts would be better spent policing the precious metals markets but that is besides the point.
Why then did the price of silver jump by such a huge amount at around noon Eastern on Friday? It is quite possible that some traders reacted to the CFTC advisory by assuming that large speculators would have to immediately exit short positions that exceeded speculative limits in COMEX silver. But as we have seen, it is unlikely that any such over-limit positions do actually exist in COMEX silver. In other words, some traders might have become falsely emboldened to make a charge against enemy lines. If so, we are probably going to see silver give up most of its gains above and beyond the $18 level quite soon. The $18 level seems to be intuitively where silver ought to be hanging around at the moment after the technical damage that was done earlier last week. Hopefully we will see some preparatory consolidation in advance of the next surge higher.
An alternate explanation for the spike in silver on Friday is that somebody dumped almost 1,000 contracts of December 2013 in the COMEX pit while possibly placing a large simultaneous bid in the active month (July). I further posit that in order to conceal the nature of the December 2013 position held by this trader (spread vs. outright long), he or she placed the bid for the active contract month using the GLOBEX. By design or coincidentally this may have happened just as gold and silver were on a nice upswing and so the large bid would have given an additional boost to the silver price that perhaps also helped gold along.
Even more intriguing is the possibility that the December 2013 contract was short covered to the tune of almost 1,000 contracts. For example, this could have happened if a bullion bank held a short position as a hedge on a long-dated swap or a forward purchase of about 5 million ounces of silver. Admittedly the December 2013 COMEX silver contract wouldn’t be the best way to accomplish this but the example is still theoretically valid. In any case, the bank’s customer may have terminated the transaction over the counter for whatever reason and that may have prompted a quick exit out of the short futures by the bank at whatever price the market would bear, which happened to be much higher at that particular moment.
Now, I admit the above might sound farfetched but this kind of thing does happen in the markets, often without apparent rhyme or reason. And while I might be wrong about the scenario that resulted in the price spike in silver, it is a fact that the strange doings in the December 2013 contract did take place. Indeed, I might even allow that the December 2013 contract gyrations could have resulted from the CFTC warning (a really big stretch), and yet that wouldn’t really mean much in the scheme of things considering that the alleged manipulation in the gold and silver markets is not speculative at all but rather endemic to the commercial hedgers according to GATA and Ted Butler. The CFTC warning pointedly did not address commercial traders.