Today In Silver

Au/ag went on a vigorous rally today as crude oil had one of its best sessions ever and the dollar pulled back from its highs. At one point crude traded above $122, a full $10 higher than just 24 hours earlier. I’ve talked enough about short covering in the past few days, but now we’ve actually seen what it can look like (in NYMEX crude oil at least). Copper and corn both did almost as well, clobbering the impressive gains of au/ag.

So, where to from here? Well, it looks like there was some more short covering in COMEX silver too yesterday, with a reduction in open interest of 2,000 contracts based on preliminary NYMEX data. If confirmed, this would be a decline in open interest of 7,000 contracts from its recent high of 140,000. Should conditions remain aligned in silver’s favor, I would expect short covering to accelerate in the days ahead, feeding the present rally.

Now let’s quickly look at those conditions. The two main drivers in the ultra short term remain crude oil and the U.S. dollar. Personally, I have some doubts that crude will be able to leverage the rally of the past two days. There are still some strong technical (if not fundamental) reasons why the gooey stuff might need to visit the $102 level or so. On the other hand, these reasons will be invalidated should crude manage to climb above $128.50. We’ll have to see if the current war of words between the “West” and Russia will do it. Also, there was a report released today that claims a single trader held 11% of the long positions in NYMEX crude last month and may have been improperly classified in the commercial category. Man, talk about concentration! Why am I not surprised this was on the long side? In any case, a CFTC investigation of the NYMEX crude market may further cool off whatever overheated speculation might exist.

With respect to the dollar, it might be unwise to count it out completely just yet. The 77.50 level basis the Dollar Index did repel initial test attacks, but the pullback wasn’t as immediate or as strong as one might expect if in fact this was an exhaustion move. Moreover, the Euro still appears bound ultimately for the 1.430 level from the current 1.485 or so, which corresponds with the 80.00 level or so in the Dollar Index.

The above assessment may seem pessimistic in terms of au/ag prices, but due to the very strong physical buying and the vast improvement in market internals, I expect any forthcoming weakness to be of the “two steps forward, one step back” variety. I don’t believe the recent lows would be taken out by more than a marginal amount, if at all. I can’t rule out a final capitulation move that results in a seminal bottom as the vast majority of speculators get flushed out, especially if it turns out that speculative long positions are quickly built back up in the next few days and weeks. By contrast, if the dollar does continue to sink and oil rise. then the $3-4 rally in silver would still be in play (to the $15-16 level). My current approach is to attempt to cover both possibilities using the strangle, which is a pairing of a long call and put option designed to take advantage of significant price movements in either direction. Since September COMEX silver expires in just a few days and its options have failed to cooperate by falling below my maximum buy price, I will be looking at October and later COMEX gold as well as options on the gold ETF, GLD.

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Some of us have speculated before about the reason Barclays split the silver iShares 10-to-1 (and some other ETFs by varying amounts) on July 21. Personally, I thought it had to do with added liquidity, an attempt to align the ETF’s price with the underlying (silver bullion) itself, attracting smaller investors, and/or a desire to move toward real-time NAV calculations like big-brother GLD. Well, I was wrong. What it had to do with was the reduction of the basket size, or the minimum ounces of silver that the Authorized Participant needs to deliver to/from the iShares Trust in exchange for receiving or redeeming a corresponding number of shares.

Before, an Authorized Participant who wished to profit from closing any gaps between the price of SLV and the price of spot silver would have to either (1) accumulate 50,000 shares before redeeming them for 500,000 oz. silver or (2) distribute 50,000 shares after delivering 500,000 oz. silver. This may not seem like a lot based on SLV’s average daily trading volume of over 500,000 (pre-split) shares per day, but considering that the price of SLV rarely meanders very far from par, a 50,000 share position may actually present some holding risk to some Authorized Participants. At a minimum, it might not be a very attractive proposition.

In fact, SLV appeared on the Reg SHO Threshold list for several days earlier this year, most likely due to Authorized Participants selling shares in advance of acquiring a basket. This is known as short selling and since ETF shares can be particularly difficult to borrow, it can easily result in fails to deliver (which some call “naked” short selling). Doing so allows the Authorized Participants to accumulate the 500,000 oz. of silver incrementally and therefore take advantage of even relatively small price gaps. Given all the tinfoil hat speculation in the gold and silver camp about the existence of metal backing, however, it’s a particularly undesirable thing for SLV (or GLD) to appear on a list of securities with delivery failures (”naked” shorts).

With the recent split, an Authorized Participant need only deliver 50,000 ounces of silver in each basket. That is obviously a much easier task and means that the spread, if any, between the price of SLV and the spot price of silver should be tighter than ever. When making your own comparisons, don’t forget that the net asset value per SLV share will decline over time as a result of the annual 0.5% administrative fee. For example, each SLV share currently represents not one ounce of silver but rather 0.9885 oz.

But judging by the large additions of silver to SLV in the past few days — a total of 9.2 million ounces or 286 tonnes since last Friday — the 10-fer-1 split has had another effect. Namely, it may have actually increased the pace at which silver is being added to the Trust. Think of it like the difference between water and sand flowing through a sieve. Since water particles are much smaller than sand particles, they travel through the openings faster. This is true even when the openings are much larger than the average sand particle. There is usually some sifting of sand required to keep the material moving at a decent pace.

With SLV baskets more like water now than sand, we may see the premier silver ETF go on an absolute gobbling spree in the months ahead. This on top of SLV being possibly one of the most strongly held investment vehicles out there with virtually no decline in its holdings after a 40%+ price drop. The future of SLV and silver could be quite interesting!

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After the prior post about my recent exchanges with Ted Butler, this feels like slowly pulling a band-aid with the scab stuck to it off a flesh wound. In other words, it would be better at this point to just let this all go and allow whatever healing might take place to do so on its own. Unfortunately, Mr. Butler insists that a mutual misunderstanding is instead actually a sleazy attempt by me to discredit him. Most of you know that I’m not like that, but I’m going to put this on the record just in case, and then move on. I promise that I will never, ever, respond to an e-mail from Mr. Butler again. I’ve had people make death threats against me as I curiously (sometimes like a bull in a china shop) traipsed the silver market to and fro. Those episodes turned into mutual forgive and forget. This one will be forget and forget. But first, I gave my word and I’m not going to go back on it even if I have a good reason.

(1) I used the term “libeling” in my August 8 commentary to refer to Mr. Butler’s repeated statements alleging without proof that Barclays’ Silver iShares Trust does not hold one ounce of silver (less fees) for each issued SLV share. Mr. Butler has been stating this as fact based on his supposed findings that SLV fundholders have been the victims of rampant, unreported naked short selling by Barclays and the Authorized Participants. These findings are apparently the result of his analysis of SLV’s daily trading volume. Yet as I’ve pointed out before, unreported short selling does not show up in reported trading volume. Putting all that aside, Mr. Butler has asked me to retract the term “libeling” because he feels that his efforts are justified and his motives lack malice. Since I have no reason to comment on Mr. Butler’s motives, nor do I care a whit about them, I am making the following amendment to my August 8 statement: Yet apparently the detractors are not satisfied with libeling questioning Barclays and its silver ETF, SLV.

(2) Mr. Butler claimed in the same editorial that Central Fund of Canada (AMEX: CEF, TSX: CEF.A) had not yet received the 3.5 million ounces or so of silver it purchased in July because of a “delay”. To this, I responded on August 8 with the phrase: “This is truly sad”. My implication was clear: I believed Mr. Butler to be sadly wrong. Well, Mr. Butler called me on it, and I offered to check with his source. The source turned out to be none other than CEF itself. During my fact-checking phone call with CEF’s chairman Philip Spicer, I learned many things but two that are relevant to the matter at hand. One, that CEF indeed had not received the silver purchased in July as of August 13th. Two, that CEF, as of August 13th, did not expect to have already received the silver it purchased in July and therefore it was not considered a delay. The story doesn’t end there because I feel more has to be said about CEF. But for now this is sufficient to define the extent to which Mr. Butler and I were right or wrong.

(3) Mr. Butler claims that I pulled a dirty trick by only posting our e-mail exchange concerning the term “short covering”. Apparently he meant all of our recent e-mail exchanges. That’s not how I interpreted it especially since those other e-mails provide an incomplete view of what I learned about CEF’s internal process. That process, while not secret, is also not general knowledge. In fact, I could not find a description of it anywhere on the Internet. Given that Mr. Butler has already falsely characterized CEF’s silver deliveries as being delayed, my belief is that reprinting our e-mail exchange, which only partially addresses the issue, would be unfair to CEF. Mr. Butler has made it very clear to me that he does not care about CEF; he only wants me to live up to my end of the bargain he thought we had made. Well, he can win this pouty-kid game but I’m not going to help him spread misinformation. I’ll soon post the (O Lord, let this be it) final installment of this “Ted Butler series” including all of my other e-mail exchanges with him as well as a detailed explanation of CEF’s internal process.

Is this all very petty? Absolutely. This is not at all how I envisioned the outcome. It’s too bad that Mr. Butler and I managed to bury some important issues under a big pile of immaturity and petulance. Still, I walk away from this with some pride knowing that I can admit and learn from my mistakes.

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Silver stocks trashed
Barry Sergeant
Moneyweb
August 8, 2008

This article is self-explanatory. It’s not pretty, but we should periodically look pain in the face. After all, no pain, no gain. The one consolation prize is that most of my “widows and orphans silver stocks” have outperformed the group. That is, if being down an average of 40% from 12-month highs can be considered outperforming anything. Silvercorp (SVM.TO) and Impact (IPT.V) have been brutalized in particular, but not for necessarily any good reason. As such, I’d put these two toward the top of a shopping list. A careful, measured shopping list.

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The EIA reported this morning a rise of more than 9 million barrels in U.S. crude inventories, which immediately pressured oil, gold, silver and many other commodities. It also gave a temporary boost to the dollar, but the reserve currency has since given back most of those gains. The rise in crude inventories was tempered somewhat by the 6 million barrel decline in gasoline as refineries have clearly slowed down in anticipation of falling demand. Still, this report had the makings of a potential blockbuster that could have easily driven gold and (in particular) silver back to their recent correction lows.

That, however did not happen. Gold bounced smartly from the $800 level while silver found support at $12.80, an area that is now quite congested. The bounce was nice but it was even nicer that the decline was somewhat orderly. Sure, there was that long 1-minute bar yet again, but if you took the time to look at the internals, you’d see that up and down volume were fairly balanced. What we have been seeing recently is down volume dominating on these “shi(f)t” declines. We get an even better picture looking at tick-by-tick data: an orderly decline in step-fashion as opposed to huge up and down swings.

As I write this, the monetary metals threaten to continue moving higher. They face their first test at $820 gold and $13.40 silver (spot). A rise above those levels within the next 24 hours despite oil and the other commodities staying weak would be a very encouraging sign that a rally with a bit of legs might be in progress. Such rally would likely be fed by commercial short covering, especially in silver. Should the dollar also snap back by giving up some of its gains of the past few weeks, we could even see the scenario I recently discussed, a $3-4 rise in the silver price over the course of a few days. In support of at least the possibility of this occurring, I would point out that for the first time since silver started its crash (after the failure to surmount the critical $17.985 level), COMEX open interest has declined by a notable amount yesterday (3,111 contracts to be precise). Ideally, we would want to see this trend of declining open interest continue into a price rise. What we probably don’t want to see is a substantial increase in open interest.

In fact, preliminary data here shows open interest has dropped again today, although by less than 1,000 contracts. Still, that is a move in the right direction.

Another move in the right direction has been the comings and goings of SLV, the Barclays iShares silver ETF, which added another 2 million ounces to its holdings yesterday to reach a new record. Curiously, the historical data table (Excel file) does not show information for last week, but I do have confirmation that SLV has actually added a total of 4 million ounces of silver so far this week (not 2 million as the table might suggest because there was a decline of 2 million ounces last week that is not shown).

So all in all, silver is currently in its best shape for the month of August. Given how beat up it is, however, that isn’t saying much. And technically speaking, there are all sorts of red flags out there that indicate the trouble is not over. For example, the 200 day moving average (200DMA) has turned down for the first time during this bull market. And the 50DMA will cross under the 200DMA at any moment (it already has on some charts). Disciplined technicians will view these and many other bear signals out there as a reason to sell into any rally.

In fact, this will be a very good test of your favorite technician. If he or she has been faithfully using a favorite set of technical indicators to give buy and sell advice for the entire length of this bull market but is now abandoning it, that’s bad regardless of the excuse. On the other hand, if the technician is not abandoning these tools, that’s instant credibility in my book even if he or she might end up being wrong this time. Of course, there are technicians who always use what works best for the circumstances based on their own research and experience in the markets. These are the ones I’d be listening to right now (and always).

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