Gold & Silver – Stoking The Fire

Fresh off the ECB making it clear Thursday night that they would be introducing even further monetary easing (increasing the already Eur1trillion QE program and reducing zero rates further), China’s central bank cut interest rates on Friday for the sixth time in less than a year and yet again lowered the amount of cash that banks must hold as reserves in an effort to stimulate weakening growth.  This double whammy saw both shares surge and the USD rise again, and more pressure on gold which it withstood until we were sleeping here Friday night.  All rejoice free money….. for now….

Speaking of an un-real situation, this coincides with a Commitment of Traders report showing near record short COMEX contract increases by the big Commercial’s (mainly the top 4 banks) last week.  COMEX silver specialist Ted Butler had this to say on such short selling and it’s worth repeating:

“Most people can’t quite understand how anyone can sell something not owned, as it is not something that occurs in daily life. This is a prime reason, I would contend, that the silver manipulation has persisted as long as it has. And for the sake of this discussion, I’ll try to be as clear and simple as possible and not get into my specific debate on short selling in SLV (or GLD), which can be quite complex.
 
There are two distinct price impacts from excessive short selling – first, the price is artificially depressed as the selling occurs. It matters not whether someone owns the asset or not, or has borrowed the asset first before selling or not – excessive selling will drive a price lower. The emphasis here is on excessive short selling. After the price of an asset or security is driven lower by excessive short selling, any rush to buyback excessive short sales can drive prices sharply higher. However, it doesn’t always follow that excessive short selling in a security must be bought back, as sometimes a company can go bankrupt and, effectively, eliminate the requirement to buyback short sales.
 
That’s not a concern in silver or any other real asset, as such assets can’t declare bankruptcy. Furthermore, all short sales on futures contracts that allow and require physical delivery, such as COMEX silver futures contracts, must be closed out at some point, either by actual delivery or by repurchasing an offsetting futures contract to close out the previously shorted contract.
 
I know that the vast majority (97% or more) of all short sales in commodity futures contracts, as well as corresponding long positions, are closed out by offsetting positions, or can be “rolled over” or extended far into the future. But that has nothing to do with the right and obligation of a contract holder to make or take physical delivery should he or she so decide. To my mind, that’s why they are called contracts. Anyone suggesting that there is some way the COMEX silver shorts can insist on some type of “cash settlement” if an existing long contract holder demands physical delivery and can afford to pay for the delivery, is flat out wrong. Such a refusal or inability to deliver would result in a contract default and the likely closing of the COMEX”.

So compare our must read story of Friday regarding physical silver demand against this set up in the paper silver market and ask yourself if this seems sustainable.