The Silver Short Squeeze – What we Learned

On Monday we wrote about the WallStreetBets (WSB) reddit group orchestrating a short squeeze on the silver market.  We discussed at that time the various reasons and sheer scale of the short positions in the silver market and questioned the ability of WSB to move such a big market compared to say GameStop (GME).   With hindsight now, the squeeze did indeed see prices rise significantly and now retrace over half of that gained, still up around 4% from when news broke.  This has many asking ‘where to from here?’.  We won’t know fully until the Commitment of Traders report on Saturday morning our time, but it would appear they have doubled down on their shorts or this was just a retail FOMO spike. 

One of the reasons we discussed in the above link (which you should read first before reading on) is the theory of deliberate manipulation by some of the big Commercial Traders, dominated by the so called bullion banks.  There are arguments for and against this position and likely a truth in between when, as we said in the previous article, there are some legitimate commercial (not speculative) reasons to be shorting silver if you are, say, a miner hedging your production.  The piece below is from long term COMEX analyst Ted Butler.  Ted is firmly in the manipulation camp and presents a compelling case.  That then raises the question of why would I buy a manipulated commodity?  The answer, frankly, is that silver has still outperformed both Aussie shares and property over the last 15 years DESPITE this supposed suppression.  The prospect therefore remains of either natural market forces of supply and demand and/or another such orchestrated attack on the long side to break all these shorts for the mother of all squeezes.  

We are not (and frankly can’t) going to tell you what is happening and what will happen as that would be pure speculation.  What we can say is that at a time of a fundamentally bullish case for all such hard assets like silver, gold, platinum and Bitcoin, silver sits as the most shorted of all.  Despite the recent rally, the Gold Silver Ratio is still historically very high at 69.  Maths, reversion of the mean, and financial history appears on the side of silver.  We just got a little glimpse of a little online group being able to move the silver market 15% in a couple of days.  Consider when a small fraction of the $300 trillion in inflated financial assets moves to the safety of hard assets…. Over to Ted Butler:

“The current short position in COMEX silver is mostly held by 8 major financial firms. We can only guess who they are because their identities are protected. According to the COT reports, the biggest 4 are short nearly 60 thousand contracts and the next 4 are short nearly 20 thousand contracts. That’s a total of 400 million silver ounces. Annual mining production of silver amounts to less than 800 million ounces. The short position in silver dwarfs any other commodity. Furthermore, it is concentrated in a few hands and thus open to manipulation.  Over the years, this shorting strategy has proven to be lucrative as the big shorts would buy back their short positions on price drops. Recently, the Justice Department and the CFTC punished JPMorgan, Bank of America/Merrill Lynch, Deutsche Bank and Scotia Bank with a deferred criminal prosecution agreement for the practice of spoofing which meant they were often putting in fake sell orders to spark a price drop.

In the last year things have changed, and the big shorts have found themselves unable to buy back their short position as they had in the past. In addition, JPMorgan, the ringleader of the big shorts, reversed gears and eliminated its short position in silver and gold. As gold and silver rose in price, the losses of the 8 big shorts began to mount and at years end totaled $14 billion. In the last few days, the picture for the big shorts has darkened even further. On January 20th, a 20-million-ounce silver deposit was made in the SLV. Following the explosion in trading volume of 150 million shares in SLV on Thursday (the most in my memory) a 34-million-ounce deposit came in. Friday’s 110 million share volume leads me to believe that total net purchases in the SLV for both days was 50 million ounces and a considerable remainder is still due to be deposited in SLV.

If such a large percentage of available silver in thousand-ounce bar form has been purchased, why has the price not exploded? The big shorts are selling new SLV shares. In other word, they are shorting additional silver to keep the price down and prevent a price run on silver. To make matters worse, they are borrowing or leasing the silver to deposit in SLV which is in effect another short since that silver must be paid back. The authorized participants doing this in SLV are no doubt connected to the 4 big shorts on the COMEX. The only reason they would sell so aggressively at such low prices and further compound their position by borrowing physical silver at such low prices is to prevent the SLV price from rising.

Another consideration is the dramatic tightening of inter-month spread differentials in both COMEX gold and silver futures contracts. Last spring the spreads blew out to unprecedented wide levels and now they have tightened in nearly as dramatically. My conclusion is that this is a strong indication of wholesale physical tightness in both gold and silver.

When something is cheap, as silver surely is, it makes sense to buy it and not sell it, and certainly not sell it short. Yet, that is precisely what the big shorts are doing on the COMEX and in SLV by leasing the metal they are depositing. Leasing is nothing more than another version of short selling. And the only possible motivation for the big new short selling by the big shorts is to keep prices from rising, which is about as illegal and manipulative as it gets.

Everyone watching silver has to be shocked by the developments of the past few days. You can be sure the big shorts were just as shocked. This Robinhood/Reddit development was a true bolt out of the blue, completely unexpected, and earthshaking in significance. The best the big shorts have been able to do in reaction is to short more COMEX contracts and borrow scads of physical metal to throw at the SLV and perhaps influence Robinhood to prevent its clients from buying SLV. The only question that remains, is will the big shorts succeed in stemming the rising price tide in silver?”