Oct 12, 2010

http://www.financialsense.com/contributors/chris-mack/silver-the-house-always-wins-until-now

Something has drastically changed in the silver market. The banks that once controlled the price of silver are now closing positions at a loss. Traders may begin to speculate on what has changed and why. Some traders have reported that a large buyer is entering the market. Regardless of the actual reason the commercial shorts have begun to bleed money. And when blood spills sharks will circle. Hedge funds and traders that never even thought of silver before will begin to squeeze the shorts. If the big banks don't quickly regain control of the silver market, they may lose it forever.

Comment:

Big banks such as JP Morgan have been "selling silver" in large quantities (paper contracts, not the real stuff) for many years, driving the price down as if there were more sellers than buyers. It has all been a paper game, since the banks had no intention of actually selling the silver, nor did most of the buyers have any intention of cashing in their paper contracts and demanding actual silver. It was all speculation on theoretical silver.

It became a big game of how the big banks could overwhelm the silver markets with too many offers to sell, thus driving down the contract price for a theoretical future "delivery."

When the price was driven down, it put silver mines out of business, because the cost of mining became more than the price of silver that they could produce. Further, since silver is used in virtually all electronics and a lot of medicine and health products, it continued to be used up. (By contast, gold is accumulated and very little is used in industry because of its high cost.)

So the long-term result was that we are now nearing a shortage of silver. Investors are becoming increasingly aware of this and are demanding actual delivery of the real stuff, rather than just rolling over the paper contracts when they come due.

Since 2002 I have understood that JP Morgan would eventually be forced to eat its shorts. A contract "sold short" means that they have contracted to sell a certain amount of silver at an agreed-upon price to another buyer or investor. When the time comes to settle the contract, if the current price is higher than the contract specifies, the short seller (JP Morgan) loses money. If the current price has been driven down below the cost of the contract, then JP Morgan makes money. The contract is usually just settled by an exchange of money, since most investors have not really wanted to hold actual silver. It was just a means of price speculation.

But something has now changed, according to the article above. The price of silver was NOT driven downward as usual, and so those shorting the market are having to settle their contracts at a loss. In other words, they have to "eat their shorts," as the price zooms up past $23/oz.

We have long watched for this day, because JP Morgan does not take kindly to losing a lot of money while trying to drive down its price. It appears that the "shorts" are beginning to be overwhelmed by the "longs," as more and more investors are dumping dollars and buying silver (among other things).

Watch for another JP Morgan bailout. After all, crime does pay, if your bank is too big to be held accountable for its crimes. And be ready to light a fire under any government official who backs such a bailout without sending its CEO to prison.