HOUSTON (ResourceInvestor.com) -- On August 6 the Got Gold Report took a look at this year's action in silver and noted that it looked like we were headed for a harsh August, similar to the previous August in 2007. That article, with the prophetic title "," suggested that the first two weeks of August this year might be rough for silver metal, because it looked like technical support levels had been breached.
The price action for the second most popular precious metal since that report has been rough indeed. Silver literally fell off a price cliff, ripping through sell stops and trailing stops for silver investors and traders. Silver dived lower so far and so fast that it became a seemingly unexplainable and irrational panic. However, over the past few days some startling evidence has surfaced which just might explain silver's record-breaking August plunge of 2008.
Once the evidence now coming to light reaches the mainstream Wall Street press, just about everyone will likely conclude that silver investors world wide were just sucker punched by two very well funded U.S. banks.
Silver Smacked 40% Lower Despite Big Popular Demand
Silver just endured a near collapse, having fallen from the $19s in July all the way down to test the middle $12s. Very seasoned silver traders who correspond with this report have expressed their shock and disbelief as to how violent and how strong the down-spike has been so far.
In the world of silver just about everyone has to be asking how it was possible that during the month of July silver would peak at over $19.00 and even though physical silver was commanding high premiums even then, the metal could plunge off a cliff seven dollars or more, a drop of 40%?
Well, it could be that silver commentator and analyst Ted Butler has discovered evidence of what might be the single largest commodity manipulation in the history of the metals futures markets in the U.S. If Butler is correct, (and the data are compelling that he might be), two U.S. based banks apparently crushed the silver market with an overwhelming onslaught of short selling of silver futures on the COMEX, division of NYMEX in New York, sometime between July 1 and August 5, 2008.
In a short article entitled "The Smoking Gun," Butler examines the reported positioning of banks in the futures markets. The bank positions are reported monthly by the Commodities Futures Trading Commission (CFTC) and those public reports are available on the CFTC website here.
What caused Butler to issue a special report about the most recent CFTC bank position report was the fact that exactly two U.S. banks had apparently taken extremely large short positions on the COMEX just prior to the recent plunge in price for silver metal.
Before concluding whether this is just a case of a couple banks getting it right and profiting from their superior analytical skills, or whether it was a case of a couple banks intentionally manipulating the global market for silver metal by forcing the market lower themselves, let's take a closer look at the data brought to everyone's attention by Butler.
Silver Market Sucker Punched by Two U.S. Banks?
This first chart takes a look at the net positions in COMEX silver futures by U.S. banks according to the CFTC Bank Participation in Futures Markets Reports since September, 2006. For that 24-month period there were two to four U.S. banks reporting positions. The report also includes participation by non-U.S. banks, but this analysis is focused strictly on the U.S. bank's reporting.
From September 2006 to July of 2008 the COMEX net silver contract positioning of the two to four U.S. banks reporting ranged from being 3,376 contracts net long on September 4, 2007 to being 12,381 contracts net short on March 4, 2008. As of July 1, there were two U.S. banks reporting and they collectively held a net short position in silver futures of 6,177 contracts as silver closed at $18.10. By August 5, 2008, after silver had declined to $16.45, these two U.S. banks had increased their net short positioning to a staggering 33,805 contracts.
So, using just the COT reporting dates, from July 1 to August 5, as silver declined $1.65 or 9.1%, these two U.S. banks INCREASED their net short positions by 27,628 contracts or a mind boggling 547%.
A short position of 33,805 contracts is a big number. It represents 169,025,000 ounces of silver. That is a net short position by two U.S. banks of 5,257 tonnes on silver worth about $2.7 billion at $16.00 the ounce.
In order for these two U.S. banks to have taken these net short positions, they had to sell short silver futures on the COMEX. Lots and lots of them. Apparently, sometime between July 1 and August 5, these two U.S. banks became the dominant force in the New York silver futures markets. As anyone can see from the data, they were dominant on the short side, or the side pushing the price of silver lower on the futures markets.
For perspective and to show just how much the trading of the two U.S. banks might have affected the COMEX silver futures price, and thereby affecting the spot price, this next chart looks at the two U.S. bank's net silver futures positioning relative to the entire open interest for silver on the COMEX.
From September 5, 2005 to July 1, 2008, the net short positioning of the 2-4 U.S. banks never amounted to more than 11% of the total open interest. Then, suddenly, as of August 5, 2008, with only two banks reporting, their net short positions spiked up to 25.37% of all the contracts on the COMEX, division of NYMEX.
On August 5, exactly two U.S. bank's net short positions for silver futures accounted for over a quarter of all 133,255 of the contracts on the COMEX. Two banks, whose identities are protected and kept secret from U.S. citizens by the rules of the CFTC, had taken an overwhelming net short position in silver (and in the process drove silver much lower in price) and these two banks were so sure of their silver-is-going-lower call that they increased their short positioning AFTER silver had already fallen over 9%.
It would be one thing if these two U.S. banks were merely part of a much bigger exodus out of silver metal; if the positions of these two unnamed U.S. banks were merely a small percentage of many commercial entities taking the short side. It would not raise the slightest question if two bank's net short positioning was large if the overall commercial net short positioning for silver was much larger. But when we compare the net short positioning of these two U.S. banks on August 5, 2008 to the entire commercial net short position of all commercial traders on the COMEX, we find that these two unnamed U.S. bank's net short positioning accounted for a sickening 60.95% of the entire silver commercial net short positioning on the COMEX.
From September 5, 2006 to July 1, 2008, the 2-4 bank's net short positioning never accounted for more than 18.21% of the commercial net short positioning on the COMEX. Then, suddenly as of August 5 it spiked up to 60.95%.
Demand for SLV Surging
Sooner or later, if large players attempt to overwhelm the market in one direction, (as has apparently just occurred), their efforts will run into the very real laws of supply and demand. (As the Arabs and the Hunt brothers learned from the other side of the market in January, 1980.)
What has demand done during this historic decline for the price of silver? Demand has exploded for all kinds of silver metal products here in the U.S. Bullion dealers are reporting they have been overrun by investors trying to buy the actual metal. Premiums for physical silver have shot much higher for those dealers still willing or able to book new sales and many dealers have no silver to sell at all.
Some dealers have resorted to booking sales now, but promising to deliver metal in the future from future business. Unless the dealer has learned to "lock-in" his sales using the silver ETF or some other method of hedging, booking physical silver sales today for delivery from future activity can be a dangerous business practice for a bullion dealer because it is like selling silver short. We'll have more about that in future reports.
At any rate, as silver has come down so far in price, one would naturally expect that there would have been a panic out of the metal and into cash. If this sell down for silver were something systemic or something that threatened the very sustainability of the silver bull market, one would have expected the "smart money" to have dumped their holdings in both physical silver and in the silver exchange traded fund.
That hasn't happened. Instead premiums, the amount over the current spot price demanded by dealers for physical silver, have skyrocketed and availability for silver is extremely scarce even at the injuriously high premiums evident in the physical marketplace today.
The silver ETF has seen consistently more buying pressure than selling pressure throughout this August silver swoon too. In fact, just since August 15, SLV has added a huge 308.839 tonnes to hold 6,474.04 tonnes of average 1,000 ounce silver bars.
The authorized market participants for SLV have to add shares to the trading float and increase the amount of silver held for SLV when buying pressure is significantly stronger than selling pressure. The reverse occurs when there is more selling pressure than buying pressure.
Instead of the silver price plunge creating a panic exodus out of SLV it has just created much more demand for it as shown in the chart below.
It should be obvious that investors have not panicked with silver and are instead thankful for the lower prices so they can buy more of it with the same money.
People Don't Like to be Sucker Punched
Everyone can look at the data and form their own conclusions. But when silver is in short physical supply, commanding injuriously high premiums and difficult to locate; when investors are piling into the silver ETF in droves, a 40% silver price plunge is not only not warranted, it smells.
It is difficult to imagine a legitimate reason that two U.S. banks could quickly and systematically amass a net short position on the COMEX which amounts to over a quarter of the entire action on that bourse. It will not be surprising at all if we learn that these two U.S. banks are taken to task by regulators for their actions. It will be even less surprising to learn that they have become the target of multi-billion dollar class action lawsuits by hungry lawyers representing silver investors everywhere.
Futures markets are supposed to answer the actual physical markets, not the other way around. In other words, futures markets are supposed to be a place where producers or large holders of a commodity can lay off price risk to speculators and thereby hedge against unforeseen adverse movements in the price of the commodity. Futures markets are definitely not supposed to be a place where a couple of well connected and well funded entities can bully the market with their own heavy handed trading.
If silver really was just taken down by a couple of very big U.S. banks to irrationally low levels, it won't be long before the laws of supply and demand reassert themselves. Got silver?
Got Gold Report Charts
That's it for this special offering of the Got Gold Report. Until next time, as always, MIND YOUR STOPS.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author currently holds a long position in iShares Silver Trust and holds various long positions in mining and exploration companies.