Silver Shenanigans – R.I.P.

July 4, 2003

There have been two very interesting developments in the past week:

1. Silver’s Daily Open Interest on Comex dropped to almost zero (See red line at bottom of chart)

TFC Commodity Charts

Silver, 5000 oz (SI, COMEX)

2. It was announced that “ China To Launch Spot Silver Trading In Shanghai July 8” (http://biz.yahoo.com/djus/030704/0432000165_2.html)

Logic dictates that these two events were not unrelated (Comex traders probably decided to square their books pending the emergence of a better understanding of the likely effects of the Shanghai development) and that this squaring of the books is what caused the silver price to show an upside chart breakout.

Now these developments raise some interesting possibilities:

On the one hand, with open interest reduced to virtually zero on the daily contracts, the way is presumably open for another bout of short selling on the Comex futures market in the event that the silver price “threatens” to rise. (That appears to have been the tactic of the Price Manipulators since Grandma experienced extreme discomfort with her washing machine’s mangle)

But on the other hand, the ratio of “eligible” silver stocks at Comex (silver that belongs to third parties but which is reflected in Comex stockpiles) - which has been steadily rising over the past few months - indicates that the physical market has be tightening (Source:www.sharelynx.net/Markets/Charts/CMX-AG-Stockpiles.htm) :

Based on the most recently available information, Comex stocks (that are actually available for delivery against futures contracts) are down to around 45 million ounces.

Now, remembering that 2001 “Physical” silver demand was around 880 million ounces with availability at around 800 million ounces excluding Government stockpiles ( Source:http://www.silverinstitute.org/news/pr23may02.html ) there was an implied shortfall of 80 million ounces and, against THIS backdrop, China is opening a market to deal in Physical silver.

So, in simple terms that even an eleven year old can grasp, with Comex stocks equal to around 2.7 weeks of world demand, and with 60 organisations about to start trading on the about-to-be-established Spot marketplace in Shanghai, things look like they are about to get VERY interesting. Not to put to fine a point on it, in the face of the unknown effects of the new Shanghai market - which has 60 trading members buying and selling PHYSICAL silver - you would have to have brass balls to short the silver market at this juncture given that the skulduggery of price manipulation can no longer occur under the benign protection of the Comex rules of trading .

The following is a monthly chart of the Silver Price:

TFC Commodity Charts
Silver, 5000 oz (SI, COMEX)

Monthly Price Chart

Technical Analysts will spot a three line downward pointing Fan Formation that began its journey in 1998, and a single rising trendline that began to emerge in 2001 - and that the third falling trendline and the rising trendline are converging - the Apex of which occurs in three months. Ie The future direction of the Primary Trend of the Silver price MUST be resolved before the next 90 days are up. It is also of significance that on the MONTHLY Comex trading figures there are still 79,441 open contracts. Now, folks, that’s equivalent to around 397 million ounces or approximately 50% of ALL annually available silver supply.

Caution dictates that one needs to be brutally objective here. According to strict charting theory the Three Line Fan formation has not yet broken up and, therefore, it is conceivable that the Primary Bear Market in silver could resume if the price breaks DOWN through the uptrend line that started forming in mid 2001.

What are the chances of this happening?

Well, it is conceivable that a concerted effort by the price manipulators could cause the futures price to break down on a temporary basis, but the intellectual disconnect is and always has been that the tail cannot wag the dog. The “futures” price does not determine spot prices. It is the other way around. And there is an unsatisfiable shortfall in market demand.

And now, with the Shanghai market opening - geographically remote from (and presumably independent of) the US skulduggery - it seems reasonable to anticipate that the brown stuff is going to hit the fan long before the next 90 days has passed.

It also seems reasonable to conclude that the boys (and girls) on the Comex are about to finally come to understand in the marrow of their bones that no single trading cartel on earth can overcome the combined forces of the overall market over the longer term.

All of which brings to mind the old adage: “as you make your bed, so you will lie in it”.

Let the fireworks begin!

Most silver is produced as a byproduct of copper, gold, lead and zinc refining.