Silver: Position Limits,
Perceptions and Monetary Ignorance
By Dr. Jeffrey Lewis
The dividing line between silver performing as
a monetary asset versus an industrial commodity is tethered to a broken price
discovery system, where unlimited position limits are held by the most
influential of traders.
This fault line, at the heart of price manipulation, paints a dangerous and
false perception that permeates the trading landscape - as well as the
mainstream perception of money.
Price Discovery and Position Limits
Dollar and other fiat currency price discovery
for world silver prices occur on many exchanges. But it remains centered on the
largest: The COMEX, a division of the New York Mercantile Exchange and owned by
the for-profit CME Group.
No serious discussion about prices can ignore what transpires in the COMEX pits
- but even more so how it transpires.
We can look to one thousand points of macro
interest for some insight on how prices performed; yet no matter how much we
strain to see the connections, they are all too dim without first starting with
the entities that represent the dominate positions in those markets.
Ted Butler of Butler Research is one of the
most well known, distinguished, and influential silver analysts. Butler is a
former commodities futures trader and has been a prolific silver market reporter
for decades. He has documented the precarious and unique situation that exists
for silver and the other precious metals.
Simply stated, in the four precious metals the
dominant and concentrated net short (excluding swaps for contracts out along the
curve for the purpose of arbitrage) have been held by the four largest traders
in the commercial category of traders. This has been documented by the CFTC for
years. And while many prefer to lump all government data into the same pile
(where we might include the CPI or labor reports), the data has held very
consistent with only a few changes over the years.
The main issue (and not much else matters more) is that these four traders
comprise a dominant position that should never be allowed in any market, simply
because its very existence interferes with potential price discovery. Of course,
in silver and gold the interference is literal.
When one entity holds the majority of any
stock traded, the temptation to game the system by moving prices would be (and
is) impossible to contain. It does not matter if those positions are hedged.
The fact that they exist is enough evidence of foul play and puts the blame at
the feet of the exchange itself.
The influence of high frequency trading merely adds fuel to the fire. HFT has
exploded the issue by making it even less likely that the Exchange would ever
self regulate, as it profits directly from the sheer number of trades. HFT
enables spoof trades that never clear - nor are they intended to clear. It also
enables the continued dominance and, ultimately, the ability for these massive
entities to make the market literally by painting the tape and guiding the
technical patterns - drawing in further speculation.
Position Limits at the Heart of the Matter
As Ted Butler has pointed out on numerous occasions (but especially along
recent rule change considerations):
"At current levels of total open interest (including spread positions, the
formula would call for an all months combined position limit in COMEX silver of
less than 5,000 contracts, or the equivalent of 25 million oz. in COMEX gold,
the formula would dictate less than 12,000 contracts as the most a speculator
could hold long or short.
The problem is that JPMorgan is holding, at last count, (nearly) 18,000
contracts short in COMEX silver, well in excess of the current 5,000 contract
proposed limit and 72,000 contracts long in COMEX gold, six times more than the
proposed 12,000 contract limit in gold."
If JPM Morgan were forced to comply, the result would be a sudden knee jerk
return upward in the direction of price based on fundamentals.
Silver: The Monetary Asset
The aftermath of this illegal, uneconomic, and distortion of price discovery
mechanism is overshadowed by another misconception held by many professional
traders. These traders prefer to justify price movements in conjunction with the
general commodity sector. Unfortunately, they wield undue influence and feed off
of a mentality that is driven by yield and underscored by a broken system of
money and credit.
Gold and silver are, first and foremost, monetary metals. This is difficult for
any modern investor who has come of age over the last 40 years, but it is a
taboo that is directly opposed by thousands of years of economic and financial
Precious metals influence has been muted by price manipulation. Nevertheless,
they lead, rather than follow, the collective commodity movement. Opponents
(usually traders) of manipulation are quick to point out, and often ridicule,
the suggestion. This is because they refuse to acknowledge the monetary role
and, therefore, inflationary signaling (again muted) from the metals.
They watch the alt indicators. Professionals see the trading structure. They
know the probability of price moves based on the illegal positioning.
Manip is not just down, but all around. The misconception is that our complaint
is one way. It is not. Any force that distorts price or down is, ultimately,
Futures zero sum. Once rally short cover ends,
new longs threaten the big silver short and eventually press on supply
Control the most visible and emotional indicator and you control them all.
Breaking the Taboo
It all boils down to the general view of silver by the majority of mainstream
Again, it may be taboo to mention the monetary character of silver in the polite
company of a sophisticated investor even when, ultimately, it comes down to
simple risk assessment.
And sadly, clear acknowledgement of risk is unfashionable, to say the least, in
the current investing environment. The 'sophisticated' investor will go down
explaining the motion of electrons as the water all around him boils.
But the average man intuitively understands, perhaps by omission or healthy
ignorance. To be small also means to be nimble; and there is certainly no
shortage of small investors who understand the intrinsic value of the food and
energy they consume - or that the budget has limits.
And invariably, eyes light up when only a brief sprinkling of industrial uses
In an age of prosperity, for many the understanding of things like the function
of electricity is closer to magic; this means the masses are much more primed to
accept the faith necessary to accept silver as a monetary asset once again.
It is guaranteed that the big players will see this wave of liquidity
approaching as well. And glamour will follow in the aftermath as the taboo
becomes lifted. Once the taboo is gone, there will no longer be a barrier.
Whether that manifests as a COMEX default, physical market, premium surge, or
some combination remains to be seen.
Watching the day to day price should be the same overall - prepare for the worst
and the best will take care of itself.
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basically everything you need to know about silver, short of outlandish fiat
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