16 May 2011

Gold Daily and Silver Weekly Charts - and Le US Douleur - More Volatility Ahead for Silver

Silver was hit harder as the US equities fell, and gold maintained some resilience.

The intraday moves had the character of bear raids and sharp selling in size, rather than steady liquidation.

Notice that the dollar too was weaker today, although it remains in a short term uptrend.

The number of contracts standing for May delivery of silver ROSE today according to Harvey Organ. The Comex delivered no actual silver, but the trading desks offered plenty of paper, as overall open interest rose again.

Someone asked me what it might be like if the Comex was unable to meet its deliveries, and there was a  cascading effect to the metals encumbered by counterparty risk in the two big ETFs, if they were hit by a wave of redemptions as large shareholders sought to lock in supply.

I did not see their scenario of multiple days of up limits until the market clears, simply because it seems to be a few large members important to the exchange who seem to be 'holding the bag'  in this case.  Market solutions are for the little people and relative outsiders like the Hunt Brothers.

Rather, I would anticipate a declaration of force majeure, and a forced settlement in cash and shares of SLV, which themselves are probably representations of bullion rather than the metal itself.   I do not know what the rationale for this might be, and it is not quite clear to me that they would even need one except for cosmetic purposes. 

When you have power and have learned to use it with ruthless hypocrisy, the only thing you need to respond to is a greater force of power that calls you to accounts. This is one of the great lessons from the recent financial crisis.  When the government and the regulators do not uphold their responsibilities, fraud becomes fashionable.

The Comex has about 32 million ounces of deliverable silver on their books, and they are dragging out the delivery process each month, as virtually no new inventory becomes available to replenish their supply.

I was a little shocked that the parabolic rise in price and  the subsequent calculated smackdown in conjunction with the increased margin requirements shook no new significant inventory loose for the dealers, only more paper profits. Customer withdrawals continue as well, with almost 3.5 million ounces leaving this month.

However it transpires, if it does, it will be memorable.   I am looking at the supply and demand as the numbers are published, and not at anything esoteric or private.  So I would imagine that the CFTC and the least sophisticated traders in the market can see the same things unfolding.  I hear things from time to time about back room discussions about the resolution of all this, and have to work to separate them from the tide disinformation, of which there is quite a bit more than you might imagine.  People are very concerned about a potential shock to the credibility of the system.  Of course, they may be utterly out of touch with current reality.  Trust is in short supply, and the natives are growing restless.

Rumours, and disparaging talk, and theoretical discussions are well and good, but as they say, show me the money, or in this case, the bullion. 

Where is it, how much of there is it, and what are they going to do when and if the supply of silver bullion drops below 30 million ounces deliverable, which is really a pittance given the size of the market? A silver futures contract on Comex is 5,000 ounces, and so that represents a mere 6,000 contracts.  There are a total of 123,000 contracts open today.  Last Friday the volume was an eye popping 126,000 contracts!  This at times seems less a market, and more a game of musical chairs, or a shell game.  And if the allegations are true about the LBMA,  and their leverage, then what we have here may be a recipe for a severe market dislocation.

And this is why I expect the silver market to remain highly volatile, with some amazing moves ahead, both up and down. And stretchers perhaps, to carry out some players from the pits, as they get caught offside in high frequency moves, and an increasingly disorderly trade. And this due to the failure to reform the financial system.

And for us, the smaller investors, caution is advised.