-- Posted 21 January, 2004 | | Source: SilverSeek.com
The title of this essay draws on the previous two essays where the Lone ranger and his silver bullets carried the theme that the price of silver metal is being aimed right at the core of the large commercial short positions in precious metals – gold and silver – with gold for now taking the back seat while the coming explosion in the silver price takes place. As Ted Butler, the silver guru, explains in his first weekly report on the silver situation for 2004 at http://www.investmentrarities.com/01-13 there is a cumulative short position in silver that is literally humongous in terms of annual production and available supply.
This is of course not news. Ted has been writing about silver and the growing short position relative to the shortfall in production vis à vis demand for a long time. And very little has been happening to silver to show that there was any significant risk for the short players in the market. Not even when Warren Buffet purchased silver in bulk 6 years ago did the price spike last more than a few weeks before the price fell back again. Rumours at the time was that some of the Buffet Hoard had been leased to ease the tight supply condition following his purchase while some would even have it that some of his purchase was to be delivered forward as there was not sufficient silver at hand to effect delivery of his orders. And despite the evidence that silver was entering a very tight market, the price sagged and took almost 6 years to get moving.
But the more recent behaviour of the silver market – coupled to increasingly widespread anecdotal evidence that silver metal is practically unavailable in bulk – are showing signs of a coming short squeeze in silver that could blow the price sky-high.
Bill Murphy of GATA has written about a contact who knows of a fund that wanted to invest $250 million in silver metal. They could not obtain the 40 million ounces they wanted even after scourging the whole world for supply. They placed the rest of the money into futures and one can imagine that at the appropriate time they will ask for delivery against the futures in order to fill their whole order.
Other anecdotal information is that even large dealers in bullion have no stock of silver and that it is only very small orders that get filled out of the depleting supply; larger orders – even as little as a few kilo-bars – have to wait until supplies can be obtained.
At the same time, news is that a large shift has taken place in the Comex warehouse silver supply. Silver stocks there are divided into “eligible” and “registered”. As Ed Steer explained in one of Bill Murphy’s newsletter, eligible silver is not available to purchase – the owners intend to hold on to the silver and is using Comex merely as a storage facility. Registered silver is also owned by outsiders, but this supply is up for purchase at some limit price set by the owners, not at the current market price. Recently a very large shift has taken place from registered to eligible, which means the assayed silver in the Comex warehouses available for delivery has decreased markedly.
These speculative factors now combine into the possible trigger for a major squeeze in silver. A large fund have been buying futures contracts presumably to obtain delivery and at the same time the amount of silver metal for delivery has decreased markedly. Perhaps this news will prompt other holders of futures contracts to also ask for delivery in the hope that they can get their hands on what appears to be a rapidly depleting available supply of silver. This applies in particular to the industrial users of silver who have taken a position on Comex as a means to ensure silver stocks for their business should their be some threat of an interruption in the supply.
However, the scent of a bear squeeze is for speculators the most powerful stimulant of all – it attracts speculators far better than a recent lion kill does vultures and hyenas. One can imagine that as the squeeze begins to unfold more and more speculative money will flow into silver – but predominantly into the paper value of silver futures, with settlement to be taken in cash. Yet there are also many investors, small and large, who have been buying silver as a long term investment against the uncertain times ahead. These investors may realise that buying futures now and asking for delivery might be their last chance to stock up on cheap silver; that if they wait say until deeper into February the silver price already may have run away from them.
Perhaps the first real hard evidence that writing about a bear squeeze in silver is no longer just speculation occurred on Friday. After reaching $6,74 on Monday, news that the ECU was viewing the weak and volatile dollar with some concern caused the dollar to strengthen substantially. As is to be expected, the price of gold and silver immediately took the opposite direction. Silver fell to $6,19 on Thursday and then finally to $6,16 on Friday, well before the US markets opened. At that time the euro was trading at about $1,250. Later, when the US trading day was in full swing, the dollar firmed to $1,237 for a gain of over 1% in a matter of hours. The firmer dollar dragged the gold price lower from just over $410 to $406, the lowest value since mid December.
However, the price of silver futures suddenly picked up while the dollar was firming and the gold price was sinking below $410. The only possible explanation for such behaviour that is directly the opposite what one would expect is that a large buyer for silver futures has appeared on the scene. It all happened just too quickly from very early during the US trading day to be the result of many small speculators taking the bit between the teeth and risking more cash to enlarge their long positions.
We will soon know whether the squeeze is really on and that the silver price is embarking on a wild and volatile ride into the blue yonder.
How far?
It depends on how long the time horizon is. Read Ted Butler’s newsletter. He speaks of deep into double digit territory; that is not only $15 or $18, let alone $11 or $12. Probably not at first and perhaps not even this year. But if one can get into a commodity not much above $6 and hope to see it 4 or 5 times higher a year from now, it would be a good investment in these uncertain times.
Of course, with a well leveraged position in futures the potential gain is multiples of ten.
It seems from the signs of the times that the potential reward from such a position by far outweighs the risk of loss and that this is now a time to start building on a substantial position in futures. One should do it gradually and with patience and discipline, not too over-extend one-self too soon. According to all indications the silver bull is only just beginning to snort and will be rampant for months and perhaps years to come.
© January 2004 Daan Joubert
All rights reserved
PS
South Africans do not have easy access to Comex and its silver futures, however, there is a way for them to open a position on the silver futures market in rand currency. This can be done through a trading platform known as GT247. Details on how to proceed to open a trading account at GT247 are obtainable from Janet Hugo.
GT247 offer positions in silver on the March contract at as low a gearing as R10 per 1 cent move in the price of silver, i.e. a move of $1 in the silver price is equal to a gain or loss of R1000. The required margin for such a position is typically R160, but can be as little as R128 if a guaranteed stop is selected. The cost is the width of the spread on the silver double, which is typically 1,6 US cents on the futures price – the equivalent of R16/unit and 2,2 cents with the protective stop in place, equal to R22. (This means that a move of about 18-20 cents in the silver price is enough to cover the cost and generate a profit equal to the amount of the margin, effectively doubling the money at risk.)
Such positions can be opened in multiples up to 500 units, which would require margin of as much as R90 000 to deliver a gearing of R5000 per one cent move in the price of silver and 100 times that for a move of $1,00 in the silver price.
With this kind of gearing the potential profit if silver should go to even just $10 or $12 from today’s $6,30 is staggering. It could be the opportunity of a lifetime – provided the position is managed well enough to ensure that any adverse move in the price of silver is not totally destructive of the position.
-- Posted 21 January, 2004 | |
