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Original Message Got Silver ?? enough ??


March 4, 2008

Up Against The Wall

There were some surprises in the most recent Commitment of Traders Report (COT) for silver futures on the COMEX. The COT, for positions held as of Feb 26, showed a big drop in the uneconomic spread positions, a notable increase in small trader short positions (most likely as a result of call option exercises that went into the money), and a decline in the total commercial net short position for the first time since the middle of December. (The raptors were buying this past week.) These all represented changes from past patterns, especially noteworthy since prices rose strongly in the reporting week.

But there was no surprise for the most important pattern in the silver COT, namely, the concentrated short positions of the largest 4 and 8 traders. Once again, each set new records, as the big shorts sold into the rally. The big 4 are now net short 62,229 contracts, or over 311 million ounces. Thatís the equivalent of more than 177 days of world mine production. The eight largest traders are now net short 79,042 contracts, or more than 395 million ounces, or more than 225 days equivalent production. Never has there been a greater concentrated position of any type (long or short) in silver, or in any other commodity. If Nero were alive and responsible for commodity regulation, Iím sure he would be fiddling as the danger in the silver market burns out of control.

Many have asked me how the concentrated short position in silver (and gold) will be resolved in the short run. Will we get a sharp sell-off or a capitulation by the shorts to the upside in a price explosion? Thatís impossible to state with certainty. What is certain is that it must and will be resolved. I can more fully explain the situation, however, with the hope that it will help to prepare you for whatever happens.

The shorts in silver and gold, as well as in many other commodities are in a very difficult position; they are, quite literally, up against the wall. Their collective open losses are of a magnitude many times greater than anything they have ever experienced in the past. In fact, it is my observation that these concentrated shorts have actually lost (on paper and in meeting resultant margin calls) more than they made in total over the past five or ten years. The shorts have gotten absolutely hammered.

While I donít feel sorry for them, decades of watching them pull dirty tricks at the last moment (with the help of the regulators) and triggering sharp sell-offs, makes me uneasy to declare them finally defeated. Until, at least, I read their actual financial obituaries or bankruptcy notices. So, for the time being, let me declare them seriously wounded. Like all wounded animals, however, they still may be dangerous.

How wounded are they? In silver, the big four shorts are out more than $1 billion in the past two weeks, and around $2 billion in the past two months. The big four gold shorts are out close to $3 billion in the past two months. Similar losses can be found in oil, natural gas, base metals, the grains, cotton and some other markets.

Who are these shorts that are being mauled? Generally, they are banks and financial institutions and large exchange member insiders who have traditionally inhabited the short side in most markets. They are the market makers.

What has caused this sudden and profound change of fortune for the shorts? Two things. One, the relentless demand for raw materials caused by world economic growth, primarily in the BRIC nations (Brazil, Russia, India and China). Two, the influx of heavy commodity investment demand by institutions, primarily the index funds for now, but with the sovereign funds waiting in the wings.

The index funds, with some 200 billion dollars already invested, have bought a wide variety of commodities futures contracts, including crude oil, natural gas, wheat, soybeans, corn, cotton, sugar, coffee and base metals (mostly in London), among others. In gold and silver, the index funds buy primarily in the ETFs, instead of futures contracts. The index funds are the bluest of blue-chip institutional money. These are long-term buy and hold positions and since there is no leverage, no margin call liquidation potential exists. (As contrasted to the tech funds who operate on margin.)
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