By Patrick A. Heller – Liberty Coin Service
Commentary on Precious Metals Prepared for CoinWeek.com
One tactic used by the US government, its trading partners, and allies in its effort to hold down the price of gold is to also manipulate the price of silver. Most of the time, gold and silver prices move in the same direction. Therefore, it the price of silver can be suppressed, that will influence investors and traders into expecting lower gold prices.
On January 17, the spot price of silver closed on the COMEX at $30.11. Yesterday, it closed at $33.70, an increase of 11.9%! Most people would take that as a sign of a strong silver market. However, the silver market is really much stronger than that relative price change.
In the COMEX weekly Commitment of Traders Report as of January 17 (which was reported on January 20), Commercial traders had a net short position on the COMEX of 20,382 contracts. At 5,000 ounces per contract, that means that Commercial traders, which are primarily the bullion banks who are trading partners of the US government, had a short position of 101,910,000 ounces on January 17.
In the Commitment of Traders Report as of February 7, which was released on February 10, the Commercial traders net short position had increased by 14,268 contracts from January 17. As of February 7, the Commercial traders were net short 34,650 contracts, or 173,250,000 ounces!
In other words, the Commercial traders shorted the market by 71,340,000 ounces of silver on the COMEX from January 17 to February 7, increasing their net short position by 70%! The 71 million ounce increase in the short silver position is equal to about 10% of annual worldwide new silver mining supplies!
Normally, the selling of 71 million ounces of silver in a period of three weeks would cause the price of silver to plummet! How much higher would the price of silver have jumped January 17 if this increase of “paper silver” supply had never occurred?
But this short selling wasn’t the only recent blatant tactic to suppress silver prices. At the beginning of February, 1- and 2-month silver lease rates turned negative. Over this past weekend, 3-month silver lease rates turned negative. So, not only do borrowers of silver not have to pay any interest to do so, they will actually be paid a fee by the lender. Obviously, lenders are not making a profit when lease rates are negative. Negative lease rates send a signal to the market that there is so much of the physical commodity available that it should be worth less than its current price level. Therefore, the price of silver should have been declining in the past two weeks rather than treading water.
Last Friday, the COMEX dropped margin requirements on all the commodities it trades. The margin requirements for gold and silver futures contracts were decreased by 11% to 13%. Usually, when it is easier for investors to borrow money to purchase an investment, that tends to lead to greater demand followed by higher prices. Several people have contacted me to ask about the implications of lower margin requirements for leveraged gold and silver COMEX trading.
I have three thoughts about the decrease in the COMEX gold and silver margin requirements. First, the decrease affected all commodities traded on the COMEX. In the circumstances, it would have looked strange for all margin requirements to be decreased except for gold and silver. It could have resulted in more investors realizing that gold and silver prices were being suppressed.
Second, even though gold and silver margin requirements were reduced last week, they are still far higher than they were a year ago. In effect, the COMEX should have reduced gold and silver margin requirements before last week, and reduced them by an even a greater percentage than happened.
Third, one way that market manipulators can make a profit is by temporarily suppressing prices even though the long-term trend is for higher prices. The Commercial traders can sell a lot of paper contracts to drive down the price, shaking out weak hands investors, then cover those new short positions after prices have fallen. A decline in margin requirements could entice some weak hands investors to enter the gold and silver market just before a major price drop, thereby increasing profits earned by the Commercial traders.
Even though the price of silver has increased from four weeks ago, it is entirely possible that there will be one significant price drop before silver soars. The COMEX March 2012 silver options will expire February 23. The First Day of Notice for Delivery of March 2012 Futures contracts is February 29. Therefore, the US government has a huge incentive for silver prices to drop from current levels before those two days.
Once we get past February 29, I expect to see some real fireworks as the price of silver shoots up. Look for it to break free of the effects of increased short selling by Commercial traders and negative lease rates that have slowed down the rise in silver prices over the past four weeks.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.