An understanding of how the silver market works shows that traders have been colluding against prices. The market manipulation has worked for nearly four years but is about to unravel on fundamental factors that will send silver prices higher. When this happens, traders will be caught with huge losses and investors will ride silver prices to massive gains.
COMEX warehousing reports its silver inventories held by large banks and investors as well as the futures contracts in the market. Futures contracts are a promise to deliver silver at a date in the future, usually used by miners for price hedging but lately used by speculators to gamble on silver prices. The chart below shows silver futures through December 2015.
Each contract for silver futures represents 5,000 ounces, meaning these 162,758 promises to deliver equal nearly 814 million ounces of silver.
COMEX reported on December 17th that registered silver inventories have fallen more than 37% this year to 40 million ounces. While total inventories amounted to 159 million ounces, only registered inventories can be used to satisfy delivery on futures contracts. Taken with the open interest data on silver futures means that there is more than 20 times the amount of silver promised for delivery than there is registered in COMEX vaults!
These contracts to deliver silver not covered by inventories represents what’s called naked short positions. It’s traders bet against the price of silver by selling commitments. The trader gets the current price in their account and hopes that the price in the future, when they have to buy and deliver, is lower. If enough traders pile into the trade, selling in massive amounts, the price of silver is artificially forced lower.
Prisoner’s Dilemma and the Silver Market
This kind of massive collusion against the silver market is perversely akin to what’s called the Prisoner’s Dilemma in bargaining. Formed in 1950, the theory goes that two gang members are brought in by police and put in separate rooms. If the prisoners say nothing then each gets a relatively minor charge and serves a year in prison. If one betrays the other though, he goes free and the other gets three years.
It’s a game that almost always ends in at least one prisoner betraying the other or both squealing on each other.
As long as traders involved in shorting the silver market keep doing their part, maintaining their short position, everyone makes money while robbing regular investors. The problem is that at these prices, it will take just one impetus to send silver higher. When that happens, one of the prisoners is going to be forced to unwind their short position to book gains and avoid losses.
With the silver market so heavily shorted, even the slightest increase in price will cause a massive short squeeze. To close out a short position, traders must buy silver which in turn sends prices higher. All it takes is for one trader scrambling to close out their short position in silver to send prices higher and cause more traders to be forced to cover. We’ve already seen that there is not enough silver to cover the short positions so prices will surge higher as more traders try to close out their future commitments to deliver.
We already covered the main reasons why silver will move higher in 2016. Whether from falling inventories, building demand or other circumstances it won’t take more than a spark to send the metal surging. When that happens, it’s only investors that have positioned early that will profit.