Mostly: Classical

[basserdan]

Silver and the Unfriendly Bear

By: Daan Joubert, Gold Signals
March 10, 2004

The probability that a genuine 24 carat bear squeeze could develop in the Comex division of the Nymex futures market in New York appears to be increasing.

The silver market

On Comex the idea is that owners of whatever commodity is listed on the exchange - say silver - are using the market to hedge against a loss in value of their physical stocks of that commodity. On the other side of the transaction are the speculators who believe the price is going to go higher.

Under normal circumstances these two classes roughly balance each other as they are guided in their decision making by what the physical market is doing. That is where the real price is being set. Comex also places limits on the magnitude of the positions in the futures market relative to the size of the physical market to prevent problems that can arise either through excessive greed or through attempts to manipulate the physical market via the futures market. Silver and gold, strangely enough, have no such limits.

Since Comex is inherently a commodities exchange, at settlement time the owners of the long side of the contracts have to decide whether they want physical delivery of the silver represented by their contracts or whether they want to settle in cash. The latter is in effect done by either selling their long contracts to close their positions or, alternatively, to buy more time by rolling their position over into the next futures contract.

Yet one cannot sit on a position to the last day when the futures contract expires and then claim delivery - that is not fair to the seller of the contract who needs some warning that he will be called for delivery. The "First notice day" is the last Friday of the month before the contract expires. In the case of the March Comex contracts - which like all other US futures expires on the third Friday of the month, i.e. the next expiry is on the 19th March. By keeping the contract open beyond the ‘First notice day‘ - 27th February in this case - the holder of the long future is indicating that he intends to ask for delivery.

This gives the seller of the contract 3 weeks to ensure that delivery will be possible.

At the moment, with a few days left to go to the expiry of the March contract , delivery is taking place - it is not known to the author whether the amount of silver being asked for delivery is more than usual, although it seems to be. It nevertheless does seem as if there will be ample silver in the Comex warehouse for the number of contracts that moved into the delivery period for the March contract.

This might well be because the potential for a bear squeeze is not yet widely known. The amount of silver for delivery is quite large relative to available silver stock, but can be met from the warehouse. One European bank taking a large bite, equal to about a third of the total number of contracts, which indicates interest from a large player. With some draw down of the Comex silver supply sure to attract wider attention, and perhaps more large buyers of silver, the May silver contract must be seen as the new favourite for the appearance of the Bear’s embrace.

The situation is also becoming ripe for a coup that can only be executed by a really large player - something that apparently was done a number of years ago.

The system is simple:

Purchase a good number of silver options across a spread of strike prices, even some way out of the money (i.e. a little above the ruling spot price) options (buy into many strike prices so that there is not much to attract attention and raise suspicions)

Go to the owners of available silver in the Comex warehouses and take an option on their silver, to expire after the end of the futures contract

When the time comes, exercise Comex the options, even those some distance out of the money and ask for delivery on the futures that are obtained

When the short sellers try to buy the warehouse silver on which you have an option, wait for them to bid up the price before you sell ‘your’ silver to them so that they can then deliver the silver back to you

The silver that is delivered can either be recycled through the warehouse to other short sellers who still have not been able to deliver, or it can be sold in the open market at a price that will be so far above the recent ruling spot price, where the options were taken on, that even well out of the money options show a good profit

Market talk at the end of 1997 - when the price of silver spiked from $5,80 to $7,90 - was that someone had pulled off a coup of this nature and made a small fortune. Whether this can still be done is a good question, as there now might be regulations to prevent a repeat.

Even so, the fact is that the silver short position is massive, compared to the available silver - not only the silver in the Comes warehouses, but compared to all silver above ground. This makes a full bear squeeze more than just a pipe dream; it can happen.

All it needs is for enough people - speculators and investors - to become aware of the situation and to purchase calls on silver that they intend to exercise in May for delivery.

If enough people do so, the squeeze will be on and the silver price will run.

Things can still hot up in March, but it is beginning to look more as if we have to wait for May for the bear embrace to really take hold.

Be prepared.

Daan Joubert
Posted 10 March, 2004

http://news.silverseek.com/GoldSignals/1078934014.php