by Ted Butler, Silver Seek:
After 40 years of silver price manipulation and suppression on the COMEX, the physical market has experienced a lack of production growth and enhanced demand brought about by too-low silver prices. According to the immutable law of supply and demand, silver is now in a deepening physical shortage in which sharply higher prices are both required and inevitable. The key element that I speak of today is the likely behavior of the short sellers of silver derivatives. Investors hold 2 billion ounces of silver in industry-standard 1,000-ounce bars and a similar quantity in smaller bars and coins. Since these holdings are owned outright, there is no short position as exists in every derivatives contract, including COMEX futures and options and OTC swap contracts.
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The derivatives short positions are mostly on the COMEX, in the form of short sales in futures, call options contracts and also in OTC dealings. Thanks to detailed information provided in the weekly Commitment of Traders (COT) reports, great clarity is given to the potential exposure of the short sellers in COMEX silver futures contracts. The current total open interest in COMEX silver futures (minus spreads) is around 110,000 contracts, or 550 million ounces.
Again, thanks to the detailed data provided in the COT reports, we further know that the 8 largest commercial shorts hold more than 50,000 contracts net short or the equivalent of 250 million ounces. Other traders in the commercial, non-commercial, and non-reporting categories hold 300 million ounces short. This current net short position of the 8 largest shorts, at 250 million ounces is of extreme danger to them should silver prices explode, as I believe is in the cards. Often overlooked is the even larger 300 million oz short position held by those outside the big 8’s holdings.
Then, there are the long and short positions held in COMEX silver call options, most of which are “out-of-the-money,” meaning they wouldn’t result in great danger to the short sellers of these options until and unless silver prices rose sharply. Conservatively, the true exposure of the call options on the COMEX is “only” 25,000 contracts of the more than 70,000 contracts of total call option open interest. That would bring the total COMEX futures and call options short exposure to 135,000 contracts (110,000 futures contracts plus 25,000 call options contracts) or 675 million ounces.
That means, for every dollar increase in the price of silver, the longs would make $675 million and those short would lose $675 million. A $5 price increase would amount to a $3.4 billion gain and loss, while a $10 increase would amount to a collective gain and loss of $6.75 billion. Should the price of silver increase much more than that, as I believe, the math is astounding for collective gains and losses. The short-sellers of silver would face a cataclysmic financial setback. For the longs, it would be the stuff of dreams – with unimaginable money and profits raining down from the heavens.
However, for those short, it would be a terrifying financial nightmare. The 675 million ounces held short on the COMEX is mostly held on a margin basis, and should silver prices explode higher, as is inevitable and likely imminent, a margin call “hell” scenario would develop. Virtually all silver shorts will be subjected to daily and perhaps intraday demands to deposit untold additional amounts of margin money with little time to do so. In a sharp price rise of the type I envision, the brokers holding the short positions will not hesitate to buy back customers short positions with little prior notice adding additional upward pressure to silver prices.
