Friday, November 18, 2011
"I like winning - I wish it wasn't quite that stressful"
- Tim Tebow after leading the Denver Broncos to a last-minute
comeback win over the heavily favored NY Jets
Silver investors probably feel like serious underdogs given the enormous amount of market manipulation exerted on the silver market by JP Morgan, especially since the CFTC is fully aware of this manipulation and does nothing to enforce the laws.
But then again, yesterday was somewhat of a victory for the silver longs because JP Morgan's ambush on the market appears to have failed. You are probably wondering why I say this. Typically when the metals get taken out back and shot, like yesterday, the open interest declines substantially as the large spec longs have their sell-stops triggered, thereby enabling a big short like JP Morgan to cover part of its short position profitably. But a curious thing happened yesterday: the open interest in silver actually increased by 1156 contracts And the open-interest in December silver only declined by 527 contracts, which is quite small relative to the open interest for December and the approaching first-notice date on November 30. Recall from yesterday, the open interest in December silver is currently over 5 times the amount of "registered," or deliverable, silver sitting in Comex depositories.
Now, it's possible that the large spec hedge fund traders jumped on the short side of the market, as this group often likes to follow momentum. I actually hope this might be the case because historically the "momentum" based hedge funds tend to be terrible market-timers in metal futures. In fact, typically once the hedge funds start shorting into rapid market declines in gold and silver, it historically has signalled the bottom of the market and the start of a fairly rapid reversal up to higher levels. In other words, in close to 100% tried-and-true fashion, the momentum funds are perfect contrary indicators in the precious metals market. Similar to Dennis Gartman, I might add. Oh, I see Dennis Gartman announced that he cut his gold position recommendation today...
Having said this, I do expect JP Morgan to take another crack at pushing the silver market lower next week because: 1) as it stands now there's not enough silver to meet potential physical delivery demands, of which JP Morgan represents at least 50%; 2) market volume will be light next week and usually during light-volume periods the bullion banks try to take the metals market lower; and 3) if JP Morgan can push the market lower in order to cover part of its short position, it will create short term trading profits that will be recognized in its Q4 earnings and help JPM to reduce its overall extraordinarily unprofitable short position. I'm not saying that I think it's a done-deal that the market heads lower next week, but it would be consistent with past manipulative patterns - just ask any of the directors at the CFTC because they know as well as any of us.
Finally, I found it interesting that Brinks - another Comex vault custodian - received nearly 1.2 million ounces of silver into its "eligible" inventory. Recall that "eligible" silver is not yet certified for delivery and can be either silver that is intended for eventual delivery or is just silver being safekept by Brinks on behalf of investors/traders. But per the futures delivery data, this silver was likely moved in from an external source and as such there is a high degree of probability that it was moved in for possible December futures delivery. Again, at this point in the calendar cycle, there are a lot of open silver contracts and only 6 trading days before the first notice (a week from Tuesday). Between JP Morgan and Brinks, there has been a lot of movement in inventory at the Comex. This could be coincidental but my bet is that we could see some unusually high delivery stress in December, which will push prices quite a bit higher than where they are now.
On to MF Global and custodial risk - Bruce Krasting, with whom I often agree, wrote a commentary in response to some ridiculous comments about MF Global by St. Louis Fed head, James Bullard. You read it HERE I was quite shocked at how naive and unintelligent Bullard's remarks were and I agree with Krasting that the follow-up after-shocks caused by MF Global may actaully be worse than the MF disaster itself. Bullard clearly has no understanding of how markets actually work, his understanding is limited to simple theory, and that was evident in his remarks.
However, Krasting opined that he believes that "money in segregated accounts at the likes of Merrill and Morgan Stanley is safe." Au contraire, Bruce. Ironically Krasting singled-out two of the firms which I believe have the highest risk of going under and at which I believe customer accounts are at high risk. The third being Jeffries. In fact, the credit default swap spreads for the debt of Bank of America (Merrill) and Morgan Stanley have really blown out to wide levels recently, signalling that the market is pricing in a much higher degree of credit risk at these two firms. I have not seen this data for Jeffries paper, if it even exists, but the downward action in Jeffries stock price suggests that market also perceives a high level of solvency risk for Jeffries. I will reiterate my statement from an earlier post that if you want to put your securities investment account in the best possible position of preservation - outside of investing in pure physical gold and silver - you should consider getting rid of your accounts at those three firms and move it to a brokerage firm that does not engage in proprietary trading or investment banking, like Fidelity or Schwab. At most other brokerage firms your account runs the risk of being "MF'd" just like the Jets were "Tebow'd" last night...
Have a great weekend!
Posted by Dave in Denver at 1:05 PM