Monday, December 13, 2010

Victory! Silver Heading to $475 Trillion an Ounce

Yeah - it is - I did the math. In a spreadsheet and everything.  Let me explain.

The Financial Times wrote an article speculating that JP Morgan has been reducing its silver short position.

"JPMorgan has quietly reduced a large position in the US silver futures market which had been at the centre of a controversy about its impact on global prices for the precious metal.
The decision by JPMorgan was an attempt to deflect public criticism of the bank’s dealings in silver, a person familiar with the matter said. The person added that the bank’s position in silver would from now on be “materially smaller” than in the past."

This, of course, led ZeroHedge to claim victory, "proving" their conspiracy theory correct

So you'll read the FT article, and you'll find:

"JPMorgan said in a statement: “It is absolutely incorrect to say or imply that the Nymex, CFTC or any other exchange or regulator has instructed or asked us to reduce our position.” The bank declined to comment on whether it had reduced its position in the silver market."

Ok - so, maybe we were a little early with that VICTORY!  But Johnny Drama was too compelling an embed to ignore.  It turns out that JPM itself gave no comment, except that they were not asked by a regulator or exchange to reduce their positions.  They didn't say that they reduced the positions. - that was speculation - and I certainly cannot prove that GATA was "the person familiar with the matter" in the FT article.  Of course, we all know that doesn't meant that JP Morgan didn't reduce their positions - let's just assume they did.  How much did they reduce it by (guestimating)?

I thank an anonymous commenter on the previous thread who points out that CFTC's December Bank Participation report shows a decrease of futures shorts in the US Bank category for the Nov 2nd to Dec 7th period from 30,760 contracts to 26,332 contracts.  Each contract is for 5k ounces, so this represents roughly 22 million ounces of silver.

We also know that over that same time period, the price of silver rose roughly 25%.  Thus, since "it has become clear" that JP Morgan is sitting on a 3.3B ounce silver short, it's a matter of simple math to figure out where the price of silver is going.  3B ounces / 22mm ounces = 136 (I rounded down to 3B just to be conservative!).   Since every 22mm ounces moves the price of silver higher by 25% (again, conservatively - it actually may get parabolic as supply tightens), if we start at $29/oz, and do the math $29 x {(1.25) ^ 136}, we can clearly see that the end result is $475 TRILLION by the time JP Morgan's risk position is flat (Again, rounded down to be conservative). 

VICTORYYYYYYY!  We're all gonna be rich!  Those imperialist bastards at JP Morgan will surely pay for their sins now!

Oh no - wait - I just got the idea to refine the data by looking at the CFTC's options report too.  The difference between the Nov and Dec reports shows that the options positions held by US Banks in silver changed as follows (changes in positions):

Long calls: -224
Short calls: +979
Long puts: +386
Short puts: -910

All of these transactions have the same directional delta - they all act to increase the short position held by US Banks, by a total of 2499 contracts.  In the interest of thoroughness, I'd better back that out from my 4428 short futures decrease, and adjust the net change in short exposure to 1929 contracts, or 9.645mm ounces.  Actually folks, don't panic, this is GOOD news - it means that my $475 Trillion target price for silver was WAY too low!  Let's check the new math:  3B / 9.645mm  = 311.  $29 x {(1.25) ^311}, rounding down, is 40 with THIRTY zeroes after it. 

Some research tells me that this is 40.3 nonillion dollars.

I'll be honest, I don't think that silver will get that high, so I'm going to stick with my $475Trillion/ounce original math.


note:  This post is pure sarcasm (although all quotes are real).  If you like the math I did here, well then, you're an idiot.  But this unsubstantiated hype train is just so much fun.

also, there are some important caveats for the conspiracy theorist in the article, such as: 

"In two previous reviews of the silver market, the CFTC has dismissed claims of manipulation. Most analysts say there is little reason to believe the price of silver is being systematically manipulated."
"Analysts and traders said that JPMorgan’s large short positions on New York’s Comex exchange, a division of Nymex, were hedges for the bank’s long positions in physical silver and London’s over-the-counter market."

To summarize, "a person familiar with the matter" says that JPM is decreasing its short position to deflect public criticism, and analysts and traders say that there is little reason to believe the manipulation hype, and that JPMorgan's COMEX shorts are hedges for their other exposure. NO! Impossible! (see, that was more sarcasm!).

disclosure:  long SLV


Anonymous said...

Feel better now that you got it out of your system? That sure was alot of dreck.

I'm not one to argue when your mind is obviously made up, so enjoy your SLV shares ;)

EconomicDisconnect said...

Well not I am not sure what to buy or hold, as Apple and NetFlix were sure to go to 4 trillion, and now even my silver holdings will as well! I guess I am all set!

Kid Dynamite said...

since I'm sure some monkey is going to write about JP Morgan's "official admission" that it has a huge short and is reducing it - as I've already read on both ZeroHedge and Clusterstock, I'm asking in advance for any reader to please provide me with a copy of this OFFICIAL ADMISSION. I would like to see it.

Anonymous said...

There are always idiots who are buying into some ridiculous conspiracy theory. What makes this one particularly scary for me is that those same idiots this time are holding similar positions to me....


KD - it is only a matter of time before someone declares that you as a JPM employee.


Kid Dynamite said...

yes Peter - makes me very nervous too. I HATE being on the same side of the trade. of course, since I own SLV, they'd say I don't own silver anyway.

Anonymous said...


You obviously only own SLV so that you can continue this charade of being a rationale blogger, rather than revealing your true profession... which is obviously being a shill for JPM.

Give it up. We all know that JPM is massively short. Get on board with the program and see if you can get more of your followers to buy some physical silver regardless of the premium, just to inflict pain on JPM, or else we will know for sure that you are in fact on their payroll.


Kid Dynamite said...

lol. guilty as charged. I admit it - JP Morgan pays me 1 MILLLLLION dollars a year to tell people that they are not short silver.

ps - in case it's not clear - SARCASM

you know what's funny, Peter, my father in law brought me a silver 1 oz coin this fall - that he bought on a cross country trip. Silver was around 22 or so at the time, he paid a markup plus tax. now, if he sold it back to the dealer, he might break even - after a 25% rise!

now, if you buy online from big dealers, you might not pay such a huge spread, or tax, but if you can't make money on a 25% rise, that's some steep vig...

Anonymous said...

I admit to not knowing one way or the other about any huge short position. But there are come compelling items that make me consider it:

1. Ted Butler's sober 25 year analysis of silver trading on the comex point to JP Morgan using a big short to control prices.

2. Oct. 26 revelation by CFTC Commissioner Bart Chilton stating, "I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told by members of the public, and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted."

And he's in a position to know more than any of us.

3. The new silver margin requirements (two announced in one week) Such dramatic action points to some 'structural' problem that threatened to let the silver price surge out of control

4. JP getting sued

If there were only one or two of these, maybe the manipulative short position would be less believable. But with all of them AND the silver price surging since JPM started reducing their short positions it's worth considering.

In any case, silver is in a new bull market regardless, based purely on currency debasement and soaring investor interest.

Anonymous said...

Google calculator says you are a little high. (So does another one I tried.)

Wouldn't want you to hang on to your position too long

Kid Dynamite said...

Nemo - thanks for checking. If you're wondering why you got a different answer, it's not because THERE"S A BUG IN MICROSOFT EXCEL AND THEY"RE GOING TO GO BANKRUPT!!!!!!


it's because my spreadsheet had the full numbers with decimals, while my post didn't... when you compound 311 times, or a little more than 311 times, it makes a big difference!

Anonymous said...

Dude, If I wanted comedy I would go to yuk yuk..

Please dont tell me your advise is long SLV.

Kid Dynamite said...

I offer no advice on this blog at all, except this: when you see the kind of ubsubstantiated MANIA like we're seeing now with the daily mis-reporting of news regarding silver (typified by the story which was totally transformed by ZH, just see their headline!) - you should be very wary. I am.

joel said...

Any reason SLV instead of SIVR?

Kid Dynamite said...

Joel - I'm always wary of ETFs with tiny assets in the fund, like SIVR. they only have $250mm in assets...

Joel said...

Aha... I see, thanks for the insight!

zentrader said...

I felt so happy for Drama at the end of that season.