The "price" is being "made"
-- Posted Monday, 15 September 2014
By Bill Holter
I wrote an article titled "Kill Switch" a couple of weeks back where I hypothesized the Chinese are the ones behind the very high (and very curious) open interest in COMEX silver, I want to revisit this. I want to revisit this because of the action this past week and this past Thursday in particular.
Silver dropped almost 50 cents on Thursday and broke through the $19 level to the downside. Please remember that silver has a global "all in cost" of production somewhere near $25 per ounce so these prices will only augur for much less supply. "Supply" in this case is REAL supply of raw silver to be used for electronics, solar panels, jewelry, investment etc.. Common sense tells you if you must sell your product for a loss you will either sell less of it, not sell any of it, or sell all that you can for cash flow and go bankrupt ...supply will dry up.
I mention "supply" in the above paragraph to give you some perspective of what was wrong with the action in silver on Thursday. As a reminder, the open interest in gold and silver could not be more opposite. Gold has very low open interest while silver now has virtually record open interest and at levels last seen 3 years ago while it was trading at nearly $50. Silver has now dropped in price by more than 60% yet the amount of contracts outstanding is as high or higher. As a refresher of the laws of supply and demand, price should rise when there is either more demand or less supply, price should drop whenever there is less demand or more supply. This is simple right? The answer is "yes, simple" but let me explain what has been and is happening.
The total open interest in silver ROSE on Thursday a whopping 6,268 contracts. This represents more than 31 million ounces of silver in one day! Does this "silver" even exist? I am going to say "no way, not even a chance", let me explain why in a minute. The total inventory of silver registered and available to deliver is roughly 60 million ounces. Do you see the problem here. The price of silver dropped over 2.5% because there were "more sellers than buyers" ...but, the sellers were selling paper "contracts", not real, touchable and usable silver. Explaining a little further, if there was a panic to sell real silver the "longs" would sell to "close" their position and open interest would decline. This clearly did not happen as the open interest rose, the sellers "sold" to OPEN positions...31 million ounces worth of positions!