Eric Sprott Lashes Out Against The "Tyranny Of A Rigged Paper Monopoly Over Silver Price Discovery"

Tyler Durden's picture

From Eric Sprott and Andrew Morris

Caveat Venditor! (pdf)

The recent bear raid on silver has left many concerned about the sustainability of its historic run. Silver, being a relatively obscure market for most mainstream commentators, attracted much attention in the ensuing days following the May 1 takedown. Indeed, though the 30% drop in silver occurred over only four days, seemingly all eyes were on silver, with commentators who could’ve cared less about the silver market only a couple of months ago, suddenly tripping all over one another to make the bubble call. Silver bubble 2.0? Hardly. Anyone who has been fortunate to have been invested in silver over the past few years would unfortunately be used to such blatant takedowns. The Chinese don’t call it the "Devil’s Metal" for no good reason. With so much talk these days about the risks of investing in silver, we think that perhaps it may be timely for us to weigh in on the matter. The silver market is riskier than ever, but for reasons the vast majority of pedestrian commentators have failed to grasp.

There is no doubt that speculative dollars have been flowing into the silver market. We note that in April record trading volumes were registered in the SLV1, Comex futures2, LBMA transfers3, and the Shanghai Gold Exchange futures4. In fact, converting the average daily trading volume in the aforementioned silver instruments to the amount of ounces of silver they are supposed to represent, there were on average, over 1.1 billion ounces worth of silver traded every day in the month of April5. Truly a staggering number when contrasted against the actual amount of silver available for investment. To wit, the world will only supply about 979 million ounces this year from mine and recycling of scrap, of which it is estimated that 657 million ounces will be used up for non-investment purposes6. So in effect, that leaves roughly only 322 million ounces available this year for investment purposes. Converting to days (recall that at least 1.1 billion ounces traded each day) it leaves only about 1.3 million ounces per trading day of available supply. So, we are essentially trading the amount of physical silver actually available for investment, 891 times over each day! It really begs the question; just what are people trading in these markets?

Consider the largest and most prominent of those markets - the Comex, which we believe has owned an effective monopoly on silver price discovery for decades. In fact, the Comex churned over 800 million ounces of silver futures and options on average each day in April7. Indeed, notwithstanding the massive but very opaque over-the-counter silver derivatives market, trading on the Comex dwarfs both the physical and the other (known) paper silver markets, combined. Despite its dynamics being relatively complex and generally not well understood by most, the world’s financial community continues to view trading on the Comex as representative of the fundamentals for the physical silver markets. A market built on a high amount of leverage, both the buyers and sellers of Comex futures and options contracts are able to establish a position in "silver" with pennies on the dollar in collateral and even more astonishingly, no physical silver backing the contracts at all. The following charts illustrate just how unreal these markets have become.

Chart A:

Chart B:

In chart A, we compare the total open interest in Comex futures and option contracts to the actual amount of silver held in registered inventories able to be delivered against those contracts, since 2009. In chart B, with the steeply-sloping line shows the ratio of open interest (i.e. paper silver ounces) per ounce of physical silver held in inventory. We believe the historical trend of rising open interest and falling inventories deserves considerable attention from anyone attempting to understand the silver market. And though we do note that since October 2010 the trend of rising open interest appears to have abated, the inventories have been evaporating steadily and thus the ratio of the two measures has continued to trend higher. In fact, since 2009 the ratio of paper silver to physical silver has increased fourfold from approximately 8 times to almost 33 times, where it stands today.

What is the significance of this discord between paper and physical supply on the Comex? Recall, that over 800 million ounces traded each day in April on that market. Further, consider that as at the end of April there were only 33 million ounces of registered inventories to back up all of that paper trading. Just imagine if a mere 5% of all of that buying actually stood for delivery; the entire inventories would be more than wiped out. Yet despite the steady erosion of these already scant Comex inventories - a characteristic which would surely be interpreted as most bullish in other commodity markets - the price of silver has actually declined since April. We endeavour to provide a framework for understanding this phenomenon below.

Those who were following the developments in the silver market in April and May (we note that there were many who were) will likely recall that the CME Group raised both initial and maintenance margins five times within less than a two week span effectively raising the minimum amount of capital required to participate in the silver futures market by 84%8. This is significant due to the amount of leverage in the futures market and also due to the losses resulting from the precipitous selloff which began on Sunday, May 1st, when several thousand contracts were wantonly dumped onto the very thinly traded after-hours silver futures market causing the silver price to plunge 13% within the span of less than 15 minutes9.

For example, consider a hypothetical speculative trader who went long, say 200 July 2011 SI futures contracts on April 28th. At that time this trader would have been required to post an initial margin of $2.565 million for a position of one million ounces of "silver" and thus would have been levered 18.5 times10. Below we present what the trade blotter for this trader might look like over the next few days assuming he maintained his position.

Following the initial trade, each day the trader’s positions would be marked-to-market and any losses or gains would be applied against his account’s equity balance. Should the losses on the position bring the equity balance below the maintenance margin level, the trader would be required to deposit the additional capital required to bring the equity in the account back up to at least the initial margin requirement level.

While the margin increases alone would have forced a decision for this leveraged long to either post the additional margin or close enough positions to bring margin balances in line with substantially higher requirements, the trader was actually fighting a battle on two fronts. This is because in addition to the margin increases, the trader was also experiencing massive losses to his capital due to a rapidly falling silver price. So it is also important to consider the extent of losses to the trader’s equity following the precipitous drop which began on the evening of May 1st. In our scenario, before finding a bottom around May 17th, the cumulative losses would have amounted to over $14 million, or over five times the initial margin deposit of $2.565 million that was required to take on the position on April 28th. This meant that with margin call after margin call, the capital committed to the position ballooned almost 700% by the time the silver price finally bottomed in mid May. The significance of such a dramatic erosion of capital on a leveraged position cannot be overstated, particularly in the context of rising margin requirements. The CME Group would know this very well, and so it strikes us as particularly suspect that they would continue to raise margin rates in the face of such a sharp selloff. A selloff, we might add, which emanated from highly unusual trading activity on May 1st that, in our opinion, just reeks of manipulation. How else can one explain the dumping of several thousand SI futures contracts within the course of 15 minutes, in one of the most illiquid hours of trading, without seemingly any regard for price or a fundamental catalyst to speak of11? Though we will let the reader connect the dots as to what the intent of the CME Group and the seller’s of SI futures contracts on May 1st really was, we can certainly observe what effect these actions had on the market by looking further into the weekly Commitments of Traders (COT) reports published by the CFTC.

The COT provides us with the weekly open interest held by various categories of silver futures market participants, and thus gives us clues as to how these participants reacted in response to these margin increases and ensuing volatility. We present the following table showing net open interest for the various categories, converted into silver ounces, which we obtained from the COT report for selected dates.

First, note how in the three weeks following the margin hikes, the speculative12 net long position dropped from 212.7 million ounces to 170.1 million. This very clearly indicates that the speculative longs, when faced with rising margin requirements and losses to capital, did close out a substantial amount of their long positions. The commercials who were short those 212.7 million ounces appear to have been taking every opportunity to cover their own positions. Rather than shorting further into the ensuing weakness, the commercials covered approximately 42.6 million ounces in the three week period.

Another piece of information gleaned from the COT data is that despite what many commentators were hailing as a bubble caused by excessive speculation in the futures markets, the net speculative long positions had in fact been dropping over time. Even during the April run up preceding the five margin hikes, the net speculative long position actually decreased by 23%.

That commercial short position deserves further mention. What is unique and of interest to many silver market observers is not only the size of the short position on the Comex, which is dominated by those "commercials", but also the concentration of the short interest. We provide the percentage of the total open interest held by the four largest short sellers on a net basis in the table above. Note that the net position of the four largest equates to 29% of the total open interest as of May 17th. Further we would also note that the concentrated short interest of the big four, though still quite high has actually dropped substantially over the past year coinciding with the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the resultant public discourse on position limits. Comments from CFTC commissioner Bart Chilton acknowledging the "repeated attempts to influence prices in the silver markets," and that, "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," perhaps have also had an impact on the behavior of silver market participants.13 And though the CFTC’s investigation into the silver futures and options market remains open after three years, we remain hopeful that its findings will further serve the interests of the investing public who rightly expect a fair and transparent silver market void of manipulative forces.

Could the drop in open interest and the reduction of the concentration in the commercial short open interest be perceived as an indication that those top four short-sellers are positioning for the inevitable imposition of position limits rules? Perhaps, and if so, it would follow that likely the short sellers seized the opportunity to further reduce their "liabilities" by buying up contracts in early May at a 30% discount.

Let there be no mistake, we view the current setup as extremely bullish. In our view, whatever froth and excess was present in the paper markets has likely been shaken out in the recent selloff. The remaining longs do not seem willing to part with their silver at these prices. These are the strong hands with longer time horizons that are likely not overly leveraged or are willing and able to withstand substantial volatility. Moreover, perhaps the "game" on the paper silver markets which has been meticulously documented over decades by Ted Butler14 and others, will soon be coming to an end.

What is perhaps most important is that despite what has recently transpired in the paper silver markets, the robust demand fundamentals for silver have not changed in our view. For confirmation of this, look no further than the physical silver market (i.e. the real silver market) which is providing us with evidence almost daily of a sustained bull market for physical silver. The US Mint recently stated that, "demand for American Silver Eagle Coins remains at unprecedented high levels."15 Likewise for the Perth Mint16, the Austrian Mint17, and the Royal Canadian Mint18 as well. The Chinese, who were net exporters of silver only four years ago, imported 300% more silver in 2010 than 2009 and such large quantities of imports are expected to continue19. Last year, Indian silver imports increased nearly six-fold, and this year consumption is expected to rise nearly 43% according to the Bombay Bullion Association20. In Utah, silver (along with gold, of course) will now be accepted in weight value as legal tender21. According to Hugo Salinas-Price, a prominent Mexican billionaire, there is now "very strong support for the monetization of silver" in the Mexican congress22. We suspect the Europeans are likely to account for an increasing amount of silver purchases going forward as well. In fact, we just can’t imagine a better outlook for silver fundamentals. This really makes us question who could be short such massive quantities of silver and why? Particularly in those leveraged paper silver markets, where as we demonstrated, only a fraction of the outstanding notional ounces are actually available in physical quantity.

We have a very tough time understanding those bearish arguments against silver. We look at the real silver market, and based on the supply and demand data coming from the real, physical markets for silver, the fundamentals are only getting stronger. And yet there exists another silver market, which as we’ve shown, is not very connected to the physical realm at all. And though silver investors have for decades suffered the tyranny of a rigged paper monopoly over silver price discovery, it appears to us that the tides are turning. In the age of QE to infinity, investors are being more scrupulous with their capital and as such they are demanding physical silver in quantity. With more and more dollars flowing into the silver markets and a finite supply of physical to meet that demand, the theoretical losses for the paper silver short-sellers are near infinite. And with such a skewed and obvious risk/reward payoff vastly favoring the longs, we pose the following question. Who is most at risk in the silver markets: the buyers of a scarce and real asset that serves a growing multitude of purposes, or the sellers, who are short a quantity of silver which may very well not even be obtainable at anywhere near current prices? Let the Seller Beware!


1 Bloomberg
4 Source: Bloomberg, CME Group, LBMA, Shanghai Gold Exchange. Figure also includes trading of Comex silver options which had registered a record open interest in the month of April.
6 Andrew Kaip, David Haughton and John Hayes. "A New Paradigm for Silver: Demand is Expected to Outstrip Production Growth," BMO Capital Markets. April 3, 2011, p. 35. Note: "Non-investment" demand includes industrial, silverware, and photographic demand
9 Bloomberg
10 A trader can always post more than the required amount of margin in his account.
12 For explanatory notes including definitions for each category of trader listed on the COT, please visit:

14 For further information please visit
19 Andrew Kaip, David Haughton and John Hayes. "A New Paradigm for Silver: Demand is Expected to Outstrip Production Growth," BMO Capital Markets. April 3, 2011, p. 17


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frippy's picture

Eric the Read.

Libertarians for Prosperity's picture

And yet there exists another silver market, which as we’ve shown, is not very connected to the physical realm at all...

Yes.  Correct. 

One only needs to look at Sprott's very own PSLV to see his "paper" units routinely trading at a ~10%-20% premium to NAV.

So, yes, there is quite a disconnect from paper to physical.

Errrr....wait....WTF? I thought the paper was suppose to be worth less than the physical...


LudwigVon's picture

One only needs to look at Sprott's PSLV to see his units, where investors have long term security that they are redeemable for real Silver unlike every other instrument available, trading above the suppresed paper price, more inline with real world Silver prices.

So, yes, there is quite a disconnect from paper to physical.

anarchitect's picture

Cute but typically superficial. Some want paper, some what physical. Physical carries a premium, at least in storage fees, so some prefer paper. But many of them want to know that they can get physical if necessary. And of all the paper silver products, PSLV is the only one that can definitely be converted to physical in a crunch. Thus it carries a premium.

SRV - ES339's picture

Interesting view, but how to explain The Sprott Gold Trust... it's also one of the few that you can convert to physical, but it sells at a very low premium (< 2%).

akak's picture

Perhaps it might have something to do with the fact that it is ~45 times easier to take possession of, and store, a given dollar figure in gold than it is in physical silver?

I'm not being facetious here ---- really, might that have something to do with it?

Libertarians for Prosperity's picture

No.  That's just dumb, as always. 

The more you post, the more dumbdumb you get. 



akak's picture

It would seem that with the apparent absence of tmosley from this forum, you have decided to haunt and harass me as the most obvious anti-troll defender of the truth here.  if so, bring it on, you dishonest and disingenuous bastard.

akak's picture

Maybe one day, WilliamtheBastard/RedneckRepugnicant/TexasShitslinger, you might actually start being a useful and honest participant in this forum.

Maybe ---- but I strongly doubt it.

midtowng's picture

No one wants our gold. The American public has no use for gold least that is what the latest Yahoo headline just said.

midtowng's picture

Oh, this is rich. The article is about gold COLORED coins. Not actual gold, like the headline implies.

narapoiddyslexia's picture

And no one wants them because they're useless. I tried to carry them around. Forget it. How many one dollar bills does anyone carry around? Very few, is my bet. So why would anyone want to increase the weight in their pocket needlessly? Why didn't they have a $2 or a $5 coin? That might be worth carrying around, but dollars are worth so little its not worth the energy to carry the extra weight.

AgShaman's picture

I find them very useful....and order boxes of them direct from the us mint.

Andrew Jackson and TJ are my faves....Sacajawea's are also nice.

They come in handy when using them for tips....after buying a drink or a beer.

I carry rolls and rolls of them in my backpack when I'm surfing the mountain....the extra weight helps me go faster....then when I'm in the lodge having a bite to eat and a microbrew at lunchtime...I'll unload a bunch of 'em with the barkeep (those chicks dig em...and they trade their fiats for them everyday).

Many inquire as to why I go to the trouble using them. I tell them it's my secret way of "flipping the bird" to my fellow Americans....some ask me to elaborate...some don't.

To each his own. Perhaps they help the treasury more than the FED...and using them circulates "better money"....I just don't know.

I'll continue to get boxes of them....and throw them around at the grocers and at the ski resorts. When some knuckledragger passes you on the you were standing still...maybe it was me (loaded down with $1 dinar coins in my backpack)

Yes...I junked you

urbanelf's picture

Discover card gives you 1% cash back.  Not all stores will take Discover card, but the US Mint will let you buy the $1 coins with Discover.

Can't wait 'til the Calvin Coolidge comes out!

narapoiddyslexia's picture

That's hilarious. Really. So, the Mint finally made a special copper alloy coin just for skiers. Do you suppose that was their intent? Is it possible they were hoping for a slightly broader market?

AgShaman's picture

"Clueless Wanker"....or predictable "Plunker"

I'm thinkin both....since it's obvious you lack the intellect to pick up on the lesson plan put forth. Too consumed with sand extraction from yer vagina I guess.

Carry on with your Rockefellian "I'm much too special to carry dollars" pomposity....

Continue to use "really" in a sentence by itself....someone here may be convinced you've got the brain stem to support your ego.

There....I junked you again

Banjo's picture

Soon to be the equivalent of your new nickel.

Enjoy the inflation.

hbjork1's picture

Dollar Tokens. 

Vending machines nation wide would have to be overhauled and then there is the risk of a $2.00 coin and another overhaul. 

Pennies cost more to make than they are worth.  Reminds me of a trip to Spain in 1970 (back when a few silver quarters and half dollars were still in circulation).  I felt sorry for the people nursing their small coins (their cent was ~ 0.1 US cent).  Now old Abe is in the same boat.  He could disappear and the public wouldn't care.  He is not worth bending over to pick up. 

It might be possible to issue a new coinage worth a factor of 10 more that could, through compositional changes be made to work in existing machines with relatively little modification.  To keep the public happy, John Wayne would go on the penny and Ronald Regan on the quarter.  But who would go on the dollar?  Marilyn Monroe would be my personal choice but the American public would probably prefer Elvis. 

Silver Shield's picture

We get cash4gold, China gets Gold for Cash...

Eric does a tremndous job of providing a forensic accounting of the drive by silver shooting in May. Watch how quite the media and their minions are this time when we blow through $50 silver.

Read the "best article written in 10 years on silver"...

petaloka's picture

This is not GOLD but gold dollar coins i.e. Sacajawea dollars and the like.

GetZeeGold's picture


Go Eric go!!!!


BrianOFlanagan's picture

this from the guys that claimed Ebay represented the best indicator of the "real" price of physical silver.

Caveat reader

Turd Ferguson's picture

And they are correct in that assertion. Using the fraudulent, manipulative Comex as your basis only shows your naivete.

Idiot Savant's picture

I thought you were going to quit posting if your "$1600.00 gold by June" call didn't pan out.

MFL8240's picture

In a free country it would have.

ForWhomTheTollBuilds's picture

I'm personally glad Turd's call failed to come true by a sliver thin margin.  That way, he is proved to have been correct in all practical respects, but I still get to listen to his detractors shriek in helpless fury that Turd is a fraud.


Bay of Pigs's picture

ZH's self proclaimed gold and silver "expert" OFlanagan talking trash. COMEX is fine and the SEC and CFTC are doing their job. LOL.   

Now he's hammering Eric Sprott and calling Turd out in one fell swoop?

Ha ha.....nice work Brian. Just "trying to help" again?


tmosley's picture

Uhhh, it did, idiot.  They have been delivering SLV paper since December.  Every month.  Now their silver is being drained out at unprecedented rates, and is at an all time low, and you want to say that everything is fine and dandy, just like it has been for decades?

Are you stupid or something?

BrianOFlanagan's picture

spoken like a true turdite who has earned a spot on the lemming leaderboard.  Good luck.

tmosley's picture

Awww, did you try posting under a pseudonym, and get butthurt when no-one gave you "hat tips"?

Awww, poor baby.  And clearly you are a baby, as you are totally unable to back up your whiney accusations.

BrianOFlanagan's picture

Every post I make anywhere is done in my real name.  I do not hide behind pseudonyms.  I welcome debate and alternative points of view and that's why I sometimes post here.  Good luck to you.


Pladizow's picture

To everyone:

Do not argue with the trolls - what do you care what they think - just accumulate PMs and laugh all the way in the opposite direction of the bank.

lawrence1's picture

Right, dont even respond to trolls... just encourages them.

jmcadg's picture

From someone else who doesn't hide behind pseudonyms (ie these are my initials),

If you want to join the People's Front of JP Morgue, you have to really hate the SIlver Hat Brigade. 

Brian: I do! 

Oh yeah, how much? 
Brian: A lot! 

Right, you're in. 


DeadFred's picture

Other than for a few trolls this post is preaching to the choir. My one problem with it is the lack of emphasis on the fact that the short sellers <banks> own the government and therefore have a legal monopoly on the use of force. They can bust into your house if they hear a toilet flush but try doing the reverse and see what happens. When the comex goes under or is about to go under what will the government do to save their owners? Maybe open Fort Knox (assuming there anything there), maybe make it a crime to own PMs, whatever, but bet on the fact they will take steps to shore up the banks from this 'grave threat to our economy'.

narapoiddyslexia's picture

Faith in the fiat money system is coming to an end. The Chinese, Russians, Indians, Brazilians, and South Africans are taking concrete steps to execute trade on a non-dollar basis. China just concluded a trade treaty with Japan and South Korea. The repercussions of this will not play out in one day, or one week, or even one year. But it will be a revolution. Listen to this -

Cognitive Dissonance's picture

Strange comments coming from someone who, based upon the types of articles you comment on here at ZH for nearly two years, is obsessed with Gold. A quick review of the type of ZH articles you comment on shows me the word "Gold" in at least 50% of the titles.

And it even seems you have changed your tune a bit. Over a year ago you thought there might be an effort afoot to discredit Gold, but now you don't? So how far will "they" go to discredit Gold Brian? Call Gold bad names, but not try to suppress it? Talk but no actual action? What do you mean by "discredit" Brian?

So if you think people are trying to discredit PMs the only question Brian is how far do you think they will go to discredit PM. Your position is illogical. If they are willing to discredit they are willing to manipulate IF they have the power to do so. And they do.


by BrianOFlanagan
on Mon, 05/17/2010 - 21:44

I'm not sure I'd agree that it's an organized conspiracy, but point 1 makes sense - individuals that have profited from the corrupt financial system feel threatened by gold and thus make every effort to discredit it.  

RockyRacoon's picture

Heads up.   Both Gainsville and APMEX are having huge silver sales over the 4th weekend into Monday.   Might wanna hang on for some better deals if you are planning to buy.   These guys are on the pulse and must see some lower prices ahead.   It ain't coincidence.


akak's picture

Very decent of you to notify us of these sales, my good garbage raider!

lawrence1's picture

Thanks Turd for your website, I read it often, although I have stopped trading anything paper. Keep it up.

RockyRacoon's picture

All hail the Turd!  Glad to see you here.   Looking forward to your input.

tmosley's picture

Right, because markets are bullshit.  We all know that prices have to be set behind closed doors by central planners.  Anyone who thinks otherwise is "naive".

SRV - ES339's picture

ROTFLMFAO... so you think the Crimex is an indicator of the "real" price of silver?

Latest US mint Ag issue is at a 75% premium to the fantasy Crimex price, with purchase limits to try to keep some in stock 'til they can get more. Caveat reader indead... as in readers of BrianOFs thoughts on silver!

XenoFrog's picture

In all fairness, that 75% premium was for the fancy proof silver eagles, not the regular ones you actually want to accumulate.

Greeny's picture

Metals are just seasonably weak. Wait for end of the summer

and we'll see some parabolic moves.

Yardfarmer's picture

indeed. despite all of the endless verbiage, analysis, and speculation, when it comes down to it, the golden rule applies. in other words, he who owns the gold rules. when the parabolic moves in Au/Ag occur at the end of August (just like last year), the "price", along with that of crude will still be in a state of manipulation. it simply behooves the oligarchs and kleptocrats to further enrich themselves with a move upwards. they make theirs on the way up and the way down. there is no inherent "virtue", "justice", or "truth" involved here. everyone but a blind fool knows that you follow the money, and that just happens to be gold, silver and commodities as fiat paper burns in the bankster's hyper-inflationary blast furnaces.