Guest Post: Strong Indications of Gold & Silver Shortages

Tyler Durden's picture

Via Adrian Douglas Of Market Force Analysis

Strong Indications of Gold & Silver Shortages

Since reaching new highs at the end of 2010 gold and silver have been sold off, and the selling has been particularly intense in the last few days. The news on the economy is almost exclusively bullish for the precious metals. From the price action one might be falsely led to believe that investment demand for the precious metals is waning. On the contrary the data analysis I will show in this article reveals strong indications of growing shortages and furthermore that the gold and silver markets are approaching “tipping points” that will lead to an acceleration of price appreciation.

We will first consider silver because the data for silver is the most dramatic.

Figure 1

Figure 1 shows a cross plot of Comex silver futures open interest against the silver price since 2001. By looking at the data in this way the time element is removed and the relationship between open interest and price is revealed. On the left side of the chart the data falls within the green dotted ellipse. The long axis of the ellipse is slanted upwards which means that generally the data within the ellipse display a relationship wherein the price of silver increases as open interest increases and it falls as open interest declines. Within the green ellipse there are tightly packed clusters of data that have been enclosed in pink ellipses and are numbered from 1 through 4. Ellipse #1 is almost vertical; this data cluster is from the start of the bull market when silver was trading around $5/oz. Because this data cluster is almost vertical it means that at that time expansion of open interest did not result in an increase in price. In other words, there was sufficient supply of silver in the market that the commercials were ready to keep selling as many contracts short as speculators demanded. If all demand for contracts on the long side was met with eager short selling the price could never rise and it didn’t. The data within ellipse #1 demonstrate that whether the open interest was 60,000 contracts or 120,000 contracts the price remained around $5/oz. It can be seen, however, that this situation gradually changed. The data clusters 2, 3 and 4 are enclosed by ellipses whose long axes tip progressively more toward the horizontal as one goes toward the right of the chart. As the ellipse leans over it means that the price is becoming much more sensitive to the open interest. As open interest increases the sellers are only prepared to meet increasing demand from the speculators at ever increasing prices. The progressively decreasing slope of the long axes of the ellipses 1 through 4 is indicative of a tightening supply of physical silver. As the supply becomes tighter there are less willing sellers so there are only minimal increases in open interest for quite large increases in price.

The exciting revelation comes from ellipse #5 which is shown in red. This encompasses the open interest versus price data since silver went above $22/oz. The long axis of this ellipse is downward dipping. This means that as the price increases the open interest contracts! This means that in general existing shorts are covering their positions as the price rises. This is indicative of a looming chronic shortage. The owners of a commodity should be happy to sell at higher prices but that is not the case in silver. This shows that those who have committed to sell and don’t have the silver are buying back their commitments and those that have silver no longer want to sell it. There is no other way to interpret this change in relationship between open interest and price that has been developing over the last ten years. We have reached the tipping point where physical shortages are going to become more and more apparent.

John Embry in a recent interview with KWN explained how difficult it was to source physical silver for the Sprott Physical Silver Fund. In daily updates in the Midas column of www.lemetropolecafe.com I have shown how Comex silver inventories are shrinking and are not far from ten year lows. The Financial Times just reported on acute shortages of gold bars for investment in Asia.

Let’s now look at gold. Figure 2 shows a cross plot of Comex gold futures open interest against the gold price since 2001. There is a similar pattern to what was seen in silver except the lower volatility of gold results in the clusters being more tightly packed.

Figure 2

There are five ellipses shown in pink and numbered 1 through 5. The long axes of the ellipses tip toward the horizontal as one goes from left to right on the chart. Ellipse #1 encompasses data from very early in the bull market. The ellipse is almost vertical which means that at that time increased demand for gold futures was met willingly by the sellers such that increasing open interest resulted in only minor increases in price. It can be seen from ellipse #1 that an expansion of open interest from 100,000 contracts to 375,000 contracts resulted in the gold price increasing from $260/oz to $425/oz, an increase of $165/oz. The ellipse #5 shows that an increase of around 50,000 contracts (600,000 to 650,000) resulted in an increase in the gold price of almost $200/oz ($1200/oz to $1400/oz). Just as we saw with silver the tendency of the long axes of the ellipses to tilt over as we go from left to right on the chart is an indication of a growing shortage. Ellipse #6 has been marked in red. It is horizontal. That is not yet quite as dramatic as in the case of silver where the ellipse is downward sloping but nonetheless it is indicating a looming chronic physical shortage. This horizontal data cluster means that even as the price rises the sellers, considered overall as a group, can not be persuaded to sell more commitments to deliver gold in the future despite a rising price.

The clear trend in the data clusters that has developed over the last ten years indicates that the gold open interest will soon be declining with a rising price as is the case for silver. Taken together the data shows that in both gold and silver there is a growing reluctance of the traditional short sellers to meet rising demand even at elevated prices. This is strongly indicative of looming physical shortages. This conclusion is corroborated by many other market observations and anecdotal evidence. We are likely very close to the “tipping point” where shortages become exposed and a stampede of investors into precious metals to benefit from the accelerating prices will give rise to a feeding frenzy that will exacerbate the shortages.

Perversely the more the market becomes close to the tipping point the more we can expect the cartel of bullion banks to make bear raids as we have seen this last week because they desperately need to cover their short positions. However, in the case of silver and soon to be the case with gold a negatively correlated open interest to price relationship means that lower prices lead to higher open interest; in other words there is no way to cover at lower prices; the only way to cover is at higher prices. As this becomes increasingly obvious to the cartel the severity of the bear raids will decrease, particularly when the premiums in the physical market are showing that the bear raids are stimulating massive physical offtake making the predicament of the cartel ever more precarious.

This makes the brouhaha about the CFTC imposing position limits on the Comex a complete joke because, as always, the regulators are going to be too late.

Just like all the other nefarious financial engineering schemes that are falling like houses of cards, the scam of selling precious metals that do not exist is fast approaching a rendezvous with its day of reckoning.

h/t Peter

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Mr Lennon Hendrix's picture

PMs looking good out of the gate.  PMs continuing the checkmark move from the friday drop.  Moving with the dollar.  Platinum is loving life above $1800.  Lovin' it!

CrockettAlmanac.com's picture

Lovin' it!

 

Isn't that the latest McDonald's slogan? Of course, like gold, you can't eat it.

Armchair Bear's picture

Wooo Hooooo!!!!

 

That's MY way of sayin' it.

breezer1's picture

as opposed to mcnuggets which you shouldn't eat.

DoChenRollingBearing's picture

@ Mr Lennon

Happy Camper Bearing is loving the PMs doing good out of the gate, especially the recent nice runs in Pt and Pd.

Yum!

Shortages bitchez!

Mr Lennon Hendrix's picture

Platinum just dominated the market.  Did the trolls notice?  No, they were busy watching gold.  Monie moves in mysterious ways.  Silver, gold, and platinum track each other in the long run, because they are all perfect monie, but they do not (always) move the same in the short term.  So while silver and gold tested support, berated by all haters, platinum jumped up and took the torch.  Now the sisters will kick their captures in the nuts, and run out of the castle.  We will help them out of the gate, you and I, and as always, a reward for the return of the princesses will be offered.

Al Gorerhythm's picture

@Bearing

Not so happy camper Al Go, is not lovin the shortage. Can't get mine, ordered since November.

Bay of Pigs's picture

Mr Jimmy,

Adrian Douglas and GATA are spot on. Add Turk, Embry, Russell, Butler and Organ and you have all you need. Most others (especially the deflationists) have been consistently bad at calling the PM's markets. ZH has been fantastic at bringing the suppession story to light.

Rock on Bitchez! BTFD.

Stuck on Zero's picture

Palladium may be the next metal to skyrocket in price.  Check out this:

New Glass Stronger and Tougher Than Steel

ScienceDaily (Jan. 11, 2011) — Glass stronger and tougher than steel? A new type of damage-tolerant metallic glass, demonstrating a strength and toughness beyond that of any known material, has been developed and tested by a collaboration of researchers with the U.S. Department of Energy (DOE)'s Lawrence Berkeley National Laboratory (Berkeley Lab)and the California Institute of Technology. What's more, even better versions of this new glass may be on the way.

 

http://www.sciencedaily.com/releases/2011/01/110110121709.htm

 

RobotTrader's picture

Platinum and Palladium haven't sold off at all.

More proof that higher gold prices are assured, but only if the economy continues to boom.  Buying gold and silver on the assumption that their price will rise when the economy collapses is a fool's errand.

Another stock to watch is PAL.  Unlikely to see a severe correction in gold as long as the palladium producers fail to sell off.

Global car sales are booming.  And once those Indian and Chinese finally migrate off the motor scooter and into a car, they feel rich and buy lots of gold jewelry for their wives and daughters.

Everyman's picture

NICE Lady!

There is a fear that the Chinese market for autos will collapse.

http://www.chinadaily.com.cn/china/2011-01/14/content_11849882.htm


Since Christmas Eve, the day after Beijing announced strict measures to limit the number of new cars in the capital, Liu has not received even one prospective buyer, let alone signed any contracts.

His showroom in Beijing's Chaoyang district, which sells China-made Chery models, could "encounter its first single-digit monthly sales before Chinese New Year", said the salesman, who started in the industry four years ago.

"We've heard the store will lay off 60 to 70 percent of its sales staff after the holiday," added Liu.

To ease the gridlock, city authorities will now issue just 20,000 new vehicle license plates a month, meaning annual sales will plunge from 891,000 units in 2010 to 240,000 units in 2011.

Infinite QE's picture

Beijing car sales may taper off due to this but outside of the two main cities, Beijing/Shanghai, car sales are parabolic. Nearly all being sold for cash. Certainly the larges t car market in the world.

 

 

DarkMath's picture

"NICE Lady!"

I agree, I'd like to give her a pearl necklace myself.

Sudden Debt's picture

ONLY IF SHE'S TRAINED IN THE ARTS OF KAMASUTRA!!

 

True.North's picture

Agreed, PAL is a favorite as a mining stock to complement my physical stuff

merehuman's picture

junked. You need a seeing eye dog. Economy is booming and  gold will only go up as long as economy keeps booming?

You really need help.  That pretty girl is no substitude for truth you rotten liar!.

Double down's picture

Nah, she is Robo's get out of jail card.

You are a free man, Robo, keep trolling.

 

Hephasteus's picture

It's like playing connect the dots with katherine hepburn steading michael j foxes hand.

JW n FL's picture

that was funny! quick junkin the funny guy(s), fucking cock blocking pricks.

knukles's picture

Only a truly sick, twisted fuck could conjure any excuse junking such clarity of thought, my man.
BTW, they were only trying to connect one dot.

merehuman's picture

"they were only trying to connect one dot"  is funny.

MsCreant's picture

I can't stop laughing. Katherine and Michael would laugh too.

Aristarchan's picture

My wife buys gold for herself.....if she put it all on at the same time, she would look like Goldfinger's christmas tree. Indian women have a thing for gold that goes beyond western comprehension.

rosiescenario's picture

"Buying gold and silver on the assumption that their price will rise when the economy collapses is a fool's errand."

 

...well, if the Fed's answer is to that is an even greater money dump, then the PM's will do even better in a collapsing economy since no one will want to hold paper...recall Weimar....as just one example.

 

ps...nice photo...is that the former Tunisian president's wife???

JLee2027's picture

"Buying gold and silver on the assumption that their price will rise when the economy collapses is a fool's errand."

It's not the economy, it's the currency collapsing. 

Robo is a liar. See Robo, Junk Robo, and Never ever read Robo.

DoChenRollingBearing's picture

Well done Robo!

Your comments are always easier to digest when spiced up with some pretty pictures.

CrashisOptimistic's picture

FYI sportsfans, unlike the USA, when a Chinese guy buys a new car, an old car somewhere is not junked because they are so new to the world of cars.  There ARE no old ones to be cut up as scrap.

Well, 2010 Chinese (excluding India) car purchases . . . about 17 million vehicles.  Give them just 10,000 miles / yr of driving (less than the US) and 25 miles per gallon and guess what, that's

10,000 / 25 = 400 gallons of gas.  42 gallons per barrel (approx with refining gains) and that's 9 barrels of oil per car X 17 million = 161 million barrels of oil or 440K barrels per day.

That's just from 2010's crop.  They are expecting to buy 21 million cars this year and 27 million next year.  This is a consumption increase of well over 1 million barrels per day just from China over the next 2 yrs.  Just from China.

Tra la.

 

Dr. Gonzo's picture

If palladium diverges with silver again tomorrow I am going to trade 10oz for 8 kilos of silver. I am hope, hope, hoping this happens. Love the girl. 

e_goldstein's picture

of all the softcore porn on the internet, yours is the best.

Dogfather's picture

FYI, it ain't softcore porn unless you see nipple...

Sudden Debt's picture

That's because woman like that are mostly kept in the bedroom and not outside in the sun ;)

Arius's picture

Platinium and Palladium to the moon...be careful of the chinese...

Savonarola's picture

If she had hairy armpits she'd be perfect.

malek's picture

As always it is most interesting what an (aspiring) manipulator is NOT talking about:

RT: "Buying gold and silver on the assumption that their price will rise when the economy collapses is a fool's errand."

But buying gold and silver on the assumption that their price will rise when the currency collapses is... ?

HyperLazy's picture

"...day of reckoning."

 

Can't wait, got my 4-D glasses and popcorn ready!

The Talmud Kid's picture

I'm long the bullion and short the GLD.

Let's see what ya got CRIMEX.

qrad's picture

nice strategy! you just have to cover the shorts, cash out and into physical before the dollars you make on your shorts won't buy the physical... hopefully that won't happen, but we must prepare for complete dollar death. keep posting your deliveries to http://standfordelivery.com

 

 

The Talmud Kid's picture

I'm long a few rolls of 1 oz AU/AG bullion coins from around 950 and 14 usds respectively, and short the GLD and SLV against at around 1200 and 28 usds.

Dislocation, bitchez.

BigJim's picture

PMs cusping the Veblen Event Horizon.

lawrence1's picture

What is the Veblen Event Horizon?  Or tell me where to look, thanks.

gwar5's picture

PM's is a way for me to get out of the dollar. If JP Morgue cheating makes me rich, that's their bad.