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Guest Post: Strong Indications of Gold & Silver Shortages
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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Hi there
I got a resume similar to yours except no CIA spook stuff. I fought in Rhodesia and Yougslavia, too. First, the coming SHTF America is going to be dominated by young kids who will learn all the tricks of the trade real fast, just as you and I did in Namsville. Also, there will be so many of them that they will (eventually) eat us for lunch, perhaps literally. The teenage fighters I worked with in Yugoslavia learned fast or died and it will be the same here. Before lonf they will be our peers in applied violence. I'm stockpilling ALL necessary items and if you think it's going to be a cakewalk taking it from me or anybody else you are just plain wrong and will pay for your folly with your life. I'm not trying to get in your face. I just want the other ZH readers to get a clearer pic of what's unfolding.
Hi there
I got a resume similar to yours except no CIA spook stuff. I fought in Rhodesia and Yougslavia, too. First, the coming SHTF America is going to be dominated by young kids who will learn all the tricks of the trade real fast, just as you and I did in Namsville. Also, there will be so many of them that they will (eventually) eat us for lunch, perhaps literally. The teenage fighters I worked with in Yugoslavia learned fast or died and it will be the same here. Before lonf they will be our peers in applied violence. I'm stockpilling ALL necessary items and if you think it's going to be a cakewalk taking it from me or anybody else you are just plain wrong and will pay for your folly with your life. I'm not trying to get in your face. I just want the other ZH readers to get a clearer pic of what's unfolding.
Hi there
I got a resume similar to yours except no CIA spook stuff. I fought in Rhodesia and Yougslavia, too. First, the coming SHTF America is going to be dominated by young kids who will learn all the tricks of the trade real fast, just as you and I did in Namsville. Also, there will be so many of them that they will (eventually) eat us for lunch, perhaps literally. The teenage fighters I worked with in Yugoslavia learned fast or died and it will be the same here. Before lonf they will be our peers in applied violence. I'm stockpilling ALL necessary items and if you think it's going to be a cakewalk taking it from me or anybody else you are just plain wrong and will pay for your folly with your life. I'm not trying to get in your face. I just want the other ZH readers to get a clearer pic of what's unfolding.
Don't be alarmed! Mourge has commissioned NASA to locate a gold and silver asteroids and they are now towing them to Earth. Should be here sometime in 2012. Therefor everything is just fine people...
Stay calm!
when I see a big fireball in the sky, I'll be the first to run to it with my pick-axe ;)
I think CustomersMan is right.
Physical gold and silver will keep their value but could any of these companies cover all the naked shorts that are out there?
In other words...it seems like Comex silver and gold is just more unfunded debt and that their price will go to zero once the financial fault lines snap.
why care what the price is in blown up fiat if you got the real thing in your hand? Would you really give up your gold or silver because some gov clown makes new rules? Sets new price? gold and silver have outlasted thousands of currencies and governments.
what if they outlawed the use of water to wash? How far, how long will you play by the criminals rules just to be part of a failing show?
Agree. They can outlaw PM all they want like executive order...think it was 6102. Fuck em. I won't comply. Maybe the only metal they get will be hot lead.
.
I was trying to make the point that physical will retain it's value but paper gold and silver will most likely become worthless. The action that's been going on lately has made me wonder of this is when it all starts to unravel.
My concern is for the people out there that don't know this. If you are a regular reader's of Zerohedge then you already know what a landmine you are walking into if you try to trade the Comex markets.
As for me it's a moot point anyway. I can see what's coming but I can't afford to do anything about it even if I want to. That doesn't really bother me though. I'm a Christian and God is holding my 'savings' account. Plus, He is the best person you can have with you in an Emergency.
So, when people figure out that more gold has been traded than exists, is the price of bullion expected to go up, or down?
So, when people figure out that more gold has been traded than exists, is the price of bullion expected to go up, or down?
That's a good question. I don't think anybody really knows for sure.My guess is that the markets will just break down altogether.
The shorts could end up declaring bankruptcy but if they keep doing the sorts of things they've been doing, then you might see Comex make the markets entirely paper based. If that happened then the market price would go to zero, in which case the shorts might make a fortune. (That would really be stomach turning wouldn't it?)
My proof of a looming shortage is simple. My bullion dealer is out of silver. Even the tarnished ingots were sold. He is having a difficult time getting more. Bunch of us buying up the last of his stuff over the weekend...
I was surprised that the handful of generic silver rounds I just sold on eBay were bid up higher than the ones I sold a couple of weeks ago. Getting $35 to $38 for them now. That's not the sign of a declining market price. I was holding back the good stuff for better pricing but what's the use? I plan to keep the junk silver U. S. coins and the recognized silver bars (like Englehard) and the silver Eagles. Getting rid of the generic rounds and bars has been a breeze.
One thing I fail to understand is that why every expert is recommending the purchase of Gold? The problem today is that the price of Gold is not derived by it's physical demand or supply but more by the speculative positions standing long or short on the commodity exchanges like any other traded commodity, stock or currency. The price of everything including gold is going to suffer when the speculators unwind their positions due to some event that they have not anticipated or foreseen.
http://www.marketoracle.co.uk/Article24581.html
PM is wealth storage. It has value. Why unwind your position for worthless fiat? I'm not interested in owning or trying to barter for asswipe. Physical delivery. Real stuff.
Silver For The People.
http://www.youtube.com/user/BrotherJohnF?feature=mhum
the basic assumption that selling short has suppressed the price of gold is false. those sales are covered in cash not metals.
The only thing that matters right now is if the central banks will be net buyers or sellers of gold. They wlll continue to be buyers so the upward trend will remain intact - whether people buy or sell futures.
the basic assumption that selling short has suppressed the price of gold is false. those sales are covered in cash not metals.
The only thing that matters right now is if the central banks will be net buyers or sellers of gold. They wlll continue to be buyers so the upward trend will remain intact - whether people buy or sell futures.
Why did your dealer indicate pressed bars are better than poured bars? I would really like to know. Thanks.
Funny, silver has fallen from 31.50 to 28 with all this "open interest". Don't let the facts interfere with your opinions everybody.
You should learn the meaning of the terms being discussed before insulting people. Open interest is going down--this means people are covering their shorts rather than maintaining them or opening new ones (which they would be doing if they had access to the metal). This means the price is about to blow up. Why don't you RTFA?
>> Open interest is going down--this means people are covering their shorts rather than maintaining them
Actually, I think the open interest going down refers to longs, primarily funds, liquidating long positions, hence the price going down. If folks were covering shorts, the price would be going up.
I own PM's for one reason: It is the only financial asset that is not easily controlled by Government- all other assets are on the GRID.
(perhaps diamonds also qualify, but they are hard to value and hard to sell with confidence)
To remain free you must have a way to avoid the complete control of your wealth by those in power - psychopaths now rule the halls of gov and finance.. They are moving against transfer of wealth accross borders- (unless your are carrying billions in US Bonds in Italy) live free.
The most important facts about the silver market is presented my CFTC's own reports.The vital fact that pussed the silver price from 18 usd/oz to 28 usd/oz is the covering of 9227 short contracts from 31527 net short contracts in 7th September 2010 to 22300 net short contracts in 4th Janurary 2011.This unique fact created the price increase.JP Morgan closed 9227 short contracts during an 8.5 usd/oz price increase.This is unique becaouse always the big shorts closed their positions during the sell offs that they create (like the past days ).Check my videos in www.youtube.com/user/silvershortagetv.Facts from these reports scream the whole truth!No analysis is needed.
While this will not, strictly speaking, help anyone missing Marla's musical musings, it is fun to listen to -- QE bears go techno:
A Musical interpretation of the viral Quantitative Easing Explained video.
if i said it once i said it too many times: gold - as with silver - is in severe and permanent backwardation. politicians, regulators, and sheople are in severe and permanent fucktardation...
Event Horizon imminent
Gonna be a beautiful show indeed, my friends.
Grab yer favorite bevs and snacks.
I like this statement: "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."
I've never seen it happen. When the price goes up everyone says: "Sell" or "take your profits" or "Shoot I missed that Bull run."