On Silver's Exponential Price Feedback Loop

Tyler Durden's picture

And as if silver bulls needed some more good news, here is a report from the Morgan Stanley metals desk...

I was told on Wednesday that big buying went thru on Tuesday in may atm silver calls which should make the market short gamma.

A short gamma position will become shorter as the price of the underlying asset increases. As the market rallies, you are effectively selling more and more of the underlying asset as the delta becomes more negative.

So what that means is that the SELLER of the calls, probably bought Physical to delta hedge themselves neutral. As this market jumps just about 1-2% daily (this week alone +6.5%) they would need to now re hedge to bring themselves back to neutral by BUYING more Physical as SILVER goes higher, essentially driving the market Higher still and so the chase goes theoretically moving the market higher causing them to buy more to hedge and moving the market higher, thus buying into rallies. 

Now they could BUY puts also to create positive Gamma as well to offset some of that pain they are not bound to the Physical for their hedge. Lots of what if's but that’s the idea.

On the other side if Silver were to gap lower, this would not help either as they would need to SELL Physical into a falling market to re-hedge themselves.

Great in a slow steady market, nightmare in a volatile

Translation: ever-accelerating feedback loop (both higher and lower). Vol is about to go off the charts.

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MaxVernon's picture

Visit the Silver Liberation Army and spread the word!



Thomas's picture

Blythe has a firm grip...on her ankles.

narapoiddyslexia's picture

Not sure the data bears this story out. The Au/Ag ratio has been linear downward since last Septmber. If this story were true it would be parabolic downwar, but of a lesser order, than its absolute price is upward. In other words, its been moving consistently faster than gold since last September. If this story were true, it would be accelerating vis-a-vis gold and it is not. I think this story may be intended to give investors the wimwams, and hence, come from Blythe herself. Opinions, anyone? Is this crazy, or what?

The Limerick King's picture

The Elites can tell nothing but lies

As there fiat based thievery dies

Believe not a word

And soon will be heard

Their pain-filled and mourningful cries.

hangemhigh's picture
TO: jeff montanye
on Fri, 04/08/2011 - 23:36

"it's mourning in america."

great line JM....i know you won't mind if i steal it and use it.............

Ahmeexnal's picture

Silver has entered self induced resonance stage.

It can't be stopped now.

falak pema's picture

its like that bridge...that shook itself to death. Resounding self feeding resonance.

mynhair's picture

Tacoma Narrows Bridge, aka Galloping Gerdie.

My granddad failed the plans for it, and was replaced.

gaoptimize's picture

Amazing!  This morning, a colleague and I were just discussing "control the debt growth for our children and grandchildren"-type congressional debating points, as if this was some linear system that will decline steadilly through the time of our children and grandchildren.  And I pointed to the Tacoma Narrows bridge as an example of a non-linear response to an extreme stimulation.   We agreed the financial system is likely begining to have non-linear responses.

Michael's picture

This Tacoma Narrows bridge subject you speak of is very special to me. For the past few days I've been thinking our current economy is like that crazy bridge. It's reached it's maximum chaotic resonance frequency with one boom/bust cycle after the next being greater than the previous, and the life cycle of our monetary system is about to self destruct in a Tacoma Narrows bridge type accident where it blows itself apart. Strange we were thinking the same thing at about the the same period in time. Just more anecdotal evidence people are all mind connected in a sort of esoteric way.

jballz's picture

Minor correction- The call sellers would need to SELL puts to offset risk, not buy them.

Also there's no reason to assume call sllers are not already hedged with long positions already held.

Also there is no reason to assume long positions and short call positions are not being entered at the same time.

Also if the BUYER of the silver calls wants to be delta neutral (gamma...really guys?) they would be shorting some amount of silver as well, adding to shorts on a rising price.

That said, the world is buying the fuck out of the silver markets so... enjoy the ride.



XPolemic's picture

Minor correction- The call sellers would need to SELL puts to offset risk, not buy them.

Correct, but in a rising (or falling) market, the moneyness changes, so while they sold ATM calls, they would need to sell OTM puts, and who wants to buy OTM options in a fast rising market? So there may be a liquidity issue selling puts of the same moneyness.

Of course, they could sell the puts ATM, and take a haircut. These options are may expiry, so if the trend of 1% a day continues, anyone with a naked position is F*CKED, so you would expect the long interest to increase substantially over the next 40 days. If the short interest also increases while the underlying is rising at this rate, then you absolutely KNOW something funny is going on. Regardless, the 1M implied vol is gunna get very funky.

In the case of The Morgue taking short positions, if the positions can be cash settled, then The Morgue can keep taking short positions and paying out with the free FIAT they get from the Fed. As mentioned on a previous post, that could go on indefinitely,or at least until the Chinese have got all their silver back.

DoChenRollingBearing's picture

Silver spiked to day's high about 1 minute ago...

LowProfile's picture

Translation: ever-accelerating feedback loop (both higher and lower). Vol is about to go off the charts.

At the risk of repeating myself..  I can't help but think they will pull the deflation valve out to get control of this one...

Too bad there isn't a silver VIX to go long!

nope-1004's picture

Wars are historically inflationary events.  I highly doubt deflation can return.  Civil unrest is growing, and TPTB need to stay in power, therefore using force under the guise of "humanitarian efforts" will expand and only add volatility.

LowProfile's picture

Mostly agree (wars are actually historically financed by debasing currency), but I think they will try to keep the metals in line, if at least to give JPM a chance to cover that short.

SWRichmond's picture

I am also a little surprised by the lack of a liquidity withdrawal-induced market crash.  I know it wouldn't work, but do they?

impending doom's picture

Excellent discussion. Please continue.

jeff montanye's picture

well, an equity slide might have some (for tptb) good results:  cowed tea party linked congresspersons, stronger dollar and lower long treasury yields.  but judging from 2008 (and the key is changed when one least expects it), it takes a pretty scary slide

SWRichmond's picture

That's basically it.  But the effect would be so temporary this time, if it even worked at all.  I think the markets are finally perceiving the reality that the U.S. will never pay its debt, at least not in constant dollars, and I think the markets are finally perceiving the effect that collapsing revenues has on that.  The deficit would get bigger, not smaller, and now that Congress is bravely quibbling over cutting the $1,600 Billion deficit by either $30 or $40 Billion, it's obvious there is no political will in the U.S. to deal with it.  In the face of a looming total catastrophe, an "exceptionalism" of the wrong kind is being displayed by the Rs and Ds: business as usual.  The third year of deficits this size, and since we've gotten away with it for this long, I guess we can continue to get away with it forever.

We're freaking doomed.

On a lighter note, through my investments that anticipated this condition, the Bernank continues to hand me free FRN currency-thingies which I am using to prepare my home and lifestyle for skyrocketing energy costs (HVAC, vehicles, etc).

insatiablegenius's picture

40.88 at 3:59 I want to buy my moms house with this.

yabyum's picture

Do Chen! Went to the coin guy to buy some 40+ product, there was a very old lady cashing in a 2lb coffee can full of 1964 Kennedy halves: She was very happy:)

natty light's picture

I wonder how happy she will be in one year.

chet's picture

Man, did I ever sell my SLV too early.  I thought TPTB would try to hammer it down a few days ago.

Now I'm waiting for a dip, not seeing.

But I've got my physical to console me.

jeff montanye's picture

damn i sure hope so.  scary chart to be buying but the size of the precious metals market (bullion plus miners less paper) versus the global financial assets gives me some hope.

oh and the world government and corporate elite are apparently irredeemably corrupt and will not redirect the surging fire hoses of money they shoot into their own mouths.

John_Coltrane's picture

The key is to roll your contracts up in strike price and forward in time, taking profits off the table but still staying in the game while reducing risk.  I've been doing this regularly with SLW since October and will do so again next week, rolling forward to June or July expiry.

Hugh G Rection's picture

And this is the reason for my perma-boner.


What was it my friends said a few years back when I chose to put all my savings in PMs and NOT buy a house?



riphowardkatz's picture

You should see a doctor if it lasts for more than 4 hours

SWRichmond's picture

...or hold hands and get in a bathtub full of water while watching a sunset...

yabyum's picture

If you have that much AG and a woody, it's time for hookers and blow!

tarsubil's picture

Is anyone else's spidey sense going crazy today?

LowProfile's picture

Hell yeah.  The Borg-nank might just pull the punchbowl over this.

roymunnson's picture

Buy Physical


and bottled water

long juan silver's picture

AGQ silver 2X ETF.

Plot the power of exponential.

August 2010

silver $18.50 // AGQ $60

April 2011

silver $40.00 // AGQ $260


Water? Here, have mine. It don't mix well with Champagne

Bay of Pigs's picture

Now you're long silver? LOL...

unwashedmass's picture


you mean, like now would be  a perfect time for a very distracting terrorist incident? yeah.

my spidey sense is telling me watch out.....the boyz don't like it when the peasantry takes control.

Ricky Bobby's picture

As I always said, buying PMs is an act of REBELLION!

From the 7 Samurai: "What do you think of peasants? You think they're saints? Hah! They're foxy beasts! They say, "We've got no rice, we've no wheat. We've got nothing!" But they have! They have everything! Dig under the floors! Or search the barns! You'll find plenty! Beans, salt, rice, sake! Look in the valleys, they've got hidden warehouses! They pose as saints but are full of lies! If they smell a battle, they hunt the defeated! They're nothing but stingy, greedy, blubbering, foxy, and mean! God damn it all! But then . . . who made them such beasts? You did! You samurai did it! You burn their villages! Destroy their farms! Steal their food! Force them to labour! Take their women! And kill them if they resist! So what should peasants do?"

Bicycle Repairman's picture

Upon seeing the peasant village, Mifune:

"I'd hate to die in a dung heap like this."

#1 film of all time.

Rinzler's picture

Damn, I need to see that movie again.

Thanks for the reminder Bobby-san.