Silver and the Deflation Thesis


I decided to make public and expand upon one section in my private newsletter weekly commentary.

As silver was monkey-hammered once again this week, I got the usual “see that, Harry Dent was right. Silver is going down” response.

It’s not enough that paper price dictates emotion. But that we still hold onto the belief in fortune tellers is over the top.

We wait for the price to tell us how to fell. 

I’ve read Harry Dent. I recommend him for any student of monetary policy and economics. He’s accessible for most and I believe he is accurate with regard to the fundamental tendency for contraction or deflation in a world economy built upon the sand of cheap credit over multiple generations. 

But he makes the wrong concessions in an attempt to be accessible. Maybe that’s good marketing.

Unfortunately, his story ends where a currency one begins where a current one truly begins. 

Of course, monetary authorities have done considerable work managing perceptions while setting the stage for more. 

Remember, it’s about the central planners, otherwise know as the central banks.

They will save themselves and they will continue to finance the government. Because they are the owners. 

They get the leaders elected. They advise, litigate, lobby and write the policies, while holding, controlling, and earning interest on what is left of the wealth and assets of the people and nation. 

So they will print. They will make whatever is necessary to keep it all going. To finance the wars, domestic and abroad. To service the backlog of IOU’s. 

Until, people say no. Which people? 

Certainly not the Greeks. But almost. 

I understand the pain. More than just about anyone. But duty is not ever free of pain and resistance.  

Positioning is what matters most right now for silver. It’s the source of where we’ve been and paints the highest probability of where we are heading in the short to immediate term. 

The COMEX, Commitment of Traders (COT) data provides all the insight one needs, just of short of prediction. Along side actual (physical) supply and demand, it is where true fundamental analysis for any commodity must begin, whether it is oil, lumber, hogs, sugar.

Opponents of the COT report - many within the precious metals information landscape - often point out that the data is just another instance of centrally controlled and grafted information, and therefore cannot be trusted. 

We all get that. 

So we are basically lied to on a consistent basis. We are told to our faces that there is no inflation or that the unemployment rate is falling. 

Yet, most government statistics are just ‘statistics’, and therefore wide open to interpretation and massage. Not to mention that they are directly connected to the media cycle that generates headlines far and wide. Those statistics are meant for the market. 

The COT report is simply raw data. Data that practically no one in the world of speculative-based price discovery pays any attention to. Certainly not the managed money class of investors. 

All that is left of modern “markets” boils down to headline driven perception machines driven by algorithms and high speed data networks. 

If were not so disconnected with reality and sustainability - it would be fascinating. 

The point is that the COT data is wide open, accessible to all. And it tells the story of price discovery. 

Therefore, general market analysis and commentary are based on the false assumptions ‘painted’ by technical indicators. 

This is across the entire market spectrum. 

The low price dollar price of silver may be the single biggest ‘gift’ for investors, but these reports are a close second. They would be easy enough to take down if anyone paid any attention to them.

So far no one with deep enough pockets cares. 

The managed money traders — the quintessential speculative class - have continued to add more selling positions to their already historic level. 

Who are they?

These are professional money management funds that care absolutely nil for fundamentals. They respond or react only to technical price signals on behalf of ‘other people’s money’. 

They are speculators. Gamblers with legal protections, ranging in size from the millions to the many billions of dollars. 

They never deliver on their short positions. Nor do they ever stand for delivery. Again, their sole purpose is to adhere strictly to technical indicators or price direction and momentum. 

As you can see in the data, archived, and pulled directly from the CFTC website, the managed money position size now stands 56,859 contracts, up 2,000 contracts from the previous reporting week and up from 10,520 contracts from one month ago - at the beginning of the current manipulative cycle. Thus perfectly coinciding with the most recent price top of around $17.50. As the managed money traders added shorts, the price moved down.

These positions will be covered (and liquidated) as we start moving up. We will probably see in the next report that this has already begun happening. The intensity of that move up is directly correlated with the size of that position. 

Remember, each silver COMEX futures contract represents 5000 ounces. 

56,859 contracts represents over 284 million ounces of silver in a market with a total of just under 1 billion ounces in open contracts (open interest of 197,092) and a combined warehouse “physical” inventory of just over 180 million ounces. 

That’s right. 180 million physical ounces backing 1 billion paper ounces. What could possibly go wrong?

And the greater irony is that these big managed money funds are totally led by the pied pipers or large commercial traders - otherwise know as the big banks.

The very same entities who broker the managed money trades - the prime brokers who know the most about their positioning and activity! 

Also the same entities who use their large positioning and high frequency trading to spoof selling whenever we reach the top of a cycle. 

(Speaking of commercial category, as a whole the 8 largest traders maintain a short position of 83,764 ounces or 418,820,000 ounces. Or 42% of total open interest in silver. Almost four times more than total inventory). 

The fuel for the next rally comes from the fact that these positions are always covered, beginning right on cue as moving average ‘inflection’ points are crossed.

Can the managed money shorts add more positions? Can they push the price down further from here? Yes. 

It’s just a matter of time before the moving averages dip low enough to light the match. 

And how volatile will these move be? Is this the one that burns out of control? The one that shuts down trading and breaks the market? 

This is where it becomes interesting. 

In the past the commercials, led by JPM would simply begin adding new shorts to contain the rally. Over the last few rallies, they have been very effective in containing the price after similar inflection points. 

Given that JPM seems to have all but extricated itself from it’s big short - the one it inherited from Bear Sterns in 2008 — while accumulating hundred of millions of physical ounces for it’s own warehouses… things may be very different this time around. 

Yes, outside market forces, the fall of the dollar, a natural disaster… these things will likely play out at some point. 

But for now, we are ‘blessed’ with these reports, and lower prices.

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