this may be HUGE - Silver lease rates

[jacobdcoates]

Re: this may be HUGE - Silver lease rates

I think he is saying that the production users of gold and silver are using MASSIVE derivative shorts to try and keep the price down, and fighting basically a rearguard action on the price now, with the CB's providing some help, but also failing. Please correct me if I am wrong

[Spartacus]

Re: this may be HUGE - Silver lease rates

When you lease a car you get a car for a while and at the end you return the car plus you pay some money for possessing the car.

Same with Silver and Gold. You get Gold or Silver - at the end of the lease you return the Gold or Silver PLUS you pay a fee for possessing it.

This whole thread had been about the price the industry has been setting for those leases.

Follow some of the URLs. There's a link to the lease rate for Silver.

I don't think any of this has been too technical, but to follow the discussion you should be familiar with these peoples' writings

http://www.silveraxis.com/index.html
http://www.butlerresearch.com/archive_free.html

Can you explain WHAT the hell your talking about!
In English as well please!
Mike

[acrabbe]

Re: this may be HUGE - Silver lease rates

Acrabbe -

Acrabbe, I'll resume this discussion tomorrow as I'm getting by on five hours sleep from last night. Just one comment of yours struck me:

<< Silver is in the late stages of a bull market began in 2002 from $4.>>

At $13 silver and five years out, I'm curious as to why you describe this as a "late stage" market in silver today? You see this market going up like a Roman Candle and burning itself out in two years? Curious because I've heard this from one other source as well.

Thanks.

I wasn't being totally clear with that statement. If I had to guess I'd say we're in the middle stages of the PM bull. Over the past century we've had about 4 real bull markets in PM's (this one included) and they last about 10 years each, give or take a few years. We're 5 years into this one, so you can say we're entering the mid to late stage, all depending on whether this turns out to be a 7-8 yr or 12-13 year bull. Hard to say.

I think the inflation adjusted highs have an excellent chance of being hit before the run is over, the big question is when, and how quickly. There's no resistance above the nominal highs, and with inflation so out of control, and with OTC derivatives currently imploding and bringing banks to their knees, who knows how high the PM's could get in the late stages. And this is all just based on the inflation/debt monetization factor. If the geopolitical situation continues to deteriorate, that could take us into very uncomfortable territory. Even if you're long the whole way! (i.e OMG, when do I sell??? :eek

Crazy thing is, Putin just told his CB to allocate more of their reserves to gold. I'm sure other countries will follow suit, and the Chinese still haven't gotten involved full force. It could be the entrance of these large players that catalyze the "adjustment" in the PM prices relative to the actual dollar supply and spark a buying panic.

Of course, the wildcard here is deflation. Even though they'd fight it to the bitter end, if it takes hold firmly, I have no idea what happens to any of PM's. Someone else would be better suited to offer an opinion on this aspect of the debate.

[Guest]

Re: this may be HUGE - Silver lease rates

Acrabbe -

Very solid, hard headed comment. I'm gonna buy you and ol' Spartacus a long cold (virtual) beer and soothe your frazzled nerves.

[Guest]

Tom Szabo of SILVERAXIS - Ted Butler's 'massive silver short position" reexamined

I'd like to make a thousand word or so technical comment about this chart on the short position in silver futures compared to other commodities and gold. If you are interested in studying the mechanics of the silver market, I urge you to read ahead, but those who are supremely confident that silver prices are heading up in the future because naked manipulators will be forced to cover at much higher prices may want to skip the following dose of reality.

CHART IS FROM TED BUTLER'S POST "A PICTURE IS WORTH A THOUSAND WORDS"




First, the chart apparently does not consider recycling in the "days of production" figures, understating the true supply of silver. Every metal is recycled to one degree or another, unlike agricultural commodities and fossil fuels.

Silver happens to have one of the highest rates of recycling and this should not be ignored: according to GFMS, the annual recycling rate for silver is 29% of mine production while VM Group believes silver recycling is more like 66% of annual mine supply. Second, the chart also ignores supplies made available by the secondary market such as private and government dishoarding.

According to both GFMS and VM Group, governments continued to dishoard silver as recently as 2006. And of course we know that around 500 tonnes of gold is dishoarded annually under the Central Bank Gold Sale Agreement. Dishoarding, on the other hand, is not a regular feature of any other commodity except perhaps palladium.

Third, some markets like metals can draw supply from all over the world, but others like orange juice, pork and milk tend not to include much international supply or demand in U.S. futures trading. Thus, it may be inappropriate to include "world" production figures for some of these commodities when making comparisons to silver or gold. In other words, it would be appropriate to include only those production figures that have a reasonable chance of being hedged via the futures market.

Fourth, a number of commodities included in the chart have a larger concentrated long position than short, virtually eliminating the possibility of short covering through physical delivery. For such commodities, comparing the concentrated net short position to annual production is meaningless.

Let's consider the quantitative and qualitative effects of these factors in terms of the chart.

COMEX Silver Open Interest on 10/2/07: 117,498 contracts, futures only

4 Largest Traders By Net Position: 38.1% Short = 44,767 contracts or 223.8 million ounces

8 Largest Traders By Net Position: 49.1% Short = 57,692 contracts or 288.5 million ounces

Annual Mine Supply, GFMS (2006): 646 million ounces

Annual Mine Supply, VM Group (2006): 672 million ounces

Days of World Production to Cover Concentrated Net Short Contracts, 4 Largest Traders: 223.8 / 646 * 365 = 126 days

Days of World Production to Cover Concentrated Net Short Contracts, 8 Largest Traders: 288.5 / 646 * 365 = 163 days

So far, so good. But now let's look at what happens when we include recycling.

Annual Silver Recycling, GFMS (2006): 188 million ounces

Annual Silver Recycling, VM Group (2006): 446 million ounces

Days of World Production Plus Recycling to Cover Concentrated Short Contracts, 4 Largest Traders: 223.8 / 834 * 365 = 98 days (using GFMS figures; but 75 days when using VM Group figures)

Days of World Production Plus Recycling to Cover Concentrated Short Contracts, 8 Largest Traders: 288.5 / 834 * 365 = 126 days (using GFMS figures; but 96 days when using VM Group figures).

So, if we include recycling in the production figures, we can see that the concentrated net short position in silver may be 30-40% smaller than the bar shown on the graph. In effect, the bar for silver would be more like the one for gold. There is, however, a similar amount of recycling in the gold market, and thus the bar representing gold would also shrink proportionally. This would make the bar size for gold about the same as the one for cocoa.

But hold your horses please. We haven't included any dishoarding as yet. For example, GFMS claims that government sales accounted for 78 million ounces of silver supply in 2006; if this is true, it would shave another 5 days production off the above figures. Similarly, the near 500 tonnes of central bank gold sales would shrink the bar for gold as well, making it just slightly larger than the one for coffee.

Next, let's consider another problem with this graph: 'world production' is not an appropriate measuring stick for all commodities. Milk, pork and orange juice, as well as to a lesser extent wheat, oats, soybeans and some other agricultural commodities, are not traded internationally at the same rate as are silver, gold, crude oil, copper, sugar, coffee, etc.

Futures positions for commodities traded predominantly in regional markets will necessarily be much smaller than those for commodities traded internationally. In fact, the chart seems to confirm that the more international trade there is in a commodity, the larger the concentrated short position is in terms of global production. If you think about it, this makes sense. The more accessible the cash market is for a particular commodity, the more likely that someone will use the U.S. futures market to hedge or speculate.

Certainly nobody is going to be trading milk futures in the U.S. based on milk production in India. On the other hand, Indian trading in silver is a key factor in the hedging and speculating decision of COMEX traders. This can also work in reverse when the global cash market is so large that there is insufficient speculative capital to provide much of an opportunity for commercial hedging. I am talking about crude oil of course. It should come as no surprise that the chart has oil on the far left side of the list opposite silver.

Now, let's examine the implications of a concentrated short position in a commodity. One reason to measure it in the first place, as explained by Ted Butler, is to gauge the ability of shorts to cover their positions by making physical delivery.

Assuming the concentrated short trader is not already in possession of the commodity being shorted, there are two sources that can be 'raided' in order to acquire a physical position to be used in settlement of any outstanding futures contract that cannot be rolled over. The first is the subject matter of the graph: annual production. To this we have added recycling and dishoarding.

Before we move on to the second source, let's examine a concept that may be just as important as annual production: "settlement of any outstanding futures contract that cannot be rolled over". What does this mean?

Well, we know that a short futures position can be closed out in one of three ways: (1) acquiring an offsetting long position (covering), (2) making a delivery of the commodity in a so-called exchange-for-physical or (3) rolling over the contract to a future date by acquiring a short calendar spread (in effect, matching the need of longs who want to remain long but must also roll over their positions before contract expiration). Interestingly, the ability to conduct (1) or (3) is directly related to the size of the concentrated long position in a commodity.

This is because exchange rules prohibit cornering attempts and therefore large concentrations of long positions cannot possible stand for delivery: they must roll or sell their contracts near expiration. Thus, when we see a large concentrated long position in a particular commodity, we can pretty much rule out the possibility that large short traders will be forced to settle using exchange-for-physical.

The implication of this is that the concentrated short position is largely irrelevant in commodities that also have a concentrated long position of equal or greater size. Which commodities are these? Out of the ones on the graph, they include crude oil, sugar, wheat, corn, copper and palladium.

To take it a step further, it would be even more appropriate to subtract the concentrated net long position from the concentrated net short position when analyzing concentration ratios. This is precisely the advice the CFTC offered to Ted Butler many moons ago, and there was a reason for it other than obfuscation. In effect, the regulators were telling Mr. Butler that large shorts need not fear delivery requests from large longs.

Any potential problem is limited to the extent the large shorts exceed the large longs. I'm not going to try quantifying this effect here, but let's just say that offsetting the large shorts and large longs in silver will result in a net short exposure about half the size shown on the graph. In fact, there have even been periods when large longs briefly exceeded large shorts in COMEX silver, such as April 2003 and September 2001.

Okay, let's now look at the second way to acquire physical supply to cover a short position: existing stocks. Interestingly, the commodities remaining on the graph -- after removing those with either small local markets or huge global ones as well as those with little risk of being covered by exchange-for-physical -- seem to share a common feature: they all have stockpiles of various size that can be drawn down in order to satisfy rising demand.

In the case of silver, approximately 60% of the concentrated net short position of the 4 largest traders is held at the COMEX warehouses. This compares very favorably to gold at 54%. Of course, much more gold and silver exist in readily available form in London, Switzerland, Tokyo, Dubai and elsewhere. There are hundreds of millions of ounces out there if the price is right, starting with the ETFs.

For cocoa, the percentage is much higher at around 375% (3.75 times the concentrated net short position is stored in central warehouses). By contrast, the ratio for coffee is around 62% based on coffee stored in approved U.S. coffee warehouses. On the other hand, less than 1% of the concentrated net short position in platinum is held at COMEX warehouses. It seems that when we add existing stocks to annual production, it is none other than platinum that may have the most outsized concentration of net short positions.

In conclusion, it is true that silver may be an outlier when we narrowly construe commodity supply to include only annual production in the form of mineral extraction or agricultural harvest, but when we add all of the possible sources of supply, silver may end up somewhere in the middle of the pack. The only way to know for sure is to redraw the graph so that it is a more accurate reflection of the commodity markets. The existing picture may very well be worth a thousand words, but it is definitely worthless without those thousand words.

[rabot10]

Re: this may be HUGE - Silver lease rates

Way back in April you said:



Looks darned prescient to me!

Fred how do U remember this stuff? All i want to know is silver going up based on this anyone anyone?

[Guest]

Re: this may be HUGE - Silver lease rates

Rick -

I think a lot of the lemming money that has flooded into bonds will prove to be a massive sucker's bet - when it wakes up, which is *very slowly*, it will pile into precious metals as concerted global monetary debasement becomes ever more evident. Ditto for the whole myopic crowd that claims precious metals are "only money when or if the government allows it to be". LOL !!

Bonds, and even short term treasuries, were one of the worst bets imaginable in the 1970's. It's amazing how many highly educated investors today still think bonds will offer protection in the recession that's blowing in.

When even a fraction of the lemming money that piled gloatingly into treasuries in August, thinking they were being so sophisticated, wakes up to the inflation beginning to seep in worldwide, the precious metals will get a bid that will make today's effervescence in the PM markets look puny in comparison.

The lemming money was jeering at precious metals investors six months ago as being slow witted, flat footed, and simplistic in their adherence to metals as the true asset haven. Now US bonds are being shown up as the swiss cheese investment they really are in the coming global inflationary era. Watch as oil prices spiral inexorably upwards. And take note five years from now, as it becomes evident that oil crisis has become one of the biggest drivers of inflation, rather than inflation driving oil. That will be a moment of lucid revelation - but it's still regarded as a simpleton's idea on iTulip.

I've had those guys proclaiming gold was for fools, and bonds for the sophisticated and world-wise conservative investors - bending my ear for five years now. Let them hang onto their bond 'safe havens' and rot - I could care less if they want to hang onto yesterday's life-raft until the water is up to their ears.

[c1ue]

Re: this may be HUGE - Silver lease rates

Lukester,

I may not share you PM tunnel vision, but I completely agree with your bond sentiment.

We may both be wrong, but at least we are both looking at how to survive should the secular market conditions of the past 25 years change.