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Turk: “I would like to focus on Silver today, Eric.  We haven’t done that for a while, and it is important to correct some silly things that are being said about silver these days, particularly with regard to the huge explosion in Comex open interest....

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“While gold’s open interest has fallen recently, silver’s open interest is doing the exact opposite.  It has grown to levels not seen for some time.

Some reports have tried to explain this surge in open interest by saying that banks are using the futures market to finance their holding of physical silver.  This is a common procedure, but only works when silver is in contango, i.e., the futures price is above the spot price.  But silver is in backwardation in the front month - and for large trades it appears to be in backwardation up to three months forward - which is the interesting part that I think is misleading so many investors.

This front-month backwardation is not reflected in Comex settlement prices.  The backwardation is only clear when you get quotes to trade physical metal from the bullion banks - one quote for spot and the other one for a month in the future.  The price traded on the Comex front month is totally divorced from what is happening in the physical market for silver, which is actually in tight supply.

I follow intraday silver and gold prices closely.  I focus principally on spot and the near months because that is where most activity takes place.  Even when open interest in a distant contract rises, say December 2014, it usually is not an outright purchase or sale of a position for that distant month, but rather, entered into a spread with spot or perhaps the front month.

We know that there has been a lot of corrupt activity going on in silver over the years.  For example, you and I discussed back in November 2012 -- here’s the link to that blog (click) -- the implications of when the LBMA stopped reporting SIFO, the silver forward rate.  What was being reported back then was totally fictitious because no bank was willing to actually deal at the rate being quoted, so the LBMA stopped reporting SIFO rather than mislead the market.  Unfortunately, the market is nevertheless being misled.  

There are shenanigans in silver’s futures price for the Comex front month.  The price looks totally fictitious when compared to the spot price of physical metal, but most individual traders of Comex futures are unaware of what is happening in the spot market.  The reason for this is because relatively little physical metal actually trades in New York.  Consequently most futures traders are unaware of the real relationship between spot, where physical is traded, and front-month futures, which of course is the paper market. 

The major markets for physical silver are in Europe.  That’s where the ETFs trade and store the metal they are supposedly holding.  It was in Europe where Warren Buffett bought his 130 million ounces years ago. 

The upshot of this is that Comex futures traders are far from the kitchen when the silver shorts are cooking the books.  As a result, individual Comex future traders are getting ripped off and don’t realize it.  The banks can buy front month futures in London at a discount to spot, and then sell the same position on the Comex at a premium to spot, generating for them an extraordinary profit because of overpriced futures sold on the Comex.  It is just another reason to avoid the paper market for silver and buy physical metal instead.

I would like to wrap up with two silver charts, Eric.  The first one is my favorite.  It is a long-term chart showing the closing price each week back to the old 1980 high (see below).

Silver is forming a multi-decade “cup & handle” pattern.  It is a huge accumulation pattern where physical metal has moved into strong hands over the last 15 years.  The dip in silver prices that is forming the “handle” is the last shake-out of weak hands before silver starts climbing again and eventually hurdles its old $50-per-ounce record high, which leaves one unanswered question:  When will silver finally take off?

Nobody can predict the future, of course, but we can use charts to spot patterns like the bullish pattern above.  We can also use fundamental analysis to determine value, and silver is cheap.  Based on the current spot price of physical metal, it now takes more than 66 ounces of silver to equal 1 ounce of gold.  This ratio has not been that high since the aftermath of the 2008 financial crisis, when over-leveraged traders dumped their silver along with other liquid assets to repay debts and get their heads above water, as we can see on the following chart.

The bottom line, Eric, is that as we move toward the end of the year, I expect silver to finally begin outperforming gold.  It will be another key signal that the three-year correction in silver prices has ended, and more importantly, that the bull market in the precious metals has indeed resumed.”

James Turk: Founder & Chairman of GoldMoney

and the author of “The Money Bubble”

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© 2014 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

IMPORTANT - KWN has many more interviews being released today.

The audio interviews with Dr. Paul Craig Roberts, Bill Fleckenstein, Gerald Celente, Dr. Marc Faber, Egon von Greyerz, Rick Rule, Ben Davies, Rob Arnott,  Andrew Maguire, Art Cashin, Eric Sprott and John Mauldin are available now. Other recent KWN interviews include Jim Grant and Felix Zulauf -- to listen CLICK HERE.

Eric King

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