Despite the large commercial short positions, are we about to see a massive short squeeze in silver?
James Turk: “This is an option expiry week for gold and silver, Eric. The Comex options go off the board Wednesday, February 24th. Then the over-the-counter options expire later in the week…
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The last week of February is a particularly important one for silver. That’s because March is an actively traded month for silver, and all the March silver options will be reaching their maturity over the next few days.
You and I have discussed many times over the years how the price of gold and silver weakens during option expiry. The consistency of this pattern is clear evidence that gold and silver markets are rigged. So it is not surprising that gold and silver prices were both driven lower last night in Asia on thin trading volumes. Someone was painting the tape.
But what was particularly interesting to me was the way that silver was pummeled in the early morning here in London just before the markets opened. At 7:30am London time, spot silver was $15.20, yet 45 minutes later it had been beaten down to as low as $14.90 before stabilizing. What happened?
It was an attempt to force some panic selling so that traders, who were just coming into their office, would dump their physical silver when they saw it under pressure when they turned on their screens. There was also some forced margin selling.
Nervous Silver Shorts
The buyers in that little silver takedown were writers of silver call options. They were in there buying under $15 to cover their option positions even before those options expire later in the week, which is the important point.
There is a lot of nervousness out there by the silver shorts as well as the longs owning the March silver calls.
The shorts are nervous because of their commitments to deliver physical silver for options that expire in the money. The availability of physical silver remains tight. So they used this morning’s head-fake to scoop up whatever silver they could find.
But interestingly, the longs are also nervous because they wonder if they will receive physical silver if their options expire in the money. They are wondering whether the sellers will force them to take a cash settlement.
Trading In Silver Is The Key
The obvious pressure points are $1,200 for gold and $15 on silver, but silver is the more important. Silver at the moment is where the real nervousness can be found.
The sellers of calls want silver to be under $15 by the end of the week. So they will pull out of their bag of tricks whatever they can do to achieve that target. They may succeed, but what will really matter is the result if they don’t keep silver capped.
A Silver Squeeze
Silver has the potential for a short squeeze over the next few days going into the end of the month. If that happens, the potential exists for silver to have one or more daily moves of greater than $1, which is a rare event that we last saw over a year ago.
Also of importance…
This was Jason Goepfert’s note on silver from last Friday:
The latest Commitments of Traders report showed the most notable change in “smart money” hedger positions in silver. They had greatly reduced their bets against the metal in December but have been adding steadily since. This week, they moved to a 70,000 contract short position, their largest since 2008. They have been more aggressive in selling each rally attempt in silver over the past two years. If it (silver) can shrug off this substantial negative indicator, then it would speak volumes about its potential for being in a sustained bull market.
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