first majestic silver

Will Silver Lead the Way?

May 5, 2003

While much has been written about the overall short position in gold, which developed mainly through the leasing of gold from central bank vaults, a similar and proportionately even larger short position exists in silver.

Overall Comex open interest in silver is 85 400 contracts - at 5000 ounces per contract, this is 427 million ounces or about 13 200 tons - and does not take into account the over the counter market, which could be ten to 20 times the Comex open interest. That can be compared with annual production of about 850 million ounces, or about 26 000 tons against current demand of the same magnitude.

This means that if the price should show a sustained increase, there will be no slack in production that can be used to cover the short position and should the shorts be squeezed, the price would skyrocket. Ted Butler of www.butlerresearch.com a long time serious student of the silver market, believes a tenfold jump in the silver price is a possibility, even though the main short position - that of four large players that were short of 163 million ounces in 2002 - has been reduced by covering during the recent decline in the price of silver, from almost $5/oz to less than $4,40.

Note that the decline in the price of silver - and the opportunity to cover short positions on Comex - parallels the fall in the gold price after Comex had increased the margins on gold contracts by 50% back in February. Whether over the counter short positions could also be covered is a moot point, as those contracts are not traded and can only be closed in terms of the custom designed contracts.

Silver, like gold, but with more vigour, is bouncing back from the new intermediate low since February and traded on Friday above the $4.75 level which is the 5 year resistance of the silver price, closing right on the resistance. With little or no reserves above ground, rising demand could again increase the price, as it did during the last quarter of 2002 until silver sold off with gold. That means if silver should break above the psychological $5,00 level, there would be no easily available supplies to cap the price - a condition which, as explained last week, may well apply to the gold market as well.

Increasing demand - which might well be due to investor buying as a safe haven - would make this balanced market very susceptible to a steep rise in price in a short period of time, perhaps triggered by a crisis of confidence that sparks a panic among investors.

While the four large short players in the market have a strong vested interest in keeping the price of silver below say $5.00, silver is not as much in the public eye as gold - it does not have the same prominent monetary role that gold has had since W.W. II - and therefore attracts less attention from the authorities. Yet, if the silver price should spike higher in reaction to rapidly increasing investor concern, the wave of buying is certain to spill over into the gold market as well.

And with gold assumed to be in short supply too, the yellow metal could be following silver into orbit. The sun following the moon, as some would say!

Bill Murphy, Chairman of GATA and who used to be a large scale futures trader with long experience, believes that we could see a day on which silver appreciates by $1.00 - a jump of more than 20% at ruling prices. If that should happen, surely the gold price will react by $25 to $50, or even more, as in a panic gold is likely to attract more interest than silver from investors fleeing the dollar and other paper currencies.

In military tactics, when one is faced with a line of extensive defensive positions, a good general will first probe the defences in strength at various points, waiting to release the main force immediately one such probe finds substantial weakness, often where major enemy formations adjoin and where it could be expected that enemy command would be slow to react in a co-ordinated manner. We have seen both silver and gold having intact defences, including such tactics as increasing the Comex margin in reserve. However, the relationship with the US dollar, which is currently wilting under a sortie from a different quarter, the Euro, may well be the weak link in the chain.

Readers should keep their eye on the silver price over the next few days to weeks - it may well be the first to signal a significant break higher. If one is to come soon.


The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.
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