New CFTC Position Limits Could Be BEARISH For Silver

Yeah – I said bearish – and now you silverbugs have two choices:  you can put up your defenses, react angrily, rant “I can’t believe Kid Dynamite is a bankster shill member of the Cartel,” and run back to your groupthink forums where you can get shovel-fed misinformation and cheered by the masses, feeling good due to the confirmation bias endorphin rush – OR you can use your head, understand what I’m saying here, and THINK.    I have no net position in silver, by the way, if that helps you keep an open mind.  Repeat: I am NOT short silver.  Now…

So the CFTC is going to implement position limits FOR SPECULATORS in a number of futures contracts.  Did you catch the key phrase in that previous sentence?    Let’s go straight to the CFTC’s wording:

“Exemptions have been established for hedging operations and positions established in good faith before the initial limits effective date.”

I’ve argued extensively that JP Morgan et all are NOT net short silver – that their COMEX silver shorts are hedges for exposure elsewhere: like the LBMA, which is many orders of magnitude larger.    All of the data suggests that JP Morgan is in fact not net short silver.  I think the sane assumption should be that they will be largely unaffected by the new positions limits.

So why did I say that the position limits could be bearish for silver?  Well – silver, as everyone involved in the market knows – is a “small” market.   It’s the kind of market where you can consume a decent amount of available supply with relatively small amounts of capital.   We know that the vast majority of the open interest in COMEX silver futures each month is either closed out or rolled forward – longs mostly  do not actually want to take physical delivery of silver.  The main risk to the COMEX shorts is that they get surprised one month, when longs stand for delivery en masse, and the shorts suddenly have to scramble to cover their liabilities for physical silver.  Even if they are notionally hedged, they might have a “maturity” mismatch (ie, they won’t actually receive physical silver from the long side of their trades on the same time-frame), and might have to scramble to come up with silver relatively quickly, causing price spikes.

The new position limit rules LOWER that risk for the shorts – they make it HARDER for longs to “corner” the market in this way (you may not like the use of the term “corner” here, don’t worry – it’s not really the point), since individual longs will be capped on their maximum position size.

Hence, the new CFTC position limits are likely to be bearish for silver prices (in isolation, of course).  Despite what you’ve been told about JP Morgan needing to cover tens of thousands of contracts corresponding to hundreds of millions of ounces of silver, it is unlikely that the large COMEX shorts will be affected negatively at all.  In fact, they will be helped by the removal of their main risk: that a long holder amasses a number of COMEX silver futures and stands for delivery unexpectedly.

Does this mean that silver prices will go down?  No – that’s not my point – there are a number of other factors involved, China being the main one in my opinion.  The point of this post is simple:

If you’re buying silver because you think that COMEX shorts will be squeezed by the new position limits, you’re buying it for the wrong reason.


Disclosure: I am long $SLV and short $PSLV


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