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It looks like the CME has “changed” their open interest numbers since posted this morning.  I saw the numbers with my own eyes this morning which showed an open interest gain of over 10,000 contracts for gold and over 3,500 for silver.  If the “new numbers” are correct, there is still more open interest in gold than there was Thursday’s close and only a drop of 2,000 in silver.  Still not anywhere near the amounts one would think that was necessary to create the price drops we’ve seen.  I know that these numbers were displayed earlier because I have since read commentary similar to mine that had the same figures… I do believe my lying eyes and am not senile yet.  I know what I saw and even checked the date to make sure that they were yesterday’s numbers.  Who knows, maybe the real numbers were too unbelievable and even a shlep like me saw what happened so they changed them… crazy world we live in!

When there are more buyers than sellers… the “price” goes up, when there are more sellers than buyers… the “price” goes down… right?  This is the way it works?  Or is supposed to?  As you know, we live in a world where nearly everything real has 2 markets, the paper market and the physical market.  Originally the paper markets were created so that farmers could “hedge” their crop and outright buyers or speculators could have access to the commodity.  This has morphed into a situation where the paper markets have outsized the real physical markets and become more important to “price.”  It is a “Wag the Dog” scenario where in gold for example there are at least 100 “paper” ounces for every real ounce (thank you Jeffery Christian for this admission) and the paper markets have “made” the price for years now.  We knew all of this before and what has happened since last Wednesday only supports this view and confirms it.

First let’s see what has happened in the paper markets.  The open interest in gold went up during Friday’s trading by some 13,000 contracts while silver dropped about 1,000 contracts, yesterday gold open interest increased another 10,000 contracts and silver increased by 3,500.  So, while gold and silver’s price was monkey hammered, the amount of contracts open actually increased?  How can this be?  Weren’t people “selling”, the price went down… more sellers than buyers… right?   Well yes, what apparently happened was that there WERE more sellers, the increase in open interest was initiated by “short sellers”.  Were the last 2 trading days an event where “longs” finally panicked out and sold, open interest would have gone down, it did not and in gold’s case the open interest actually rose substantially.  The obvious fingerprints of what GATA has been saying for 15 years now are all over this move, it was a fake and “made” to happen!

Now let’s look at the physical side of the market.  On Friday, Miles Franklin did 116 orders, there was only 1 buyback.  Yesterday we did 90 orders with only 3 being sells.  So what is this “buy to sell” ratio, at least 30 to 1 buys over sells?  Does this sound like a panicked market where everyone wants out of the water?  We also can look at what other dealers are doing by going online to look at pricing and availability.  Junk silver for all intents and purposes is gone, the only thing left are the scraps that your local dealer has to sell as “bags” are not available and were last trading at $5 (20%) over spot on Friday morning.  Other silver product has become spotty as to availability and premiums rose dramatically over the last week.  Low price in the physical market IS doing what it is supposed to do; it is bringing out demand and drying up supply.  But, if real demand has been exploding and supply is tight, then how did the price get here in the first place?  It is obvious that the futures market “wagged this dog” BIG time!

As I wrote yesterday, I can see the possibility of a force majeure in both gold and silver.  I should have clarified and written more correctly however.  A force majeure is when supply gets disrupted which the mine collapse in Utah could cause but not immediately as they can process existing ore.  The Barrick situation pertains only to future potential production (which is sorely needed).  A “default” on the other hand can occur if too many longs stand for delivery.  This very well could happen and the likelihood has risen in just the last 2 trading days as open interest has increased rather than decreased.  If something like 10% of the longs stood for delivery in silver, the inventory would be wiped out.  The fact that the “drop” in price was CAUSED by new shorts opening positions rather than longs scurrying away tends support the case that the long position is a resolute buyer with deep, VERY DEEP pockets.  If they hold in and meet the margin calls created by the price drop AND higher (18+%) margin requirements as of yesterday the shorts and the exchange itself have a very big problem on their hands as the availability to deliver on the open interest just does not exist.

I will say this, if open interest does not decline after the drop in price and this latest margin hike (and maybe more to come) the odds of longs standing in a big way for delivery increases exponentially.  As for the physical markets, the longer they keep the “price” down the more and more physical metal will be gobbled up.  We were already extremely tight in the physical silver market.  The last 2 days price action has cleaned up inventory and left shelves nearly bare of silver.  This is what you’d expect in a real market.  As always, Mother Nature will take care of price when availability is short.  Premiums have risen as supply dwindled.  I do not believe that the “price” in the physical market can stay where it is now for very long, otherwise we will have a supply “event” where there is none to be had… UNTIL price rises to entice sellers.  This low price will also add incentive to paper longs to stand for delivery if the physical price is far higher than the paper price.  It would simply be an arbitrage where COMEX silver is purchased at one price and sold on the physical market for another (higher) price.  It very well may be that the COMEX is engineering its own demise that ends in a default because they so blatantly defied supply and demand in the real world.

PS  I mis-wrote yesterday regarding Barrick.  They had their environmental permits pulled and ceased work, they were not shut down from the litigation over leases and road rights as I incorrectly wrote.  I try to be correct factually in everything that I write.  This was my error plain and simple.