by Craig Hemke, Sprott Money:
In this blog, we delve into the concept of short squeezes and their potential impact on the price of silver.
By now, most everyone understands that the bullion bank trading desks freely manage and manipulate COMEX precious metal prices. But they don’t just move price to the downside. The banks will also manipulate prices higher if there is profit to be made. They did so on four occasions in late 2022 and they appear to be setting the table for another spec short squeeze in the near future.
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Understanding Silver Price Manipulation and Short Squeezes
Let’s start with the current situation. As the value of the U.S. Dollar Index fell sharply in July, speculator and hedge fund cash rushed into COMEX silver. In just one five-day period mid-month, the dollar index fell by nearly two full points from near 102 to below 100. The hedge funds responded by aggressively buying COMEX silver contracts and the silver price rallied by over $2.00 or about 8.5%.
You can see this on the chart below from the CFTC’s Commitment of Traders report. This data was published on Friday, July 21, and it reveals the position changes during the reporting week of Wednesday, July 12 through Tuesday, July 18.
Note that, over the period of July 12-18, the swap-dealing banks dumped 1,137 longs while adding 14,768 new shorts. In contrast, the speculating hedge funds covered 1,932 shorts while adding a whopping 22,259 new longs. Again, it was this massive net speculator buying of COMEX silver contracts that drove the price higher by over $2 during the period.
As you’re likely aware, the three weeks since that event have brought a turnaround in the dollar index, and it has rallied nearly three full points. In turn, the speculating hedge funds have rushed to sell all of those COMEX silver contracts that they were gleefully and blindly buying three weeks earlier.
The next set of data that you see below is from last week’s Commitment of Traders report for the period of Wednesday, August 2 through Tuesday, August 8. Over just those five days, the COMEX silver price fell by $1.52/ounce, while the Dollar Index rallied about a full point.
Look at what was taking place… the exact opposite of three weeks earlier. The banks added 383 new longs while covering 12,452 of their shorts. The hedge funds dumped 12,593 of their longs and added 3,846 new shorts.
Do you see how this works? OK, good. Now to the point of this post.
Let’s scroll up and do some math. On that first CFTC report, note that the hedge funds were NET LONG 29,689 COMEX silver contracts (subtract the gross short position from the gross long position). Now three weeks later, and with the price about 10% lower, those same funds are NET SHORT 3,781 contracts. Is this important? YES! Because if the banks are willing to take the short side against the hedge funds before a price plunge, they’re also happy to take the long side against those same funds before price rallies in a short squeeze.
Keeping a Vigilant Eye on Silver Price Trends and Market Behavior
As you’re about to see, this squeezing of the spec hedge fund shorts happened four times late in 2022, and all of the squeezes came about following periods where the hedge funds had collectively built massive short positions.
On the chart below from late 2022, you’ll notice four very quick spec short squeezes. I’ve numbered them 1-4 so that you can easily spot them.
And what was the Commitment of Traders data before each squeeze?
Short Squeeze #1 began on Tuesday, July 26. Since it was a Tuesday, there was a Commitment of Traders survey taken at the COMEX close. Note that as of that day – and just before a 12.2% price spike occurred – the banks were NET LONG 14,560 COMEX silver contracts while the hedge funds were NET SHORT 17,818 contracts.
