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Tuesday, April 19, 2011

Commitment of Traders

JP Morgue sells futures contracts in anticipation of a price drop.  Let us say they write contracts for May 2011 @ $45 and in May, at expiry, silver is at $40.  JPM makes money through buying silver in the market at $40 and filling the contract at $45.

JPM floods the market with "naked short" contracts on days like Non-Farm Payroll release and Options Expiry to drive down the price, tripping stop-loss triggers that unexpected traders have set, thus enabling JPM to buy the silver at a cheaper price and deliver it at the higher price, and they pocket the spread.

If the example silver price were to be at $50 on May expiry, JPM is losing $5 by having to buy silver in the open market @ $50 and deliver it at the $45 contract price.  They flood the market, push the price down by clearing the trade books, being aided other traders who are keen on this (like Andrew Maguire stated).

Here is a snapshot of the CFTC Commitment of Traders reports from April 12th, 2011.  You can see the large concentration in shorts I highlighted.  Usually in the futures and options market hedges are made by mining firms and producers to offset any inventory they may have or other contracts they have open.

Source: http://news.silverseek.com/COT/1302895964.php

Here is the link to the same data if you want to delimit it yourself and break it down.

As investors demand delivery, JPM must come up with the silver to deliver.  If it fails to do so it will default, so they are forced to go in the market (or tap the SLV trust storage, which we have seen is enough for six contracts, so clearly they go into the market) and buy the physical silver to deliver, which drives the price up.  If the don't do that, they offer to settle in cash or SLV shares.