Bullion shorts in over their heads, says our man in London

Earlier today, I received from our friend Andy Maguire, a London bullion dealer, some very interesting notes concerning the precious metals market, which was hit hard this week.  Although I posted the full text of Andy’s message in the chat room early Wednesday morning, I am unable at the moment to find the material archived.  For those of you who missed it the first time, or who want to save a copy, here it is again:

“I just got back on the platform yesterday and am in meetings for a couple of days as we catch up with clients and kick off the buying for 2011. I will get into the chat room before NFP on Friday though. In the interim we are back in strong buy mode again, already started to layer into this naked unbacked paper selling. The end of year thin traded holidays going into xmas was the first year in the decade where my stink bids didn’t get hit. Usually the balance of power shifts to the HFT outfits in the thin conditions where the stops are chased both sides. That didn’t happen to any degree, especially on the short side, which is very telling. Other than day trading short silver and gold had to wait for the Boyz to get back to work yesterday. (Monday was a holiday in UK Europe etc.)

“This is just a  bluff poker hand and by the time we get through NFP they are going to be called. Embedded shorts are going to have to cover or suffer a royal religious experience. All we are seeing is the same old washing cycle active so that the bullion banks can cover. However the lines cross very close to here so any benefit gained by flushing out the visible stops will be lost as new real strong hands pick their pockets. We buyers sat back largely yesterday looking for better prices and any spike down will, be short lived and cause a feeding frenzy.

“I and my clients are looking for $50 silver and $1,600 gold this year — it’s just  a question of how much we can fill. As I mentioned prior to Xmas we concentrate on the spot market, which is many times larger than the futures market, and by accumulating metal in that market we are indexed to the price of the real metal without actually paying the premium converting to physical at this stage. To anticipate the questions re availability of metal in this already tight physical market one has to understand just what a spot trade is. It is just like any other FX currency cross. like EUR/USD JPY/USD where traders are long one side short the other. In this case its short $ long silver or gold (XAU/USD XAG/USD).

“This means participants can trade in massive $ volumes that index them to the real price.The futures markets are so heavily leveraged naked on the short side with no auditable OTC leg that we end up with the perfect scenario for a big buyer. The tail wagging the dog, setting unsustainable low prices that do not come close to  reflecting the true supply demand parameters. This is illegal under commodity law,the futures markets should not set the price of a commodity.

“As an example we have client positions that are long silver in size in the 18’s and couldn’t care less if it goes to $50 before they take delivery, as we are indexed and the carry cost is less than storing the metal due to the low cost of borrowing $ vs. buying spot. This is a tsunami  that myopic futures trades don’t even see or know about!  Even if the COMEX were to default, we are indexed to the spike up.

“The real bombshell yet to be understood by the media or the majority of traders I speak to is the impending change in oversight by the until now powerless CFTC.  The fact that the CME has been self-regulated has enabled the massive concentrated short positions in silver and gold to build to excesses that defy the imagination  (silver up to 40% by JPM). Position limits aside, this will change. JPM et al. will have to reveal to the regulator the supposed ‘hedge’ leg in the OTC markets here in London. They are dead in the water when this happens, as it does not exist in any tangible form — just swaps and more paper backing paper.

“Time line for this?  Can’t say exactly, as the CME has two commissioners who appear to be in bed with them, but this will only give a little more time for the banks to unwind some more positions. Like yesterday and today, however, looking at the worst case scenario, the Dodd-Frank Act has to be in place by no later than July.  If I were an embedded short, I would look to be exiting long before then — likely to be complete three months prior, and that is IF the regulators don’t move faster, which I suspect they will.

“The opportunities IMO med to longer term are to bid the [Hidden Pivot midpoints and targets] — and if short, best make it a short-term ride, as when this turns by next week it will consume as many local shorts as it is consuming the longs.”