Sunday, April 24, 2011

Trade Update: GLD JPM SLV

To look at the charts of GLD and SLV you can't see why I'd be concerned about a total loss in those positions. But silver isn't even $50 per ounce and I can already feel JP Morgan squirming. I can see a possibility for the bank to wiggle it's way out from under's it's silver short position by invoking a force majeure.

How would such a stunt affect the ETFs? It is impossible to say. We know that the ETFs can't possibly hold more gold and silver than exists on the planet so, we can deduce that they are short. The gap that is growing between the underlying metals and the respective ETFs shows that the professionals on Wall Street know it. What we don't know is how many of the Morgan short contracts are tied to them.

When JP Morgan ingested Bear Stearns it took down a belly full of naked silver short positions.
But they didn't just idly chew on their gleaming new contracts. The Morgan house was able to suppress the market by naked short selling silver, and rolling existing contracts into future ones.
The result is that they have built up a 3.3 billion ounce short silver position. With spot silver at $47.82 on the Hong Kong market it's safe to say the Morgan has lost control of the beast in it's belly. So, now the question is not if rather when JP Morgan will capitulate. I think shortly after silver breaks it's all time high of $50 per ounce, most likely this week.

Now none of the options are good. They include a full or partial default and letting the institutional investors take the hit. But we have seen this movie recently. That means another government bailout of the mobster bank and the big investors. They won't call it a bailout of course. What usually happens in cases such as this is that the party unable to fulfill it's obligation will attempt to invoke a force majeure. That is, I believe a likely scenario here.

Without knowing how the contracts are tied to SLV there is no way of predicting what will happen to the ETFs or the investors in them. In the worst case the ETFs could close and liquidate overnight while JPM received a back door (or front) bail-out. Right now we hold profits of roughly $56 per share on GLD and profits of $29 on SLV. But if the ETFs are dissolved those holding shares could loose everything including principal.

I hate to say it but after spot silver busts $50, it might be time to get out. We might stay out until either the disaster occurs or spot silver breaks $60 an ounce. Painful I know, but it increases your odds and on the Street where all the odds are against you it is the smart move.

Of course those trading in physical gold and silver only need to sit and hold.

For right now on GLD, JPM, and SLV just sit tight.

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