Blood in the Streets - Update - KPMG Report Out!

Silvercorp has just been vindicated by KPMG.

In the morning the price opened at $8.91 (up from Friday's close of $8.13) going nearly straight up to $9.83, before falling back and closing the day at $9.62.

There short interest had fallen from 25 million to 10 million shares. End of July short interest was under 5 million share, while average daily volume is around 3 million shares, so there's still a great deal of shorts to cover.  Metals options expire on October 26, so we can expect volatility on the price of silver.  Chances are we will see the shorts cover when silver spikes downward.  (Basically, SVM prices should be supported on the silver down days, while moving upwards on the up days).

At this point, we are seeing buyers of SVM come in on the long side to catch it on the upswing.  If you day-trade SVM, selling SVM on the downswings, and catching it on the upswings, it's now possible that you may out of a position on a big move up.

Back around mid July, we saw a stock price of around $11+.  This could be considered a reasonable price for SVM (pre-short).  Given that the shorts must unload, which could result in a nice over-correction, it's possible that we could see $14-$16.  From the current price of about $10/share, that's a nice 40%-60% move.  Furthermore, SVM is about to release financials for Q2 2011 (FY2012) (ending Sept. 30, 2011) soon, which should give another boost to the stock price.

What could go wrong with this scenario?  Well, the overall market could completely tank, like in 2008, sending all stocks down by 40%.

So, the safest way to play this move is :
- BUY SVM (or SVM options)
- BUY a position in SPXU as insurance, should the entire stock market tank

If all goes well, then SPXU will stay the same, while SVM takes off for a 40%-60% gain, and at that point you should consider taking profits.

All of the above is for the short term (weeks to months).  In the mid to long term - months to years, many people believe that silver is undervalued, and has reached a local (intermediate) bottom, and could rise significantly from this point.  If you want to hold a long term stock, at current price levels, SVM could be one of the best deals of the decade.

Sometimes, the guys in the white hats win!

Bloody in the Streets 2

By Tony S

On Sept. 23, the CME raised margin on Silver (as well as Gold).  The price of silver dropped from about $40/oz to $30/oz over a day, and continued to drop as the Shanghai exchange raised it's margin requirements the same day.  

Silver mining shares got slaughtered.  The ones I am looking at are Silver Wheaton (NYSE:SLW), Endeavor Silver (NYSE:EXK), and Great Panther Silver (NYSE:GPL).  (I'll talk about Silvercorp Metals (NYSE:SVM) a little later, as that is a special case).

The spot price of silver is currently $31.27/oz (having reached a low of $26 briefly a few days ago).  Many investors (longs) are despondent, and sold, limiting possible future losses.

I view this a bit differently, and I'll explain why.  Since this price drop came as direct result of changes in margin requirements by the CME, it has nothing to do with actual supply/demand fundamentals, and must be short lived (unless the CME again decides to raise margin requirements).  As a result, if you bought into the silver market for fundamental reasons, then this is an opportunity to buy more - at a discount/bargain price.

If you are looking at Bollinger bands, flag patterns, and various other technical indicators, then there is uncertainty in the marketplace, and you may not feel comfortable holding such a volatile investment.

So, with so many people selling (to meet margin requirements), who was buying?  Well, it turns out to be the LCNS (Large Commercial Net Shorts).  So that large short position in silver is emptying out.  This appears to be sometime before the CFTC would enact any position limits (as per the Dodd-Frank bill).  It appears that the LCNS has escaped/is escaping financial ruin (as some believe their short position was untenable).  It is possible that the institutions which were large net shorts, might even turn around to become net longs (or at least buy long positions to offset their shorts, and prevent financial ruin).

So, if the people who have always made money (the Large Commercials) are closing out their short position, or limiting their downside exposure by going long, then wouldn't it be a good idea to join them?

This doesn't mean that SLW, EXK, or GPL might suddenly rise (if the price of silver rises), as their prices tend to be suppressed by short sellers (and possibly naked short sellers).  They certainly are undervalued relative to the current silver price.  Compared to what the price of silver would be if the CME did not raise margin requirements, they are incredible bargains.

Earlier, I mentioned that SVM was a special case.  If you read my "Blood in the Streets" article, then you know that this company has a huge short position, and that rumors were spread regarding fraud and corruption.  Since the time of that original article, management has fought back, buying back shares, opening the books, hired KPMG to audit his books, invited investors to come to China and tour the mines, refiners, and locals,  Rui Feng (CEO) is also suing market manipulators in New York courts.

It looks like this combination of tactics may be working as SVM is currently trading at $8.66.  Compared to $6.48 a few weeks ago, this stock has certainly gone up significantly.  Recently, Casey Research has complete d a report (written by Jeff Clark), and indicates this as a strong buy.  His only reason to not go all in - is that a 2008 crash event may occur which would effect SVM as well as every other stock.  My take on it, go long SVM, and buy some insurance - ProShares UltraShort S&P500 (NYSE:SDS).
If the market crashes, then SDS will pay off, and use this gain to buy either SVM, SLW, EXK, or GPL at a further discount.

In closing, remember, in the stock market, you don't really make money when you sell - you only realize a gain (or a loss) on a decision that you made earlier - when you bought.  Also, if you sell at a profit, you lower your entry price into your position.



Disclosure : I'm currently long SVM, SLW, EXK, and GPL.


Legal Disclaimer : This article is intended for education, information, and entertainment purposes.  Do not buy or sell any stock without performing your own due diligence.

Under no circumstances should it be mistaken for professional investment advice, nor is it intended to be taken as such.
The commentary and other contents simply reflects the opinion of Tony S alone on the current and future status of the markets, various economies and world events. It is subject to error and change without notice. The presence of a link to a website does not indicate approval or endorsement of that web site or any services, products, or opinions that may be offered there.

Neither the information nor any opinion expressed constitutes a solicitation to buy or sell any securities nor investments. Do not purchase any security or investment without doing your own and sufficient research. Tony S is not under any obligation to update or keep current the information contained herein. Tony S, at times and probably does, have positions in the securities or investments referred to here and may make purchases or sales of these securities and investments while this article is published. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.


References :

http://www.gotgoldreport.com/2011/10/comex-commercial-silver-net-shorts-lowest-in-eight-years-.html
http://www.gotgoldreport.com/2011/09/stunning-plunge-in-comex-commercial-silver-net-short-positions.html