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.
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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
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