What does it all mean when people talk about 'shorting silver'?

Discussion in 'Silver' started by FluffyWesties, Oct 19, 2012.

  1. FluffyWesties

    FluffyWesties New Member

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    I keep reading these articles around the 'net about these big corporations which are 'shorting' silver or are trying to
    keep the price of Silver (and Gold?) low?

    Being very new to the whole physical metals scene I'm curious about just what this means.

    I've done some googling about the place but frankly a lot of the Jargon goes right over my head, I figured that
    people here would have a good idea and maybe someone could explain?

    Why would it be very important for instance to keep the price of Silver under $40.00? If big companies and trading
    houses have silver (metal or paper) wouldn't a price increase in silver indicate a healthy demand for the commodity and
    a potential increase in the value of an asset?

    Anyway, thanks for reading my queries and happy stacking!

    -FluffyWesties
    (P.S, I don't live in Western Sydney, FluffyWesties is short for my favorite breed of dog,
    the West Highland White Terrier, which oddly enough is not really all that fluffy).
     
  2. Fykus

    Fykus Member Silver Stacker

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    its got something to do with buying paper silver at a price lower than what it is at the time or something like that. ive got no idea how it works.
    they wanna keep the price of silver low so people dont see it going to the moon and causing a panic about the state of the economy im guessing. plus apparently theres 100x more paper silver than there is physical and a sharp rise in price might make people want to take delivery of said paper silver and thered end up being a shortage and theyd be caught with their pants down.

    i _think_
    someone else could probably explain it better/correct me on this.

    hold on i found this:

    The Basics of Shorting Stock
    I own 10 shares of company ABC at $50 per share. You believe the stock price of ABC is grossly overvalued and is going to crash sometime soon. You are so convinced that the stock will crash, you come to me, and ask to borrow my ten shares of ABC and sell them at the current market price for $50. I agree to lend you my shares as long as you pay me back ten shares of ABC at some point in the future. You take the ten borrowed shares, sell them for $500 and pocket the money (10 shares x $50 per share = $500).

    The following week, the price of ABC stock falls to $20 per share. You call your broker and tell him to buy 10 shares of ABC stock, at the new price of $20 per share. You pay him the $200 (10 shares x $20 per share = $200). A few days later, you pick up the shares of ABC and bring them by my office. "Here are the ten shares I borrowed," you say as you put them on my desk.

    Do you see what happened? You borrowed my shares of ABC, sold them for $500. The following week, when ABC fell to $20 per share, you repurchased those ten shares for $200 and gave them back to me. In the mean time, you pocketed the difference of $300.
     
  3. Silver Soul

    Silver Soul Well-Known Member Silver Stacker

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  4. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    In a nutshell, to make a profit you have to buy low and sell high.
    This transaction can be executed in two ways:

    1. Buy low then sell high - (this is long).

    2. Sell high then buy low - (this is short).

    Simple. :)

    As for keeping the silver price low - the theory is that Govt's are responsible for this to maintain the value of their currency against the only universal measurement of value - silver and gold. :)
     
  5. JulieW

    JulieW Well-Known Member Silver Stacker

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    hence the term 'naked shorts' where the whole deal is done without the actual selling in the first place. Everyone is just selling hopes that they won't have to replace any shares at a loss. Relatively easy for the big boys with insider trading connections.

    Then we have hypothecation, which is where they promise your shares and money if they happen to get caught short for betting on the black when it was the red that won.

    Jail a few hundred thousand of these thieves around the world and break up the 'investment' banks into the casino for the gamblers and 'real banks' with real regulations for real deposits for use by the real world and we'd all be much better off.
     
  6. JulieW

    JulieW Well-Known Member Silver Stacker

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    btw Goldman Sachs is suggesting everyone short the AUD against the Euro, calling it the 'trade of the century.

    I still don't understand in this game, why the thieves tell you their plans.
     
  7. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    Hypothecation is the same process in which real estate is bought using a mortgage secured by the property. Lucky it's not classed as theiving or illegal or I wouldn't be living in my own house. :)
     
  8. JulieW

    JulieW Well-Known Member Silver Stacker

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    Thanks wrcmad you're right, I should have referred to re-hypothecation they'll pledge your mortgage several times in an ever decreasing spiral. It's in the fine print as I understand it - or at least as MFGlobal interpreted it.

    [youtube]http://www.youtube.com/watch?v=AtZTGfOhB7Y[/youtube]

    or from Max Keiser

    [youtube]http://www.youtube.com/watch?v=EXerNqaJse4[/youtube]
     
  9. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    Yes, agree. Re-hypothecation is nasty and crooked.
     
  10. JulieW

    JulieW Well-Known Member Silver Stacker

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    and standard practice wherever they can get away with it.
     
  11. House

    House Administrator Staff Member

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    Somehow I've never heard of re/hypothecation before, thanks guys.
    Just another unbelievable practice to add to the list of "How the F are they getting away with this?"
     
  12. MrSteve

    MrSteve New Member

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    That's what they want the average mug to do... in the meantime, they're long the Aussie
     
  13. Pirocco

    Pirocco Well-Known Member

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    Actually, a futures market position is most of the time hedging.
    Take for ex a silver dealer, (a big one is the so called bullion bank JP Morgan.
    They sell silver. If the price rises, they receive more, make more profit. If the price drops, they receive less, make less profit.
    Now imagine such dealer sells 5000 ounces to a customer, when the price is $30.
    Some months later, the price became $35; and the customer wants to sell the silver to get a $5 profit per ounce.
    But the dealer would then buy silver back near a peak price, so a high downwards price risk.
    A dealer can't just refuse, his customer would ofcourse not like that.
    So, the dealer hedges the silver against dropping prices.
    How does he do this? He takes a short position. That means that in case the price does drop, collapse from the peak, he will receive dollars on the margin account of his short positions. Those dollars then compensate for the loss when he again sells the bought back silver from the customer to again to customers.
    Take now the other price direction. The silver price rises. The dealer makes more profit with silver sales. But, the margin account of his hedging short position undoes a part of his profits.
    So, those commercial hedgers 'adjust' their total net short position according to the price outlook.
    When the price sits near a bottom, they have the lowest net short position, simply because the downside price moving room is small.
    When the price sits near a top, they have the highest net short position, because the downside price moving room is high.
    So, they throttle their amount short positions.

    Now, above was what a silver dealer / supply sider / commercial hedger does.
    Every short position requires a long position, you can't have a contract with one side, every seller needs a buyer.
    So, on the demand side of the futures market, there are people betting on higher prices and lower prices, but mostly, they bet on higher prices, which is the reason that the silver futures market demand side is always net long, and consequentially, the supply side is net short. Imagine such a demand side speculator wants to grab the profit, by dumping the position where his margin account accumulated dollars from during a price uptrend. If the long position is dumped, the demand sides / commercial hedgers / bullion bank JP Morgan has to auto close (aka 'cover') the corresponding short position. It's impossible for JP Morgan to keep the short position, because the counterparty on the long side doesnt exist anymore.
    So all that hyped talk about JP Morgan covering shorts, being in trouble, commercial failure, is just trying to make people think the price will breakout, in order to make them pay higher prices (after which the hype-makers then dump for profit. All it is, is closing the short contract sides when the speculators on the demand side decide to grab the by the price uptrend realized profit on their margin accounts. If they didnt grab it, and the silver price dropped, they would start to give again away the profits they accumulated in the uptrend.
    Likely the same that blame JP Morgan and hype about 'shorting zilver', are the very same long siders that grab the profit, with as incentive to shift the 'blame', focus to others.
    Of course, a system bank like JP Morgan is a crap institution, one of the core nodes that the govts has in its monetary system of theft. But that doesnt mean that what they do on the silver market is different than any of these markets. Usually they have the best insight in the supply, bullion banks like JP Morgan often finance mining projects and other silver market nodes, and that insight give them a better trading position than the X average joes that hunt the free bucks, causing the latter to lose.
     
  14. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    :D

    [​IMG]
     
  15. JoelAG

    JoelAG New Member

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    I think I can simplify.

    I just bought 1,000,000,000 ounces of silver at the going price.
    I am a big powerful (something) and people watch what I do.
    I publicly shout, "Silver is going to the moon! It's the best investment there is. Get in now or horrible things will happen to you!"
    Now everyone else starts buying and the price goes up. As the price goes up, I restate my claim and it goes up higher.
    In the end, I sell at a higher price and make more money.

    That's the only reason the thieves would share, to help back a position they already have plans for.

    Watch Trading Places, it's actually very telling on what can happen when you know something, or think you know something as applies to the stock market.
     
  16. Pirocco

    Pirocco Well-Known Member

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    That's not surprising, in the end, those speculators profit origins from others losses, and in order to make those others making wrong buy/sell decisions, they need to tell them bogus stories haha.
     

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