Midas: Why PM Shares Sputter

posted on Nov 17, 09 06:40PM

Bill Murphy notes that, among other things, Hedge Funds are long bullion and short various PM shares. A profitable strategy it seems, but for the life of me I can't see how, or why. Maybe ECU is one of those being targeted.

------------------------

The gold/silver shares still don’t show much exuberance, certainly not relative to the gold and silver price action. And the performance of some of the smaller stocks is downright miserable. Gripes are coming my way from various directions. Re what’s going on, it is the same problem…

*Most of the mainstream gold world and Planet Wall Street is bearish at these price levels. Investors want to sell their shares ahead of the constantly predicted correction.

*Hedge funds are long bullion and short various shares in the sector. If put on properly, it has been a winner. They will stay with the trade until they don’t. Many will reverse the short share positions and go long.

*There is probably some manipulative short selling, a la when JP Morgan Chase borrowed gold shares from Oppenheimer years ago for that purpose.

*The worse some of the shares act, while the DOW advances, the more selling it engenders. The continued lousy action is feeding on itself.

Bottom line: the moribund shares will go ballistic in internet mania fashion. The longer they remain undervalued and unwanted, the grander the explosiveness in the months ahead.

What honest people don't get is that these funds never use their own money. They sell short the shares to fund a leveraged position in physical gold and silver. Very high leverage!

Hi risk to be sure, but by focusing shorts on juniors, they greatly affect the ability of the shorted stocks to rise. The zillion $ question is 'are the shorted stocks naked or honestly shorted' (if that's not an oxymoron).

"the S&P 500 index housed 220 individual companies that had market caps in excess of the entire contingent of silver stocks." …a quarter of the market cap of Coca Cola is larger than that of all the silver stocks. I think even Yahoo is bigger.

So it's easy to imagine how easy it must be, or at least have been, to manipulate the silver market in general and some emerging silver stock like ECU in specific.

Wondering about shorts, could be that JPMorgan never thought even for a second that they couldn't control forever the price of such a dinky little market by shorting everything coming down the pike while laughing up their sleeves. Bust up the other side any time they wanted. Sort of like having their own ATM machine.

I imagine there might be a lot of finger pointing one of these days trying to figure out who thought up this shorting strategy, 'cause it may be unraveling right in front of their eyes. Probably end up with a bunch of guys walking the plank, guilty of not.

Then again, if JPMorgan had to cover all their silver shorts, it probably wouldn't amount to a quarter's profit. Big deal. I think Ed Steer mentioned something like that the other day in reference to their gold market shorts .That might be their backstop position, if they get forced to the wall. Not much pain at all. Hardly affect their bonuses. And that would be the real shame.