Naked Silver Short Selling

Naked Silver Short Selling

Many people accuse bullion banks of naked short selling of silver in order to drive down the price. What is naked silver short selling? Let’s start with silver short selling, which is the sale of bullion that is not currently owned by the seller (usually borrowed) and the subsequent repurchase of the metal. The idea is to take advantage of the price decline, as it enables to repurchase the white metal at a lower price.

And we say that short selling is naked when silver short selling occurs without first borrowing it, or at least ensuring that the precious metal can be borrowed. So the short-seller can sometimes fail to deliver silver to the buyer.

The impact of naked shorts is, thus, controversial. The popular story says that the Fed uses bullion banks as its agents to put on naked silver shorts on Comex to drive down the price of silver. It protects the U.S. dollar’s value and enables banks to repurchase silver at lower prices.

However, if short sellers on Comex were really as uncovered as it is claimed, there would be a huge ‘short squeeze’ and the price of silver would rise. Therefore, any manipulation using naked shorts would be short-lived. If banks had massive short positions in the silver market, they would have to buy large numbers of futures contracts to cover their position and buy the physical metal to deliver it or roll their positions, buying expiring contracts and selling the next one out. In all cases the short-term impact of selling the futures contract would be reversed as banks would have to unwind their positions (investors should also not forget that for each seller of a futures contract there must be a buyer). Thus, the practice of naked silver short selling, existing or not, cannot explain the long-term bear markets in silver.