A Golden Rescue on the COMEX?

30 July 2016 — Saturday

Once again I was wrong about this week’s Commitment of Traders Report in silver for positions held at the close of COMEX trading on Tuesday. Although the Commercial net short position in gold decreased by the expected smallish amount, there was a tiny increase in silver once again.

But under the surface in the headline gold number, was an absolutely stunning change that both Ted and I were shocked to see. But it proves Ted’s premise that one of the smaller traders in the Big 8 category most likely had its financial back against the wall — and had to get bailed out in whole or in part by one or more the Big 4 traders. More on that shortly, as first things first.

In silver, the Commercial net short position rose once again, this time by a tiny 868 contracts, or 4.34 million troy ounces of paper silver. The Commercial net short positions stands at a new record high of 535.6 million troy ounces of paper silver.

During the reporting week, the commercial traders reduced their long position by 2,264 contracts, plus they reduced their short position by 1,396 contracts. The difference between those two numbers is the change for the week. With such a small change in the commercial net short position, there wasn’t much activity in each category. Ted said that Big 4 increased their short position by a bit more than 100 contracts — and the raptors, the commercial traders other than the Big 8, added about 800 contracts to their short position, which means that the short position of the ‘5 through 8’ traders was basically unchanged. In the grand scheme of things, these changes are not even rounding errors. Ted pegs JPMorgan’s short position at around 32,000 contracts, unchanged from his estimate last week. We get a new Bank Participation Report next Friday — and that will enable Ted to calibrate their short position more precisely.

Under the hood in the Disaggregated COT Report, things were quite a bit different, as the Managed Money traders added a whopping 5,200 contracts to their already gargantuan [and record] long position, plus they increased their short position by 428 contracts, for an increase on the week of 5,200-428=4,772 contracts, which was almost six times the increase in the Commercial net short position. Of course to make up for that, the traders in the ‘Other Reportables’ and ‘Nonreportable’/small trader categories had to go short the difference — and that’s what they did. Ted was wondering out loud as to who those traders in the Managed Money might be that were piling in on the long side so enthusiastically. I mentioned those ‘unblinking long’ non-technical traders as a possibility — and I just know that he’ll have more to say about this in his weekly commentary later today.

Here’s the 9-year chart for the silver COT Report — and it’s as ugly as it’s ever going to get. I said the same thing after last week’s report as well — and the week before as well. One of these times I’ll get it right!

In gold, the Commercial net short position declined by a smallish 6,454 contracts. I was hoping for a bit more, but it is what it is. That change reduced the Commercial net short position in gold down to 30.90 million troy ounces, which is almost no change at all from last week’s report.

But that number is a paper-thin cover for the explosive changes within the Commercial category — and what I’m about say only hints at the future ramifications of these changes.

Even though the Commercial net short position declined by 6,454 contracts during the reporting week, Ted said that the Big 4 traders actually increased their net short position by about 8,400 contracts — plus the raptors, the commercial traders other than the Big 8, also increased their short position by around 1,800 contracts. But the biggest change was in the ‘5 through 8’ category, as they reduced their net short position by about 16,700 contracts. My immediate reaction when I saw that number was that one of the Big 4 — most likely JPMorgan, and I’m speculating here — had to come to the rescue of one of the ‘5 through 8’ traders that was about to go bust because of margin calls. And rather than have this trading firm cover their short position in the open market, which would have driven gold [and most likely silver] prices to the moon and the stars, and bankrupted everyone else in the process — a Good Samaritan stepped in to prevent that from happening, saving themselves, plus everyone else in the process — at least for the moment.

If this is what actually happened, then it has all the hallmarks of another Bear Stearns moment, when JPMorgan was forced to take over that firm back in early 2008 when the same thing was about to happen there. I look forward to what Ted has to say about this with eager anticipation.

Here’s the 9-year COT chart for gold — and despite the improvement for the second week in a row, the numbers are still ugly. But all eyes should now be on the changes inside the Big 8 category going forward.

The changes in this week’s Commitment of Traders Report are certainly unprecedented — and hint at desperation on part of the commercial traders, especially the smaller ones that don’t have deep pockets like JPMorgan, Citigroup, or maybe Canada’s Scotiabank. Firms like Morgan Stanley would certainly be a member of the Big 8 — and even Goldman Sachs could even be included in this group now. These would be five members of the Big 8 — and whoever the three remaining firms that are part of the Big 8, wouldn’t have access to unlimited funding like the Big 5 I just mentioned. Of course, with the probable rescue of one of the ‘5 through 8’ traders, all that does is elevate one of Ted’s raptors, the commercial traders other than the Big 8, into the Big 8 category by default — and as Ted correctly mentioned, you have to wonder about their financial ability to meet margins calls along with some of the other raptors that are close to Big 8 status as well.

One thing is for sure — there’s big, big trouble brewing in River City at the moment — and how this is resolved remains to be seen — and I’ll have some closing comments on all this in The Wrap.

Here’s Nick Laird’s “Days to Cover” chart updated with yesterday’s COT data for positions held at the close of COMEX trading on Tuesday. It shows the days of world production that it would take to cover the short positions of the Big 4 and Big 8 traders in each physically traded commodity on the COMEX. Click to enlarge.

As I say in every Saturday column—the short positions of the Big 4 and 8 traders in silver continues to redefine the meaning of the words ‘obscene’ and ‘grotesque.’ For the current reporting week, the Big 4 are short 167 days [more than five and a half months] of world silver production—and the ‘5 through 8’ traders are short an additional 71 days of world silver production—for a total of 238 days, which is a hair under 8 months of world silver production, or 547 million troy ounces of paper silver held short by the Big 8. These numbers are virtually unchanged from last week’s COT Report.

And it should be pointed out here that in the COT Report above, the Commercial net short position in silver is 535 million troy ounces. So the Big 8 hold a short position larger than the net position—and by just about 12 million troy ounces. That’s how grotesque, twisted, obscene—and dangerous—this COT situation in silver has become—and gold and platinum aren’t far behind.

And as an aside, the two largest silver shorts on Planet Earth—JPMorgan and Canada’s Scotiabank—are short about 120 days of world silver production between the two of them—and that 120 days represents around 72 percent [almost three quarters] of the length of the red bar in silver in the above chart. The other two traders in the Big 4 category are short, on average, about 23 days of world silver production apiece.

The Big 8 traders in gold are short 47.7 percent of the entire open interest in the COMEX futures market in gold, plus they’re short 46.0 percent of the entire COMEX futures market in silver—and these positions are held against thousands of other traders in these two precious metals who are long the COMEX futures market. Ted pointed out that if you subtract out the market-neutral spread trades in both these precious metals, the Big 8 are actually short a bit more than 50 percent of the total open interest in both metals.

The WRAP

I find myself thinking about the circumstances of how the big 5 thru 8 gold short which bought back its short position and came to be replaced by JPMorgan or another big short trader. This doesn’t sound at all like a fully open market transaction in which a big short moved to buy back in a transparent manner and accepting free market sell orders to close out the short position. Instead, it reeks as an arranged trade (highly illegal) in which the vast majority of market participants and observers knew nothing about as it was transacted. The price action during the reporting week it which it occurred was highly orderly and no hint was given that a big short fish was in trouble. My guess is that the big gold short which covered came into financial distress weeks ago and was carried by the exchange until the position rearrangement was finalized.

As such, someone had to know of it – certainly the short trader which bought back and JPMorgan or whoever else added gold shorts. The CME clearing house had to know and probably arranged the illegal transaction. While I am convinced few other traders were aware of the gold short in trouble, I am not sure if the CFTC was in on this or is as out to lunch as some (including me) profess. My hunch is that the CFTC was told after the gold short got in trouble but before the transaction was effected. In any event, this was an arranged transaction in keeping with a long COMEX tradition of arranged transactions (such as the Bear Stearns takeover and the May 1, 2011 silver price massacre). The only questions are was it enough and what now?

Even though I think I have a clear reading on what took place that doesn’t extend to blueprinting short term price action. As I’ve maintained all along, I’ve narrowed it down to either we go straight up from here or experience one last hard shake to the downside before lifting off for good. This week’s extraordinary big 8 gold repositioning just accentuates either outcome. Should the commercials lose control, prices will surge and it is hard to understate all the unintended consequences. I’m not an end of the world guy, but a genuine commercial failure could rock the world. -- Silver analyst Ted Butler: 30 July 2016

It was obvious that the powers-that-be were all over the precious metal prices during the COMEX trading session on Friday, because if they’d been allowed to trade freely, the moon and the stars would have been the limit as far as closing prices were concerned. Then the resulting margin calls to the Big 8 traders alone would have certainly buried more of them and, as I said in my discussion on the COT Report, it appears that one of the smaller trader has already been bailed out.

Ted mentioned on the phone yesterday that the current paper loses for the Big 8 now total at least $3 billion dollars as of the close of trading on Friday — and those loses do not include the realized gains that they made earlier this year. He says it’s likely more than that, but wasn’t able to compute it more precisely during the time we spent on the phone yesterday, which was considerable. These are huge loses, but there’s now no question that for some of the small traders in the Big 8 category, plus most likely for some of the raptors [the commercial traders other than the Big 8] the writing is on the wall.

I’d guess that a resolution to all this is very near — and there are only three end-game scenarios that I can think of at this time of morning — and they are all ugly — and are as follows: 1] with the approval of the CFTC and SEC, both organizations that most certainly know what’s going on at the moment, we’ll get another JPMorgan-led drive-by shooting like we had starting on May 1, 2011 in silver. This time it would be in gold as well, plus platinum most likely. But as to how successful that might be in the current financial and monetary environment remains to be seen. 2] Another one or more small Commercial traders rush to cover — and we have a melt-up in precious metal prices, plus a melt-down in the U.S. banking system as the margin calls bankrupt ever larger players up the precious metal food chain as the price management scheme unwinds around the world, or 3] The CFTC is forced to close the COMEX in order save JPMorgan et al. That would save all the short players, but suddenly the precious metals would be selling on the spot market, with no futures and options attached to them. I can’t even begin to comprehend what would happen to the financial market on a world-wide basis if that came to pass.

Ted was of the opinion that the possibility existed that these unprecedented gold deliveries we’ve been watching unfold over the last two or three months could be part and parcel of what’s happening now. I couldn’t agree more.

The other thing we talked about — and I alluded to in my discussion on the COT Report earlier, was the fact that with such huge volume and open interest, there could be all kinds of things going on under the hood in the COMEX futures market that can’t be seen in the COT Report, or at least that are not that obvious. But in the ‘obvious’ category — and as a ‘for instance’ the huge increase in the long position in silver in the Managed Money category this week. Who was that — and what was it all about?

There are many more questions than answers, but JPMorgan et al have now painted themselves into such a small corner that there doesn’t appear to be any more wiggle room left — and the first sign of big trouble was the apparent rescue of one of the Big 8 traders in the COMEX futures market in gold.

A cornered beast is a dangerous animal — and those caught in the price management scheme as it breaths its last, will do just about anything, legal or otherwise, to save themselves and the system that nurtures them. So this bears watching carefully in the days and weeks ahead, if in fact we actually have that much time left.

‘Push’ really has become ‘shove’ at this juncture — and I must admit that I’m on ‘Red Alert’ from this point onward.


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