HOUSTON -- This special Got Gold Report is about the positioning of U.S. banks in gold and silver futures according to CFTC reports. We’ll get to that in a moment, but first:
We’re back in Houston following the 35th New Orleans Investment Conference mi compadre Brien Lundin puts together each October, upholding the tradition the late James Blanchard started back in 1974. If you missed this year’s event you missed a lot, but take heart. High-quality DVDs will likely be available soon at the conference web site.
My own particular favorite of this years confab was the thoughtful commentary by Charles Krauthammer, who reminded us that the so-called “public option” of proposed healthcare legislation is merely a “foot in the door for the government to take over.” Krauthammer’s talk is a must-see.
DVD buyers will also want to go right to the Saturday, October 10, special feature Brien dubbed “Summit on America’s Future” featuring former senior advisor to President George W. Bush, Karl Rove (who was clearly in his element), best-selling author and liberty defender Robert Ringer, very popular cable TV commentator on CNBC and heck of nice guy in person Rick Santelli,andthe aforementioned Charles Krauthammer (clearly one of the brightest among us). Conference master of ceremonies Gary Alexander, who plays a mean clarinet at after-event functions, did his usual superb job as MC this year and moderated the summit artfully.
It was certainly a distinct honor for yours truly to have been one of the speakers in an event with so much history and tradition, which has seen so many respected and revered authorities in past New Orleans Investment Conference gatherings, which included giants of intellect such as Milton Friedman and Ayn Rand (one of my heroes), even political giants such as Barry Goldwater and Lady Margaret Thatcher.
I began my first presentation by pointing out that it is difficult for humans to conceive of just how much a trillion dollars is and offered up this simple example to illustrate it. “Each paper dollar is 6.1 inches long. If one were to place one trillion of them touching end to end, beginning at the earth, that line of paper dollars would stretch out into space three-million-miles … PAST THE SUN. That’s right, a trillion one dollar bills would stretch over 96 million miles! … Does that put a trillion dollars into better perspective?”
We conference attendees were also treated to timely, worthwhile analytics and timely intelligence delivered by the heavyweights of the biz, such as Adrian Day (Adrian Day Asset Management), John Mauldin (Millennium Wave Investments), Chris Powell of GATA, Frank Holmes (U.S. Global Investors) and Rick Rule (Global Resource Investments, Inc.). Rule had one of the more memorable quotes of the conference, at least to me. He said, “When your outgo exceeds your income your upkeep becomes your downfall.” Quite right, Rick. Good one.
There were so many highlights at this year’s conference, but there is no sense going on and on about it and that’s not really what this article is about. If you can spare the reasonable cost of the recordings, consider them highly recommended. And for fun account of the event and some actionable content (code for specific company stuff), don’t miss Thom Calandra’s hot-off-the-press N.O. conference account on Stockhouse.com at this link.
Thom’s been red-hot lately with his Ticker Trax wealth building subscription service. Trust me on that one.
Now back to our special Got Gold Reporting.
Please note: Gold Newsletter (GNL) subscribers received this special issue of the Got Gold Report Tuesday, October 12. GNL subscribers enjoy access to all Got Gold Reports, technical charts, analysis and information, as well as Brien Lundin’s timely and actionable analysis of specific resource related companies. For more information or to subscribe visit the Gold Newsletter home page.
U.S. bank positioning
Each month the Commodities Futures Trading Commission (CFTC) publishes its Bank Participation in the Futures and Options Markets Report, which shows the positioning of reporting banks in the U.S. futures markets for commodities including gold and silver.
The most recent report was for bank positioning as of October 6. It was released a little late this month, by several days for some unknown (to me) reason.
As of Tuesday, October 6, with gold then at $1,041.96 the two U.S. banks with reportable futures positions (one bank less than last month) held a total of 10 contracts long gold and a total of 116,790 contracts short gold for a total net short position of 116,780 COMEX 100-ounce contracts. That was with a total open interest of 484,307 contracts open. This, while all commercial traders as a group (all 55 of them) reported a net short position of 281,864 contracts the same day.
A net short futures position benefits if prices fall, but could theoretically represent offsetting transactions to hedge the risk of opposite positions or financial derivatives in other markets.
For comparison, as of July 7, three reporting months prior, three reporting U.S. banks held a net short position of 116,457 gold contracts while all commercial traders as a group reported 191,307 gold contracts net short, with gold then at $924.65 and a total open interest then of 372,985 contracts. The U.S. bank’s nominal net short position is shown in the graph just below.
Source for data CFTC for COT, cash market for gold
Since July 7, as gold metal increased by $117.31 an ounce, or 12.7%, (from $924.65 to $1,041.96), the large, well-funded and presumably well-informed banks first reduced their gold net short positioning by a little over 41,000 contracts in August and September, but over the last month the U.S. reporting banks put all that net short positioning back on. So, the net effect on a nominal basis is that as gold rose $117.00 over three months the U.S. bank net short positioning is basically back to where it was when gold was at $924.65 in July.
During the same July-October period the total combined collective commercial net short positioning (from all traders classed as commercial, the LCNS) ROSE a huge 90,557 contracts, or 47%, from 191,307 to a teeth gnashing 281,864 contracts net short.
That means that measured as a percentage of all commercial net short positions, the (now two instead of three) U.S. bank’s net short positioning fell from almost 61% in July to about 41.4% in three reporting months with gold marching higher as shown in the chart below (the last four data points of the right axis).
Source for data CFTC for COT, cash market for gold
In Texas English, so much for the idea that the two U.S. banks are “hammering the gold market,” or anything of the kind. As a percentage of all commercial traders the two U.S. banks have clearly become a considerably smaller portion of the commercial net short game, according to the figures reported by the CFTC.
U.S. banks in silver futures
Looking at just the U.S. bank’s positioning in silver, as of October 6, exactly two U.S. banks reported holding 38 contracts long silver and 38,375 contracts short silver for a total net short position of 38,337 COMEX 5,000-ounce contracts - with the total open interest of 131,801 contracts open and silver closing on the cash market then at $17.35.
The nominal net short positioning of the U.S. banks in silver is shown in the graph just below.
Source for data CFTC for COT, cash market for silver
That’s an increase over the prior month of 8,462 contracts, or 28.3%, as silver metal increased $2.34, or 15.6%. Although it looks like a large jump in the number of contracts net short, the increase of the U.S. bank’s silver futures net short positioning was actually only slightly higher than the increase in the total open interest on a percentage basis month to month. The open interest increased 25,130 contracts, or 23.6%, from 106,671 to 131,801 contracts open. (As the open interest increased 23.6% the U.S. banks increased their net short positioning 28.3% for the month.)
All commercial traders as a group (all 36 of them) held a net short silver futures position of 65,188 contracts as of October 6. That was an increase of 17,132 contracts, or 35.7%, month to month. So, the two U.S. bank’s percentage of the total commercial net short positioning actually fell slightly from 62.2% to 58.8% over the past month as shown in the graph below.
Source for data CFTC for COT, cash market for silver
Although the nominal size of the bank’s net short positioning increased the second highest amount in one reporting month (8,462 contracts) since the CFTC began reporting bank positioning in 2006, (the highest was the huge 27,628 contract jump the month of August, 2008), because the net short positioning of all commercial traders increased substantially more for the period, the effective relative net short positioning of the banks to all commercial futures traders is slightly less than it was a month ago.
Simply stated, the two U.S. banks roughly kept pace with all the other traders classed by the CFTC as commercial on the short side in silver. But with just two large U.S. banks holding over 29% of all the COMEX contracts open and 58.8% of all the 65,188 contract commercial net short positioning in those two well-connected hands, the overall commercial net short positioning for COMEX silver futures remained very highly concentrated as of October 6.
Opinion and commentary
The CFTC is likely to announce new federal position limit proposals for public comment in the energy futures markets and possibly also the metals markets fairly soon.
Here at Got Gold Report we continue to doubt that the CFTC will adopt hard position limits for actors on the financial hedging side of the metals markets battlefield, but we wouldn’t mind being wrong about that.
When just two reporting entities are able to amass a net short position in silver of 38,000-plus contracts, over three times the 6,000-contract accountability limits (for two traders) imposed by the COMEX, division of NYMEX, that’s one reason many feel that the market is structured to give the hedgers and short sellers an advantage much of the time.
Earlier this year, during several days of hearings on the subject of the CFTC taking over the job of setting position limits in the energy futures markets, we often heard the phrase “excessive speculation” from the CFTC commissioners, but not once did we ever hear anything that sounded like the commission was at all worried about excessive hedging or short selling.
We took the view then and continue to believe this CFTC, under CFTC Chairman Gary Gensler, is more concerned with trying to manage energy prices lower by limiting the position limits for players on the long side while preserving the ability of large actors on the short side to ignore those same limits.
That is not exactly a level playing field. A level playing field would have the exact same position limits for all players no matter who they are or what side they are on.
Bullion banks are able to take such large, over-limit positioning in aggregated accounts for their clients in silver futures via “exemptions for bona fide hedgers” even though they neither mine nor produce silver. Some of the bullion bank’s positioning instead seeks to generate an income from an otherwise static asset (metal sitting in vaults) for themselves and their clients, by selling paper derivatives based on that metal located here and abroad. Since very little metal will actually ever be delivered to settle those derivatives, it’s safe to say that much of that positioning is purely financial hedging.
Even though Chairman Gensler mentioned in his July 7 opening comments for the hearings that the commission intends to take another look at how exemptions to position limits are implemented, all of the restrictions and restrictive actions the commission has taken thus far affected only those traders who aggregated positions on the long side, such as reneging on exemptions to grain traders and threatening to do the same with aggregators of exchange traded fund investors in oil and natural gas. (As reported in prior reports.)
Again, we’d love to be wrong on this one, but so far we’ve seen nothing that suggests that the CFTC intends to actually level the playing field when it comes to position limits in the metals markets.
Not that it actually makes any difference in the long run. No matter how concentrated the positioning on the COMEX gets and no matter how many contracts the banks decide to sell short, the metals markets are global and will inevitably seek their supply/demand/liquidity equilibrium over time.
As a practical matter position limits in one futures market might make a difference for very short periods of time (no pun intended), but over the long haul there’s nothing that can stop the metals from seeking a liquidity-driven market price in the real world.
That’s it from Houston for this special report. We’re planning a full update this weekend. Until then, good luck, good trading and as always, MIND YOUR STOPS.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author and/or his family currently holds a net long position in iShares Silver Trust, long San Juan Basin Royalty Trust (SJT), long Permian Basin Royalty Trust (PBT), long the following “Vulture Bargain Hunter Stocks” mentioned in this report or within the last three months: Timberline Resources (TLR), Paragon Minerals (PGR.V), Forum Uranium (FDC.V), Odyssey Resources (ODX.V), Radius Gold (RDU.V), Columbus Gold (CGT.V), Endeavour Financial (EDV.T), Terraco Gold (TEN.V), Hathor Uranium (HAT.V), Natcore (NXT.V), Esperanza Silver (EPZ.V), long DZZ as a gold hedge (but with an extremely tight stop) and currently holds various (approximately 20) other long and short positions in mining and exploration companies. The author receives no compensation from any company mentioned in this report. To contact Gene use LLCCMAN (at) AOL (dotcom).
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