Wednesday, October 27, 2010

CFTC’s Chilton Probably Not Why Silver Strong

In our weekend COT Flash update to Got Gold Report subscribers, after noting a reduction in the relative commercial net short positioning by commercial traders, we said: 

Isn’t that interesting?  We are speaking of course about the fact that as silver has challenged new 30-year nominal highs the largest commercial traders in silver futures are apparently not willing to take on much higher net short positioning.

How about that?  We have to ask ourselves the question, with silver at 30-year highs why aren’t the largest futures hedgers and short sellers willing to really pile on the short side of silver futures?  What signals do they see and what is keeping them from selling the heck out of this $5.00-plus rally since the August consolidation breakout?  

Just below is our own chart which we shared with Got Gold Report subscribers in our COT Flash Report Sunday, October 24.  It is the nominal amount of commercial net short positioning of silver futures on the COMEX, division of CME.  More about that in just a moment.  


Perhaps not coincidentally, yesterday CFTC Commissioner Bart Chilton issued a statement regarding the silver market.  Commissioner Chilton said in that statement:

“I believe that there have been repeated attempts to influence prices in the silver markets.  There have been fraudulent efforts to persuade and deviously control that price.  Based on what I have been told by members of the public, and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.”

The full CFTC statement is available at this link.

If the link doesn’t work properly, please copy and paste the full link below into your browser. 

Has Commissioner Chilton opened a window for us?  Could it be that silver is not being hammered in the futures markets on the short side because traders that have used their ability to game the system in the past are now under a CFTC microscope?  (In which case the futures game may have changed.)

Continued …

Is this a case of a regulator stepping in to alter the trading habits of futures market makers operating on the short side of the market, thus causing their opponents to take advantage of that possibly temporary influence to press their own long positioning?  (In which case the game has changed, but only temporarily, and we need to beware.)

Is this merely a case of a U.S. regulator taking advantage of a historic rise in the silver market to grandstand – posturing to take credit for “action” that is responsible for the now apparent absence of concerted heavy short selling of silver futures by an elite few traders which have historically had access to unfair size exemptions as “bona fide hedgers”? (In which case we have to applaud Commissioner Chilton’s sense of timing, but at the same time prepare for a whiplash at some point.) 

Or is silver rising purely on the basis on stepped up demand from outside investors meeting static and quite limited supply in a smallish, highly volatile market dominated by a small number of firms in the physical markets in London?  (In which case nothing the CFTC does or says will stop the momentum.  Only a reduction in demand for silver will do so.) 

Silver Trading Substantially Different    

In truth we do not know with certainty which (if any) of the scenarios above are in play, but we do know that silver has not been trading anything like it “normally” does since at least the end of September.

Just below is our own chart which we shared with Got Gold Report subscribers in our COT Flash Report Sunday, October 24.  It shows the relative net short positioning for silver for the traders the CFTC classes as “commercial” in the legacy commitments of traders (COT) reports.  Notice that the relative net short positioning (the commercial net short positioning compared to the total open interest) actually fell as silver has been rising sharply in price.  


In the three reporting weeks since September 28, the traders the CFTC classes as commercial collectively reduced their net short positioning from 65,413 to 58,150 contracts net short silver.  (From being net short 327 million ounces to 290.8 million ounces – a reduction in net short positioning of 7,263 contracts or 11%).   Why is that not “normal” comparatively speaking?  Because it occurred as the price of silver advanced from $21.74 to as high as $24.90, then settled Tuesday, October 19 at $23.36.  

Notice that over the past seven trading weeks, the relative net short positioning of the largest commercial hedgers and short sellers has actually declined from 45.4% of all contracts open to 38.5%!   

The unusual part is that the commercial hedgers and short sellers reduced their net short positioning on a material increase in the price of silver.  In the past that would be considered strongly unusual.  Hedgers in retreat?  Hedgers NOT selling into a 30-year price high?  A historic change is underway in the futures markets, friends.  We are witness to it right now.

Not Merely Regulator Scrutiny  

The idea that silver is now rising merely because of increased scrutiny by regulators on the short sellers is neither comforting, nor appealing, but we sincerely doubt that is solely the reason that silver has found a bid of late.

We are of the firm opinion that silver is not rising merely because of regulator’s newly found desire to promote “fair” futures markets.  Indeed we believe that if there is any influence from the CFTC investigation into the silver futures markets, or increased scrutiny, or whatever, that influence is at best minimal, and more likely coincident to what is happening in the much larger and much less regulated physical markets.

To be sure we lament the unfair advantage in the futures markets that the traders the CFTC grants “bona fide hedger” status to (thus allowing a few elite traders access to larger positioning than their long-side opponents). And, it doesn’t take ownership of a tin-foil hat to have noticed multiple bone-crunching sell raids by those “usual suspects” in the past.  All long-time traders are certainly aware of them.  All long-timers have learned to survive them using one or another money management method (stops, options, nimble trading, etc.).    

However, as we have said so many times in the past, one can manipulate the price of something temporarily for short periods of time given enough firepower and given the “right” execution of the trading, but nothing and no one can manipulate the global market price of something – no one, not bullion banks, nor even central banks can argue with the supply/demand/liquidity equilibrium of a global market for any length of time and certainly not indefinitely.  

Our view:  We believe there is a tectonic shift underway for silver.  A shift of historic and generational proportions that is only just now starting to surface in a material way.  We believe that global public demand for precious silver is once again returning the metal to its historic role as money – alongside its rarer cousin gold. We believe that the recent absence of concerted short selling is more likely a logical market reaction by hedgers and short sellers to the reality of much higher demand and the realization that existing and available supplies may not be sufficient to satisfy that burgeoning demand at current pricing.

If our view is correct, then it really doesn’t matter if the CFTC or any other regulator is looking harder at the positioning of futures traders.  If our view is correct, then the market price of silver will find its own supply/demand/liquidity equilibrium whether or not hedgers and short sellers sell a few hundred million more ounces of the stuff in paper contracts in New York.  

Would it be better if the futures markets were played on a more level playing field? One where both sides of the battlefield had the exact same rules and size limits? Where one side of the action didn’t have access to many times the number of contracts – access to more “ammunition” than the other side does?  Sure, certainly it would.  No question about it.  It might cut down on the short-term blood lettings from time to time. Maybe. But, will that make any difference in the long-term price of silver?  

No, not really.  Futures contracts answer to real demand by the population for silver, not the opposite.

We believe the story has been considerably different for gold, which is held by governments as a reserve-asset and thus has been subject to an unseen hand of “currency management” from time to time in the past, but that is another story for another time. Governments no longer hold silver – and they have all but stopped dishoarding the silver they did have. Governments have stopped supplying the silver that artificially kept the price unreasonably low for decades – and the markets are discovering that now.    

For all the latest developments on this issue we strongly recommend bookmarking the Gold Anti-Trust Action Committee (GATA) web site at this link.  If the link doesn’t work on your system, please copy and paste the following into your browser:  Chris Powell has been burning the midnight oil dispatching the latest important developments for us.  We own him our thanks for doing so!

We’ll close this comment today with a quote from our friends at to illustrate how many in the gold and silver community view this event:

The US commodity futures regulator is looking into claims by a former JP Morgan trader in London that JPMorgan Chase was involved in manipulative silver trading, The Wall Street Journal reports, citing a person close to the situation. Reuters reports that in recent months, Commodity Futures Trading Commission (CFTC) lawyers have interviewed employees of JPMorgan in its metals trading business, the newspaper said. Along with JPMorgan, CFTC lawyers have also interviewed industry traders, commodity executives, experts and employees of other metals trading firms, The Journal said. Ray Bashford, a spokesman for JPMorgan in Hong Kong, said the bank had no comment when contacted by Bloomberg News today.

It is hard to know how important Chilton's comments are with regard to the ongoing silver manipulation allegations.

They suggest that he himself agrees with the Gold Anti-Trust Action Committee (GATA) allegations that silver prices are manipulated. If the CFTC prosecutes those who may have manipulated gold and silver markets (as Chilton urged today) and violated commodities laws then it could lead to further volatility and higher prices. This would especially be the case if the large concentrated short positions on the COMEX, held by banks such as JP Morgan, were forced to cover their positions.

This may lead to a short squeeze that could propel silver above $30 and towards its nominal high of $50/oz in the coming months.-   (Emphasis ours).  

That is all for now, but there is more to come.    


The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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