Sunday, November 07, 2010

US Banks in Silver Futures

HOUSTON - (Got Gold Report) - Some people believe there are sinister forces at work that have kept the price of silver suppressed for years.  We believe that such notions, while sometimes well delivered and compelling, are just not borne out by the trading data.  As long-time readers know, we also don’t believe the price of silver is dependent on the “defeat” of those “bad guys,” real or imagined.  The price of silver is being driven by something else entirely. … However, we do still find the data useful and interesting, even if aggravating from time to time.

The graph just below shows the positioning of probably two U.S. banks in silver futures as of the most recent Bank Participation in Futures Report  (BPR) compiled by the Commodities Futures Trading Commission (CFTC) as reported by the U.S. banks.  It won’t come as a shock that the two banks in the BPR, likely JP Morgan Chase and HSBC (although they are not identified by name by the CFTC, which hides the identities of traders), are singled out by some analysts (and at least three new lawsuits alleging silver manipulation) as heading up the “forces of evil” in the silver market.

Source CFTC for US Bank positioning, Cash Market for silver.

This particular report is issued monthly for the first Tuesday of each reporting month.   The CFTC publishes a rolling 25-month history of the BPR on its website.

We here at Got Gold Report are focused on the positioning of the largest hedgers and short sellers in silver futures, the bullion banks, which we believe report in the U.S. Banks category of the BPR. 

As of November 2, with silver then trading at $24.91, less than four and probably two U.S. banks reported holding 899 contracts long silver futures and 30,760 contracts short,  a net short position of 29,861 contracts.   Therefore the probably two U.S. banks were net short COMEX futures contracts representing 149.3 million ounces of silver metal.


These probably two large and probably bullion banks held a net short position equal to 18.8% of all the 158,633  contracts open on the COMEX November 2 as shown in the graph just below.

Source CFTC for US Bank positioning, Cash Market for silver.

Therefore just two commercial banks held net short positions of roughly 149.3 million ounces out of a COMEX universe of contracts representing 793.2 million ounces.

During the 2008 panic period, and shortly after JP Morgan Chase took over the assets of Bear Stearns, in August of 2008, exactly two U.S. banks then held zero contracts long and 33,805 silver contracts short, a net short position of 33,805 contracts.   At that time there were 133,255 contracts open, so the two U.S. banks then held a net short position in silver futures equal to 25.4% of all the contracts open on the COMEX. (Two big traders – more than one-quarter of all the action.)

The U.S. banks net short position as a percentage of the total open interest would peak with the March 3, 2009 report when the two U.S. banks reported a net short position of 30,838 contracts (again zero long) with 93,051 contracts then open or 33.1% of all the COMEX futures action net short. Note that the two U.S. banks were then, in March of 2009, net short contracts representing 154.2 million ounces of silver with the metal then trading at $12.83 and having tested below $9 not very long before in December of 2008.

The U.S. banks are able to hold such large positioning in the futures markets by virtue of exemptions to position and accountability limits because they are classed by the CFTC as “bona fide hedgers.”  Without those exemptions, the elite bullion banks would have been limited to a much smaller number of futures contracts.

Two Banks the Big Guns in Silver Futures

When we compare the two commercial U.S. bank’s net short positioning to the positioning of all traders the CFTC classes as “commercial,” we can form an opinion as to how much of the commercial net short positioning has been concentrated in just these two bullion bank entities.  The chart just below compares the U.S. bank net short positioning to the net short positions reported by all commercial traders.  The CFTC reported that there were 38 traders classed as commercial in the most recent CFTC commitments of traders (COT) report. 


Source CFTC for US Bank positioning, Cash Market for silver.

As of November 2, the probably two U.S. banks reported a net short position in silver futures of 29,861 contracts while all 38 commercial traders reported a net short position of 56,048 contracts.  Therefore just two large, well funded and presumably well informed U.S. bullion banks held 53.3% of all the commercial net short positioning for silver futures on the COMEX division of the CME.  We note, then, that 5.3% of the commercial traders reporting held 53.3% of all the commercial net short positioning on the COMEX bourse.

In December of 2008, probably the same two commercial U.S. banks then held a net short position of 24,555 contracts with the open interest then down to 82,434 contracts and all commercial traders as a group then held 24,894 contracts net short.  Remarkably, in December of 2008 these two U.S. banks accounted for 98.6% of all the commercial net short positioning for silver futures (the high point in the graph above).

What we find enormously interesting is that since August of 2008 the two U.S. banks have maintained a net short position in silver futures roughly the same size nominally (minimum 22,684 contracts in November, 2008 and maximum 40,957 contracts in December, 2009, but averaging 30,670 contracts or an average of 153 million ounces) while the price of silver has fluctuated during the 28-month period from $16.45 to below $10 and now back up to $24.91 (as measured on BPR reporting dates). 

Just below is a table of the data we use for the graphs above provided as a service for others to study and to reach their own conclusions. 

Source CFTC for US Bank positioning and COT, Cash Market for silver.

Our own conclusions:  The data show that there is an enormous concentration in silver futures “firepower” on the short side which now resides in just two elite U.S. bullion banks.  These two bullion trading banks have held as much as 99% of all the commercial net short positioning on the COMEX and their net short positioning alone has been as high as 33.1% of all the contracts – all of them, long and short – then open. We can certainly say that at times these two bullion banks were virtually ALL of the commercial net shorts on the COMEX.  Is that just two banks doing ALL the silver selling?  (And, remember how extremely high the premiums were for physical silver metal at the time?)  Put backwards, at its most extreme above, all the other commercial traders on the COMEX amounted to just 1% of all the commercial net short positioning at one point.

Perhaps this next chart of the premiums for pre-1965 90% silver U.S. coins will remind us of how out of kilter the futures market became in 2008 at the same time as the big commercial banks represented virtually all the selling of silver futures.

Source Coin Dealer Newsletter for premiums, Cash Market for silver.

As a reminder, premiums, the amount over the spot price charged or paid by dealers for physical metal, shot up to over $4.00 the ounce over the spot or cash price for $1,000 face value bags of “90%” in October of 2008.

With that much concentrated “trading horsepower” it strains credibility to contend that traders for these big banks have never used the weight of their own trading to manhandle the futures markets from time to time in the past.  When just 5% of the entire trading battlefield wields more than 50% of the “action” it must lead to their having a feeling of superiority over their trading counterparts in the futures markets.  Certainly with the exemptions to position limits in their arsenal, we can imagine that the traders for those large banks could, that’s could, develop an arrogant attitude toward the rest of the trading class – because the rest of the traders cannot access those exemptions in size and therefore are at a disadvantage during ordinary or during adverse market conditions.

With that much of a trading advantage granted intentionally to the banks by the CFTC, how would it be possible for the bank traders to refrain from using their CFTC-granted advantage to “improve” their positioning just a little ahead of key events, such as options or contract expiry or perhaps when silver advanced a little too far in a dull market?  At times it must have seemed to all the other traders on the COMEX that they were using slingshots against the two large bank’s bazookas and howitzers.

But now apparently the demand for physical silver has been so intense, the over-sized downside firepower of the bank actors has been overwhelmed.

Hit and Run Hammering, No Grand Conspiracy – We Think

Having said all the above we are unable to correlate the movement in silver prices with the net short positioning held by these elite bullion banks over time.  Indeed, if we look at the extremes of the data set above, and if we were to attempt to demonstrate that the U.S. banks attempted to force silver prices lower by increasing their net short positioning, the data will not cooperate with that notion very well.

We have to believe that the lawsuits against JP Morgan and HSBC will run into difficulty when it comes to proving their case for manipulation on a grand scale in other words.  The plaintiffs better stick to the idea of short-term hit and run tactics by the “banksters” instead.  We believe the data has in the past and DOES NOW support that case well enough to give the defendants cause for a Maalox Moment.

There are marginal to clear examples of where the U.S. banks increased their net short positioning AHEAD of the price of silver falling, such as in December of 2009, for example.  But if the U.S. banks were using their short positioning to drive silver prices lower we would expect to see the net short positioning rising as the silver price fell.  Instead we consistently witness the opposite, at least in the silver futures market.

We will continue to conclude and to point out that the U.S. banks do indeed have a disproportionate amount of concentrated “firepower” in the small COMEX futures market, and any time that is the case it certainly means there is an opportunity for abuse of that trading advantage.

But we will also continue to contend that the market for silver metal is global, that the COMEX futures market is just one market and that even if there are attempts to push the pricing around from time to time, by bulls or bears, no one trader or group of traders has enough “horsepower” to argue with the global supply/demand/liquidity equilibrium for any length of time – certainly not indefinitely. 

At the end of the day, we do not know what contracts or inventory the banks have offsetting their net short positions or in what markets the offsetting positions are located.  We do not even know the net positioning of the banks, only their net positioning in futures.  For all we know the banks could be flat or even net long silver when all other markets are factored in.

We believe it is silliness to presume that the U.S. banks are “naked net short” silver, as some now contend or allege.  Much more logical would be that these net short positions are indeed for the most part hedges offsetting corresponding net long derivatives in other markets or inventory, or future production/cash flows, or hedging more complex financial derivatives, … or perhaps hedging something we have not thought of.

Otherwise we would have to conclude the banks are stupid and reckless, which we find difficult to accept for the firms mentioned.  Smart and ruthless we certainly can accept at face value, and in terms of short-term trading events the evidence is mountainous in size and scope – thus our continued call for a more level playing field in the COMEX domain.

As just one final point for today, as of January 5, 2010 probably two U.S. banks held net short positions in silver futures of about 37,300 contracts representing about 186,500,000 ounces of silver metal.  Silver began the reporting year at $17.77.

Silver recently reached as high as $26.76 on a closing basis, an increase of roughly $9.00.

Since the beginning of the year the U.S. banks have reduced their net short positions by roughly 7,000 contracts to about 30,000 contracts or about 150 million ounces.

Thus, it is a good thing that the U.S. bank positions are reportedly “hedges,” because if they were pure net short positions, or so-called “naked short” positions (if the banks were gambling on the price of silver in other words) the banks would be in the hole by about $1.35 billion on this year’s action alone.

We conclude the bank’s net short positions are indeed hedges for the most part.  We also conclude that the notion of the banks holding an uncovered or naked net short position is most likely a myth, but there is no question that two very large bullion banks have a clear trading advantage in the futures markets much of the time.

Our contention is that we don’t need a “naked short boogey man” to make the case for higher silver prices.  Further, that idea detracts from what is actually driving the silver price bus now – the much more compelling idea of exploding real demand into a very limited supply of commercial sized bars of silver metal.

To stay abreast of all the latest developments in the gold and silver arena, Vultures (Got Gold Report subscribers) should bookmark and visit often the Gold Anti-Trust Action Committee (GATA) website at this link or copy and paste the following into your browser:   Of particular interest to us this week is a recent GATA dispatch of a Financial Times article by Hal Weitzman  which contends that the CME is running interference to the CFTC, attempting to delay implementation of position limits and the CME seemed to be seeking protection for the Big Sellers.  “Noting that the Dodd-Frank Act allows the CFTC to make broad exemptions to the new rules, the CME also urged the regulator "to accommodate all non-speculative positions," Weitzman reported.

We think a rough translation is:  "Don’t mess with our position or accountability limit exemptions, CFTC! Not now!"

For the latest developments at the CFTC a good place to start is here:   

On another note, we have updated all the linked charts, including our changes to trading stops for both gold and silver.  Vultures can access the linked charts by logging in and navigating to the bottom of the most recent full GGR, where the charts “live.”

To subscribe to Got Gold Report, please click on the GGR Subscribe link above and to the right, and thank you for doing so!  Subscribers make it all possible here. 

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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