Sunday, December 19, 2010

CFTC Delays Position Limits – Bullion Banks Reduce Silver Shorts

LAS VEGAS - We are still on the road as we write this brief weekend note for readers and subscribers, but ready to head back to the ranch in Texas.  Today we take a look at the CFTC hearing on metals position limits and a close look at the positioning of the bullion banks in silver futures, but first, just below is this week’s closing table.


If any of the images are too small click on them for a larger version.

Note please the outperformance of silver to gold.  Silver up 1.9% versus gold’s -0.9% which of course was beneficial for the gold/silver ratio which came in at 47.17, the lowest reading for that important measure since March of 2008 when it briefly took only 46 ounces of silver to buy an ounce of gold.   Incidentally, once the GSR trades below a 46 handle, the next historic target is the 44-handle last seen in both December of 2006 and February of 2007.



Also in the table above we note for the record slight negative money flow from the largest silver ETF, but that is offset by positive money flow into the largest gold ETF.  Perhaps the most interesting data is the continued reduction of net short positioning by the largest commercial traders in futures, seemingly regardless of the price action. (See the data for “Gold LCNS and Silver LCNS” for the commercial net short positioning and the data for “Gold Close COT Date” and “Silver Close COT Date” for the price action for the COT week.

For whatever reasons we continue to see the largest commercial sellers of gold and especially silver futures “getting smaller” as we have been talking about for quite some time now.  

Looking elsewhere in our long list of interesting data, we note that the smaller, less liquid and more speculative miners and explorers, such as the companies represented in the Market Vectors Junior Gold Index (GDXJ) continued to outperform their larger, well-funded and more liquid cousins, such as the miners represented in the Gold Bugs Index (HUI).  Just below is a relative performance chart showing that the trend of the “Little Guys” outperforming the “Big Boys” is still in play.


It is our contention that when the smaller miners are outperforming their larger cousins that is usually a more bullish than bearish condition.  Another way of saying it is that when the market for gold and the gold miners is turning over, we tend to see relative weakness in the smaller miners and explorers, not relative strength.

CFTC Delays Position Limits for Metals

During this holiday season we are and will be on the road a lot, watching markets when we can and trying not to forget that we are taking some time out to recharge the batteries for what we anticipate to be a fast and furious January-April period in 2011.  Other than taking in Thursday’s  CFTC hearing on position limits  among other policy issues (which we do recommend for readers and subscribers with the time to watch them), we have been and plan to stay on a kind of “low power” mode, looking forward to celebrating the holidays and developing our plans for the New Year.

Watching the hearings from the Wynn Resort in Las Vegas, we noted some “good” and some “bad” in the CFTC discussions about the proposals for position limits, which begins at about the 2:38 mark in the CFTC replay at the link above.  For example, “good” would be reasonable position limits based on a percentage of the open interest and at least some discussion as to a tighter definition of what a “bona fide hedger” is.   (The proposal being considered is similar to the energy market restrictions of no more than 10% of the first 25,000 contracts and no more than 2.5% of the open interest thereafter in all futures months combined, which seems reasonable to us here at Got Gold Report.) 

But “bad” from our admittedly narrow point of view, is the continued CFTC focus on “protecting bona fide hedgers” and allowing them to obtain exemptions to the position limits. We are unclear if the proposed exemptions for bona fide hedgers would be allowed in unlimited amounts as they have been in the past, but we are encouraged by the CFTC staff recommendation that the policy to be adopted include the common sense pleasing restriction that no futures trader might be able to amass a position in excess of 25% of deliverable supply in any event.

If we heard that right, then we believe the CFTC is on more or less the right track, but we reserve the right to change our mind at a moment’s notice if we find that the final proposal does not contain such a reasonable “speed limit” in the U.S. futures markets. 

The CFTC decided in the end to wait for data on swap transactions before taking any further action, and any proposed new position limit regime will be put out for public comment once it is finalized.  We plan to review the hearing at least once more before commenting further or making any recommendations.

Holiday Trading    

End of year position squaring, profit taking and tax loss selling is dominant presently, especially in the small resource company space.  That means we just might get some late December bargains, maybe even low enough on a few issues we are tracking to name as official Vulture Bargains.   We’ll see.  The bar for entry is high to that “club” with gold and silver likely to continue to consolidate or correct just ahead. 

Liquidity is a fickle thing in late December.  It can be thin as all get out, especially in the week just before and to a lesser extent, just after Christmas.  Of course that is a lousy time to be a seller of any size in issues that are already thinly traded.  But it can be an excellent time for Vultures (Got Gold Report subscribers) to lay in wait for the sellers and to gratefully accept their offerings via “stink bids”.  

Finally, we cannot help but notice that the Producer/Merchant commercials in silver futures, the category that includes the largest two U.S. bullion banks, continued to reduce their collective net short positioning despite a higher price for silver metal on COT Tuesday, ... by 1,790 contracts to show 46,155 contracts net short.  That is the lowest  net short position for the PM commercials in silver since August 25 of 2009, when they reported being net short 45,392 contracts with silver then $14.28 the ounce.  Just below is the graph for the PM commercials in silver.

Source:  CFTC for disaggregated COT data, Cash Market for silver.

Remember that the PM positioning on the graph is expressed as a negative number, so when their net short position falls the blue line rises and vice versa.  The lower the blue line on the graph, the higher the net short position.  The higher the blue line, the lower the PM net short position. A net short position benefits if prices fall.  

Clearly the bullion banks, including JP Morgan Chase, were not yet done “getting smaller” in their net short positioning as of Tuesday, December 14, even though silver had advanced 79-cents or 2.8% for the COT reporting week.  Indeed, silver closed Tuesday at the highest nominal price on a COT Tuesday in 30 years at $29.44.  Recall that just three months ago, on September 14 the PMs were net short silver futures to the tune of 62,732 contracts with silver then at $20.46 the ounce. 

Just as clearly, despite their extensive recent reductions in net short positioning, the PMs remain considerably net short silver (46,155 contracts or about 231 million ounces worth).  We do find it very remarkable that they have reduced their net short positioning by 16,577 contracts (83 million ounces) as the price of silver has INCREASED by just under $9.00 over that historic 90-day period. 

Having said that, the probably two big U.S. bullion banks are presently net short something like five times the current amount of the Registered silver held in the COMEX warehouses (46.4 million ounces). If we include all the silver the COMEX classes as Eligible (another 58.9 million ounces as of Friday), then the PM commercials are still net short something like 2.2 times the amount of “deliverable silver” in the COMEX system. 

If we use all the silver in the COMEX, both Registered and Eligible as the benchmark for “deliverable silver”, and if the CFTC does include a restriction that no trader can amass a position in excess of one-quarter of the deliverable supply, then the PMs might have a lot more “getting smaller” to do.  As of Friday the PMs were net short roughly 9 times the amount being contemplated by the CFTC as the maximum amount of “deliverable supply” any one trader might have a position in at any one time. 

Yes, we realize that there is more than one PM trader.  Yes, we realize that there might be a consideration for their bona fide hedging, but it helps to have a sense of the numbers, doesn’t it?  As of Friday 25% of the deliverable supply was either 11.6 million ounces (if we only use the Registered silver) or about 26.3 million ounces (if we use both classes of inventory in the COMEX).  Recall that in the last CFTC Bank Participation Report, the less than four and probably two U.S. banks held net short positions in silver equal to about 149 million ounces of silver as we reported to subscribers in the GGR.  

The bullion banks hold net short positions today that are multiples of the limits we think the CFTC is contemplating in other words. 

We expect to have more and to refine this idea in future comments, but for now we are on “low power” for the holidays, remember.

GGR Charts Updated for Subscribers

As usual, we will be updating all the GGR technical charts by 18:00 today, Sunday.  GGR subscribers can access those technical charts by logging in and navigating to the chart links located near the bottom of the last full Got Gold Report or COT Flash report.  To subscribe, click on the GGR Subscribe link above and to the right.  And thanks for doing so!  Subscribers help make GGR possible. 

Happy Holidays 

With that we want to wish all our readers and subscribers a safe and happy holiday season, and good family fun and fellowship.  Merry Christmas everyone.  

(Editing note:  Some minor editing done in Houston on Sunday prior to publication.) 


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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