Monday, February 07, 2011

Bullion Banks Get Smaller in COMEX Silver Futures

HOUSTON – Keeping tabs on what the largest, best funded and presumably the best informed commercial futures traders are doing opens a window into their expectations for the price of gold and silver ahead – we think.  But what happens when these long-time veteran traders do the unexpected? 

In most of our history following the Commodity Futures Trading Commission (CFTC) commitments of traders (COT) reports, as we saw increases in the price of silver metal we saw increases in what we call the LCNS, the large commercial net short positioning.  That makes sense because as prices rise the incentive for hedgers to sell forward or for short sellers to bet on the down side or “hedge” is theoretically higher. Some of the largest of the hedgers and short sellers of silver futures are the largest bullion banks. 

What used to be normal has apparently been turned on its head because since about last September, as the silver price has been rising and rising dramatically, instead of the biggest sellers of “paper silver” increasing their net short positioning the big bullion banks have been “getting smaller” in the short selling of silver business. 

A short position in futures benefits if prices for the commodity fall.  

The CFTC reports the positioning of the largest reporting banks in futures once each month (for the close on the first Tuesday of each month) in their Bank Participation in Futures reports.  The graph just below focuses only on the largest U.S. banks and is for the report just issued for February, 2011, for silver futures. 

Source CFTC for bank positions, Cash Market for silver.  If any of the images are too small click on them for a larger version.  

In the past we have witnessed very large one-month increases in the bullion bank net short positioning just ahead of very large declines in the price of silver, such as in August of 2008, the most recent and most obvious example.  Big moves in the metal are sometimes telegraphed in advance if traders know what to look for. 

Conversely, we have also seen very large decreases in the U.S. bank positioning just ahead of significant increases in the price of the metal.  A great example of that occurred in gold futures in August of 2010 when the U.S. banks dumped more than 39,000 of their gold net short position with gold then at $1,186 and staging for a run up to $1,400 in December.

The “normal” condition is for the Big Sellers of futures to increase their net short positions on material price advances and vice versa. Regardless of the reasons why, it is crystal clear that the largest U.S. banks in futures, the largest bullion banks, are losing their appetite to take the short side of silver futures contracts in New York.  

Continued… *** 

On December 1, 2009 with silver then $19.08, the reporting U.S. banks held 1,776 silver futures contracts long and 42,733 short or 40,957 silver contracts net short.  By February 1, 2011, with silver at $28.51 (+$9.43 or +49%) the reporting U.S. banks had reduced their net short positioning by 22,022 contracts (-53.8%) to 18,935 contracts of net short exposure.  

To quantify that very large and very unusual change in positioning, in the last month of 2009 the big U.S. bullion banks were net short contracts to deliver 204.8 million ounces when silver was trading in the $19s. In February of this year, literally last week, with silver now in the $28 range the reporting banks were on the net short side of “only” about 95 million ounces.  (Less than half as net short now as they were in December of 2009 at much lower prices.) 

This is, of course, only for the regulated and more visible futures markets in New York.  We are not able to see the bank positioning in the less regulated and more opaque markets overseas, the OTC markets for physical, forwards and swaps.We have to believe that it is no coincidence that the price of silver has broken out to new 30-year highs as the largest bullion banks, of which there are less than four and probably just two reporting bullion banks in silver, have been closing out their net short futures positions. 

We here at Got Gold Report strongly suspect that the amount of real silver bullion stored in warehouses and available for lending into the futures or forwards markets has declined to the point where the largest and smartest short sellers have a legitimate concern that metal would be available to borrow in the near future should the buyers of their paper short sales demand delivery.  As evidence we can point to large declines in the amount of silver trade clearing at the London Bullion Market Association and the reductions in the combined collective commercial net short positioning we have been writing about.  Add to those signals the chart above which clearly shows that as silver has been rising the bullion banks have been getting smaller in their selling of paper silver, not larger as we would “normally” expect.  

We also strongly suspect that demand for physical silver at the moment is not, repeat not, as price sensitive as it has been in the past.  In other words we get the feeling that silver accumulators in this market are not yet done hoarding.  We think the large accumulators of silver are convinced that a structural shortage of commercial sized bars of silver lies ahead.  If true, that helps to explain why silver saw heavy demand and checked up well above where we expected it to last week.  

Looking again at that first chart of the U.S. bullion banks in silver futures, just since September 7 of last year (about five months), the reporting U.S. banks in silver futures have reduced their net short positioning by 12,592 contracts or 39.9% as silver Rose a net $8.72 or 44%.  The usual Big Sellers of silver have become net buyers with the price of silver on a historic rise.  As we reported on Saturday, virtually all the contango has evaporated from the silver futures market. Reports of intense demand for physical metal are legion.   

Witness then, the unexpected and marvel that an era of silver price domination is apparently coming to a close in 2011.  

We said it would for years, and here it is.

When there is very little metal to borrow, short sellers become reluctant to take the short side.  What should we think when the smartest players in the game are no longer willing to sell short?  And who then is replacing them as the big seller in this market? And, do they realize that the best-connected former Big Sellers are scared to sell the market short now? 

If the strongest, best funded, best bullion-connected banks (the largest of which is JP Morgan Chase) cannot find metal to borrow – when it is they that have the largest, soccer field sized warehouses (plural) of metal stored for their own accounts and for clients in the world, in London, then we tip our hat to those who are brave enough to think they can find metal to sell short in this tightening market.  

We think that means that the “strength” of the short side is declining, by the way, and that probably means a much more volatile silver market just ahead.  Samuel L. Jackson’s voice:  “Hold onto your butts.”

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

Contact Us