Wednesday, January 02, 2013

Largest Bullion Traders Futures Positions do not Match Silver Manipulation Narrative

HOUSTON – As we have long suspected, the class action lawsuit against JP Morgan Chase alleging silver manipulation was dismissed by a New York judge (Robert P. Patterson, Jr.).  The only surprise to us was that it lasted as long as it did. 

Shortly after the lawsuit was filed, after reading it, we opined to close friends and colleagues that we sure wouldn’t want to be going into court with such a weak case.  A lawsuit which is based mostly on hearsay and public comments, rather than specific, spelled out harm, mischief or damages, is usually going nowhere. 

At best it was an opportunistic shot to initiate a fishing expedition. The judge apparently saw it that way. 

At worst the lawsuit was a manifestation of a market myth popularized by professional high profile muckrakers like Max Kaiser, et al.  A mean canard with an appealing, Oliver Stone style plot meant to draw in market neophytes and play on their conspiracy fears.  A myth perpetuated by people who have a vested interest in the Big Bad Bank Silver Manipulation storyline.



What is particularly obvious to any thinking observer, which will undoubtedly escape the silver conspiracy salesmen’s gaze, is that for the long period of time the lawsuit alleging silver manipulation was pending, there was apparently no material or compelling evidence which surfaced to support the plaintiffs case. 

No real whistleblower came forward to offer concrete proof of actual manipulative behavior by the defendant (no material factual allegations).  No disgruntled former trader or manager apparently came forward to align themselves with the plaintiffs or furnish the plaintiff with something compelling, some “red meat” the opportunistic, profit-seeking lawyers could amend their pleading with.

No smoking gun could be found or conjured, which, given the size of the defendant, must have come as a surprise to the organizers and lawyers who bought into the silver manipulation screenplay. 

That apparent fact is the dog not barking in this instance.  We have to believe that if ever there was an opportunity for a former bank operative to come forward to corroborate the supposed manipulation of the silver market by bullion banks, it would have been while there was a suit pending. 

In the absence of compelling evidence there is merely a failed lawsuit and a waste of the court’s time and the lawyer’s money.  

Largest Bullion Traders Futures Positions do not Match Silver Manipulation Narrative

Now, another interesting fact to consider.    

In a recent update to our Subscribers we took a look at the pure short positions reported in the COMEX futures markets by traders classed by the Commodity Futures Trading Commission (CFTC) as “Producers, Merchants, Processors and Users” which we shorten to the “PMs.”

The PMs are the category of traders analysts believe include a majority of the positioning of bullion banks.  It also includes large metals dealers, refiners, producers and large manufacturers that have a real need to lay off silver price risk using futures.  Many of those entities trade for their own book in both the COMEX and OTC markets, but no small number allow the bullion banks to manage their hedging (and metal)  for them and end up trading through the banks owing to their trading efficiency in that market. 

That is partly why the bullion banks end up with a large futures position.

To be sure bullion banks also trade futures for their own account.  But they warehouse and manage a very large amount of physical metal for themselves and for other clients in very large, soccer field sized “vaults” located in and around London and in other European and Asian money centers. 

Perhaps the most visible evidence of the large metal stockpiles is the commitment by JP Morgan Chase to BlackRock’s iShares Silver Trust (SLV) to provide up to about half a billion ounces of silver metal as primary custodian for the trust as needed. (SLV currently has its nametag on about 333 million ounces of those stored, LBMA approved bars of silver metal.)

Getting back to our note to Subscribers on the short positions held by the PMs, below is a graph of just the short positions held by all traders classed by the CFTC as Producers/Merchants…

(Source CFTC for COT data, Cash Market for silver prices.)

Below is a short excerpt of our commentary to Subscribers to go with it.  After mentioning that the chart of the Big Hedger short positions “does not fit the narrative” of some analysts who give an impression that the PMs and bullion banks are “massively selling” paper shorts in silver futures, we said:

“Truth is that the hedgers have been within a pretty tight range in total shorts for quite a while. (Between roughly 40,000 and 70,000 contracts short since about 2008.) Any objective review of the PM short position must conclude that the hedgers have not been overly reactive to the wide ranging price of silver metal. Instead, their pure short positions have been much more like an oscillator since 2008. (Moving higher with higher prices and lower with lower prices as one might expect from people hedging price risk.)

There is a good reason for that. It is because the Big Hedgers really are primarily hedging price risk in the futures market. The bullion banks are, of course, the largest players on the short side (in futures), but the majority of their trades are for clients who let the banks manage their hedging for them. Clients such as very large bullion dealers, large holders of physical silver metal, refiners, producers and all the rest of the silver bullion Trade. … The above chart has not fit the “Big Bad Bullion Bank” narrative since at least 2008…”

Again, looking at the chart objectively, we cannot help but notice that in the vast majority of instances as the price of silver rose, so did the amount of hedging and vice versa.  That is consistent with hedging, is it not?  If the Big Sellers were using shorts to hammer the price of silver wouldn’t we expect to see the opposite – at least at the beginning of the down moves?

Instead what the clear record has shown is that as prices rise the people involved in the silver trade are more motivated to hedge (to put on new shorts, resulting in higher net short positions for the hedgers).  As prices fall the hedgers are less motivated to put on hedges – just as one might expect to see on a bourse designed for hedging price risk in a global market.  

To state it simply, as prices go higher, hedgers want to lock in more of the higher prices. As prices fall their fear of lower prices ebbs. 

Perhaps even more interesting is that as silver more than doubled from August of 2010 to April of 2011 the PM short positions did not move outside the 40,000 to 70,000 contract range either way.  If the PMs were attempting to push the market one way or another, there is little in the way of short contract evidence to support such a notion. To the contrary. 

To see a class of traders with much more variability in their positioning we need only look to the traders the CFTC classes as Swap Dealers (SDs).  Below is the chart for Swap Dealer short positions for the same period for comparison. 


We would argue that the most recent pullback in silver prices was preceded by a much larger percentage increase in short positions by the (Goldman led?) Swap Dealers than the Producer Merchants.  The graph suggests as much.  Notice also right near the end of the graph that as silver began its pullback the Swap Dealers actually increased their hedges.  (A nudge?)


Enough about that for now.  It is not as if there are no games being played in the futures markets, but that is an issue for a another time.

Make no mistake, however, the silver futures market in New York is secondary and inferior in both size and importance to the physical and forwards markets cleared overseas.  The COMEX is where people go to hedge the price risk of their physical metal or their silver derivatives.  Although the COMEX is physical backed, and some metal is delivered and warehoused there, it is not the primary source the world turns to, to trade and clear large amounts of physical metal. 

The reported positioning of the largest, best funded and presumably the best informed traders of silver futures - (PMs), the positioning of people and firms actually involved in the metal Trade of producing, warehousing, manufacturing and delivery of silver metal -  just does not follow the bank manipulation through futures "script."  ... It is also pretty boring to look at.  


We will end this brief with our concluding comments to Subscribers.  We said:

"Finally, please do not confuse our comments above with the gold market, where it is clear to us that governments sometimes have interfered in the gold metal market in a bid to maintain confidence in their under-backed fiat currencies. ... (Governments no longer have access to large amounts of physical silver and have not had since China quit dishoarding silver in the middle of the last decade.)  

Having said that it is also clear to us that the various governments actually want (or do not mind) a higher price of gold as that weakens fiat currencies, thus rendering the nominal debt amounts easier to repay over time.  Gold is a quiet measure of actual (monetary)  inflation for now.  For evidence just compare the total U.S. national debt chart to a long term chart of gold to see a high correlation. 

They just don’t want that higher price to occur in a disorderly or frightening manner. "

That is all for now; Carry on.   


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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