COMEX Swap Dealers Hedging a Massive Long Play on Silver?
HOUSTON – We have just two stops to make on today’s rabbit trail, but both of them “count” and both are pretty dang important. Today we will be looking at what some are calling a “too-high, too fast” net long position in silver by Managed Money traders and then we will cover an aspect of the huge, record high short position in silver futures held by the mercenary Swap Dealers, and it’s a “keeper.” So, with no further preamble, let’s take the lesser of the two first and move on from there.
Have you noticed some of the analysis out there that says that Managed Money (MM) traders (large Specs, hedge funds, CTAs, CPOs, and other large traders who trade futures for clients, not for their own book), have a “too-high” net long position – that they have, according to those analysts, “put on too many longs in too short a time” which, they say, usually “precedes a sharp drop in the price of silver?”
Well, what that kind of thinking must stem from is a chart that looks like this when we look at the MM net long position as of July 25:
Similar charts source: CFTC for COT, Cash Market for silver or gold prices, GGR.
Yes, the MM net long position has jumped up really, really far in a very short time. But is that all there is to say about that? I mean, how exactly did the MM net long position go there? We can see that in the table below…
Let’s make, uh, “short” work of the table to make, but not belabor, a simple point. Starting with the left column and moving right, we begin the data at June 3 because it was the point at which the trend-following Managed Money traders were at their most net short (-7638 contracts, which is rare! And the net position is actually the right, shaded column). Next column is just the closing price for that COT week – from June 3 to July 22 the price of silver advanced a net $2.14 or 11.4%. Next column is MM long positions and for the period the MMs added a net 18,567 new longs for silver. Next column is the MM shorts and for the period the MMs covered an enormous 34,121 shorts! That leaves the spreading column (simultaneous long and short contracts that attempt to catch a spread but offset each other net) which we exclude anyway, so we can dispense with it here, but did you catch the huge difference between the amount of new longs versus shorts covered above? Managed Money covered almost twice as many shorts as they bought new long contracts. (Remember that for later in this message.)
That tells us a few things, not the least of which is that The Funds (MM traders) became convinced in late June that the downtrend which had been in place since February had ended and it had been replaced by a nascent uptrend. Otherwise the trend-following Funds would have had no reason to cover their shorts so fast.
So if you think about it, the appearance of the chart is a little skewed at the moment. Only about 18,500 of the additional net longs was in the form of new longs. All of the rest of that increase was short covering.
Look what has happened to the MM positioning in just the short two months in the table above. Managed Money went from a rare net short position to what is universally considered a large net long position. They “got there” mostly by covering what we have come to call their “insurance shorts,” which put upward pressure on the silver price for sure.
Let’s look at a simple silver graph for reference here.
Silver Daily small w GSR
Another simple point. If Goldman and the other Swap dealers tried to “break silver” (and gold, which we really don’t think they want to do longer term, but might to run the stops and book some prop profits every now and then using, I don’t know, maybe a bearish gold call ?) … it didn’t work. Instead, we are looking at what is essentially a Fibonacci 38.2% retrace, so far, which is what one expects in bull markets, not bears.
As we saw in this week’s recap of the large trader positioning in COMEX futures, there was not very much change to report week on week. That’s another way of saying that the large traders more or less played to a draw this week. That is despite Goldman’s jawboning and halfhearted sell-down, which got underway on Thursday. Using gold as our barometer, this sell jag didn’t even move low enough to challenge upper support (between $1285 and $1292).
We might just say that the large traders did manage to knock a little price off gold, but not really enough to change anyone’s thinking, bull or bear.
Swap Dealers Record Short Silver, but Likely Near Flat Overall
Over the past few weeks, actually the entire month of July, I have been bringing to the GGR blog my own fresh analysis of the CFTC commitments of traders COT reports. The work is apparently well received, especially in Asia and Europe because these recent articles have seen tremendous traffic from there to them, thanks to several portals who look for them and share with their readership pretty regularly. (And that is always appreciated by the way, when the story is linked and attributed.)
For example on June 27, in “Gold and Silver Disaggregated COT Report (DCOT) for June 27” I called attention to the fact that Managed Money traders were doing some rapid short covering as the price of silver advanced and also called attention to the new record high shorts for Swap Dealer commercials.
On June 28, in “COMEX Managed Money Traders Covering Silver Shorts Big Time” I tied the rapid Managed Money short covering to the technical breakout for silver, suggesting that it was now clear that Managed Money believed the downtrend is over (almost exactly one year from the left double bottom).
On Sunday, June 29, in “COMEX Managed Money Traders Cover One-Week Record Number of Gold Shorts” I called attention to the fact that Managed Money traders were in a huge hurry to cover their short exposure and were doing so in giant, record amounts. More evidence they think the gold downtrend is done.
On Friday, July 4, in “COMEX Heavy Commercial Gold Shorts Not Always a Sign of a Top” to counter some analysts who were running scared, thinking that the jump in net long positioning for Managed Money “was a sign gold was about to pull back,” I thought it was a good time to share that my own findings suggested the possibility of a short squeeze was developing and so it was a good time to look at the last “really, really good short squeeze,” the 2010-2011 glorious squeeze for gold. (There is one chart in that one that is a must-view if you haven’t already.) Key quote from that piece: “So, had someone assumed, in 2010, that the Swap Dealer heavy short position was a sign of a gold top, they would have assumed wrong in a very big way, missing the all-time largest gold rally ever.”
Here's the must-view chart, but don't miss the article if you haven't seen it...
On Wednesday, July 9, in “Swap Dealers ‘Goal Line Stand’ for COMEX Silver Futures in Jeopardy, Squeeze Very Possible Now” I focused on the possibility of a short squeeze and gave the data to back it up. I also called attention to the fact that some of the analysis out there was just plain wrong - embarrassingly so.
Key quote (well, one of many in that piece): “The trouble is, it is not really the Producer/Merchants, which is where most analysts believe the bullion trading banks report their own positioning and their positions taken for clients as well …, it is not, repeat not, the Producer/Merchants that are responsible for the huge increase in commercial net shorts for silver recently. Not really, and we are about to see it in spades.” … Round Up the Usual Suspects? No, Not Really…
On Saturday, July 12, in “COMEX Silver Traders in Commitments of Traders (COT) Mexican Standoff, Short Squeeze Remains Likely,” I highlighted the apparent “battle” between the way, way short Swap Dealers and the Way long Managed Money traders, knowing in the back of my mind that they actually are not in direct battle with each other, but not quite ready to address it on the blog. Key quote: “A sure-enough short squeeze, should one develop just ahead, could easily add $2.50 to $5.00 to the silver price in a relative blink of an eye - for starters. We can look back to the last great silver short squeeze for a sense of what might be possible if all the stars and planets align just "right."
It would not be the first time we have seen it unfold with huge imbalances in the COT positioning of the larger paper futures traders. Recall in 2010 that it was the Producer/Merchants then with more than 62,000 contracts net short and silver then threatening a breakout at $20.46 the ounce. Managed Money was the other combatant then too, with a really high number of net longs, well above 40,000 contracts then. … We all know the end of that story. Silver (and gold) broke out that September and never looked back…”
On Friday, July 18, in “Gold and Silver Disaggregated COT Report (DCOT) for July 18,” I pointed out that looks can be deceiving vis-à-vis the pullback for silver that week, which quite a few analysts thought meant that Managed Money was bailing from their long positions, incorrectly (me included). Instead we learned that during the dip Managed Money was a net buyer. Key quote: “When silver is being sold by someone at $104.5 million per minute for thirty minutes, and it fetches up at known upper support (the bottom of the green box, actually slightly above it), not even making it to a 38.2% retrace, it's time to raise an eyebrow isn't it?”
On Saturday, July 19 (a week ago) in “COMEX Large Trader Positioning for Gold Holds Surprises in July 15 Data” I pointed out that Managed Money was dug in and determined on the long side of silver futures, and mining shares indexes were sporting bottom-looking formations for the technical crowd. Key quote: “Rather than run for the hills, The Funds pared down their long positions a teeny bit, but then, apparently decided they would rather hold ‘em than fold ‘em.”
On Sunday, July 20, in “COMEX Mercenary Swap Dealer Banks Way Short Silver Too, Vulnerable to a Squeeze” I focus again on the possibility of a short squeeze, with emphasis on the way-too-short Swap Dealers again, in both gold and silver. Key quote (one of many): “Our view is that gold and silver are in the formative, difficult for many traders to believe, stage of a nascent, but powerful bull market. We believe that gold and silver are beginning to price in something ahead … something we cannot yet see clearly, but nevertheless is real enough to underpin this market with ample buying pressure, even into managed sell downs. … For evidence to support the stealthy bull market getting underway, we confidently point to gold and silver’s resilience in recent trade, the very powerful bottom-looking signature now forming in gold shares indexes, with inverted head and shoulders breakouts showing, clear outperformance by silver over gold of late, with the metals nearing a more favorable part of the annual cycle just ahead as July goes off the board.”
Finally, on Tuesday, July 22, in “COMEX Producer/Merchants in Gold, View from 30,000 Feet an Eye Opener” I reemphasize the point that the lack of Producer/Merchant hedging with gold under $1500 is a tell. Key quote: “The view from 30,000 feet shows us all that the people in the gold trade are currently positioned as though they do not believe that gold has any significant downside.”
That brings us more or less up to date, right up to this weekend’s offering. This, as we wait for a new short squeeze to either get underway or not. We end the month pretty much as it began, with the Swap Dealers extremely net short and Managed Money traders hugely net long, with no clear indication that either wants to liquidate their respective positions…
So, Saturday I was looking at email and ran across this note from a reader named Dave (no last name, no notion of where Dave is from, but the ISP is based in England.) Dave writes: “Gene, why would the swap dealer banks bet so heavily (58k contracts shorts) on silver being crushed in price?” …
Wait a minute, stop the tape. WAIT A MINUTE! Right! Right you are, Dave! You know, how, when you finally remember something and you want to just slap your own forehead – hard!? Well, that was me on Saturday. As something that has been rolling around my head off and on for some time, but I never committed it to paper, and thus gave it life outside the ether, until now, well, actually earlier today, voicing it to a commenter on the blog, and that is very simply this:
See the enormous short position for silver futures taken by the mercenary Swap Dealers? Well, part of the definition of what a Swap Dealer is by the CFTC is an entity that uses futures to hedge swaps. Right! Of course! …
Yessiree, Bobcat! In the words of Vik the Wonder Buzzard:
“That’s a keeper short position, ya’ll. It’s a record high!”
Now, think about it for one moment. If the Swap Dealers have put on such a huge short position in a very short amount of time, then who in the Sam Hill is the giant entity that has put on such an enormous long position via swaps? Slap! (Sound of my hand forcefully hitting my own forehead.) I know this stuff! How could I have not mentioned that all dang month! (Edit: Upon further reflection we don't know where the corresponding long position is placed or who might be the buyer. Technically we don't know there is one, but it is reasonble to assume the swap dealers put on a record size short for somebody to hedge something for somebody!)
In explaining it to a reader earlier, I said it this way: “John what will really mess with many of the "guppies" minds is when they do finally realize that the Swap Dealers are also not making a one-way bet using futures, but instead use futures to hedge their swaps (the same way that dealers use futures to lay off inventory risk). I may try to put something together on that today (and I may not too!, we'll see how far I get before my other research takes all my time).
Oh, I almost didn't make the point! Think about this. As of July 22 The Swap Dealers (and there aren't all that many traders the CFTC calls Swap Dealers) were holding just a hair under a record high short position in silver futures. (24,184 NET short, and a whopping, never-before-even-close-to 56,853 gross shorts or the equivalent of a giant, humongous 284 million ounces worth of futures SHORT.) I just got through saying that the SDs use futures to hedge their swap positioning.* (You probably know where this is going, but don't assume everything yet!, Just listen. I don't talk about this aspect very often for obvious reasons.) Now for the punch line: If the combined Swap Dealers have used COMEX futures to HEDGE their Swaps Book, then who in the Sam Hill took such a giant long position via swaps? Whoever it is HAS TO BE HUGE and whoever it is - is NOT going to be run out of town by the paper sellers. Not if I am right about who I think it is, and I am not saying yet. …”
(By the way, they could still get caught in a squeeze - they have to protect their Delta's too, like all traders, but who is the giant new long on silver, anyone? Care to take a guess on the comment section? (And yes, I have an idea who it is...)
* (Edit: I should have also included the clients of the swap dealers in this thought but didn't.) Also, don't forget about the recent Goldman/Ecuador swap deal. That is another long-term LONG position for Goldman that has to be hedged to capture a spread...(Edit: But even then, we cannot know who Goldman is representing on the long side of the swap. For their own account or for a client or group or whatever. ... There will be many more probably.
So, how about a quick review. It’s time to sew up this essay and have some dinner or some of you may prefer an adult beverage. Apparently huge, huge long silver positioning got bought from the Swap Dealers via, well, swaps, in late June and early July (Edit: Upon reflection it is impossible to know where the huge long is placed. We can only see the COMEX positions) – at about the same time that the Large Specs covered their shorts in a giant way – all at the same time a new uptrend was getting underway. Sound about right? Did I leave anything important out?
I’ll tell you what, people, I like the action. I guess short term anything is possible, but this looks like as bullish a setup as I have seen in decades. How can I relate it in a paragraph for everyone: Let’s try to close this message doing just that!
It’s not JUST that the short position is heavily concentrated into just a few really big swap dealing banks… but that is a reason to point out how isolated they have made themselves in terms of futures and the really important unanswered question is: WHO IN THE SAM HILL TOOK ALL THAT LONG ACTION THAT HAD TO BE HEDGED VIA SWAPS? … It’s not just that the Managed Money traders got religion a month ago and quickly, very quickly dumped the lion’s share of their record high short silver position that peaked in June… but that is a reason to look for dip buying and heavier than normal support on those dips and you can bet THEY know who the oversized long silver player is on the other side of those swaps … It’s not just that mining shares have shown bottom-looking signatures recently, but they have done so while putting in fantastic, historic, classic technical patterns doing so, like “inverted head and shoulders reversals/bottoms” for example. Annnnnnnnd, the miners have done it on huge, in many cases RECORD volume. (That cannot be ignored.) … It’s not just that silver has been outperforming gold since May, that’s right May, moving from a nosebleed 67 ounces of silver to one ounce of gold down to about 63, which is still quite high, but moving in the “right direction.” When silver outperforms gold it is always a clear sign that money flow is positive for the sector. … It’s not just that the Federal Reserve has really no choice but to cause inflation, that Japan is in the terminal phase of the Keyensian endpoint and near a detonation … that Europe is in the beginning stages of Euro QE … and on and on and on down the list of reasons that underpin the precious metals.
That’s enough for a Sunday afternoon. Have a good one and hold onto something as this ride gets underway soon.
Gene Arensberg for Got Gold Report