Got Gold Report – COMEX Commercials Least Net Short Silver In Years

By Gene Arensberg
27 Oct 2008 at 09:34 AM GMT-04:00

The Got Gold Report takes aim on the few big bullion banks which it contends have had a trading advantage in gold and silver futures markets and suggests investors take delivery of gold and silver from the COMEX in December to take advantage of the result of the short seller’s actions; artificially low prices.

ATLANTA (ResourceInvestor.com) -- A few very large short selling players have had their foot on the necks of all those who would dare to either hold on or try to buy into these distressed markets for all things gold and silver. They have had unchecked power now for months. They have had a great deal of “fun.” But the smartest of them are probably getting “smaller,” as legendary trader and Virginia son Dennis Gartman is wont to say. That is, according to commitments of traders data, the smartest and largest of the short sellers are getting smaller, not larger in their short positioning right now.

A few of them are probably turning net long by now or will be by the end of the month as the end of fund tax loss selling arrives on Halloween, five days hence.

Indeed, as discussed below for example, the largest of the largest traders of gold and silver futures, the traders classed by the Commodities Futures Trading Commission (CFTC) as commercial on the COMEX, division of NYMEX in New York, are actually now the least net short contracts for silver they have been in years.

By November 15, the deadline for most year-end hedge fund redemption notices, another layer of forced selling pressure will have come and gone.

Odds and Ends

Following up on an item in the last full report, the gold:silver ratio (GSR), which reached a 16-year high two weeks ago of 88 ounces of silver to one ounce of gold, has begun the expected contraction. As of the Friday close the GSR was 78.65 ounces of silver to one ounce of gold using cash market closing figures. The reasoning for conversion of gold into silver while the GSR is so high was discussed in the last Got Gold Report.

In other news, the flood of forced or panic sellers into a vacuum of no buyers now has great companies, the greatest mining companies on earth, selling for prices that discount gold to $300 and silver to $4. Talk about a fire sale on the HUI! The action in the world’s major equity markets is getting pretty frightful also.

Due to time and travel constraints, we’ll be moving faster than normal in this report, but long time readers of the report won’t want to miss the End Notes section (at the end of this report). It’s time to call a short selling spade exactly what it is. And, perhaps it’s time to do something about it.

First, let’s look at a few indicators.

Gold ETFs

Despite the very real fear of financial Armageddon in the air Friday morning, with Asian markets blood red, the euro cratering and DOW and S&P futures lock limit down pre-open, SPDR Gold Shares, [GLD], the largest gold exchange traded fund, reported a small reduction of 9.8 tonnes over the past week, to 747.06 tonnes of gold bars held by a custodian in London for the trust.

Source for data SPDR Gold Trust

So that the price of each share of GLD tracks very closely with the price of 1/10 ounce of gold (less accumulated fees), authorized market participants (AMPs) have to add metal and increase the shares in the trading float when buying pressure strongly outstrips selling pressure. The reverse occurs when selling pressure overwhelms buying pressure.

For the year 2008 so far, GLD has added a net 119.18 tonnes of gold bars to its holdings. For context, 119.18 tonnes is about 3.8 million ounces. The gold metal on hand in the COMEX warehouses as of October 23, was reportedly a little over 8.5 million ounces. Thus, so far this year one ETF, GLD, has added the equivalent of 44.7% of all the gold actually held on the COMEX. (No, that’s not a misprint.)

Put another way, during 2008, buying pressure for GLD so overwhelmed selling pressure that the authorized market participants had to add just under half the amount of metal that the COMEX (which still more or less sets the price) has to work with in its member’s vaults.

What is kind of interesting about that is that if you add up all the contracts that are traded on just the COMEX, all 319,472 of them as of last Tuesday, that amounts to contracts either side, long and short, of 31,947,200 ounces. That means that the COMEX is trading almost 32 million ounces of gold but only has about 8.5 million ounces backing those contracts up.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, declined 0.88 tonnes for the week, to 122.64 tonnes of gold held. Barclay’s iShares COMEX Gold Trust [IAU] gold holdings dipped 1.07 tonnes, to 64.52 tonnes of gold held for its investors.

For the week ending Friday, 10/24, all of the gold ETFs sponsored by the World Gold Council showed a collective decline of 10.78 tonnes to their gold holdings to 907.8 tonnes worth $20.8 billion.

In a world where everyone seems to be selling anything at any price in order to raise U.S. dollars, a reduction of 10.78 tonnes to gold ETF holdings doesn’t quite fit the horrible panic selling model of virtually every other investment class, does it?

SLV Metal Holdings

Metal holdings for Barclay’s iShares Silver Trust [SLV], also declined a smallish 61.43 tonnes this week to show 6,834.15 tonnes of silver metal held for its investors by custodians in London. That’s almost exactly where it was two weeks ago in the last Got Gold Report.

Source for data Barclay’s iShares Silver Trust.

Interestingly, during 2008 buying pressure for SLV so overwhelmed selling pressure the trust has added a total of 68,921,884 ounces (2,143.71 tonnes) of silver to its holdings. And for much of that time the COMEX paper-contract dominated spot market was falling?

For comparison, as of Thursday (10/23), the COMEX, division of NYMEX, reportedly held 131,530,256 ounces of silver in its warehouses. That means that during 2008 one ETF, SLV, added the equivalent of 52.4% of all the silver metal that the COMEX has in its vaults. One ETF and in less than one year.

Perhaps just as interesting, if we consider all of the 95,873 open contracts for silver on the COMEX as of last Tuesday, then we find that the COMEX traders are trading contracts either side, long and short, of 479.4 million ounces of silver but only have 131.5 million ounces behind it.

Let’s see; because of overwhelming buying pressure, during 2008 SLV had to add over half of the amount of silver that all the members of the COMEX have in total inventory, but the COMEX-paper-contract-dominated price of silver metal fell over 50% from its March peak?

How can that be?

Well, here was the October 7 positioning by the two U.S. banks in the CFTC Bank Participation Report as compared to the entire commercial net short positioning.

Exactly two U.S. banks continued to keep their thumb on the COMEX silver market as of October 7 when the silver price had already declined from $19.00 to $11.00 and change in the face of severe physical silver shortages of metal on the street. As of October 7 the two largest commercial banks still held a scandalous 23,308 net short silver contracts when the entire commercial net short position was 29,829 contracts. That’s right, two banks still dominated the small silver futures market with over 78% of all the commercial net short positioning.

It is not even fair to call the immoral bank’s position a “net short” position. The two U.S. banks were so certain of their dominance, they were so certain they could drive the futures price of silver lower still, that they did not hold a single long contract for silver on October 7. That, my friends, is the smoking gun and all the DNA we need to see.

Who is ever so sure of such a large position? Only those who can control the ball game.

No wonder that metal is now flowing out of the COMEX and into the physical market. Over 2 million ounces of silver have fled the vaults of the COMEX in just the last five trading days alone. As we will see a little later, the big U.S. banks have now apparently covered or offset some part, but not yet all of that overwhelming trading advantage over the rest of us.

Gold COT Changes

In the Tuesday 10/21 commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) fell a big 16,950 contracts or 13.48% from 125,743 to 108,793 contracts net short Tuesday to Tuesday as spot (paper contract) gold plunged $63.26 or 7.57% from $835.76 to $772.50.

Gold versus the commercial net short positions as of the Tuesday COT cutoff:

Source for data CFTC for COT, cash market for gold.

That’s a big drop in the LCNS, but it was also a big drop in the price of gold metal futures. However, all it did was to raise the premiums for physical metal on the street to the highest levels in years. Then dollar gold plunged again ending the messy week with a last trade of $735.39 on the cash market after briefly testing the low $680s in Friday morning’s panic. Interestingly, gold priced in euro was flat for the week at E581.42. So the big drop in gold was largely a U.S. dollar phenomenon.

The chart below compares the COMEX commercial net short position with the total open interest (LCNS:TO).

Source for data CFTC for COT, cash market for gold

Silver COT

As silver fell $0.82 or 7.51% COT reporting Tuesday to Tuesday (from $10.92 to $10.10 on the cash market), the large commercial COMEX silver traders (LCs) reduced their collective net short positioning (LCNS) by 4,903 or 18.04% to 22,268 contracts of net short exposure, while the total open interest on the COMEX fell yet another 2,723 contracts to just 95,873 COMEX 5,000-ounce contracts.

That is the lowest silver LCNS in years. In fact we have to go all the way back to March of 2003 to find a lower commercial net short position for silver metal. Back when silver was trading at $4.00 and change.

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market

For context, the chart below compares the silver LCNS to the total number of open contracts on the COMEX, division of NYMEX. When compared to all the contracts open, the commercial net short positioning amounts to an extremely low 23.23%.

Source for base data CFTC for LCNS, London Silver Fix for silver from LBMA until 2-26-08 then cash market

Silver has since tested as low as $8.68 during Friday’s panic morning trade before recovering back up to close at $9.35 on the cash market, about even with the previous week’s ending. Despite the huge plunge for gold, silver behaved relatively better this week, but the fear-driven action was unsettling to even the most grizzled of hard core trading veterans.

In a normal market the extremely low silver LCNS and LCNS:TO would be extraordinarily bullish. This is, however, a market that is anything but normal. Nevertheless, the intrepid among us should be on the lookout for signs of a breakaway run on the silver market. Most likely that will not get started until there is the threat of stability in the rest of the global financial kingdom. Virtually anything is possible short term. Be very careful out there.

End Notes

The futures markets have completely divorced from the physical markets for gold and silver as two or three U.S. banks continued to savage those who would take the long side in futures. These miscreant banks continued to reap (rape?) obscene profits from their short-selling domination of the paper contract markets, but COT data shows their positioning and therefore their ability to influence the market is growing smaller now.

It is difficult to imagine a more egregious abuse of trading power than that shown by the two large U.S. banks holding over 78% of all the net commercial short positioning in the small COMEX silver market on October 7. An enormously dominant position that, once allowed by regulators to be taken, the banks were compelled to defend. They have been relentless in that defense.

You can bet that if any two entities took a similarly large long position the howls of protest by the short side to the CFTC and the SEC would put an end to it pronto.

Why are such overwhelmingly large positions allowed for the hedgers and short sellers and not allowed for speculators? Because presently the rules of the game favor one side over the other on the COMEX. The rules allow position limit exemptions for the very largest traders which can claim they are hedging other offsetting positions, whether they are or not. That has to change before we will be on a level playing field in the paper bullion markets. We can all help to effect that change in the coming months and years with our actions and with our own voices.

In a year when just one ETF added the equivalent of over half of the entire COMEX inventory of silver, because of more buying pressure than selling pressure, it is extremely difficult to justify a drop of over 50% in the price of the metal.

We are repeatedly told by some captive analysts that the plunge in the prices of silver and gold stems from the forced selling by funds and panic selling by investors during this crisis of confidence in financial markets. Sorry, that argument is not supported by selling pressure in the largest, most liquid and most transparent markets for gold and silver. The gold and silver ETFs. (They have been adding metal consistently which indicates increasing demand, not distribution.) That argument is not at all supported by the real physical bullion markets for gold and silver. Every bullion shop everywhere has three things in common right now and have had for months and months. Virtually no inventory, intense demand and the highest premiums for actual metal in many years. That is not a sign of liquidation, it is a very real sign of strength.

The current commercial net short positioning for silver is the most bullish it has been since March of 2003. In more normal times that would lead to this report issuing a leveraged bullish call. (With appropriate new-trade trailing stops in place of course.) In the current environment, however, it’s just another in a long string of damning evidence that points to an artificially manipulated paper market that is not influenced by real supply and demand.

It points to a market dominated by a few very large hedgers and short sellers that have forgotten that there is a real physical market out there. Either that, or they arrogantly ignore the physical market with impudence and disdain for those of us who buy and sell in it and deign to dictate to us what the dollar denominated price of stuff should be. Again, that has to change.

That’s why everyone who wants to add significant quantities of gold and silver to hold for the long haul might consider taking delivery of some of the COMEX metal stocks in December as discussed in the Friday special Got Gold Report. The slogan: Delivery in December. (DID) Given the outbound flow of metal from the COMEX to the physical market in October, there may actually be a sense of urgency on that. We’ll see.

Now It’s Personal

On a personal note, I am saddened that we have not seen more vigorous opposition to the raping of the gold and silver markets by the two rogue bullion banks from the leaders of the gold and silver industry itself. Where are the leaders in the gold and silver industry, except cowering in fear and running for cover? Do they fear retribution in the OTC market if they try to put the spotlight on the two almighty federal reserve member and bullion banks? How far down will the price of gold and silver have to be driven before they will fight like men instead of running like mice?

Where are the industry champions? So far they hide, seemingly impotent, blind and mute. We should hear from them loudly and often. Encourage them to find their voices and to take up their pens. Do it now while the thought is fresh and spirit high.

Where are the regulators? So far the CFTC and the SEC protect the status quo in the face of obvious and compelling evidence of scandalous, heavy-handed advantage for one side of the market. They should be at the vanguard of the issue, but instead they too are silent.

Do Something Not Nothing, We All Matter

Producers that don’t have to sell their metal (admittedly very few of those) ought to consider buying metal (on the COMEX in December) to deliver into commitments, withholding new production short-term until the markets stabilize and come to their senses. Take delivery. Remove the metal from the COMEX and let them trade paper between themselves.

We can take a stand right now. Everyone can participate. Individuals, companies, funds and all investors that want to hold significant quantities of gold and silver metal for the long haul can consider taking actual physical metal delivery of gold and silver in the December contract month, as discussed in the Friday special Got Gold Report.

It isn’t just the big boys that will make a difference in this counter-assault on the very few, but dominant short sellers of gold and silver. Every purchase of gold and silver ETFs contributes to the cause. Every person that takes delivery of a 1,000 ounce bar of silver or a 100-ounce bar of gold from any source helps too.

Finally, we can’t say when this unnatural and devastating assault on silver and gold will finally grind to a halt, but when it does the pent up speculative demand and the vicious short covering rally that follows the ultimate lows ought to be neck snapping and dramatic. That’s of course if we manage to avoid financial Armageddon.

A few very large players have taken advantage of a situation where too many speculators left the field of battle leaving the hedgers and short sellers with the superior advantage. As in all things human, that situation is temporary. It is about to change.

Meanwhile, let’s remove as much of the physical metal as we can from those COMEX players who don’t respect it and move it into the physical bullion market where people do.

Got Gold Report Charts

• 1-year daily gold
• 2-year weekly gold
• 1-year daily silver
• 2-year weekly silver
• 3-year weekly HUI
• 2-year weekly Gold:HUI ratio
• 2-year weekly U.S. dollar index

That’s it for this offering of the Got Gold Report. Until next time, hopefully in about two weeks, as always, MIND YOUR STOPS.