Tuesday, September 16, 2008

Two US banks crushing the silver market

Got Gold Report – Banks Cover Gold Shorts, But Not Silver, Yet

By Gene Arensberg
15 Sep 2008 at 10:47 AM GMT-04:00

Following the U.S. Fed and Treasury Department’s blatant intervention raid on gold and silver to bolster the U.S. dollar, the few large U.S. banks that hammered the futures markets with an avalanche of short futures sales have covered most of the short contracts in gold, but not silver, yet.


ATLANTA (ResourceInvestor.com) -- On September 1 the Got Gold Report documented the blatant concentrated attack by three U.S. banks on both gold and silver futures on the COMEX, division of NYMEX.   As everyone knows, the cash market spot prices for gold and silver are largely influenced by paper futures trading on that bourse. 

In a separate August 25 Got Gold Report, we looked at the same issue for silver.  This report concludes that gold, silver and mining company investors were sucker punched by a few very large U.S. banks, probably at the behest of the Treasury Department and the Federal Reserve which in June faced an almost certain loss of confidence in the U. S. economy and perhaps just as importantly, in the U.S. dollar, unless they “did something” to stem growing fears.

We Should Have Known  

In retrospect, maybe we should have known.  Back in June, when Treasury Secretary Henry Paulson, Fed Chairman Ben S. Bernanke and even President George W. Bush all came out and jawboned the U.S. dollar higher in the same week (very remarkable), maybe we should have known that something unusual was about to happen.

Oil was trading in the $140s. Gasoline was an unacceptable $4.50 per gallon.  Gold and silver were rising back toward their March highs due to global fears and uncertainty. Agricultural commodities had been marking new highs and price inflation was heading north fast. Rumors were swirling about banks and bond insurers as the credit fiasco engine driving it all revved up to the red line.  

Obviously the Fed and Treasury went into crises mode.  There was very real fear of systemic risk in the financial sector in June.  The best evidence of that was the U.S. dollar index which was threatening to break to new lows, perhaps even below 70 on the index.  In a world where fiat currencies are not backed by anything more than confidence (and are therefore the largest confidence game in history) one thing that governments must do is to maintain confidence. Apparently that includes direct intervention in the supposedly free markets from time to time because that’s just what happened in the financial markets for gold, silver and the U.S. dollar.

It looks like the U.S. government, acting through those few very large (and probably Fed member) banks set out to crush the markets for gold, silver, oil and other commodities.  If successful, one beneficial result would have been to lower the prices for virtually all hard goods and agricultural products which would have the effect of lowering inflation expectations.   Fed Chairman Bernanke and Treasury Secretary Paulson must have reasoned that direct intervention was warranted in this unusual case rather than waiting for the free markets to perform their time honored function of supply/demand price discovery. 

Unfortunately, Treasury Secretary Paulson’s bazooka blast aimed directly at the futures markets worked very well, but perhaps it worked too well. All that artificial  selling into the COMEX by the privileged few Fed member banks crushed the gold market as the government expected it would.  Gold has since lost $200 or more in value and silver has since lost as much as a shocking $9 in value or almost half.  That in turn caused a runaway panic among gold and silver investors everywhere, which in turn caused massive panic selling and fund redemptions by investors in mining shares.

Premiums Very High          

The resultant disorderly crash in spot metals prices is causing significant shortages in physical metal in the U.S. as bargain minded buyers try to capitalize on the artificially low prices.  Buyers of physical gold face hefty premiums (the amount dealers charge above the current spot price) if they do try to buy today. At the same time gold scrap supply has dried up to a trickle putting additional pressure on existing gold inventories as we head into the busy season for jewelry.    

Premiums for silver have gotten so high that even during this once-in-a-generation panic high-percentage plunge for silver metal there has continued to be more buying than selling pressure in the largest silver ETF, Barclay’s iShares Silver Trust [SLV]. (More about that below).

Banks Cover Shorts in Gold   

For those keeping track of the banks’ net short positioning, remember that in the August 5 Bank Participation in Futures Markets Report issued by the Commodities Futures Trading Commission (CFTC), just 3 U.S. banks had gone from being $448 million net long COMEX gold futures on July 1 to an insanely large $6.8 billion worth net short August 5.  They went from being net long COMEX contracts covering 538,100 ounces to net short COMEX contracts representing 8,222,800 ounces in one month.

A new CFTC report as of September 2, when gold had by then fallen to $805.67, shows that the three U.S. banks have since covered or offset a huge 52,996 or 64.5% of those short gold futures positions, down from 82,228 to 29,232 contracts net short.  Gold has since tested as low as the $730s on September 11, over $75.00 lower at one point.

Below is a graph showing the positioning of the three large U.S. banks in gold futures according to the September 2 CFTC report.

Note:  The graph only includes the net short positions of the three to five U.S. banks for the 24-month period shown.  The CFTC report also shows participation by non-U.S. banks, but this analysis focuses strictly on the U.S. bank positioning. For the last eight months of data there were only 3 U.S. banks included in this CFTC report.

As shown on the graph the three U.S. banks took huge net short positions by selling COMEX contracts in amounts sufficient to overwhelm the paper-contract-dominated market.  Once they had driven the market lower under the influence of their own trading, the banks have since covered a majority of that position.

Once again, in order to give a sense of the magnitude of the net short positioning taken by just a few really big and probably Fed member banks, the graph below looks at their positioning in relation to the entire COMEX commercial net short positioning.  This graph demonstrates that the bank’s net short positions were extraordinarily dominant and exceedingly large. 

If it isn’t obvious at first glance, consider that on August 5 just 3 U.S. banks had sold so many COMEX gold contracts short that these three privileged banks held 41.34% of all the commercial net short positions on the COMEX just one month after being net long.  That is an unconscionable abuse of trading power in the COMEX market in this analyst’s opinion. 

I suspect the reason it hasn’t made it to the front page of the Wall Street Journal yet is because it’s not that easy an issue for most people to wrap their mind around.  Here’s what it boils down to:  In an attempt to maintain confidence in the U.S. banking system and the U.S. dollar, the government used the parlor trick of intentionally crashing the gold, silver, and oil markets by having a few banks clobber them with obscene numbers of short sales.  And, as a bonus for the privileged few Fed member banks, not only do they get the pleasure of acting as the Fed’s commodity market executioner, they get to book huge profits for their trouble in the markets they knew they were going to crush. 

It probably ended up being surprising to them how many contracts it took to collapse the markets, but that ended up allowing analysts to discover the tracks.  

The “good news” is that now that gold has been artificially crushed and so much collateral damage has occurred, the banks responsible for that action are now covering their gold short positioning in a big way.  

No “Coverage” for Silver Yet    

In contrast to gold, the two U.S. banks that crushed the silver market evidently haven’t seen what they were looking for, because as of September 2, even after silver had been destroyed by $6.00 to $13.44, the miscreant banks had not yet covered or offset very much of their net short positioning.  (They may have by now, but the bank participation report inconveniently only comes out once a month.)

Remember that between July 1 and August 5 the two U.S. bank participants in silver hammered the COMEX silver market so viciously that they amassed a net short position of an unprecedented 33,805 COMEX silver futures contracts.  It is even unfair to call it a “net short” position, because their long component of the “net” was exactly zero.  In other words they were so sure of their actions, so sure they would crush silver, they did not even have a single long contract in silver on August 5. 

These two privileged (and probably Fed member) banks were sure because it was apparently their job to break the silver market.   And they did break it. 

As the chart above shows, even after breaking silver down to $13.44 (from the $19s) by September 2, the two U.S. bank actors had only covered or offset a mere 1,895 contracts to still show an unreasonably large 31,910 COMEX silver contracts net short. 

A net short position of 31,910 contracts is an obscenely large amount.  It represents the selling pressure by just two privileged banks of 159,550,000 ounces of silver or about $2.1 billion worth by just two banks. 

Once again, to give a sense of the intensions and the arrogance of these two U.S. banks the graph below looks at their positioning in relation to the entire COMEX commercial net short positioning – all the COMEX traders classed by the CFTC as commercial

Even after silver had been massacred to $13.44 on September 2, these two U.S. banks were still so sure of their silver-is-going-lower action that their positioning alone accounted for a nauseating 82.14% of all the collective COMEX commercial net short positioning. 

As we will see a little later, that is in conflict with what all the other COMEX commercial traders were doing.  

No one entity ought to be allowed to have such a large presence or effect in one market, but apparently the CFTC, the SEC, the Treasury Department and the Federal Reserve are either unconcerned about it, or they condone it.  For now.

Moving now from the bank participation report to our regular coverage of the COT reports.      

Gold COT Changes.  In the Tuesday 9/9 commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) fell a sizable 14,047 contracts or 13.0% from 108,031 to 93,984 contracts net short Tuesday to Tuesday as gold fell $28.67 or 3.56% from $805.87 to $777.00.     

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

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

The chart below compares the COMEX commercial net short position with the total open interest.  As of Tuesday, 9/9, the LCNS percent to total open interest had plunged to just 23.94% of all open contracts.  That’s the lowest LCNS:TO since August 21, 2007 when it came in at 27.86% and gold traded at $657.78. 

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

From a contrarian perspective, generally the lower the LCNS:TO the more “bullish” the chart becomes. 

Gold ETFs.  Over the past week gold holdings at SPDR Gold Shares, the largest gold exchange traded fund [NYSE:GLD], reported a reduction of 27.83 to 614.35 tonnes of gold metal.  As of Friday’s figures that’s equal to $14.8 billion U.S. dollars worth of gold bars held by a custodian in London for the trust.  

Source for data SPDR Gold Trust.

Interestingly, from July 21 to September 12, as gold plunged from $960.50 to $750.25 (-$210.25 or 21.9%), GLD metal holdings only fell from 705.59 to 614.35 tonnes (-91.24 tonnes or -12.93%).  GLD actually still holds more gold today than it did following the March-April swoon (33.90 tonnes more).   

Silver ETF:  Despite a continuation of the meltdown for silver over the past week, metal holdings for Barclay’s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, remained steady at 6,524.93 tonnes of silver metal held for its investors by a custodian in London.

Readers may find it interesting that since July 15, as silver was vaporized by $8.22 or 43% from $19.09 down to $10.87 SLV has seen consistently more buying pressure than selling pressure.  Indeed, over that period the trust increased the trading float and added 524.91 tonnes of new silver to its holdings. 

Source for data Barclay’s iShares Silver Trust.

Investors need to keep focused on the longer-term fundamentals for the white metal, nearly all of which remain extraordinarily bullish and nearly all of which continue to improve with time. Artificial selling pressure in the paper silver markets will likely not continue to overwhelm the laws of supply/demand/liquidity in the popular physical silver markets.  Judging by the extremely high premiums for physical today, it is only a question of time before the paper market re-corrects back to sanity.    

Silver COT: As silver fell a sickening $1.79 or 13.71% COT reporting Tuesday to Tuesday (from $13.06 to $11.27 on the cash market) the large commercial COMEX silver traders (LCs) decreased their collective net short positioning (LCNS) by a measly 1,345 (3.46%) to 37,503 contracts of net short exposure, as the total open interest on the COMEX edged 225 contracts lower (0.1%) to 116,403 COMEX 5,000-ounce contracts.

The chart above and the chart below demonstrate just how egregious the still large net short positioning by the two U.S. banks is, because if it wasn’t for their net short positioning the commercial traders on the COMEX would probably be net long silver with a $10 handle.  

When we compare the commercial net short position to the total COMEX open interest we find that the large, well funded and presumably well informed commercial trader’s net short positioning has fallen to 32.22% of all open COMEX contracts.  Remember, however, that as shown in the graph near the beginning of this article, just two privileged banks (and probably Fed members) held 31,910 contracts of that commercial net short positioning or a staggering 82.14% of it. 

In case the significance of that statement isn’t completely obvious, these two malefactor banks have been willing to steadfastly stick to their short positions while silver plunged nearly in half and most all the other commercial traders covered or offset theirs.   

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

A Few Observations

This article is too long already, but the importance of this issue compels a few more comments, in no particular order. 

By using the selling pressure of the U.S. Federal government to artificially lower prices on commodities, the Fed has settled for a quick fix – something that will make things look better very short term, but that action will undoubtedly result in harsh long-term consequences.  

The disorderly markets we have just witnessed will put strains on producers of all commodities and their production capacity going forward.  Before this parlor trick occurred, there was not going to be all that much new supply coming into the system for things like gold, silver, wheat, corn, and oil.  Now there will be less supply. 

Below $750 many marginal gold mines will be forced to shut down and production will diminish.  With each $50 lower in price that reduction of production will escalate.

One of the ironies of investing is that individuals tend to pull their money out of funds in panic at precisely the time they should be adding to those investments.     

Got Gold Report Charts

That’s it for this offering of the Got Gold Report. Until next time, as always, MIND YOUR STOPS.  Got gold?  Got Silver?  Got mining shares? 

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The above contains opinion and commentary of the author.  Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure:  The author currently holds a long position in iShares Silver Trust, SPDR Gold Shares and holds various long positions in mining and exploration companies.   

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