Wednesday, November 12, 2008

COMEX Commercials Least Net Short Gold In Years

Got Gold Report 

By Gene Arensberg
10 Nov 2008 at 08:22 AM GMT-05:00

The big news this week is that the largest of the largest traders for gold futures, the commercial traders on the COMEX, are now the least net short gold they have been in years.

ATLANTA ( -- Regardless of whether or not the world is near the end of the giant financial “Charlie Foxtrot” we have all endured up to now, the largest of the largest traders of gold futures now have the fewest bets that the U.S. dollar price of gold will fall further than they have had in years. 

As of Tuesday, November 4, traders classed by the Commodities Futures Trading Commission (CFTC) as commercial held a collective net short position (LCNS) of just 76,406 out of a total 303,908 contracts on the COMEX, division of NYMEX in New York.  A net short position means that the trader profits if the commodity goes lower in price.

Yes, the current COMEX commercial gold net short positioning is the lowest in years.  Indeed, we have to go all the way back to June 7, 2005 to find a reporting week which shows a lower LCNS (67,052 then), back when gold closed at $424.87.

That doesn’t mean that gold can’t go lower still, it can.  It just means that the big dogs in the futures trading arena are not positioning like they think it will.  To the contrary.         

More about that very interesting and potentially bullish development below in the Gold COT section, including what it might signal the commercials’ expect, but first, let’s look at the gold and silver ETFs and the CFTC Commitments of Traders Reports (COT). 

Gold ETFs    

In a much quieter trading week than the past several, SPDR Gold Shares, [GLD], the largest gold exchange traded fund, reported no change to gold holdings over the past week.  The trust reports that 749.21 tonnes of gold bars are held for its investors by a custodian in London.

If an anticipated pre-November 15 rush of fund redemptions was going on during the week, it apparently didn’t affect funds’ positioning in gold ETFs.  At least not enough to cause gold ETFs to redeem shares and sell gold.        

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.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, increased 1.90 tonnes for the week, to 123.20 tonnes of gold held.  Barclay’s iShares COMEX Gold Trust [IAU] gold holdings showed a 0.02 tonne maintenance reduction to 64.50 tonnes of gold held for its investors. 

For the week ending Friday, 11/7, all of the gold ETFs sponsored by the World Gold Council showed a collective addition of 1.90 tonnes to their gold holdings to 910.20 tonnes worth $21.5 billion.

About the best we can say is that this week buying and selling pressure were more or less equal for the world’s gold ETFs as there were neither significant additions nor redemptions of metal from gold ETFs.

SLV Metal Holdings

Metal holdings for Barclay’s iShares Silver Trust [SLV], fell by a tiny 3.05 tonnes this week, probably a maintenance reduction, to 6,748.16 tonnes of silver metal held for its investors by custodians in London.

Source for data Barclay’s iShares Silver Trust.

SLV Benefits From the Silver Shortage

Contrary to what many people seem to think, SLV has one and only one prime directive.  That is for the price of the trading shares of SLV to track very closely (within a very small percentage deviation) to thespot price of silver metal.  That’s it.  That’s what SLV is supposed to do.  So long as it does that it is fulfilling its prime function as a trading vehicle.  SLV has performed superbly in that utility thus far.    

SLV was never designed to be a substitute for actual physical metal in hand.  It was not designed as an investment pool where people put money in for a specific amount of silver and then get it out later in a choice of cash or metal (although one can redeem shares for metal if over the minimum basket size).  It was not designed, as some physical silver purists wish, as a physical silver bank, although its value is derived from the fact that it holds just under one ounce of silver for each trading share (currently .9875 ounce per share). 

Forget all that.  That’s not SLV’s job.  SLV’s job is to constantly track in lock-step with the futures-dominated spot price of silver (less its accumulated reasonable 0.5% annual fees).  It is really quite simple and straightforward how SLV ends up doing that too.

For demonstration purposes, since it is what has been occurring, let’s consider when there is much more buying pressure than selling pressure on SLV.  Left alone under those circumstances, that is, without adding shares to the trading float and selling them into the market, the price of each share would quickly move higher than the price of spot silver when there are many more buyers than sellers in a given period.         

When there is more buying pressure than selling pressure, the authorized market participants (AMPs) for SLV have to add shares to the trading float in baskets of a minimum threshold of around 50,000 shares (currently about $492,000 worth).  The selling pressure of the new shares keeps the price of each share of SLV traded from running too far above the prevailing spot price.  In return for the basket of new shares being sold the AMPs cause a predetermined amount of silver (very close to one ounce per new share issued) to be deposited with the trust’s custodian in London. The current minimum basket amount of silver is 49,369.5 ounces for example. 

The reverse occurs when there is significantly more selling pressure than buying pressure.   

Isn’t it curious that as the paper-contract-dominated futures spot price of silver was bludgeoned by over 50% since its highs in March that SLV, the largest, most transparent and most liquid silver ETF, has shown consistently more buying pressure than selling pressure?   

Take a good look at that chart above.  Just since July silver, as measured by the world’s paper-contract futures markets, has careened lower from around 19 U.S. dollars to as low as $8 and change.  Yet, was that because people were dumping all their silver and SLV en masse?  Apparently not.  During the period from July 2 to November 7 SLV added a net 748.14 tonnes from 6,000.02 to 6,748.16 tonnes of silver bars on hand. 

Therefore, on balance, people were buying the heck out of SLV each time it tested a new low.  We know because the evidence of that continued buying pressure is crystal clear in the SLV metal holdings chart.  SLV could not have been adding 24 million ounces of new metal in the face of overwhelming selling pressure.  The AMPs only add shares and increase the metal holdings in response to positive arbitrage opportunity which comes from more aggressive investor buying pressure. 

To be sure, the AMPs would have certainly redeemed shares of SLV and had the trust sell off silver metal if there had been more selling pressure than buying pressure, because that’s just another arbitrage opportunity for them in that direction. The AMPs don’t care which way the market is heading, they make money coming and going.  They close gaps in the spread between the real-time current SLV share prices and the trust’s per-share net asset value or NAV.  (Good work if you can get it.) 

So, we can absolutely conclude from the chart that SLV has continued to see an abundance of buying pressure while futures markets priced silver lower in U.S. dollars.  That action, of course, removes some quantity of metal from the same sources that the futures markets also trade.  Namely the large, average 1,000-ounce, so-called “good delivery bars” found in London at the London Bullion Market Association’s (LBMA) member vaults and their counterparts in New York in the depositories of the members of the COMEX, division of NYMEX.

What we do not see is evidence that investors overwhelmingly wanted out of SLV and silver.  What we do not see is evidence to support the theory that there has been more investor selling pressure than buying pressure for SLV.  To the contrary on both counts. There are other, more sinister reasons for the plunge in spot silver prices and we covered those in the last Got Gold Report.

Persistently High Premiums    

Many think part of the strength of silver ETFs stems from the enormously high premiums for silver (and gold) metal in the real physical bullion market.  As silver futures prices fell off a cliff, already tight supplies for products like 100-ounce bars, silver eagles, 1-ounce prospectors, Mexican Libertads, old 90% silver U.S. coins in $1,000 face value bags and every other kind of small silver product, got so tight, so scarce, that premiums shot up to the highest levels seen since 1980.  Premiums are the amount paid and charged by dealers over the prevailing futures-dominated spot price.

Recently premiums have even gone quite high on the largest bullion items such as the 1,000-ounce silver bars that futures markets trade and ETFs use for their bullion storage.  That’s odd and unusual.  The reason?  They are practically and actually the only physical silver item left that can be sourced reliably in quantity, close to spot prices, but there’s a catch.  If investors want them, they have to wait until December for delivery on the futures exchanges, so even 1,000-ounce bars that can be locked in and delivered today carry an unusually high premium to compensate for immediate delivery. 

Heck, some well-known, very large and popular bullion dealers are charging the high premiums and also making customers wait until December or January for actual delivery!  That’s kind of a middle man double whammy.  If buying 5,000 ounces or more it makes little sense, because anyone can open a futures trading account and buy a contract for delivery in December.  It’s easy.  The details of how were in a special Got Gold Report two weeks ago.

It’s Demand Stupid, Not Stupid Demand     

In case the point of mentioning that ETF demand affects the futures market inventory was a little opaque, each bar of silver that gets allocated to the SLV custodial accounts is one less bar that can have the name tag of an LBMA futures-trading member, a COMEX futures trader, a manufacturer, or any other silver buyer in the bullion futures market warehouses.  In other words, silver removed from the market by ETFs means less silver available in the overall bullion trading market and therefore should be supportive of higher silver prices in the long term.     

It is becoming more clear now that the lack of physical supplies relative to very high physical demand, extraordinarily high premiums for silver (and gold) on the street, coupled with a shortage of available contracts on the futures markets that could be delivered into the physical market until December, increased demand for SLV even while the price of silver was falling.  SLV represents one way to participate in the lower price of silver until one can lock in and take delivery, either in a local bullion house, an online source or on the futures markets themselves.

Another New GGR Service

By the way, we hope to bring you a brand new chart in the next report that tracks bullion dealer premiums over the last three years for a few very popular bullion items.  We’re in the process of compiling the very interesting data right now.  Thanks to my friend Brien Lundin of New Orleans based Gold Newsletter for the excellent suggestion.   

Gold COT Changes  

In the Tuesday 11/4 commitments of traders report (COT) for gold metal the COMEX large commercials (LCs) collective combined net short positions (LCNS) fell another  8,670 contracts or 10.19% from 85,076 to 76,406 contracts net short Tuesday to Tuesday as spot (paper contract) gold ADDED $16.78 or 2.25% from $746.61 to $763.39.

Gold actually tested its weekly low near $722 on COT reporting Tuesday (11/4), so it is not surprising to see such a large reduction in LCNS, but gold rallied into the close that day to the $760s, over $40 higher than the lows. 

It is usually kind of bullish when the commercials reduce their net short positioning on an increase for the metal, but it is even more interesting is that this week’s collective commercial net short positioning (LCNS) is the lowest since June 7, 2005 (67,052 then), when gold closed at $424.87.  In other words, the COMEX commercials are the same level of net short as they were when gold was in the $420s. 

Readers might find it interesting that just since September 23, when gold closed at $891.90, the COMEX commercials have covered or offset 64,870 contracts of their net short positioning, which is 45.9% lower than the 141,276 net short contracts they held then.  That’s as gold fell $128.51 or 14.41%.  So, roughly speaking, as gold took that very last down leg on the chart below, the COMEX commercials got out of about 202 tonnes worth of gold downside bets. 

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

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

Perhaps even more interesting and dramatic is the reduction of commercial net short positioning since the period BMO’s Donald Coxe calls the July Massacre (the peak of LCNS and when the U.S. banks hammered the oil, gold and silver markets with an avalanche of short sales). 

On July 15 the commercials came in at a staggering 246,577 contracts net short with gold then at $977.31.  In the 16 weeks since, the COMEX commercials have reduced their short side bets by a whopping 170,171 contracts or 69% as gold fell $213.92 or 21.8%.  In other words, as paper-futures-contract-dominated spot gold fell 21.8% (as measured in U.S. dollars) COMEX commercials reduced their net short positioning by over three times as much percentage wise and covered or offset contracts representing a mind boggling 529 tonnes of gold (about $12 billion worth as of Friday’s gold price).  The reduction in short side bets has been colossal by the commercials. 

We should also mention here, that the $213.92 or 21.8% drop since July corresponds with a truly titanic 22.5% rise in the U.S. dollar index.  The dollar’s relative purchasing power (to a basket of other fiat currencies) increased from just over 71 to around 87 on the index in only 16 weeks, so using constant U.S. dollars, gold really hasn’t sold off all that much.  Gold has even made new highs in other currencies, such as in euro and in pounds sterling as examples during the extremely volatile July-November period if one wants a little proof of that. 

Here in the U.S. we’ve seen “gold falling” when in Europe or in the U.K. they’ve seen gold holding up quite well in other words.  The current very low LCNS is probably every bit as much a statement of the COMEX commercial trader’s expectations of the near-term direction of the U.S. dollar index (they expect the dollar to fall soon) as it is for their expectations for gold metal itself.  

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

As is readily apparent in the above chart, the most recent commercial net short positioning is quite low both in nominal terms and as a percentage of the total number of contracts open.  So is the open interest.  Low, that is.  As of Tuesday the total open interest for COMEX gold was a paltry 303,908 contracts.  That’s the lowest total open interest since July 4, of 2006 when gold was at $616.91. 

Under more normal market conditions such a very low LCNS would be extraordinarily bullish, especially the low percentage of LCNS to the total open which, up to now at least, has been a fairly reliable bullish indicator below 27%.  Now that we have transitioned into a market that is abnormal in the extreme, it will definitely be interesting to see if this indicator remains reliable.

Should gold catch a bid in the coming few weeks, then this indicator is (excuse me) ‘as good as gold.’     

Silver COT

As silver rose $1.01 or 10.99% COT reporting Tuesday to Tuesday (from $9.19 to $10.20 on the cash market), the large commercial COMEX silver traders (LCs) increased their collective net short positioning (LCNS) by a large 4,396 or 18.70% to 27,908 contracts of net short exposure, while the total open interest on the COMEX fell yet another 1,351 contracts to a low 94,365 COMEX 5,000-ounce contracts.

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 a still low 29.57%. 

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

It might surprise some readers, but spot silver failed to mark a new low over the past trading week.  Having tested as low as $8.40 the week prior, the best the bears could muster on the down side this past trading week was the $9.70s Monday and Tuesday.  Silver did manage to record a slightly higher high for the week, but only briefly. 

Repeating from the last Got Gold Report, written with silver then trading at $9.35:  “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.”

Odds and Ends

The gold:silver ratio (GSR), which reached a 16-year high a month ago of 88 ounces of silver to one ounce of gold, continued the expected contraction.  As of the Friday close the GSR was 73.61 ounces of silver to one ounce of gold using cash market closing figures. 

To that we add that just since October 17, the inventory of silver metal of COMEX depositories has dropped by 3,372,466 ounces and now threatens to drop below 130 million ounces.  That’s metal leaving the COMEX for the physical market or for industry as suggested in the last Got Gold Report.  So long as the futures markets continue to grossly under price silver relative to the popular physical markets, we can expect that trend to continue and probably to accelerate into December. 

Some very respected mining and metals analysts think that as production of silver declines much more dramatically over the next few quarters (due to multiple mine closures) an actual physical metal squeeze could quite easily develop, so keep one eye on the visible metal inventories.   Manufacturers that must have silver in order to keep the factory doors open will start hoarding physical metal instead of relying on paper futures contracts if even a hint of a squeeze surfaces, similar to what happened with copper a couple years ago.     

End Notes

We managed to get through the worst of the worst news in the credit freeze and now the TED spread, although still high, has returned to levels that no longer suggest financial Armageddon.  At least for now.

We had the potential guillotine of the U.S. elections pass and the riots some feared didn’t materialize.  Once again we see a peaceful and orderly transition of power in the U.S.  Thankfully, the way too long election season has ended.  Pity the winners. 

The height of fund tax loss selling season came and ended October 31. Now people are holding their breath, wondering how much of the $1 trillion in hedge fund investments (it used to be just under $1.7 trillion) will be called out for redemption between now and November 15. 

In all the panic and market mayhem it’s easy to forget about geopolitical risk and what happens to gold when a wheel falls of the global security wagon.  It seems quiet right now, but that’s probably only because the crazies of the world decided to cool it until after the U.S. presidential election.  Well, actually they are probably waiting until Mr. and Mrs. Bush hand the keys to the White House over to the next occupants. 

Terrorists seem predisposed to push their world-domination ideas more when they sense weakness in their adversaries. Right now, with the western world dealing with a full-blown financial crisis and a U.S. in government transition, it would not be at all surprising to see them resurface.

Now the Russians are deploying missiles to their borders in a provocative act in the waning days of the current U.S. administration…

Finally, the governments and central bankers of the world have pretty much all decided that printing currency is the answer to this financial and banking threat.  Lots and lots more dollars, euro, pounds sterling and yen will now be out there.  What leverage used to accomplish is now being replaced by an actual mountain of paper and electronic dollars.  That’s ironic, isn’t it?    

At the same time the newswires are flooded with reports of mining companies having to close existing mines due to low prices of metals.  New mines that were due to come on line are also being shelved.  So, at the same time that we have the highest premiums since 1980 for physical gold and silver – when one cannot actually find gold and silver bullion at anything even close to the futures-dominated spot price - we learn that there is a huge increase in the number of “currencies” out there about to be chasing a vastly reduced amount of physical production.  

Short term virtually anything is possible in this crazy futures-dominated market, but shouldn’t that be a potent recipe for an explosion in precious metals prices over the longer term?  Got gold?  Got Silver?  Got mining shares?    

Got Gold Report Charts

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


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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