U.S. banks dominate the COMEX
While those of us with a long bias can take some comfort in the larger reductions of net short positioning by the commercial traders (covered in the full Got Gold Report), we need to remember that as of right now the short side of the market is literally dominated by just two big U.S. banks. When the regulators, the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), consent to allow just two traders to take overly large positioning on either side of a particular market, it leads to mistrust and angst among the public and market commentators. Such overwhelmingly large positioning also provides ammunition to conspiracy-minded commentators who constantly blame price movements of silver (and gold) on deliberate action by sinister members of a secretive “cartel” intent on suppressing the price of gold and silver.
Some of the individuals advancing the notion of a conspiracy to suppress precious metals prices are bright, articulate and bring compelling evidence and research to the discussion regularly. We’ll undoubtedly have much more about that in future reports, but for now it has become increasingly difficult for the industry and regulators to ignore the so-called “conspiracy camp” and its growing legions of members.
Regardless if one believes in menacing cartel theories, and regardless of whether or not one takes the opposite view, (that most or all of the very large net short positioning of the two very large U.S. banks in silver futures are actually legitimate hedges offsetting long positions in OTC markets on behalf of the various clients of the banks), the current positioning by the two banks in COMEX silver futures is an example of an enormously concentrated futures position.
According to the latest Bank Participation in Futures and Options Markets report, as of March 3, 2009, two U.S. banks held zero long and 30,838 contracts short with silver then at $12.83 and with 93,051 COMEX 5,000-ounce contracts open. So, just two banks held net short positions equal to 33.14% of all the open contracts on the largest futures bourse in the world. The chart below shows the net positioning of the U.S. banks relative to the total number of all open contracts for silver on the COMEX, division of NYMEX.
According to CFTC COT reports, during that 3/3 reporting week all COMEX commercial traders as a group – all of them - were collectively net short a total of 38,704 contracts, so just two very large U.S. banks held a shocking 79.68% of all the commercial net short positioning on the COMEX. The graph below shows the two U.S. banks net short positioning relative to all COMEX commercials net short positioning since 2006.
One potential problem with allowing overly-large positioning by just a few players is the potential for those elite traders to get into the position of having to trade in a particular direction in order to protect their position. The incentive for a trader running 1,000 contracts to try to move the market with the weight of his own trading would certainly be much less than a trader (or two traders in this case) with 30,000 contracts of one-way exposure.
Sure, the COMEX is not the only market for silver in the world, but trading on the COMEX does indeed influence the trading for silver on all the other world markets, including the larger OTC markets based primarily in London. And sure, if silver were to be man-handled too low for too long buyers, acting in their own self interest, would step in and buy it back up to reality over time. Haven’t they already done exactly that in the real physical silver markets given the insanely high premiums for most physical silver products?
One could argue the silver market is relatively small, and therefore prone to manipulation because it doesn’t take all that much capital to move the futures markets. Perhaps over short periods of time it actually is. But, this report leans toward the idea that the silver market is global and deep enough to discourage even the larger players from messing around with it too much or too long.
On the other side of that silver coin, we also believe that the amount of physical silver available for investment by new investors is rapidly approaching a critical inflection point in the not-too-distant future. If we know it, anyone who would short the market knows it even better. We have to conclude that anyone who would consistently attempt to manipulate the silver market downward in the face of obvious and material supply constriction is either very stupid or is a phantom of coincidence.
With that in mind, in an era when regulators allowed the Bernard Madoff scam to go unchecked for many years, even though they were handed the scamster on a silver platter by others in the same business eight or nine years ago, a scam ruining hundreds or thousands of innocent investors; in a period when ANY silver product being sold on the street carries with it extremely high premiums due to overwhelming public demand; in a period when investors have had their confidence severely shaken in all markets; can the COMEX continue to allow such one-sided and concentrated trading action to continue? Perhaps more to the point, shouldn’t the COMEX explain publicly why it has allowed that very concentrated short positioning by just two U.S. banks?
Perhaps with more clarity would come more confidence.
AI
