by Ted Butler, SilverSeek:
I’d like to share what may be a different way of looking at the gold and silver market, but still remain focused on what has been the primary driver of price – changes in the COMEX futures market structure. It has become fairly common knowledge that prices rise when the managed money traders buy and prices fall when these traders sell. So great is the effect on price of this COMEX derivatives positioning that it is discussed in more commentaries than ever before. And that is due to what has become a clearly observable pattern of cause and price effect.
Let me first quantify the amount of gold in existence throughout the world in all forms as 5.6 billion ounces, an amount on which there is near universal agreement. Not all of this gold is thought to be available for sale at some price, such as religious and other artifacts and some jewelry, but much of it could find a way to the market depending on price. Quite arbitrarily, let me assert that 4 billion ounces of gold might find its way to market at some point, including all government holdings and the amount held by the earth’s 7.5 billion inhabitants. Don’t get caught up with the precise amount, as it doesn’t make much of a difference whether the number is 3 billion or 5 billion oz.
Just like in any investment asset, those entities and individuals which hold gold would prefer and would generally be benefited by a rise in the price. Conversely, all the holders of gold would generally be adversely affected by lower prices. This is very basic stuff and in no way is intended to trick anyone; I’m just speaking in very simple terms. In addition to all the existing physical gold in the world, there is a large gold mining and production industry that extracts 100 million oz of new gold each year; which in turn, is owned by all types of investors, all of which would prefer to see rising gold prices for the obvious reasons.
In summary, the holders of 4 billion oz of gold, as well as those who own the mining companies that extract 100 million gold oz annually, all have a vested interest in higher gold prices and virtually all would be financially damaged by lower prices. This is exactly the same point that could be made in any investment asset, from stocks and bonds to real estate – up in price is good for holders, down in price is not so good. Of course, it’s not simply a matter of good versus not so good, as investment assets and markets can get overpriced or underpriced, depending on collective investment behavior and other factors.
The difference between gold (and silver) and all other markets is that what determines price going up or down has already been established as positioning in COMEX futures. I’m not saying that futures positioning doesn’t exert pricing influence on stocks and bonds, because it does – just nowhere near the extent as in gold or silver. I’m not aware of any influence futures positioning has on real estate, or collectibles, but its influence is rampart among commodities.
Against all the holders of the existing gold in the world, as well as all the owners of the mining industry that extracts 100 million new ounces annually are configured those who stand to benefit should prices decline and who are worse off should gold prices rise. These are the short sellers, or those who bet on a price decline by selling that which they don’t already own in the hopes of buying later at a lower and more profitable price. Of course, if the short sellers guess wrong and prices rise instead, losses begin to mount as the buyback price rises.
While short selling in gold and silver takes many forms, such as short sales against mining company shares or metal ETFs and the buying and selling of options, the key form of short selling is the shorting of COMEX futures contracts. No need to reinvent the wheel here – it has already been stipulated by now that COMEX futures positioning is the main (if not sole) gold and silver price driver. Having established the physical market parameters of gold – 4 billion oz in existence and 100 million new oz produced annually, let me do the same with the COMEX futures positioning opposed to the physical market. In doing so, we happen to be blessed by exquisitely detailed and reliable data from a federal agency, the CFTC, in the form of COT and Bank Participation Reports.
Since COMEX futures contracts are derivatives contracts that means there is both a long and a short for every open contract. Up front, we know that the long futures contract holders’ interests are aligned with the owners of physical gold and its producers, as all benefit on higher prices and suffer on lower prices. The only entities not aligned with the interest of higher prices are the short sellers of COMEX futures contracts. Here’s where the CFTC’s reports are quite revealing.
The basic glaring fact is that the short positions in COMEX gold and silver futures are incredibly concentrated; meaning they are quite large and held by just a few traders. In both versions of every COT futures only report (legacy and disaggregated), the long form report gives detailed concentration data on the 4 and 8 largest traders’ holdings to the nearest contract. Let me make my point using the 8 largest traders, but I could do so just as easily with the 4 largest traders.
A quick word on the concentration data. As regular readers know, I’ve harped on the concentrated short position is silver for years and even decades. It is the key to manipulation, for without an extremely concentrated position, manipulation is impossible. And while I could never get the CFTC to admit that they monitor and publish concentration data as the best early warning sign of potential price manipulation (out of fear they might appear to agree with anything I wrote), there is no other plausible reason for the Commission to collect and record such data.
But as important as the concentration data is to the silver (and gold) manipulation, it is not just the CFTC that continues to ignore this vital information. Despite the literal explosion in the amount of interest now focused on the COT market structure approach, I can’t recall a single independent reference or article on the concentration data (not quoting me). That’s a shame, because the concentration data always provide insight vital to understanding what makes these markets tick. Not to consider changes in concentration data, particularly in COMEX gold and silver, is a waste of epic proportions.
In trying to understand why there is continued aversion to pondering the concentration data in gold and silver, despite the explosion of COT commentary overall, the only explanation I have been able to come up with is that getting the concentration data requires the additional step of doing a simple calculation involving multiplication in order to get a very precise contract amount. It’s certainly not a case of the calculation being difficult (although I do use a $3 solar-powered calculator that has to be 20 years old), I think it’s more a case of a lack of awareness about how to derive the concentration data. Let’s face it, when someone first observes the COT report, it looks like a mumbo jumbo of incomprehensible numbers; now I’m telling you to whip out your pocket calculator to create more numbers. Be that as it may, that’s the way it is.
The way the CFTC presents the concentration data, in percentage terms of total open interest, mandates one additional calculation and, quite frankly, I believe this prevents many from considering the data. And while I am not shy about criticizing the agency on a variety of matters, having considered this issue for many years, I’m convinced the CFTC is presenting the data efficiently. I suppose I would prefer the concentration data be presented in contract terms, but personal preferences aside, there is no real barrier to arriving at the data. Only two numbers matter, the net short positions of the four and eight largest traders; disregard gross completely and the concentrated long positions, as they don’t matter.
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