by Craig Hemke, Sprott Money:
A few years ago, we wrote the salient article on the subject of derivative supply and demand on Comex. Given the recent price breakout and sentiment change, it’s likely a good idea to re-visit this topic today.
The post from 2017 dealt with Comex silver and the original link is below. However, since it is extremely important that you understand this dynamic, I’m going to ask the folks at Sprott Money to reprint the post in its entirely at the bottom of this page. Please take the time to read and study this full article:
While it is important to understand that action on Comex is perhaps only 25% of the entire, global digital derivative pricing scheme, Bullion Bank control of that “market” means that Comex manipulation has an outsized ability to impact price.
One of the primary tools the market-making Banks have at their disposal is contract creation. As interest in owning “gold exposure” on Comex grows, The Banks do not simply hold the supply of contracts constant. Instead, they create new contracts to add to the existing float. In doing so, they dilute the supply of contracts while at the same time making bets against the Speculator long interest…and this is often a winning, profitable bet for The Banks as their infinitely deep pockets allow them to simply outlast the margin-handcuffed Specs.
The current price and open interest action in Comex gold again illustrates how this process works. Over the time period of May 30 through July 1, price rallied $105 from $1285 to $1390. That’s a change of +8.2%. However, over that same time period, The Banks have increased the available float of Comex gold contracts from 443,231 to 591,164. That’s 33.4%! See below:
The first question you should ask yourself is: How much might price have risen if the supply of contracts had been held constant? That’s hard to say but it’s quite likely that it would have been a tad more than 8.2%.
The next question is: Where did all this new digital gold come from? The chart below from Nick Laird at GoldChartsRUs shows that Comex warehouse stocks have remained pretty constant over the past 90 days:
The final question then becomes: What the heck is going on? And the answer is…once again…Bank manipulation/management of price through contract creation.
By issuing 147,963 new Comex gold contracts since May 30, The Banks have created obligations for 14,796,300 ounces of digital gold. As shown above, the entire Comex vault structure only holds 8,437,760 physical ounces. So ALL of this new contract creation is once again a simple bet being made by The Banks against The Specs where The Banks create new contracts to meet Spec demand.
And you can see this in the Commitment of Traders data, courtesy of GoldSeek. Note that as of May 28, the Large Specs (hedge/trading funds, managed money, institutions) were NET LONG 86,688 Comex gold contracts while the Commercials (primary The Banks) were NET SHORT 109,954.
By last Tuesday, June 25, note the change of positions. The Large Specs are now NET LONG 236,554 Comex gold contracts while the Commercials are now NET SHORT 260,150.