Same As It Ever Was

by Turd Ferguson, TF Metals:

While we've all noticed some of the extreme and historic changes to the Commitment of Traders report over the past two months, the once/month Bank Participation Report belies the fact that nothing has yet changed. Whenever price rallies, The Banks are still quick to take the short side of the trade.

First, we should probably begin this post with the usual background and disclaimer:

We've written about these CFTC-generated reports so many times, it would be impossible to link every post. However, nearly every post began with these bullet points. Here they are again, just so that we're on the same page:

  • The CFTC's Bank Participation Report is issued monthly from a survey taken at the Comex close on the first Tuesday of every month. The report summarizes the combined positions of the four largest U.S. banks (primarily JPM, MorganStanley, Citi, Goldman but occasionally others) and the twenty largest non-U.S. banks (Scotia, HSBC, DeutscheBank, UBS, Barclays and others).
  • Always keep in mind that these reports might be utter nonsense and complete falsifications, designed to mislead you and get you leaning the wrong way. In 2014, JPMorgan was fined by the CFTC for "repeatedly submitting inaccurate reports relating to the required reporting of positions". See here:

Again, we know that what The Banks report as their "positions" provides an incomplete picture at best. Not only do The Banks maintain considerable long and short bets in the OTC market, they also operate numerous, offshore hedge funds and utilize these funds to take positions not included in the CFTC data as "commercial". So, what good are these reports? Similar to the weekly Commitment of Traders reports, the Bank Participation Report is only useful/interesting when considered historically...and that's what we'll do again today.

OK, with that said, let's take a look at the latest report that was surveyed on Tuesday, August 1 and released late last Friday, August 4.

If you've followed along for any length of time, then you know how The Banks make a market on the Comex. Once upon a time, The Banks operated as agents for the miners. The mining companies would hedge and/or sell forward their future production and would do so by having the agent Banks issue contracts on the Comex. The miner, through The Bank, would be on the short side of the trade and a speculator would bet on the long side. This is largely how the commodity markets functioned since they were first created.

However, over the past two decades, the amount of mining company hedging has declined to nearly zero. The most recent estimate we've seen showed only a total of about 270 mts of production in 2016 ( Even if ALL of this hedging occurred on the Comex, this would only represent a need for about 87,000 contracts of open interest. However, we all know that total Comex gold open interest routinely averages in the 450,000-500,000 contract range. Thus the difference between 87,000 and current open interest is simple Bank speculation.

Again, we can't attribute EVERYTHING to the Comex and surely some of the stated Bank Comex positions are offset with other positions in London and on the opaque OTC "markets". However, when we consider the history of the Bank Participation Report data, a clear trend emerges and its one that, unfortunately, is quite clearly still present today.

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