This commentary from Ed Steer* - with a couple of opening paragraphs from Ted Butler - looks at some hugely anomalous transactions on the U.S. gold and silver markets over the past week which appear to breach regulations - indeed Ted describes them as illegal. As Ed points out in his introductory paragraphs, before he gets to his own opinions on what may happen now in his Wrap-up: “Although the Commercial net short position in gold decreased by the expected smallish amount, there was a tiny increase in silver once again. But under the surface in the headline gold number, was an absolutely stunning change that both Ted and I were shocked to see. But it proves Ted’s premise that one of the smaller traders in the Big 8 category most likely had its financial back against the wall — and had to get bailed out in whole or in part by one or more the Big 4 traders.”
Ed goes on: “Even though the Commercial net short position declined by 6,454 contracts during the reporting week, Ted said that the Big 4 traders actually increased their net short position by about 8,400 contracts — plus the raptors, the commercial traders other than the Big 8, also increased their short position by around 1,800 contracts. But the biggest change was in the ‘5 through 8’ category, as they reduced their net short position by about 16,700 contracts. My immediate reaction when I saw that number was that one of the Big 4 — most likely JPMorgan, and I’m speculating here — had to come to the rescue of one of the ‘5 through 8’ traders that was about to go bust because of margin calls. And rather than have this trading firm cover their short position in the open market, which would have driven gold [and most likely silver] prices to the moon and the stars, and bankrupted everyone else in the process — a Good Samaritan stepped in to prevent that from happening, saving themselves, plus everyone else in the process — at least for the moment.
“If this is what actually happened, then it has all the hallmarks of another Bear Stearns moment, when JPMorgan was forced to take over that firm back in early 2008 when the same thing was about to happen there.”
Now the shenanigans which take place on COMEX where these kinds of paper gold transactions seem to be the norm rather than the exception - although perhaps not to the kind of extent noted above - tend to fall outside my own zone of understanding as far as relevance to overall gold and silver prices are concerned - apart from having an obvious impact in terms of setting (controlling) U.S. precious metals prices, which tend to be followed by the rest of the world’s markets, but Ted Butler has been following this activity for many years in meticulous detail and has no compunction in calling some of these activities, and their perpetrators as technically criminal in effect, but the authorities trusted with overseeing these markets seem to turna a continual blind eye to them.
In his introductory paragraphs, which incorporate charts, mostly from Nick Laird’s sharelynx.com site, Ed also notes: “The changes in this week’s Commitment of Traders Report are certainly unprecedented — and hint at desperation on part of the commercial traders, especially the smaller ones that don’t have deep pockets like JPMorgan, Citigroup, or maybe Canada’s Scotiabank. Firms like Morgan Stanley would certainly be a member of the Big 8 — and even Goldman Sachs could even be included in this group now. These would be five members of the Big 8 — and whoever the three remaining firms that are part of the Big 8, wouldn’t have access to unlimited funding like the Big 5 I just mentioned. Of course, with the probable rescue of one of the ‘5 through 8’ traders, all that does is elevate one of Ted’s raptors, the commercial traders other than the Big 8, into the Big 8 category by default — and as Ted correctly mentioned, you have to wonder about their financial ability to meet margins calls along with some of the other raptors that are close to Big 8 status as well.
“One thing is for sure — there’s big, big trouble brewing in River City at the moment — and how this is resolved remains to be seen”
Ed’s full introductory comment and conclusions are available on goldseek.com - click here to read
Ed’s wrap-up on what has been happening - with the intro paragraphs from Ted Butler now follows:
|I find myself thinking about the circumstances of how the big 5 thru 8 gold short which bought back its short position and came to be replaced by JPMorgan or another big short trader. This doesn’t sound at all like a fully open market transaction in which a big short moved to buy back in a transparent manner and accepting free market sell orders to close out the short position. Instead, it reeks as an arranged trade (highly illegal) in which the vast majority of market participants and observers knew nothing about as it was transacted. The price action during the reporting week it which it occurred was highly orderly and no hint was given that a big short fish was in trouble. My guess is that the big gold short which covered came into financial distress weeks ago and was carried by the exchange until the position rearrangement was finalized.
As such, someone had to know of it – certainly the short trader which bought back and JPMorgan or whoever else added gold shorts. The CME clearing house had to know and probably arranged the illegal transaction. While I am convinced few other traders were aware of the gold short in trouble, I am not sure if the CFTC was in on this or is as out to lunch as some (including me) profess. My hunch is that the CFTC was told after the gold short got in trouble but before the transaction was effected. In any event, this was an arranged transaction in keeping with a long COMEX tradition of arranged transactions (such as the Bear Stearns takeover and the May 1, 2011 silver price massacre). The only questions are was it enough and what now?
Even though I think I have a clear reading on what took place that doesn’t extend to blueprinting short term price action. As I’ve maintained all along, I’ve narrowed it down to either we go straight up from here or experience one last hard shake to the downside before lifting off for good. This week’s extraordinary big 8 gold repositioning just accentuates either outcome. Should the commercials lose control, prices will surge and it is hard to understate all the unintended consequences. I’m not an end of the world guy, but a genuine commercial failure could rock the world.— Silver analyst Ted Butler: 30 July 2016
It was obvious that the powers-that-be were all over the precious metal prices during the COMEX trading session on Friday, because if they’d been allowed to trade freely, the moon and the stars would have been the limit as far as closing prices were concerned. Then the resulting margin calls to the Big 8 traders alone would have certainly buried more of them and, as I said in my discussion on the COT Report, it appears that one of the smaller trader has already been bailed out.
Ted mentioned on the phone yesterday that the current paper loses for the Big 8 now total at least $3 billion dollars as of the close of trading on Friday — and those loses do not include the realized gains that they made earlier this year. He says it’s likely more than that, but wasn’t able to compute it more precisely during the time we spent on the phone yesterday, which was considerable. These are huge loses, but there’s now no question that for some of the small traders in the Big 8 category, plus most likely for some of the raptors [the commercial traders other than the Big 8] the writing is on the wall.
I’d guess that a resolution to all this is very near — and there are only three end-game scenarios that I can think of at this time of morning — and they are all ugly — and are as follows: 1] with the approval of the CFTC and SEC, both organizations that most certainly know what’s going on at the moment, we’ll get another JPMorgan-led drive-by shooting like we had starting on May 1, 2011 in silver. This time it would be in gold as well, plus platinum most likely. But as to how successful that might be in the current financial and monetary environment remains to be seen. 2] Another one or more small Commercial traders rush to cover — and we have a melt-up in precious metal prices, plus a melt-down in the U.S. banking system as the margin calls bankrupt ever larger players up the precious metal food chain as the price management scheme unwinds around the world, or 3] The CFTC is forced to close the COMEX in order save JPMorgan et al. That would save all the short players, but suddenly the precious metals would be selling on the spot market, with no futures and options attached to them. I can’t even begin to comprehend what would happen to the financial market on a world-wide basis if that came to pass.
Ted was of the opinion that the possibility existed that these unprecedented gold deliveries we’ve been watching unfold over the last two or three months could be part and parcel of what’s happening now. I couldn’t agree more.
The other thing we talked about — and I alluded to in my discussion on the COT Report earlier, was the fact that with such huge volume and open interest, there could be all kinds of things going on under the hood in the COMEX futures market that can’t be seen in the COT Report, or at least that are not that obvious. But in the ‘obvious’ category — and as a ‘for instance’ the huge increase in the long position in silver in the Managed Money category this week. Who was that — and what was it all about?
There are many more questions than answers, but JPMorgan et al have now painted themselves into such a small corner that there doesn’t appear to be any more wiggle room left — and the first sign of big trouble was the apparent rescue of one of the Big 8 traders in the COMEX futures market in gold.
A cornered beast is a dangerous animal — and those caught in the price management scheme as it breaths its last, will do just about anything, legal or otherwise, to save themselves and the system that nurtures them. So this bears watching carefully in the days and weeks ahead, if in fact we actually have that much time left.
‘Push’ really has become ‘shove’ at this juncture — and I must admit that I’m on ‘Red Alert’ from this point onward.
How did it come to this?
*Ed Steer publishes a 5 day a week newsletter on gold and precious metals and on geopolitics and geo-economics which he finds relevant to the precious metals markets. It is a subscription publication but gives insights into what is going on in the sector seldom covered by mainstream media. To learn more click click on edsteergoldandsilver.com
Ted Butler is perhaps the doyen of all commentators primarily covering the silver markets, but also touching on gold given its particular relevance to the path taken by its less costly sibling. Again he publishes a subscription newsletter. To learn more click on www.butlerresearch.com