Will the COMEX need a golden rescue?

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

What is the COMEX Futures & Options market really all about?

By Julian Phillips*

Let’s take a deep look into COMEX in this article that describes COMEX today.

All of us follow COMEX in New York and assess the ‘net speculative long position’ there, so as to see the actual weight of opinion on the gold price.   It gives us a clear market opinion, after all.   But many of you out there may believe that COMEX is a very large factor in the gold price.   Should it be?   

It would be easy of us or any other commentator to give their opinion on the matter, but would that be enough to be absolutely right?    So as to not give an opinion, we felt it important to go direct to COMEX to get the proper story.   We spoke to the Director of Metals Products in the COMEX Marketing Dept.   This is what COMEX says;

What you may have thought about COMEX

It may seem reasonable to you to assume that the ‘net’ position on COMEX would be covered by COMEX actually ensuring that this amount of gold or silver is held in one of their four COMEX approved depositories that are all located in New York city.   After all, delivery of the gold and silver is effected via electronic warrant.   

This would reassure us that COMEX dealings did affect the gold or silver price, would it not?   After all, supposing someone went short and could not deliver, who would supply the metals?   The implications are that COMEX is constantly adjusting their gold & silver holdings to make sure that no-one would be left without the metal they bought there.   Not so!

What really happens?


  • Does COMEX hold gold or silver to cover the net position to ensure market players will get their metal?   


COMEX does not ensure the net long positions are covered by gold or silver. But, COMEX does perform oversight and regulatory due diligence, to ensure that no adverse events disrupt the marketplace to ensure that all market participants meet their contractual obligations.   Yes, holders of COMEX approved depository electronic warrants can withdraw gold and silver from the depositories.

  • So where do the sellers of gold or silver come from?


– The Exchange takes all short notices tendered and matches them to the appropriate long positions per an Exchange system algorithm.   COMEX DOES NOT supply the gold.   The Seller supplies the gold as part of the contract rules.    The deliverable gold resides in four (4) COMEX approved depositories that are all located in New York City and the delivery of the gold is effected via electronic warrant.   Find our warehouse stocks on a daily basis on our website:     http://www.cmegroup.com/trading/energy/nymex-daily-reports.html

  • So if a seller doesn’t have the gold to supply to the buyer, what happens?


– COMEX positions in spot (current) month Gold are settled by trading out (rolling) of the position or engaging in the Exchange delivery process.   When someone wants to take delivery, they will establish a Long (buy) futures position and wait until a Short (seller) tenders a notice to delivery.

  • Where does the gold come from, that’s held in approved depositories?


– Should you hold to delivery, you will get your gold!   We match buyer and seller….one cannot exist without the other.   The majority of positions are settled via trading as opposed to delivery.   I cannot comment on where participants buy physical gold.

  • So how is physical delivery made?


– The gold contract is physically settled, meaning if you stay to delivery you must deliver gold or you receive gold.  If you trade out of your position or roll into other month you are paid or must pay the difference.  You must know that less than 1% of the trades actually go to delivery. 

  • What if a seller [Short] does not have the gold to deliver [naked short]?


– If a short does not have Gold to deliver he must liquidate his position by the last trading day.  A short which goes to delivery must have the Gold in an approved depository. This is represented by the holding of electronic depository warrants.   

  • What percentage of sellers are ‘naked shorts’


– Don’t know what percentage of shorts do not have physical gold and am not aware that any such statistics are kept.   I imagine you could get some idea by looking at open interest and comparing that to registered stocks [gold] in the depositories.   [Go to the above website and check the totals against the Commitment of Traders report on Fridays and look at “Open Interst” to get that number.]

  • Does the COMEX gold market directly affect the gold price?


– Our markets are used primarily for price risk management or financial reasons…..although we can be a source of physical metal we are not used for that reason.   The Exchange does not set the price – the market does.    The gold price is created by the buyers and sellers.

  The exchange in no way determines the price….we only report it.

Conclusion on COMEX

The long and short of it is that COMEX is simply a ‘cash’ market that does not deal in gold or silver or other items at all.   They simply provide a’ cash’ market where risks are laid off.   Yes, physical dealers in gold and silver may well use the market to ‘hedge’ opposing real physical positions so that they don’t face a price risk and yes, traders [or gamblers] use the market to take leveraged, speculative positions that are in no way backed by the physical possession of the metals.

To see how a true “Hedger” uses COMEX see the experience below of one trader protecting himself and profiting by the sound use of COMEX

How a true Hedger acts

Many investors are puzzled by the importance of the COMEX Options & Futures markets on the price of gold.

Take a look at the Diagram here [to enlarge it put your cursor on the corner and pull it diagonally] and you see that 86% of trading in gold Futures and Options takes place in London and New York.


Many may well believe that this translates into 86% of trading in gold [physical gold] takes place in these two centers. But this is not correct. The best way to illustrate this is to give you an example of a company that manufactures gold jewelry, as its main business.

This company needs to take delivery of a tonne of gold for the manufacture of jewelry between September and November and then deliver it to retail jewelers. Its business is manufacturing only, but it finds itself at the mercy of a constantly moving gold price. These moves can be large enough to destroy profit margins.

The company cannot afford to suffer the risks on the gold price.

It is at this point that they need to turn to the COMEX Futures & Options to lose the risk of the gold price.

The head of the jewelry manufacturing company decides on when they enter the contract to buy the needed 1 tonne of physical gold. This may be at a time well ahead of September, the delivery date. He may believe that the price he can buy for is the lowest price he will see before September. So he goes ‘long’ of one tonne of physical gold just as he needs to be, so he can take delivery in September to get on with the business he is in. He does this by buying it on a bullion market, or from a refinery, or a bullion dealer.

But can he afford to take such a risk with such a changing price in gold? The price may drop before then and he is left with a cost that may prove too much for his business.

So he ‘hedges’ by selling a tonne of ‘paper’ gold on the Futures market. Now he hasn’t ‘zero’ positions, but one physical long and one short hedge position, but zero risk, as any losses he makes on one position will be covered by profits on the other position.

Now the price drops horribly. He then believes it has gone far too low, so he buys another tonne of paper gold on the Futures market and makes a profit [technical] from his short position. Now he is left with his original physical long physical position, a ‘hedged’ short position and a new long position. The effect of his profits on his short position has left him, in effect, with a much lower price on his physical long position.

But he has a risk position, nevertheless, as the net position is; two long and one short. But netting out these is what he started with. So now the manufacturer still wants to cover his risk, although his net price is lower than the price he originally paid.

He is willing to open another short position to remove all risks if the price rises again. The price then rises again so he does open a new short position.  Now he has four positions, three of which are in the Futures market. Each time he makes a ‘profit’ on matching positions, in effect he lowers his entry price.

He is not speculating, in the modern sense of the word, as the only risk he really takes is on the original physical position.

It is not uncommon for such a hedger to have 50 plus positions against the original exposure. He doesn’t need a large change in price to continue increasing his positions. The reason it is not so speculative is that his original position needed hedging and subsequent actions are only undertaken when a profit is sure.

A speculator takes a view on the price itself with no underlying motive except price direction. He usually exposes himself to high risk that remains uncovered. Frequently, such traders take losses. We questioned one trading house, who informed us that even amongst professional speculators the success rate was only 52% at best amongst amateurs.

This example helps one to understand that COMEX is not about gold supply and demand, simply about price. It is a money market separate from the gold market or the pork belly market.

It serves a vital function, but should not lead the gold price but follow it.

Now look at the diagram we featured here once more.

*Julian Phillips is the publisher of the Gold Forecaster and Silver Forecaster newsletters