In Ted Butler's Archive


What’s going on in the futures market for gold and silver may be the biggest financial clash of all time. Billions are at stake. Two weeks ago, the big commercials, 5 through 8 in size, bought back a hefty 16,700 short contracts in gold, moving completely opposite to the rest of the commercials. The most plausible explanation for the big buyback of gold short positions by the 5 thru 8 largest short traders is that one of these traders bit the financial dust and had to close out its gold short position. I have been looking for signs of a weak link among the commercial shorts, given the unprecedented $3 billion in unrealized losses currently attached to short positions in COMEX gold and silver.

If one of this small group of concentrated shorts moved to buy back its short positions, it would mean that another of the remaining big short sellers would have to increase its short position. Otherwise prices would soar because there would be few if any other sellers. The other big shorts would have to take up the slack in order to prevent a price runaway. Last week’s concentration data indicate that a member of the big 5 thru 8 commercial shorts has closed out its short position and was replaced by a member or members of the big 4.

This doesn’t sound at all like a fully open market transaction in which a big short would move to buy back in a transparent manner and accept free market sell orders to close out the short position. Instead, it reeks of an arranged trade (highly illegal) that the vast majority of market participants knew nothing about. The price action during the reporting week it which it occurred was highly orderly and no hint was given that a big short 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.

The driving force behind this extraordinary gold short buyback this week was the ongoing financial toll that has been placed on the commercial gold and silver shorts due to rising prices. Since the commercials are now underwater by the largest amount ever, my sense is that their backs might be up against the wall and it’s more critical than ever what happens next. Another $50 higher in gold and $2 higher in silver would put the commercials deeper in the hole by an additional $2.3 billion, bringing total unrealized losses to over $6 billion. Since the commercial short position is almost fully held by 8 traders, that would bring the average loss per trader to $750 million. Never have the stakes been this extreme.

Because the stakes are so high and because a collective commercial failure on the COMEX would have implications beyond profound, it is difficult to imagine it occurring. Yet such a failure must be considered one of two possible outcomes. Either the commercials succeed in turning prices lower and inducing significant technical fund selling or they will be forced to buy back to the upside for the first time in history. Furthermore, if the shorts manage to escape this predicament through lower prices, I can’t imagine them getting into this situation again. A reluctance on their part to go short again would free up silver (and gold) to establish price levels in harmony with supply and demand. For silver, that is definitely much higher. We are closer to a truly free market than ever before. Some kind of price resolution lies directly ahead.

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