In Ted Butler's Archive


In gold and silver, it’s essential to conclude that the primary price drivers in the short to intermediate term are positioning changes in COMEX futures contracts, as indicated in the Commitment of Traders report. That’s why more people follow the report than ever before. Once someone grasps the report’s significance, there’s no going back. I’ve yet to see anyone who has seriously followed the COT report and grasped its relevance ever stop following it and embrace a different approach.

The current report chronicles a huge money game between two very specific groups of traders – the commercials (JPMorgan and the big banks) and the managed money technical funds. Take away these two groups of traders and the COMEX would not exist as we know it. The fact that these two groups account for upwards of 90% of all net positioning changes in COMEX gold and silver and are very small in total number (no more than 50 to 100 on either side), points to the absurdity of how prices are set. Absurdity notwithstanding, these two narrow trading groups determine gold and silver prices.

I have long observed that the commercials have made money at the expense of the technical funds for the past three decades. On rare occasions, the technical funds have managed to score a monetary victory, but in gold and silver, those technical fund victories are very few. This is my understanding of the gold and silver markets based upon more than 30 years of studying the data and following the money. When the commercials are heavily short and the managed money traders are heavily long (like currently) it is very likely that prices will eventually fall, until that market structure is changed.

There’s not much unusual about the current COMEX market structure, save for the enormous, record size of the current poker table stakes. In thirty years, the financial stakes have never been higher, nor the case for higher gold and silver prices never been more compelling. As such, I have trouble imagining how we avoid some type of price fireworks ahead.

I don’t think the price of gold and silver can continue to be driven as it has been driven over the past three weeks and past thirty years: by COMEX positioning between the technical funds and the commercials. This is strictly a paper game while the forces of the physical world seem more bullish than ever before, so much that JPMorgan has accumulated a physical silver position unequalled in history and appears to be starting to do the same in gold. Certainly, by virtue of its massive physical silver ownership, JPMorgan is immune from financial harm in the event silver prices explode. The delay in the silver price explosion has been the result of JPMorgan continuing to buy more physical silver well below $20 an ounce and looking to whittle down its COMEX paper short position. Now it appears JPM is attempting the same thing in gold.

However, the size of the current commercial short position on paper might be problematic for the other commercials. COMEX commercials appear to hold the equivalent of 35 million gold ounces short. That means every one dollar rise in gold creates additional unrealized open losses of $35 million for the commercials. Every ten dollar increase in gold adds $350 million to the open commercial loss and if gold rises as much as it rose over the last three weeks, the commercials will be out an additional $3.5 billion. And if silver runs as well, add in $450 million in additional open losses for every dollar rise in silver.

We’re talking really big money here. The commercials have never been out anywhere near this amount, so it’s impossible to know how they would handle it. Because the commercial short position is so concentrated in gold and silver the bulk of any potential loss will be taken by a small number of traders. The 8 largest traders in gold hold nearly 90% of the entire commercial short position and in silver it’s even worse – the 8 largest traders hold 100% of the commercial short position.

I’m not worried about JPMorgan not meeting margin calls. I’m much more concerned about the other commercials, large and small. Should gold and silver prices fly upward now, the losses to the commercials would be unprecedented and create financial stress never seen before. On a rise of $100 in gold or more and a rise in silver of a few dollars, some individual commercials will be subject to hundreds of millions of dollars in margin calls and I have real doubts as to whether all could meet those immediate financial demands. Not being able to meet margin calls on rising gold and silver prices was what did in Bear Stearns, so no one can rule out that happening again.

Given the seriousness of the situation, I still lean to a resolution that features a selloff and a cleaning out of the technical funds by the commercials. That would clear the deck for a big move up. We are at a critical juncture in gold and silver. Be prepared for volatility, violent price swings and ultimately much higher prices for precious metals, most especially silver.

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