In Ted Butler's Archive


It has now been ten business days since the end of 2019. That’s ten days for the CFOs and top risk officials at the 7 largest shorts in COMEX gold and silver futures to ponder what to do about the record large mark-to-market losses booked at the end of last year. On Dec 31, the 7 biggest shorts in gold and silver booked a mark-to-market loss of $3.8 billion, or just over $540 million per trader on average. While the big shorts have been underwater on their concentrated short positions since the summer, they were able to rig gold and silver prices sharply lower into the end of the third quarter, September 30, when the open losses were reduced to around $2 billion. That’s of lot better than the $5 billion they were out at the price highs in early September.

Worse for the top financial managers at the 7 largest shorts (mostly banks and financial firms, both foreign and domestic), is that the New Year added an additional $1.6 billion making the total open loss $5.4 billion, or more than $750 million per trader. While these are open, rather than closed-out or realized losses, they are real enough to the organizations involved in terms of keeping the books and the advancement of additional collateral (margin) to the central clearing house at the CME Group.

The open losses to date already would rank in the annals of the largest and most infamous derivatives debacles in history; from Barings Bank (Nikkei futures) and Long-Term Capital Management (interest rate and equity derivatives) to Amaranth Advisors (natural gas futures) to JPMorgan (credit default swaps). Whereas the most infamous losses in history were taken by individual companies, my point concerns the relative size of past debacles and the one perhaps in the making in gold and silver.

The current situation in COMEX gold and silver futures is an open derivatives position yet to be closed out. It could turn out that the big shorts succeed in engineering sharp price declines in gold and silver and close out their big shorts at no loss or even a profit. That has always occurred on previous occasions of big concentrated short positions in COMEX gold and silver futures.  Then again, it is possible the big shorts won’t succeed in closing out their short positions at lower prices, but only at current levels or even higher prices. At this point, no one can know for sure which it will be – that’s the difference between closed-out and open positions.

The traders responsible for establishing the large short positions are typically young, aggressive and short-term-oriented. They trade on behalf of the institutions they work for, seeking gains that will result in bonuses and increased compensation. Should these traders incur large losses, they stand to lose bonuses and even get terminated, but since they are trading with the institutions’ capital, the losses are borne by the institutions, not the traders personally.

The CFOs and senior risk officials at the institutions, on the other hand, are responsible for safeguarding the capital positions of the institutions. In a real sense, these officials are the adults watching over the children (the traders). For more than 35 years, the senior officials haven’t had to scold or reprimand the traders much, since the traders never collectively incurred actual losses in trading COMEX gold and silver futures from the short side. The traders and the institutions did have to endure periods of time when the short positions moved against them, resulting in open losses and having to come up with increased margins. In the end, the traders were always able to rig prices lower and close out what were big open losses with no actual realized losses. Everything always ended up hunky-dory when the dust settled.

This was the history of the past 35 years in which gold and particularly silver were manipulated in price. The speculators, mostly the managed-money traders, would buy large numbers of futures contracts causing price rallies which were sold short by the traders at the big commercial institutions. These short sellers knew that there was a limit to how many contracts the managed-money traders could buy and they also knew that when the managed-money traders were done buying, they would have to sell and the commercial short sellers would then buy back their shorts at lower prices and take profits.

This is the repetitive wash, rinse, repeat cycle of futures positioning that has dominated gold and silver prices for three-and-a-half decades. Today there is now near universal recognition and acceptance of these facts because they are clearly spelled out in the weekly Commitments of Traders (COT) report. As regular and reliable as the COT report has been in explaining price moves, the positioning was inherently corrupt and manipulative because the big commercial shorts were invariably taking money away from the highly mechanical managed-money traders. In other words, changes in gold and silver prices had nothing to do with anything but the big commercials cheating the managed money-traders any way possible. The criminal charges against JPMorgan traders for spoofing (entering fake orders) are one example.

Now, however, there are signs that the big commercial shorts’ control may be coming to an end. Chief among these signs is the record open losses. For some reason, over the past few months the managed-money traders which would have always sold aggressively in the past when the moving averages were penetrated to the downside failed to do so in the fourth quarter. Without that expected selling, the big commercial shorts have been unable to buy back their short positions (or unwilling to buy back at prices which would result in realized losses).

Looming over everything is the positioning of JPMorgan, once the principal COMEX short seller. The big bank now appears to have an increasingly minor role on the short side. Far more important is that JPMorgan has used the low prices that it was instrumental in creating to accumulate massive amounts of physical gold and silver – by my count, at least 900 million ounces of silver and more than 25 million ounces of gold. When gold and silver rise, JPMorgan will be the biggest beneficiary, regardless of whatever it may hold short on the COMEX.

In a market rigged by a handful of large concentrated shorts for more than 35 years, I don’t expect them to go quietly into the night. Either the big shorts will succeed in smashing gold and silver prices sharply lower and inducing the managed-money traders to sell at these lower prices, or they will fail to do so. Should the big shorts fail to rig prices lower and buy back their massive gold and silver short positions, the consequences for the price are enormous. This is the vision that occurred to me more than 35 years ago, yet has failed to materialize through today. Despite that failure to materialize, I remain undeterred. This is something that must occur at some point, even if I am incapable of predicting precisely when it will occur. And in all the time I have studied silver, never has it looked more likely that the time of resolution may be at hand.

What would you do if you were in the shoes of a senior official who wanted to make sure your current extremely troubling predicament was not a continuing nightmare?  You would seek to eliminate any possibility of a recurrence and the only way to do that would be to order the short positions closed out. Such an order would turn the gold and silver world on its head. After all, the only reason gold and especially silver prices have been as cheap as they’ve been is because of the excessive and concentrated short selling by a handful of large entities. Remove that short selling and there would be no reason for prices not to explode. In essence, the big short sellers, should they cease to sell short, would remove the only selling force of consequence.

It’s not simply a case of no more selling and walking away – the short position must be bought back in order for it to be closed out. The moment there is an attempt to close out the massive concentrated short position a massive buy order will come into the market from a big former seller. Mechanically, this would create a selling vacuum in which prices would explode. Because the short position is so concentrated (meaning it is held by relatively few entities) any move by just one or two big shorts to buy back and close out short positions would automatically put tremendous pressure on the remaining shorts to do the same. That would be like spontaneous combustion – the sudden explosion of a buying force that feeds on itself until it burns out. The possibility that the big shorts are about to abandon the game that has controlled and manipulated gold and silver prices so vastly overshadows all other factors related to gold and silver that it is the only thing that truly matters.

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