Less than one month ago, I
started writing about the Raptors, which I defined as those smaller silver
(and gold) traders in the large reporting commercial category of the
Commitments of Traders Report (COT), other than the 8 largest traders. I
advanced a theory that suggested these smaller commercial traders were now
calling the shots in the COMEX gold and silver markets and were, quite
literally, eating the big traders’ lunch. Subsequent COT reports have
confirmed this theory.
The most recent COT, for
positions as of June 12, indicated that the raptors were active in silver,
but especially so in gold. In silver, the raptors bought 3800 futures
contracts on the big price decline, or almost two-thirds of the 6000
contracts they had sold at the previous price highs of the prior two weeks. The
raptors booked a profit of roughly $20 million on their previous sales and
bought back the majority of those sold silver contracts. In the latest COT,
the raptors are long 11,500 futures contracts. These are not insignificant maneuvers.
In contrast, the 4 or less
largest traders, or the T. rex’s, not only
booked no profits on the price decline by buying back any of their short
positions, but they actually sold short 2400 additional contracts, bringing
their total net short position to almost 50,000 contracts, or 250 million
ounces. This is the first time I ever recall the big 4 meaningfully adding to
their short position on a significant price decline. The big four hold almost
98% of the total dealer net short position. The eight or less largest shorts
now hold over 122% of the total net commercial short position. Without the
four and eight largest traders, there would be no commercial net short
position at all. How can the CFTC and NYMEX continue to ignore such blatant
concentration and manipulation?
As dramatic as the
raptors’ performance was this week in silver, their activities in gold
were truly breath taking. On the $22 dollar decline in gold prices during the
reporting week (compared to silver’s 72 cent decline), the gold
commercials reduced their total net short position by just over 38,000
futures contracts. While there is no doubt that such a large reduction smacks
of a clean out to the downside and must be considered bullish, the real
surprise was that the gold raptors accounted for almost all of the buying,
accounting for an astounding 35,500 contracts. In contrast, the big 4 gold
short only bought back less than 500 contracts.
The net result of the
unusual raptor buying in gold is that the raptors now hold the highest net
long position (over 42,000 contracts) in memory, while the big 4 hold a net
short position greater than 100% of the total net commercial short position. The
8 largest gold traders now hold a net short position that is more than 144%
of the total commercial net short position. These figures are near record
The data in this latest
COT report confirm, in the clearest terms possible, the central theme of the
raptor theory, namely, the growing competitive challenge to the big perma-shorts presented by the smaller commercial traders
over the past year. Furthermore, while the overall use of the COTs continues to be a very dependable analytical tool,
the study of the raptors has added to that dependability. In both gold and
silver, the smaller commercials now hold a substantial net long position
against the giant concentrated net short position of the biggest commercial
The good news is that the
current market structure in gold and silver is highly correlated with market
bottoms. To many, the analysis may end there. Further, the actions of the
raptors strongly suggest the game has changed. Considering that the raptors
have never collectively sold on price declines, risk appears low and profit
potential seems high.
The bad news is that, due
to the extreme levels of the short side concentration by the big traders in
silver and gold, it is hard not to conclude that this concentration is
tantamount to manipulation. The simple truth is that neither the CFTC, nor
the NYMEX would (or should) tolerate such an extreme degree of concentration
on the long side of the market. Regulation and the law should be about level
and fair treatment, with no regard to whether a manipulation be to the upside
or downside. Someone should explain this to the regulators.
Excerpts from the current issue of
The following paragraphs
are taken from an article by John Embry in Investors Digest.
"In the past, I have
alluded to the fact that I may be even more bullish on silver than gold in
the near future.
"There are many
reasons for this, including an imbalance between sustainable demand and mine
and scrap supply, rapidly shrinking above-ground inventories, exciting new
uses for silver in the medical and industrial fields, the introduction of
silver ETFs (exchange-traded funds) which greatly
increase investment demand for silver, and as the piece de resistance, the
existence of a remarkable short position on the COMEX.
"Ted Butler, to whom
I have referred to before and who, in my estimation, has done remarkable work
on the silver market, has looked extensively into this COMEX short position
and is totally appalled.
"Essentially, a group
of four or less large traders on the COMEX are short more than 250 million
ounces, representing nearly 150 days of annual production – a figure
that dwarfs the relative short position in any other commodity.
"The argument that
the short position is immaterial because there is a long for every short is
totally dismissed by Butler.
He argues that, in this instance, it would appear as if the short position,
given its size and more importantly its concentration, exists primarily for
purposes of manipulation.
"I strongly suspect
is on the right track here, but given the incredibly bullish fundamentals for
silver, I believe the short position will turn out to be a major positive
because a short in a rising market becomes a motivated buyer. If gold
approaches its all-time highs as the year unfolds, I have no problem
envisioning silver trading comfortably in excess of US$20 per ounce with the
shorts scrambling to cover."
John Embry is chief
investment strategist at Sprott Asset Management.
NEW YORK TIMES
Morgan Stanley Settles Metals Lawsuit
"Morgan Stanley will
pay $4.4 million to settle a class-action lawsuit with brokerage clients who
bought precious metals and paid storage fees, according to a court filing.
settlement, which is subject to approval by the Federal District Court in Manhattan, includes
$1.5 million in cash and other benefits valued at about $2.9 million,
according to a court filing on Monday.
"The suit, filed in
August 2005, asserted that Morgan Stanley told clients it was selling them
precious metals that they would own in full and that the company would store.
"But Morgan Stanley
either made no investment specifically on behalf of those clients, or made
entirely different investments of lesser value and security, according to the
We are told by sources
close to the situation that the case came into existence as a result of an
article we wrote in November 2004, entitled "Paper Caper." After
this article was published, we received complaints from some of our customers
that several big brokerages in New York
would not provide proof that their silver existed.
The premise of our article
was that investors should be wary of silver storage programs that did not
provide serial numbers for 1,000
oz. bars. Here’s an excerpt:
According to silver
analyst, Ted Butler, if you can’t get proof that real silver is in your
name, then the silver doesn’t exist. "Why
wouldn’t they give you the serial numbers if they had the bars?"
"The vast majority of
silver pieces of paper, such as foreign bank silver certificates, pool accounts
and all leveraged contracts have no real silver behind them. How could they?
We have billions of ounces of silver promised by various pieces of paper (all
with no serial numbers).
"What they have been
doing, issuing and letting their silver certificates remain unbacked by real silver, is an immensely profitable
business. For twenty years, or more, by not having to go out and buy and
store real silver whenever a customer buys a silver certificate, the foreign
bankers have been printing profits for themselves. Their customers give them
cash upfront, and not only do these banks have full use of that cash, they do
not have to pay any interest on that cash, and get this – they charge
storage fees for silver that doesn’t exist.
This story confirms and
validates a theme. Ted Butler has often written about. He told me that he
hoped investors learned from this episode. Specifically, he stated:
"There are hundreds
of financial institutions in the world who claim to store silver, where no
real silver exists. If you think you own real silver in the form of 1,000 oz. bars and
don’t have the serial numbers, you are kidding yourself. You have a
fiduciary responsibility to yourself and your family to get those serial
numbers. If you can’t get the serial numbers from your existing storage
provider, get a new storage provider. And do it quickly."
(No one can safely predict the future and
it’s possible that Israel
analysis will prove incorrect. Silver can go up, but silver can go down. It
is up to you to read, analyze, and arrive at your own conclusions. Prudence
requires we emphasize that precious metals may or may not prove to be
suitable for your consideration.)