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Gold futures market heading for crisis

IMG Auteur
Published : December 11th, 2012
931 words - Reading time : 2 - 3 minutes
( 14 votes, 4.3/5 ) , 5 commentaries
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Category : Editorials

 

 

 

 

I thought I had a good idea what disasters we might face in 2013, and then I saw the most recent US Commodity Futures Trading Commission’s Bank Participation Report for gold and silver. On the basis of recent BPRs these markets are heading for a crisis, which is generally unexpected. I shall break the reader in gently by looking at gold first.

The first chart below shows US banks’ net short exposure to gold up to December 4. Between February and August the US banks managed to reduce their net shorts from 104,717 to 57,689 contracts against a background of a declining gold price. This is logical, to be expected and sensible position management. However, when the gold price turned up after the August BPR, net shorts rapidly rose to new highs, and over the last month unexpectedly increased again while the gold price actually declined. This is a sign that the US banks, of which only five made returns for December, are having difficulty keeping a lid on the market that emotionally at best is neutral, but most probably somewhat oversold. This differs from an over-bought market with potential profit-takers to shake out, as was the case when gold traded at $1,900 per ounce and the same banks were able to bring the gold price back under control.





The next chart is of Non-US banks’ net shorts, which tells a very different story. From October 2011 these banks increased their short positions, with a sudden jump between August and October, before sharply reducing their net positions to 44,707 contracts this month. It appears that some of the shorts have ended up on the US banks’ books, pushing their shorts to uncomfortable levels as shown in the first chart.





The jump in these net shorts between August and October was comprised of sharp rises in both longs and shorts involving swap dealers and the other commercials. Longs more than tripled from 9,199 to 34,881 and shorts rose even more from 49,772 to 113,445 on a rising gold price. The likely explanation is that buyers materialised through some of these non-US banks, who hedged by buying futures contracts. A dealer or dealers at one or more other non-US banks saw the price go against their shorts and tried to kill it by massive intervention. Subsequently, when the US banks sold the market down from the October rally these non-US banks took the opportunity to reduce their shorts to more normal levels.

This information is particularly revealing, given that the Commitment of Traders Report shows a substantial reduction in the Commercials’ net position by 34,551 contracts for the week to the same date as the BPR, giving an impression of a market being brought back under control. The BPR suggests otherwise.

Silver

While there is a large stock of gold that can theoretically become available at higher prices, the same cannot be said for silver. We shall look at the position of the US banks first. The first silver chart shows that even though silver is trading well below its 2011 highs, US banks’ net shorts are substantially higher than might be expected. The long figure is down to only 625 contracts, while the shorts are 40,198, so these less-than-four-banks that reported last week have a net short exposure of nearly 200,000,000 ounces, or twice the estimated annual supply of silver available to investors after industrial demand is allowed for.





The final chart shows the non-US banks’ net shorts. Unlike their exposure to gold, these banks are in the same deep trouble as the US banks, having made the mistake of turning a broadly level book as recently as the August BPR into a record net short position on the August-October price rise. This is a vicious bear squeeze on them, which added to the US banks’ position amounts to a total short of 290,000,000 ounces. This figure compares with net shorts of only 120,000,000 ounces when the price was successfully taken down from its all-time highs early last year.





Conclusion

The silver does not exist to cover these short positions, and it will take very little further buying to set off a crisis in this important market. In the case of gold, there have always been central banks with physical bullion available to ease market shortages, but so far as we are aware the strategic silver stockpiles of previous decades are exhausted. There is therefore no price at which these shorts can be closed.

Bank positions in both silver and gold seem to have been adversely affected by “events unknown” from the August BPR onwards. All attempts by the banking community to regain control of these important markets appear to have failed.

Since the date of the latest BPR (December 4), there have been three serious attempts to reduce these short positions and each time the same $32.60 level has held firm. This suggests that a buyer or buyers larger than the banks are prepared to take them on by buying the dips. This price action supports anecdotal evidence that physical bullion in important markets such as London is in short supply.

On this evidence, and assuming the trend continues, there will shortly come a time where NYMEX will be forced to declare force majeure in this market, which they can do under their rule book. The consequences of this extreme action could well be destabilising not only for the price and demand for silver but also disruptive for gold.

Therefore, we must add the breakdown of precious metals markets to the list of systemic dangers we face in the New Year.

 

 

Thanks to Alasdair Macleod from www.goldmoney.com
Companies Mentionned : Bullion | First Silver | Metals X | Strategic |
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FinanceAndEconomics.org is the website of Alasdair Macleod, who has a background as a stockbroker, banker and economist. Alasdair is available for seminars, speeches and interviews. Please check on Services to get further detalils.
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Latest comment posted for this article
There is never a shortage of Gold as all of it that has ever been mined is still existence. It is all about whether that gold will be risked for the irredeemable and increasingly worthless currencies that it is priced at. That is in effect saying that t  Read more
S W. - 12/13/2012 at 6:06 AM GMT
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There is never a shortage of Gold as all of it that has ever been mined is still existence.
It is all about whether that gold will be risked for the irredeemable and increasingly worthless currencies that it is priced at.

That is in effect saying that those big players and established money who hold gold are increasingly reluctant to accept the narrowing basis between the spot and futures price.

Force Majeure is just another way of saying..."GAME OVER,STUFF YOU JOE PUBLIC"
Rate :   1  0Rating :   1
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OK. Perhaps I'm being dum, but is he saying gold & silver are going to spike up?
Exactly the point I was trying to make below.
What exactly is he trying to say? Typical economist, if you ask me. So obscure it is impossible to understand the point the author is trying to make.
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Well, this article is about as clear as mud. I thought I was following along until the force majeure comment. Is the author trying to say that the price of silver and gold will go down because there is not enough available silver and gold to supply the markets? I would have thought the scenario would have been just the opposite. If it became apparent to all that there was not enough physical silver and gold to supply the markets, then the markets would logically come to the realization that all the short positions could not possibly be covered, thus creating a short squeeze, with the price of silver and gold rising, not falling. Increasing the demand due to the inadequate supply. Economics 101, as far as I can remember.
Also, the following comment about "the consequences of this extreme action could well be destabilising not only for the price and demand for silver..." How could the DEMAND for silver be destabilized? Will the demand dry up because of the NYMEX declaring force majeure? Will industrial users stop creating their products because of this? I seriously doubt that. If anything, they would be clambering for supply (to carry on their businesses), which would drive the prices up, once again.
I understand that the author is an economist, which might make it difficult for him to write in plain English that could be understood by lay people such as myself, but really, is that necessary? Why write articles for the public that are obscure and un-readable? Stick to your text books if you want to write jargon.
I think at best, the article will be ignored. At worst, the author has just given the crooks at the CME/NYMEX a good idea about how they could screw the individual investor once again, jut as they did a while ago by raising the margin requirements on silver futures 3 times in as many weeks, thus crushing the price down over 40% Force majeure can be used in times of war and natural catastrophes, not because some bankster gets caught with their pants down and an illegal short position that cannot be covered.


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Goodness me, this so-called 'analyst' just does NOT get it! It is shocking the degree of ignorance of the true Gold markets amongst the stale and paid for "experts". One hardly knows where to begin to dismantle this piece, and give it some veracity and authenticity. Ok, let's start with the utterly absurd notion that there is, according to the author, a juicy big fat ready stock of gold available should the price rise. Unbelievably short-sighted and WRONG! There is NO supply of Gold Bullion available in any meaningful amount. Any that is available can only be purchased at many multiples of the current smoke-n-screen LBMA and Come price for paper gold, a price which -in truth- is merely a deposit price for Gold Bullion which will NEVER exist. It's a fraudulent price. And yes, there's a massive juicy stock of that imaginary gold available at any price.

But Gold Bullion hides when the price rises; it sits still, its owners' very reasons for holding it undergoing the starkest verification. It does NOT become available, it becomes even more UNAVAILABLE.

If you knew anything at all about the TRUE gold markets, you would know that Gold Bullion is and has been in hiding for many years. The BIS will get you access if you are a CB, and you'll pay the price of the true VALUE of Gold Bullion, many many times its paper gold price. There is an insider since 1978 who reveals the workings of the true markets, an insider for the past 40 years; see preciousmetalspete.blogspot.co.uk/ Get there fast, you need to learn!
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