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In the weekly review, I referenced several news stories about
JPMorgan. A few hours after
publishing that report, another big news story made the scene – a
comprehensive front page story in Sunday’s New York Times concerning
the big banks and base metal warehouse shenanigans. In a nutshell, the story
alleged that giant financial firms, like Goldman Sachs and JPMorgan, had
amassed vast holding of metals warehouses and then engaged in schemes
involving artificial metal movements for personal profit (at the expense of
the consumer and user communities). http://www.nytimes.com/2013/07/21/business/a-...-gold.html?_r=0
This story was followed by news of senate committee
hearings yesterday and CFTC interest in the warehousing issue and more
commentary about the Federal Reserve having doubts about whether the big
banks should be allowed to deal in physical commodities. http://www.nytimes.com/2013/07/24/business/senate-panel-examines-potential-risks-in-big-banks-involvement-in-commodities.html?_r=0 This
issue is potentially as important as it gets. And it certainly begs the
question I have asked repeatedly - why in the world should big banks be
dealing in physical or derivatives on commodities in the first place?
Over the past few years, much has been written and
discussed about the Volcker Rule that would outlaw proprietary trading by
commercial banks. http://en.wikipedia.org/wiki/Volcker_Rule The
main purpose of the proposed rule was to end the risks to the financial
system caused by reckless speculation by banks backed by insured deposits
that were deemed too big to fail. The idea of the Volcker Rule is to get the
big banks out of proprietary trading and eliminate any need for taxpayer
bailouts for big bets gone wrong. While the big banks have held the Volcker
Rule at bay and prevented its enactment to date, it occurred to me that there
is an even more compelling reason why these banks, and especially JPMorgan,
should not be allowed to trade commodities for their own accounts. Potential
risk is one thing; clear and present damage is another.
Quite apart from the potential risk that taxpayers may
have to bail out a big bank on the wrong end of a speculative bet, there is clear
proof of a greater actual damage that is occurring today. We are all
suffering presently and mightily because of how JPMorgan and others conduct
their proprietary trading in commodities. These big banks are not interested
in trading commodities like any other market participant; instead their modus
operandi is not just to trade in, but to dominate markets. This is my key
point – JPMorgan’s intent and culture is to be the leader, to be
number one, in any business activity in which it is involved. Being number
one and dominating a particular business space may be fine in activities like
investment banking and issuing credit cards, but the problem with this intent
in commodity markets is that market dominance equals price control and
manipulation.
There is no justification for there to be market
dominance in any commodity market. In fact, this is the whole point in having
commodity law and a commodity regulator, namely, to prevent dominance by any
one entity. I’ve used the word “concentration” endlessly
and that’s just another word for dominance. If you allow concentrated
holdings and little real competition, you invite price-fixing. This is the
problem with the concentrated ownership of metal warehouses, but it is even a
bigger problem in our regulated futures markets, where concentration and
market dominance are verifiable.
The enactment of legitimate speculative position limits
would eliminate and prevent concentration and market dominance (as I’ve
advocated for decades) and it should be no secret that those who hold
concentrated and market dominant positions, like JPMorgan, have killed any
prospect of legitimate position limits ever coming into existence. If you
held a dominant market position that enabled you to control prices and your
own profits, wouldn’t you fight to keep that control?
Let’s face it – if I’m going to accuse
JPMorgan of concentration and market dominance (and, therefore, of
manipulation), I’d better be specific and accurate. In the past,
I’ve pointed out JPMorgan’s concentrated short position in COMEX
silver futures which had reached over 40% of the total net open interest a
few years back. Back then, CFTC Commissioner Bart Chilton verified my
findings publicly, but has since retreated from his past statements. So let
me update my COMEX silver concentration findings and include specific data on
COMEX gold.
In the CFTC’s Commitments of Traders (COT) and Bank
Participation Reports of February 5, my analysis indicates that JPMorgan held
a net short position of 35,000 contracts in COMEX silver futures. Once 50,000
spread positions are removed from the total open interest of 151,512
contracts (to arrive at true net open interest), JPMorgan held 34.5% of the
short side of COMEX silver on Feb 5, little real reduction from the 40% that
Commissioner Chilton confirmed years before.
Please allow me to state the obvious – JPMorgan
held a manipulative share of the silver market on Feb 5 and that controlling
and dominant market share was primarily responsible for the fall in silver
prices from $32 on that date to a recent low of $18 and change. For those
keeping score, JPMorgan’s historic rigging of the silver price lower
enabled the bank to reduce its share on the short side to less than 15% of
total current COMEX net open interest. Certainly if I am misstating anything,
I call on the CFTC or JPMorgan (or anyone else) to correct the record.
I’ve been writing a lot about JPMorgan’s
COMEX gold position recently and I thought it might be instructive to talk
about the bank’s concentrated and dominant market share of that market.
On February 5, JPMorgan was net short around 50,000 COMEX gold contracts,
with the price of gold at $1670. After removing approximately 70,000 spread
positions from total gold open interest of 423,982 contracts on that date, there
was a true net open interest on Feb 5 of 354,000 contracts. Therefore,
JPMorgan short position of 50,000 contracts (or more) made up 14% of the
entire short side of COMEX gold futures on a true net basis on Feb 5.
A 14% share of a market may not sound like much after I
just stated that JPMorgan had held a 34.5% share of the silver market on Feb
5, but silver is very special when it comes to being manipulated in both
level of degree and longevity. It would be a mistake to underemphasize the
significance of a 14% net market share in any regulated futures market,
especially one as large as COMEX gold futures with a total notional value of
more than $50 billion. Let me return to the significance of such large
percentages of concentration and market share dominance in a moment. First,
let’s look at JPMorgan’s current long COMEX gold position.
Based upon the most recent COT report, as of July 16, I
estimate JPMorgan’s net long position in COMEX gold futures to be
75,000 contracts. After subtracting 77,000 spread positions from total open
interest of 440,283 contracts, true net open interest in COMEX gold futures
is just over 363,000 contracts. Therefore, JPMorgan’s 75,000 contract
net long position represents more than 20% of the
entire COMEX gold futures market on the long side. First, JPMorgan had a 14%
market share on the short side and now they flipped that into a 20% share of
the long side, as a result of JPMorgan manipulating the price of gold nearly
$500 lower. These are extraordinary and dominant market shares and
unprecedented price rigs to the downside. To not see them as cause and effect
is to miss the obvious.
To get a perspective of market shares of 34.5%, 14% and
20%, you must measure them against some objective barometer. I would suggest
using the CFTC’s own formula for position limits as the barometer. The
formula (10% of the first 25,000 of open interest, plus 2.5% of the remaining
open interest) would call for a position limit in silver of around 5200
contracts in silver, and not the 35,000 contracts held by JPM on Feb 5 or the
14,000 contracts that JPMorgan holds net short now in silver. In gold, the
CFTC’s formula would call for a position limit of 12,875 contracts and
not the 75,000 that JPMorgan holds long now. Expressed in percentage terms, the
CFTC’s formula in gold would call for any one trader to hold not more
than 2.9% of the COMEX gold futures market, yet JPMorgan currently holds 20%
on the long side.
If you can remember back three years ago, I was bitterly
disappointed when the CFTC devised their formula for position limits. Many
thousands of public comments were sent to the Commission at my urging asking
that 1500 contracts or 1% (of the entire COMEX market or of total world
production) be the proper formula in silver. http://www.investmentrarities.com/ted_butler_comentary09-14-10.shtml
Not only was the base rate of the formula two and a half times greater
than the proper 1%, adding the much larger 10% provision on the first 25,000
contracts of open interest, artificially raised the effective rate to 5% for
smaller open interest markets like silver. By the way, this provision was
provided by the CME Group and was readily accepted by the CFTC.
As it turned out, I should have saved my disappointment
for the eventuality that even the much larger 5% position limit in silver was
too restrictive for the CME and JPMorgan. In the end, the enactment of
position limits approved by the CFTC in conjunction with the Dodd-Frank Act
was disallowed after legal action sponsored by JPMorgan. Now you know why we
don’t have position limits – because it would limit
JPMorgan’s manipulative hold on the market.
But by being specific and clear, I am hopeful that the
current scrutiny being placed upon the big banks for their dealings in
commodities might focus on the real issue – market dominance. This is the key issue and it has gone
unstated until now. According to the CFTC’s own proposed formula, no
one trader should hold more than 3% in COMEX gold futures, yet JPMorgan holds
20% currently. Why is that allowed? Years ago, the CFTC was successful in
alleging manipulation in the copper market by a trader from Sumitomo called
“Mr. 5%” for his share of the market. What should we call JPMorgan -
“Sir 20%” or “Your Highness 34.5%”?
The important point is that my analysis is based upon
publicly available data from the CFTC. That data indicate that JPMorgan holds
an unnaturally large and dominant share of the gold and silver markets based
upon any objective measure. Of course, a 20% or larger market share is not
unnatural from JPMorgan’s perspective or culture and, quite frankly,
that is the problem. JPMorgan is only doing in the commodities market what it
does in its other lines of business. But what it does elsewhere is
manipulation in the commodities market.
Some may question whether I should even raise the issue
of JPMorgan holding such a large concentrated and dominant long position in
COMEX gold for fear its forced disposal might pressure gold prices. I
understand those concerns, but as an analyst it would be dishonest for me to
remain silent in the face of such compelling evidence of wrongdoing by this
crooked bank. Besides, the chances of any immediate action by the CFTC are
remote. Still, it would be far better to remove JPMorgan as the dominant
participant in the commodities market and eliminate their incentive for
continued commodity manipulation. Certainly, I shouldn’t have to be the
one to urge the CFTC to do the job they swore to do, particularly when the
proof of market dominance and control is contained in their own publications.
Finally, there continues to be an
outburst of what I feel are misleading reports from within the
precious metals Internet community. Some of the reports, from declining gold
inventories on the COMEX, to stories about lease rates and backwardation in
gold, to predictions of COMEX default or sudden changes in contract delivery
terms, have my head spinning. Look, I’m bullish about the price
prospects for gold and silver based upon the market structure and the fact
that the silver cost of production is above current prices, but that’s
no excuse for spreading false information. The level of COMEX inventories has
little to do with a contract default. What would matter more would be short
contract holders refusing to buy back or roll over positions in the spot
delivery month.
A delivery default would kill the COMEX and it would be a
self-inflicted fatality. The CME knows better than anyone what the
consequences of a delivery default would be and they would take any measure
necessary to prevent it, especially now that JPMorgan is massively long COMEX
gold. The same goes for suggestions that the exchange would suddenly and
unilaterally alter basic contract delivery requirements or institute a cash
settlement. The term, futures contract, means there are rigid contractual
requirements which can’t be suddenly abrogated without that being
considered a legal default.
I suppose the CME could introduce new futures contracts
voiding the physical delivery obligations of the current contracts, but that
would take years and no one would deal in such phony contracts anyway. The
one thing that gives COMEX metal contracts legitimacy is the ability to
convert futures contracts into actual metal via delivery. The chance of the
CME initiating a contract default in gold or silver, regardless of what
warehouse inventories may be, are about as good as me stepping ahead of the
new royal baby in future UK succession plans for the throne. And I have to
add that I don’t understand any of the current discussion of gold lease
rates (and I am very familiar with metals leasing), for the simple reason
that none of them make any sense.
Let me be the first to say it – for a wide variety of reasons,
GOFO is goofy.
Instead, as I indicated on Saturday, one market participant,
JPMorgan, determines what will happen price-wise in gold and silver (and
other commodities). This is a crooked bank that has no business controlling
the gold and silver markets by its easy to document dominant market position.
It’s encouraging that there is wide discussion on the unnatural control
that big banks have on LME metal warehouses and that the Fed is reconsidering
the wisdom of allowing banks to deal in physical commodities. But the most
obvious danger of all is allowing JPMorgan to hold dominant market shares in
regulated futures markets.
Ted Butler
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