We are all used to the bullion banks covering their shorts on Comex by waiting until the speculators are over-bullish and vulnerable to mark-downs that trigger their stops. Algorithmic traders go from long to short in a heartbeat as well, and they dump contracts into a falling market, speeding up the decline. We should say at this juncture that the Managed Money speculators are short-term, attracted by futures leverage, and their gold position is often part of a wider risk strategy deployed by hedge funds. They do not intend to stand for delivery. The wider investment world taking strategic portfolio decisions does not often get involved with gold, so the Comex gold contract has been a secular play.
The table below shows a typical set-up, in this case July 2016. The Managed Money category (296,106 — net 259,129 contracts) is close to record long. Open interest was 633,000 contracts and the gold price was at $1360, having run up from $1040 the previous December.
In the non-speculative category, the bullion banks (Swaps) had 56% of the shorts and the Producer/Merchants 44%. Mark-to-market value of the Swaps net short position was $25bn. Of the speculative longs, the managed money category (hedge funds) held 69%, and at 296,106 long contracts it was almost a record. There was a high level of bullishness; easy pickings for the bullion banks, who by the following December drove the price down to $1120, reducing their net shorts to under 50,000 contracts.
It was a game that evolved out of Comex futures being used simply to offset long bullion positions at the LBMA. Over time, bullion bank traders increased their trading position limits, as opposed to their pure hedging activity, making easy money jobbing the other side of Managed Money trades.
Now look at the current situation, with the gold price at decade highs ($1775) and open interest at 561,628 (30 June).
In the non-speculator category, the Swaps are more short than they were in July 2016 despite open interest being 71,372 contracts lower. The mark-to-market value is record net short at $36.6 billion. What has happened is the Producer/Merchants have cut their positions, presumably deciding that hedging mine output is less important in the current inflationary environment. Consequently, the bullion banks are bearing 71% of the short exposure.
The speculator category makes this more interesting still. At 138,555 net long, hedge funds are only 25,000 contracts longer than average, and compared with their bullishness in July 2016 have hardly got going. It is the other categories, Other Reported and Non-reported have taken 56% of the long side, and they are not behaving like skittish hedge funds at all. These include family offices, the ultra-wealthy and foreigners through Globex who are standing for delivery as a means of getting their hands on physical bullion —171 tonnes from the June contract alone.
Bullion banks are between a rock and a hard place. For years they’ve been playing the hedge funds as an angler hooks and plays a fish. That game has ceased and there is no easy way for them to get level. For the moment they are trying to put a lid on the price, but the cost has been rising open interest, and therefore rising mark-to-market positions.
The August active contract runs off the board at the end of this month and bullion banks are likely to be forced into large delivery volumes again. Furthermore, the exchange for delivery arbitrage facility between Comex and the LBMA is broken, allowing Comex premiums to London spot to go unchallenged.
It is increasingly possible the gold contract is evolving into deep crisis, and that force majeure might have to be declared if, as seems increasingly inevitable, a wider banking crisis ensues.
The Liberty Beacon Project is now expanding at a near exponential rate, and for this we are grateful and excited! But we must also be practical. For 7 years we have not asked for any donations, and have built this project with our own funds as we grew. We are now experiencing ever increasing growing pains due to the large number of websites and projects we represent. So we have just installed donation buttons on our websites and ask that you consider this when you visit them. Nothing is too small. We thank you for all your support and your considerations … (TLB)
Comment Policy: As a privately owned web site, we reserve the right to remove comments that contain spam, advertising, vulgarity, threats of violence, racism, or personal/abusive attacks on other users. This also applies to trolling, the use of more than one alias, or just intentional mischief. Enforcement of this policy is at the discretion of this websites administrators. Repeat offenders may be blocked or permanently banned without prior warning.
Disclaimer: TLB websites contain copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available to our readers under the provisions of “fair use” in an effort to advance a better understanding of political, health, economic and social issues. The material on this site is distributed without profit to those who have expressed a prior interest in receiving it for research and educational purposes. If you wish to use copyrighted material for purposes other than “fair use” you must request permission from the copyright owner.
Disclaimer: The information and opinions shared are for informational purposes only including, but not limited to, text, graphics, images and other material are not intended as medical advice or instruction. Nothing mentioned is intended to be a substitute for professional medical advice, diagnosis or treatment.
Leave a Reply