Heckle if you want, but be prepared for anything

HOUSTON – We have been getting some email heckling recently. 

Oddly enough from interests apparently sympathetic to Gold and Silver sellers of paper futures on the COMEX bourse in New York City.   We won’t repeat their comments in these pages – no sense in giving them any credibility – but it is nice to get some notice from some of them … in a manner of speaking.

We WILL, however, take this opportunity to remind the market and all its global participants just how exposed and potentially vulnerable one particular class of COMEX trader has become recently – to make sure that the entire market is aware of the “score,” so to speak, as a courtesy to our favored readership and potentially, just potentially as a small measure of additional motivation for those short-selling bankers to think about their exposure often and with urgency perhaps.

Incidentally it is our comments about that subject that has apparently invited the ire of the heckler(s).    

That particular class of commercial traders calls themselves Swap Dealers when these prop-trading bankers fill out a Form 40-F for the CFTC regulators.   They principally and supposedly use COMEX futures to hedge their overall metals or economic exposure. 

Once that designation is made on the 40-F, it really does not matter how or what the Swap Dealers used to get to their net book (whether swaps, futures, forwards, other more exotic derivatives, etc.) – once a Swap Dealer always a swap dealer – until the next 40-F is filed for that entity.  That’s whether their position is tiny or huge (like now).    

Indeed, as of August 12, the Swap Dealers reported a NET short position of 105,311 COMEX contracts (10.5 million ounces, $13.7b worth at $1300).  A pretty big exposure for the 18 bank entities reporting as Swap Dealers on the short side, according to the CFTC.  That’s the NET exposure.

CFTC, Cash Market, GGR 

If talking about just their gross short exposure (and all of such contracts must be covered or bought back at some point), then on August 12, with $1309 gold the Swap Dealers reported holding a whopping 158,448 COMEX shorts – a huge number only rarely exceeded in COMEX history.  (15.8 million ounces, $20.5b worth today.) 

How is that possible, by the way?  That 18 banks would be able to amass short positions in gold futures in excess of $1.14 billion each if divided equally among them?  (5,850 contracts each.  Really.) 

At any rate, as we can easily see in the graphs above, the Swap Dealers have built up a very large exposure on the gold short side.  The point is inarguable.  

Their gold short exposure jibes with their silver short arrogance in a relative sense – relative to the previous record of heavy short positioning by Swap Dealers that is.  Take a look. 

As of August 12, with silver then changing hands for $19.90 an ounce, the mercenaries of the trading pit – the Swap Dealers – reported holding a significant but not a record 15,910 contracts NET short. That’s down from 25,245 contracts on July 8.  Notice, however, in the net position graph how unusual it is for the Swap Dealers to report more than 10,000 contracts net short before we move on.   

Now look at how the Swap Dealers “got there.”   In the graph below we are all witness to the highest, record gross short position for the Swap Dealers.  As of August 12, it was still a heavy 48,978 contracts and while that may be down from the Swap Dealer record set July 8 of 58,381 shorts, it is still an exceedingly high number of shorts sold into the COMEX bourse and it represents an enormous amount of potential buying pressure as those contracts are bought back in the near future.

So we opened this brief piece up with the hecklers, and now we can pretty much guess which camp they hail from.  We’ve mentioned them a few times in recent offerings.  They are adamant and arrogant, insisting that silver is oversupplied and vulnerable when the opposite is actually more like it in our view. 

They mock our comments about the possibility of a short squeeze, but can you blame us for mentioning the highest and best use of an abundance of shorts in a market?  A squeeze? 

We know, of course, we may or may not get one. 

And so do they… 

If they are so sure of their positioning, then who are they trying to convince with their incessant sniping? 

Us …  or themselves? 

That is all.