Two silver market commentators have been going back and forth regarding the large silver long that has emerged in the futures markets. Silver market observers are trying to figure out whether it is a sovereign, or a large managed money trader, that has dramatically reversed course and have gone long the futures market.
Here is what the silver futures market looks like for the past few months, which will be relevant to the discussion in this article.
Ted Butler and Alasdair Macleod have both noticed that a really large long appeared in the silver futures market this past couple of months. The behavior is curious because most of the large concentrated positions have been short this market for years. Given the nature of silver futures trading, this new long position sticks out like a sore thumb.
The China Silver Whale
Alasdair started the speculation off with a July 11 article arguing that China was likely behind the long move in the silver futures market.
When we dig into the weekly Commitment of Traders’ Reports covering Comex futures, we see something very odd indeed. The largest four traders, normally bullion banks or major producers hedging future output, almost always run short positions against speculators’ longs. The more bullish speculators are, the more shorts are carried by the big four to accommodate them. Equally, they only go net long when the speculators are extremely bearish and are collectively marginally long or exceptionally net short. Not now, as the following chart of the Largest Four Traders net positions shows.
Alasdair opines on which parties are the likely culprits.
It seems unlikely that in normal circumstances any of the largest eight would be running a diametrically opposed trading position to the other seven. Comex doesn’t work like that, consisting of distinct groupings: producers and merchants hedging their future deliveries, bullion banks acting as market-makers, and speculators, who take on the price risk by going long. They all tend to stick within their group motivations.
This has led Alasdair to the conclusion that China, a large silver user, is using the long positions to hedge future rises in the price of silver to protect their silver import position used in manufacturing. And further, that JPMorgan was acting in China’s interest by managing their futures market position.
None of this explains why a substantial long position appears to have now materialised on Comex. Instead of selling futures to suppress the price, our market whale appears to have turned buyer; buying enough to cover China’s annual silver imports, the equivalent of about 43,000 Comex contracts. Clearly, the new strategy is to hedge against rising prices instead of suppressing the silver price.
This is a plausible, if a somewhat fringe, theory on the short position reversal in the silver futures market. However, another long term observer of the silver market has a different opinion.
The Wrong Whale
Ted Butler, renowned silver market analyst, provided a response to Alasdair’s article a few days later. Butler agrees that a whale is now purchasing large amounts of silver long futures, but not that it is China. Ted believes the long lies in the managed money segment, not the commercials. I will let him explain his position without further comment.
Since I’ve been writing about the highly unusual and unprecedented concentrated long position in COMEX silver futures for weeks, I thought at first Alasdair picked it up from me (certainly, I didn’t pick it up from him). Macleod holds, among other things, that the concentrated long position is mostly (or exclusively held) by commercials and not managed money traders. That’s false on its face.
Since May 28 (all COT dates) the concentrated silver long position grew by nearly 18,000 contracts from 49,614 contracts to 67,328 contracts on June 25 (to coincide with Macleod’s article). Over that time the managed money traders bought a total of 59,930 net silver contracts. Over that same period, the commercials SOLD 53,678 net silver contracts. Unless there’s a new math being deployed here, the sharp increase in the concentrated long position was very unlikely to have been caused by commercials.
I have stipulated all along that there might be a commercial trader in the ranks of the concentrated long, but clearly at least two and most likely three of the four big silver longs are managed money traders.
Even after the liquidation by the managed money traders and the big concentrated longs, over the past two reporting week, the managed money category is still slightly more long (on a gross basis) than the combined commercial gross long position (Producer/Merchant and Swap Dealers combined). That’s not evidence that the commercials are holding the majority of the concentrated long position – just the opposite.
Who is the Long Whale?
Alasdair Macleod provided a response to Ted’s criticism of his position that China is the whale, noting that both the LBMA and COMEX futures markets are likely involved in the story. However, there is absolutely no way to associate trades between the two markets. Even gaining clarity over trades within a single market can be frustrating to even the most dedicated analysts.
The main problem with the major futures markets is that agents conduct trades on behalf of their clients, and that positions are reported in net amounts. It is very difficult to determine exactly who, and for what reason, individual entities want to go long or short in the futures market.
What is clear is that the typical reasons for taking futures positions, such as hedging production or price risks, has been somewhat marginalized in favor of very large long or short positions designed to shape the actual underlying physical price of silver for the benefit of the trader.
This occurs because buying or selling silver contracts is performed on margin, at a fraction of the market cost, and provides enormous leverage to the amount of silver ounces traded.
This system was originally intended to allow legitimate hedging at reasonable cost, much like purchasing insurance against the loss of a valuable asset like a home or business. Because the exchanges do not require all positions to be auditable against proof of real physical price exposure, they allow many more paper ounces to be controlled on the market than are mined, refined, and sold at any given point in time.
A Broken Futures Markets System
The truth is that we will likely never know who is ultimately behind the long silver futures position until many years from now when the ultimate results of the trade are long completed.
I have written about the problems that this softly unregulated futures model causes to the underlying physical metal market, when allowed to be controlled by larger moneyed interests such as banks, corporations, and even potentially sovereign nations.
What is further troubling on the ability of opaque futures markets to effectively manage the participants is the problem with position limits. The markets can adjust the position limits by mandate, e.g. to flex them up or down as they see fit. They are not hard rules designed to cap the amount of leverage any large traders can exert on the market over time.
And when position limits are breached by a single trader, enforcement is relatively weak. Former CFTC Commissioner Bart Chilton, when interviewed on Arcadia Economics, mentioned that a trader, which independent analysts had confirmed was JP Morgan, had exceeded their position limits in the silver futures market after acquiring Bear Stearns.
Well, there’s some stuff that’s out there in the public that I’m not sure everybody put together. Most people did. And I would never for example, and I won’t now, say that there was a bank and name it that held close to 40% of the silver market at one point.
But the news reports…I mean…people surmise it’s JP Morgan Chase. And the news reports and the public record showed that when Bear Stearns collapsed, that their silver positions got transferred over to J.P. Morgan. And we, the CFTC, had to approve those positions, because the Bear Stearns positions, when they came over, combined with J.P’s positions were so large that they violated the position limits one trader could hold. So the CFTC had to approve that J.P. could take on the Bear silver positions.
So if people want to do the math, they can can do the math on who had the largest silver (position).
But there was an exception that we made, and that’s in the public record…that we made that allowance for a certain time…and that allowance was for them to be able to get out of those positions….and after this time was coming to an end, the runway which we had given for them to get out of the positions in excess of position limits, they were nowhere close to getting out of them.
Matter of fact, at one point they bought even more. Which was in direct conflict of what we had in mind.
So they were granted a little bit more time, a couple of months as I recall, and they did ultimately get down to the position (limit). But it was at that time that they were so large, that I made the comment about how large a particular bank was in the market.
Which sort of shocked people. And it shocked me, quite frankly, that it was so large.
Someone Is Also Going Very Long the Silver ETF
The futures market is not the only place in which longs are flexing their bullish bets. Per Yahoo Finance, the Silver ETF (SLV) have seen more than $623 million of new net investment in the past month. This after seeing a net increase of only $45 million in the fund, year to date.
Source: Yahoo Finance
So both the ETF and silver futures are seeing whale-sized long positions at the same time.
Very curious, indeed. Could it be the same player influencing both markets?
While the long futures position is likely a price hedge against silver moving up, the SLV position represents more a large bet that silver will be moving up in the near future.
I find it very unlikely that the relatively small number of silver bulls has driven that much money into SLV in such a short period of time. Most silver bulls buy physical silver anyway, and don’t consider owning paper silver due to lack of convertibility to the metal.
No, this is more than likely another large speculator or sovereign player showing their hands on their silver bet.
Perhaps the same entity is betting all their chips on the notion that silver prices have to rise from here. If that is the case, what do they know about the silver market that we do not?
Whatever the case, it is safe to say that some very moneyed interests are expecting the price of silver to rise. At the end of the day, that is just fine with us. We have been expecting the very same thing.
Will this solve the issue with the broken silver futures market? Not likely, but it may provide a little justice to those waiting for silver’s price to finally catch up with the physics of silver’s supply and demand fundamentals.