Got Gold Report – Firestorm Erupts Over U.S. Banks' Gold, Silver Shorting
By Gene Arensberg
01 Sep 2008 at 03:13 AM GMT-04:00
A very few and very large banks seemed to have positioned very well ahead of the plunge in prices for gold and silver, but in the process they may have bought more than they bargained for – possible class-action lawsuits.
HOUSTON (ResourceInvestor.com) -- An internet firestorm erupted over an August 5 report issued by the Commodities Futures Trading Commission (CFTC) which report revealed an unprecedented exponential one-month spike higher in short positions in gold and silver futures reported by two U.S. banks in silver and three U.S. banks in gold. Investors and bullion dealers may band together to seek legal recourse against the thus far unnamed banks.
In that CFTC report it surfaced that those few banks took the huge net short positions in gold and silver futures just ahead of the largest and harshest fall in prices for gold and silver since the Great Gold Bull began in 2001 – 2002. The Got Gold Report covered it from the silver point of view earlier this week.
Sucker Punched
Speculation in the metals community since the issue was first raised by silver analyst Ted Butler on August 22 has centered around whether the few banks acted principally to profit by their own downward trading pressure after taking the extremely large short positions, or if those very large net short positions could have been legitimate positions put on as offsetting hedges to other over-the-counter trading positions, swaps and derivatives held by the very large banks.
Subsequent work done by independent analysts point to specific banks as the most likely actors responsible for the immense short positions. As examples, (and there are more), Rob Kirby of Kirby Analytics in Toronto opined that the action is likely the work of the U.S. Federal Reserve in concert with J. P. Morgan Chase in an August 25 piece on FinancialSense.com. Tom Szabo of Silveraxis.com researched FDIC Quarterly Banking Profiles and Call Reports and concluded the most likely “usual suspects” were J.P. Morgan Chase and HSBC. Investors keenly interested in this subject will want to read Rob and Tom’s comments carefully.
Since we’ve already looked specifically at silver in the previous Got Gold Report, this report looks closer at the gold positioning. The three unnamed U.S. banks went from holding long positions for 538,100 ounces of gold in July to holding short positions for 8,222,800 ounces one month and four days later. That’s a huge change in positioning for just three trading entities. (From $448 million dollars worth long to $6.8 billion dollars worth short if we value gold at $830.) Just below is what it looks like on a graph.
Note: The graph only includes the net short positions of the three to five U.S. banks for the 24-month period shown. The CFTC report also shows participation by non-U.S. banks, but this analysis focuses strictly on the U.S. bank positioning. For the last seven months of data there were only 3 U.S. banks included in this CFTC report.
At the very least it is obvious that these three banks evidently saw in advance that gold and silver were about to plunge off a cliff in price and positioned in advance of it perfectly. At worst these few banks sucker punched gold and silver investors by taking such overwhelmingly large short positions as to literally crush those metals markets with the weight of their own trading.
CFTC Says “No Manipulation” in May
In response to persistent public concerns about market manipulation, in May of this year, the CFTC Division of Market Oversight issued its Report on Large Short Trader Activity in the Silver Futures Market. The 16-page executive summary of that report can be found here. The report concludes that the silver market is not manipulated and cites as evidence that, according to the commission: “There is no observable relationship between short-futures-trader concentration levels and silver prices.”
Perhaps if there was no observable relationship between short-futures-trader concentration prior to that report there is now as of the August 5, 2008 CFTC Bank Participation in Futures Markets report.
Again, according to the CFTC, between July 1 and August 5, 2005 three U.S. banks went from being 5,381 contracts net long COMEX gold futures to being 82,228 contracts net short. During the exact same period the total collective commercial net short positioning reported in the CFTC Commitments of Traders Reports (COT) went from 227,027 contracts on July 1 to 198,917 contracts net short on August 5. So, if we are to believe the COT reports, these three U.S. banks were layering on 82,228 net short positions in gold futures at the very same time that the commercial net short positioning was going DOWN 28,110 contracts.
From July 1 to August 5, 2008 these unnamed three U.S. banks went from being net long gold futures to overwhelmingly net short and over 41.34% of all the commercial net short positions.
