Home » Precious Metals » For Gold, Friday’s COT Report Is Huge

For Gold, Friday’s COT Report Is Huge

by John Rubino on April 18, 2013 · 28 comments

The dominant explanation (in the sound money community at least) for the precious metals crash is, well, sabotage. The metals exchanges were running out of physical product and faced imminent default, so the major governments via their money center bank proxies sold tens of billions of dollars of gold and silver futures contracts, forcing prices down and triggering stop-loss orders and margin calls that produced Monday’s epic bloodbath.

These short positions were then covered at huge profits for the manipulators, leaving nothing but smoking rubble where prosperous gold-bugs used to live. It’s a compelling story with a lot of circumstantial evidence to back it up. But one piece of concrete data is needed for this narrative to win out: The Commitments of Traders Report that will be released on Friday at 3:30 EST by the US Commodities Futures Trading Commission (CFTC) has to show massive short-covering by the big banks. Here’s a more complete explanation from silver analyst Ted Butler:

So, if it wasn’t abrupt change in the fundamental story in the various separate markets that were hit to the downside yesterday, then what the heck accounted for the steep declines in price? Stated differently, what was the common denominator present in the markets that plunged? The most visible common denominator was that the various big price declines occurred on the NYMEX/COMEX markets owned and run by the CME Group. But the most important common denominator was the nature of the buyers and sellers across all the markets that got smashed. Without exception, in any market that declined significantly, the big net buyers were the traders classified as commercials and the big net sellers were those traders classified as non-commercials, largely technical trading funds. Not only was this true yesterday, it has been true on every single big price decline throughout history, according to US Government data (COT reports).

This may seem elemental, but I ask you to contemplate this anew. In the highly-charged emotional state of significant price declines, it is tempting to accept fabricated stories as to what may be the cause of the declines. Because of that, it is more important than ever to rely on the known facts and only that which can be substantiated. COT data have and will show without question that the commercials are always the big buyers and the technical funds are always the big sellers and there was no exception this time. Once you know who the big buyers and sellers are (which is the beauty of the COT), only then can you proceed to the how and why of the big price declines.

Armed with the certain knowledge that in every market that declined substantially the big buyers were the commercials with the big sellers as the technical funds, how and why fall into place. Why is real easy – in order to make money. The way one makes money is by buying low and selling high, although not necessarily in that order. For instance, JPMorgan the big concentrated short seller and manipulator of silver and other markets, has made a boatload of money, many hundreds of millions of dollars, by short selling at higher prices than the prices they have been buying back at. I don’t begrudge JPMorgan for making large trading profits if they were doing so legally, but that is not the case. The trading profits being made by JPMorgan and the other commercials are as far from legal as is possible. That’s the only plausible conclusion a reasonable person could reach when answering the last open question – how do they do it?

Knowing who the buyers and sellers are and why, all that’s left is the how. Simply stated, JPMorgan and the commercials have captured control of the mechanism that sets short term prices, by means of High Frequency Trading (HFT), which dominates modern electronic trading. Whenever JPMorgan and the commercials wish to set prices for any market sharply higher or lower, they can and do set those prices. That is an incredibly powerful trading advantage. Since the technical funds, which are always the counter parties to JPM and the other commercials, rely on price changes to initiate their buying and selling, these funds are, effectively, controlled by JPMorgan and the commercials.

Sunday night was a classic example in that JPMorgan and the commercials kept setting lower and lower prices in the NYMEX/COMEX commodities mentioned to induce more and more technical fund selling so that JPM and the commercials could and did buy. The commercials knew there was residual margin call liquidation for Monday morning, following Friday’s rout, so rather than let panicky margin call sellers out with additional losses of 50 cents in silver or $20 in gold, the commercials rig prices lower in thin Sunday night Globex dealings by $3 in silver and close to $100 in gold. This is similar to the May 1, 2011 Sunday night $6 massacre in silver. The only difference is that this time the commercials took all other important NYMEX/COMEX markets down with silver.

The proof that this is how the market operates can be seen in current and historic COT data in that on big declines in price the commercials are always big buyers and technical funds are big sellers. In fact, I don’t know that there can be an alternative explanation based on actual data. Of course, there is no way a small group of large banks and financial firms could be continuously pulling this trading scam off without prearrangement and collusion. And of course, this collusion and price control is against the law and any sense of fair trade. We actually have in place a federal regulator, in the form of the CFTC and a self-regulator in the CME, specifically created to combat the trading operations I just described, who both refuse to end the ongoing scam.

Clearly, the main impetus behind Monday’s price decline is margin call liquidation by those holding long futures contracts. Although I’ve always warned not to hold silver on margin, at times like this I kick myself for not having warned more forcefully. The $200 gold and $5 silver move over the past two days has resulted in most holding long gold and silver futures contracts to be forced to immediately deposit $20,000 to $25,000 for each contract held or be sold out by their brokers. These demands for such large amounts of money have resulted in an avalanche of panic selling. And it matters little if you believe, like me, that there was an intent behind the extreme price declines or if the margin call selling was spontaneous and beyond intent. In the end, there can be no question that gold and silver (and copper, platinum, palladium and oil) are down today due to extraordinary trading activity on the NYMEX/COMEX, led by margin call selling.

If you accept the premise that massive margin calls are at the center of today’s price decline, the next question is when will the margin call selling end? We know from market history that such selling must burn itself out fairly quickly. This is particularly true in COMEX gold, copper and silver, since there was not a large relative speculative long position to begin with, following months of speculative net long liquidation and new short selling. I don’t think that technical funds are adding aggressively to short positions today since current prices are so far below the popular moving averages so as to make the normal stop loss points above too excessive for prudent risk taking. This looks like plain-vanilla leveraged long liquidation in which the selling pressure has reached a climax and, therefore, must soon end. Prices will stop going down when the margin call liquidation, principally on the COMEX, ends.

We’ll have to wait until this week’s COT report, but there appears little doubt that it will indicate more record net commercial buying as has been the case for weeks and months. Since I’m convinced beyond question that the price of silver has been manipulated by the big commercials on the COMEX, watching them buy aggressively suggests they could let the price rip to the upside with the same intensity that they’ve orchestrated to the downside.

With the record-setting trading volume Monday and on Friday, I would not be surprised if JPMorgan had eliminated its concentrated silver short position. I think it obscene that the CFTC and the CME have stood by and allowed JPMorgan and the other crooked commercials to disrupt the orderly functioning of the markets, but this is nothing new. The reality is that JPMorgan and their collusive partners are better positioned for a price rally in silver and other markets like never before.

So on Friday at 3:30 EST we’ll get a piece of data that tells us both what happened and what will happen. If Butler, the guys at GATA and the other pro-gold analysts are right, the manipulators have had their fun and are now on the other side of the trade. For the next few months at least, their ability to (illegally) influence short-term moves in precious metals will be working in gold bugs’ favor.

Meanwhile, this latest smash appears to have backfired in a way that might make future manipulations a lot tougher. Instead of panic selling in the physical market, the price collapse led to panic buying. Dealers are swamped and premiums and wait-times are soaring as investors small and large grab all the suddenly-cheap silver and gold they can get. These are strong hands. As anyone who owns gold or silver coins can tell you, once they’re in their hiding place you tend to forget about them. You absolutely do not dig them up and sell them if prices go down a bit. So to say that record amounts of bullion are being bought this week is to say that record amounts are being taken off the market, leaving the exchanges even shorter of product and bringing the next near-default experience that much closer.

  • pipefitter9_3

    Not getting much of a ‘V’ bounce, not that I don’t buy the gist of the story presented here.

    • Tony D

      The lack of V bounce may suggest that there are still some shorts to be closed .

      i have 2 questions John:
      1) if JPM are on the short side of the trade on behalf of the Fed and USGovt why would they now move to the long side ?
      2) if the technical funds are effectively “controlled” by JPM why do they trade at all? is there even more dumb money in the market than them ?

      I can also confirm bullion shortages here in Sydney, Australia. Many gold and silver products simply not being offered today.

      • sculptorbill

        1) because they are greedy SOB’s (like us all) not always a Government agent
        2) Funds MUST trade/sell under certain rules based behavior….makes them easy targets

        If you were a dealer, you’d pull back and hide inventory too, and try not to sell silver you bought in a higher market into a bargin bin. Creating a higher markup because of “shortages” helps retail price profit in a downturn and assure value to eager buyers i a down market. When Silver hit $9 in 2008, the mark-up was $5 per ounce over spot, instead of the usual 1.20

    • Chris

      You are too impatient.

      • pipefitter9_3

        Don’t understand your point, Chris. I’m not looking to buy or sell, although in hindsight I wish I had sold and would then be buying back cheaper now. But what does ‘patience’ have to do with the fact that we’re not getting a ‘V’ bounce?

        • Chris

          Sorry. I misunderstood. The fundamentals for gold are good. Like the mortgage market in 2008, the bond market is heading that way. What other alternatives to money are there. If bond goes, so will other assets like houses, stocks, etc will go down. Gold is both money and asset. It should have AAA rating for banks to hold as reserves.

  • Agent P

    Here is a question (that helps me, at least) maintain a modicum of clarity throughout this upside-down market:

    Is it, or is it not important for the dominant global trading currency to be viewed as having stable value – even in the face of debt, deficits and unfunded liabilities that have no historical precedent? And if so, is it important enough to maintain that perception – by any means necessary, even in the face of growing foreign demand for the monetary metal’s protection against debasement? To me, the answers are self-evident. So then, it becomes just a matter of time and events outside our control that could easily bring equilibrium and monetary sanity back to the fore. That could be a matter of months, or it could be a matter of years. Based upon recent history however, the likelihood is nearer rather than farther.

  • donald gillies

    This conspiracy theory DOES NOT jibe with the skyrocketing japanese yen on the final day of the crash. The theory that DOES jibe with the skyrocketing yen, is that the carry traders who bought gold, were getting badly burned by the 2% interest-rate target in Japan with a side-ways trading asset, so they decided to suddenly all exit their gold positions and pay back their loans, simultaneously driving down the price of gold and forcing up the yen in value.

    • http://twitter.com/spiritjewelry Rev. Suzanne Powell

      The USgovt is making the Japanes debase their currency. It is called “race to the bottom” and “beggar thy neighbor”. The people buying paper gold are getting hammered, the ones buying the physical are getting a good deal. Notice that the fundamentals are being ignored by the paper markets, especially when looking at actual above-ground supplies and the loss of 2 major mines. The COMEX is expected to default on its metals shorts in the next couple of weeks… they don’t have the inventory so they will have to pay out in cash. This will probably be when the decoupling of the physical from the paper markets finally occurs, and then we will see free market price discovery.
      Buy silver while you can… it is about to get really expensive.

    • sculptor bill

      interesting theory, but I don’t think that trade was a big enough volume to throw the world gold price. Panics feed on themselves, a big naked paper short, prices drop, stories appear in media, margin gets called, traders sell to buy back cheaper, the JGB may have contributed….I wouldn’t be surprised if gold was pushed below its cost of production, only to have it jump back up in price with bullion and mine stocks held in different sets of hands

  • http://twitter.com/spiritjewelry Rev. Suzanne Powell

    Dr. Paul Craig Roberts has a very inciteful article about this topic. Basically, the government wouldn’t be bothering the metals if it wasn’t advantageous. They have to maintain the idea that the dollar is sound and that metals are risky… and people are not buying it. They have to keep selling treasuries and avoid sell-offs to keep their ponzi scheme going.
    I read that people are lining up at bullion dealers all over the world to buy this “dip”.
    I went to my local bullion dealer yesterday… bought what I could afford. They had just a few backdated eagles (I got them), then I picked through the generic bullion box, pretty much taking everything but the generic mexican bullion. This is a big dealer in Houston and I’ve never seen them so lacking in inventory!
    I’m gonna keep stacking.

  • didier

    I hope they are right about this. To make good the losses and so we haven’t been reading those analists for nothing!

  • Robert

    Paper players rarely buy or sell any gold or silver. They buy and sell paper. For gold to have gone down as a real matter there had to be real physical selling in the market.

    And while small coin dealers were faced with more buying on the sell-off, and are running out of their fabricated products that is not where the massive non government held bullion is stored.

    Outside of on the bodies of Chinese and Indian women the really big amounts of bullion is stored in ETFs. And there was indeed discouragement of product from ETFs during the great take down.

    Real selling did happen. The paper players may have tried to stampede the cattle for their gain, but a lot of the cattle did in fact run.

    • http://pulse.yahoo.com/_KTGVSXMZJD4U57OZ5ALH6JZ2IQ Edward Cate

      Do you REALLY think that the ETFs actually possess the gold and silver they claim to have bought???

      • Robert

        That is a very good question. When you know that you have a corrupt and dishonest gov-banking sector watched over by a dishonest exchange it is hard to know how far and deep the dishonesty goes.

        On its face however the futures market hardly ever involves physical delivery. That is why the Comex only holds a tiny fraction of the gold represented by the number of paper longs at any given time.

        The ETFs on the other hand are supposed to have physical product available for redemption (at least in currency terms) on a one to one basis representing the physical gold investments of their shareholders.

        But Edward you and others have a good reason to doubt this, because the fox (the gov and its institutions) is in fact the one guarding the hen house. Since PM ETFs began people have been investing more and more money into institutions where there is little real knowledge that the product is in fact there.

        We will only know that when there is a major run on these ETFs for redemptions.

        I don’t know yet (if anyone does please let me know) the amount of discouragement that took place during the great PM smack down. But I believe that it was only about 1% to 2% percent of the supposed massive PM assets of these ETFs.

        In any case redemptions went without any reported hitches that I know of. That is a good sign. Also famously skeptical billionaires like John Paulson hold their gold there. I don’t believe that he would do this if he wasn’t pretty comfortable that his gold was in fact there.

    • Pauleade

      Well where is the report?

  • stonehillady

    Who would prosecute Blythe Masters ?
    She actually works for her biggest client,, the FEDS, & the US government & who doesn’t have any GOLD, it’s all leased out , The FEDS…….

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  • sculptorbill

    Sunday night, in my bullionvault account I bought 10 kilograms of silver at the “30% off” sale and narrowly missed filling an even lower order, bought some gold too at 12% below my usual “dip buying” price. Having currency pre-deposited in your account is the “dry powder” loaded and ready to pounce on dips. in volatile markets, 1/3 cash position is good, be patient, wait for it. I must admit since MF global and Cyprus having too much cash in my account, makes me nervous now, but I try never to be “all-in ” metal, there is always a dip.

    In a separate, much smaller stock trading account, one can protect against downside price pannics by small day trades in 3x gold shorting ETF’s like DUST. If you screw up and guess wrong, your shorting is covered by gains in your physical holdings, if you guessed right and profit by the 3x short….immediately turn those profits into physical gold or silver in your allocated vault holdings. The idea is to rachet a gain in grams/ounces of PMs with each market volatility move,, even if at lower prices, increasing your PM weight is how you win in the long run. NEVER NEVER NEVER TRADE ON MARGIN….that leads to tears and being trapped and in ruin. Don’t put so much in metals that you are cash starved in other aspects of your life and business, this is about slowly growing savings in metal weight not gambling betting the house. Define savings in grams gained, not in dollar value, which will likely become more irrelevant in the coming decade (think Zimbabwe)

  • Alamanjani

    John, COT umbers are rigged as well. I wouldn’t put too much weight to them. But yes we got a bargain, I’m buying also

  • http://www.facebook.com/people/John-Drake/100000765017056 John Drake

    Time for someone with extensive computer knowledge to access the JPM computer system and their HFT platforms and destabilize it to the extent that they can’t function – for as long as possible. Then we might see the PM’s, being left to their own devices without manipulation, achieve their real prices in the marketplace. Where is Harold (Person of Interest) when we need him!

  • A. Paco Liptz

    If you want to sell some metals because you need cash to buy a car, or any other item, the seller doesn’t give hoot about “theories” as to why gold dropped and you don’t have the currency needed to make the purchase. Cash talks and BS walks. Gold goes up, down, up again and never stops oscillating. Forget the theories and ask why you want the shiny stuff. Maybe you really need a productive farm or large garden, which could bring greater security than gold. The metals however, are excellent at creating neurotic behavior. All traders are neurotic; some even psychotic, because they put their “faith” where it doesn’t belong. It always leads to disappointment. And they go nuts too!

  • Tony D

    I’m certainly no expert but the charts I’ve just accessed at barchart.com suggest that aggregate shorts went from 28k to 23k (approximately) through the price smash we’ve just seen. This wasn’t disaggregated data so there may be other interpretations open but I’d hesitantly suggest that the price falls aren’t over yet as there are many more shorts to close and this number also allows for the possibility of short positions being increased as JPM et al jiggle the market. I’d certainly like to hear from people with more expertise than I possess as to what they think.

  • Bruce C.

    I had to think about this piece for a while. There is a lot going on here.

    There is also so much to say that I’ll just mention a few things that others haven’t already said.

    First of all, the only ones who might understandably be upset by this sudden price drop in the PMs are those who may have bought some recently. It’s no fun to lose money even on paper. However, the fact that physical buying has actually increased because of this should be comforting. There will come a time when the price of physical g/s will be far greater than the “paper” investment vehicles precisely because of greater investor knowledge of how the paper futures market works. This latest take down will actually decrease the interest in g/s ETFs and thus decrease the leverage that market makers have. Physical owners are an entirely different breed than the shallow opportunistic paper speculators.

    For review: The original concept of “short selling” assumed physical possession of a real commodity. The “short seller” was to borrow some commodity from some legitimate owner for some agreed upon period of time (and pay some rate of interest or “rent”) and then return that commodity to the owner by the agreed upon date. In the meantime the short seller (the borrower) could/would sell that commodity at what he believed was a relatively high price with the hope that the commodity’s price would fall within the time frame of his rental agreement so that he could buy it all back and return it to its rightful owner, and pocketing the difference.

    Now, consider how the modern “paper” market works, which is a creative extension and abstraction of the basic physical concept. In this case the “short seller”, instead of borrowing a real commodity, simply pays a broker/dealer to enter a “futures” contract with the broker/dealer that states that by a certain date he surrenders his claim on the underlying commodity. In the meantime he can sell his claim to that commodity at a price he believes is relatively high, with the hope that he can buy another claim to that commodity at a lower price before the end of his contract’s expiration date, and pocket the difference.

    It’s important that you understand the difference between these two examples. In the first case everything is accounted for: The physical commodity is either here or there, and there is NO QUESTION that it physically exists. However, in the second example THERE NEED NOT BE ANY PHYSICAL COMMODITY AT ALL! Neither the “owner”/lender nor the “borrower”/short seller cares about that. At worst the “borrower” owes the “lender” nothing because the lender has nothing; he is literally borrowing NO-THING. The lender doesn’t care about that either because he can earn interest/rent on the fictitious rental to the paper short seller. All the borrower cares about is working “the system” which is to play the paper price game. So the lender lends something he may not have and the borrower borrows something that may not exist and sells it to someone who may be playing the same game (whether he knows it or not), and then buys a similar contract of claim to the said commodity which he returns to the lender, and pockets the difference in costs. As crazy as it sounds, this game can (and is) played all the time. Everything “works” as long as some spoiler doesn’t come around and demand physical representation. That’s when the house of cards comes falling down. That is what is beginning to happen.

    • Bruce C.

      In other words, the only discouragement that this price drop (whether it was intentionally orchestrated or not) is with the paper/ETF speculators, not the physical buyers/owners. Ironically, if there is in fact an intentional effort to suppress PM prices then the result affects only the speculators and not the physical buyers, who are the true targets. Again, natural selection in action.

      • Robert

        I could be wrong. But if you believe that the ETFs actually have the gold they claim they have, then I believe that there was a lot of discouragement during the great smack down. The coin store market beloved of gold aficionados plays only a small part in the market. The real question is who did the selling and why?

        • Bruce C.

          That’s actually a separate issue. The ETF holders still don’t seem to understand or care about that. They are just “weak hands” as you’ve said. They buy and sell without convictions. Whatever triggered this sell-off, be it stop losses or sudden epiphanies concerning deflation or whatever seemed to be amongst the paper traders primarily.

          I really don’t know if the ETFs have the gold that they’re supposed to have and I haven’t seen the latest COT report that JR is referring to so I don’t know if the “commercials” did all the selling as is suspected by Butler. All I’m saying is the physical holders of g/s didn’t sell (as far as I can tell) so the only ones left are the paper traders.

          However, keep in mind that a drop in the price of g/s (along with all the other commodities too) was in the air for a few weeks prior. Goldman Sachs warned of it, George Soros shat on it, talk of deflation was widespread (JR’s on piece just few days prior cited that trend), etc. So, under those circumstances a big sell off isn’t that surprising, except to say that I would think that most buyers of PMs aren’t as stupid and fickle as most traders/investors. They wouldn’t fall for the absurdities that are being promulgated (“the global economy is improving”, “the US stock market is the place to be”, “the central banks pulled it off – the crisis is over, everything will be okay”, etc.) Instead I would expect educated/not-stupid investors to buy more PHYSICAL g/s because the latest events have shown that things are playing out just as “gold bug” types have warned, so leaving your buying power in fiat is suicidal. Volatility works both ways, sometimes things go up unexpectedly as well as down. I suspect that when things do blow up it will start from a “top”, not a bottom.

  • jesterx

    the guy from http://sentiment-trader.blogspot.com who is insanely accurate with his market calls has done some good analysis with gold lately, he is saying there is a massive bull run coming and those short gold better look out. Interesting.

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