Silver Futures -
Confidence and the COT Reports
By Dr. Jeffrey Lewis
The real value of the Commitment of Traders or
COT Report for silver traders, (as
GATA, and others have been pointing out for years) lies in revealing the
marked concentration of short silver futures positions held by the major bullion
banks, who are classed as commercial traders.
Some observers predict that the Commodities Futures Trading Commission or CFTC
will eventually simply hide this data or even change the classification like
they have done in the past.
Of course, this would probably only serve to
destroy confidence in the silver futures market once and for all.
The Issues for Silver Longs
For the long holder, the concentration of
shorts is the main issue, and not simply:
Banks hedging positions in the futures market against client business that
leaves them long. Yes, banks typically have little choice but to cover long
positions with short positions for risk management purposes, as well as for
the sake of earning a profit to provide shareholders with value.
positions being taken on or off or played both ways.
limits on positions.
These details simply detract from the core
issue of market manipulation and lend credence or play into to the conspiracy
phobia prompted by the mainstream media.
Most traders can use the COT Report to observe changes in positioning without
worrying about the concentration structure. This could explain why the
CFTC remains silent about this key issue, and why the CFTC has not done away with
or dramatically altered the COT Report to hide it.
Effectively, there are only a few large commercial traders (i.e. bullion banks)
selling silver futures against a huge variety of longs.
No Great Conspiracy?
This manipulation may be easier to see when looked at from the perspective of an
attempted long market corner. Who cares what the Hunts were doing with the other
side of their long position? The issue for regulators was the Hunts’
concentrated long position.
In this case, the real pink elephant on the couch, which shows up clearly in the
COT data put out by the CFTC, is that the majority of the outstanding short
position in silver futures is held by only one or two commercial traders.
Nevertheless, somehow 'hedging' — which is another word often thrown around
loosely (like conspiracy) by mainstream media — makes this concentration 'okay'.
Yet when two large shorts hold 60 percent of the entire sell side of a
relatively thin market against a whole crowd of diverse longs, something
questionable is definitely going on. The Hunts were chastised and persecuted for
doing this on the long side, so why not the heavily short bullion banks?
Can you imagine if oil or copper had the same
market commitment profile or IBM for that matter? Sure, there may be naked
shorts in those markets, but the shorts are as diverse as the longs, which is
how things should be in a fair and balanced market.
It really does not matter if those two heavily
short entities are hedged elsewhere. The illegal and immoral concentration of
positions still exists in the silver market.
The Confidence Question
Not only does this concentration create an artificially depressed price reality
for silver, but it also prevents the investing public from noticing an
otherwise healthy way of avoiding wealth destruction by using silver as a
non-paper inflation hedge.
Additional dangers of this
Big shorts throwing caution to the wind.
Shorting is a treacherous game that has potentially unlimited losses.
Who else but the big banks could afford to take this kind of risk?
Of course, the real danger here is the
unlimited downside risk inherent in short positions potentially triggering a
daisy-chain of derivatives-led bank failures. This risk scenario could result in
a much bigger systemic problem that would send shock waves reverberating
throughout the already fragile world financial system.
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