Wednesday, September 1, 2010

Yeah, COT's matter: Visualizing the silver short

Many of us will never forget that crazy, foreboding weekend in March 2008 when the cards began to fall. In a matter of weeks, the mighty Bear Stearns had metamorphosed from a perceived Wall Street giant to a pulsating pile of toxic waste, and the legendary investment bank's share price had fallen from $93 per share to $2. Whatever really happened on that weekend in March, we may never fully know: information from the same source (ah-eh, Mr Paulson) conflicts even with itself. All we can say is that our wonderfully shortsighted Mr Geithner and his utterly corrupt FRBNY, along with the aforementioned Treasury Department head crook Mr Paulson, arranged for the orchestrated insta-bankruptcy and massive firesale of Bear Stearns and its non-toxic assets to JPMorgan Chase. The balance--that is, the remaining fantastically toxic debt--was jammed down the throat of the US taxpayer, first via the Fed's Maiden Lane LLC, and later via the inevitable bailout of zombie bank JPM. It is a long story that has been covered here before, but the reason this move from over two years ago remains important--beside the BILLIONS in debt that the taxpayer will be stuck with and massive payoff to JPM that the taxpayer footed--is because of the silver mystery embedded within it.

Full disclosure: I think the crime against the American taxpayer committed in the bailout of Bear/JPM is something that far surpasses in both gravity and significance the possible side-line manipulation of silver which I am about to mention. Besides the mere scale of this grand larceny (in Billions) being larger than the entire silver market, the utter disgracefulness that the US government and its so-called officials demonstrated in "saving" these fraud-laced institutions is what did cement the path upon which all of the subsequent bailouts and financial bloodletting travelling, the path straight to the pocket of taxpaying, dollar-using Americans. The silver story is important, but I do not personally think that the JPM-Bear bailout happened because of silver manipulation. Unfortunately, I have no confidence in this government or the one before it, and I believe it would have happened with or without any interest in a shiny white metal.

That said, something very, very big in silver happen during those hectic weeks in March 2008, and we cannot be sure just what. Somebody knows (okay, more than one somebody: I would guess Mr Paulson, Mr Geithner, Mr Kohn and Mr Dimond, oh--and can't forget Mr Bernanke and, of course, Mr Cayne, and Mr Schwartz), but no one is saying. That leaves plenty of room for speculation, and given these last two and a half years, plenty of time, too.

The Bankster Report frequently harps on the
paper positions in gold and silver and the CFTC's refusal to address them, but here I just want to speculate on the silver short. Remember back to 2008: In January, the Fed and Bank of America absorbed the sub-prime leader Countrywide. By March, Bear Stearns was down, and the real tremors started. By summer, a dozen banks had failed, and Fannie and Freddie were in big trouble. By September, Lehman was under, and every single one of the top five banks were in serious, legitimate risk of insolvency. The rug was out from under the market, LIBOR rates were at records highs, and credit was frozen. By October, financial terrorism and threats of Congressional martial law had the once-defeated TARP bill successfully forced through Congress after the DJIA crashed 777 points in one day. By November, gold was under $750/oz, Treasuries were starting a path to negative yields, and markets of every kind all over the world were nothing but red. Take a minute to remember this (because its going to happen again, but that's another post): do not forgot how fast things fall apart.

As was astutely
covered by GATA during the thrashing rolls of the market in November 2008, besides all this very visible financial deterioration, something else was up. At the time of the GATA article, silver was sitting under $10/oz (back up the truck!) after having lost over 50% of its value from the March 2008 prices of $21/oz. In March, before its collapse, Bear Stearns was sitting on up to 25% of all COMEX silver contracts in a short position when silver was a near 25-year highs. This entire position was acquired by JPM, because if the Fed would not have transferred these positions, then attempting to close this huge short of the metal while it was at record highs would have only unleashed it further. Silver is not the only commodity position JPM accepted. Yet, within 8 months, silver had last over half this price, and JPM was reaping the profits of this massive short position and the massive 50%-plus crash. The November GATA article presented evidence from once-skeptic turned long-time mega silver-bug, Ted Butler (and I do mean mega silver bug, which is appropriate to consider in viewing his analysis). From Mr Butler's November 2008 article:

"This week, I received a copy of a letter, dated October 8, sent from the CFTC to a California Congressman, Gary G. Miller. It discussed allegations of a silver market manipulation because of the data in the monthly Bank Participation Report. The data in that report for August showed that one or two U.S. banks held a massive short position in COMEX silver futures of 33,805 contracts, or more than 169 million ounces. This is equal to 25% of annual world mine production, and was up more than five-fold from the prior month’s report. After this position was established, silver prices fell more than 50%, in spite of a widespread shortage in retail forms of investment silver. Never before had there been a such a large concentrated position in any market, including every manipulation case in the CFTC’s history. Concentration and manipulation go hand in hand. You can’t have one without the other."

Here, Mr Butler is referring to the JPM-held post-Bear short.
Check out this detailed post for more information on this bank participation (BPR) than you would like to know, and for plenty of information on the documented short positions of JPM. This is all very important, but for now, let's just fast-forward all the way to last week, and last week's COT report. The COT's, or Commitment of Trader reports, are commodities market participant disclosure reports released by the CFTC. COT reports are notoriously difficult to interpret. They are somewhat like looking at a chess board from above, so theoretically they allow a view of each side (long and short) and side interest (speculative, commercial, hedgers/producers), but they don't necessarily reveal moves or direction. Click on this COT example, and see if you can extrapolate any of this data. Can you read the moves on this chess board?

Well? It is possible, but its not simple. So this is why I'm so pleased to share this very nice
visual version of the CFTC's COT reports release, courtesy of Libanman Futures. Thank you, Libanman! Yes, even if the information contained within it is frustrating, perplexing, and perhaps even evidence of massive commodities market manipulation, this is sure a pretty chart! It is quite different from the example above--the COT as issued, as a bunch of numbers which is not easily discernible. However, pump this data in Excel, and you'll receive a visual version that is quite easily understood. Or, just check out Libanman's great work.

So let's visually compare the COT's of different commodities to determine if we can spot a trend.
Here's an example of the cocoa COT:





The light blue is net commercials (banks), darker blues are swap dealers and small speculators, and the pink is net managed money. Positions below the axis are short, positions above are long. The line with red dots is open interest. What we're really looking at here is how the net shorts (which happen to be commercials) respond to the net longs: you'll see that it is very close to a mirror-image. This is what you would except if the net commercials were engaged in the kind of normal activity banks do in future markets to make money, activity such as smartly hedging against the bets they've taken either to insure long positions they've guaranteed for, say, a producer, or to hedge their own proprietary long bets. There are other smart reasons to do this, as a successful bank can figure out how to turn a profit no matter how the commodities markets move (to a point), they just play the markets to move.

Now, let's compare this cocoa COT to the same week's silver COT:




Can you see any differences? Let me rephrase that: is there something wrong with this picture? Where is that mirror-image we saw before? What's with the large changes in long positions and virtually no reflection of these changes in the shorts? What kind of investor can run this gambit without getting burned? Are these some kind of rolling short positions? Don't look at me--your guess is as good as mine!

For one last comparison, let us look at the gold COT. You'll see that despite the constant claims of overspeculation in gold (claims that may or may not be accurate), it looks a whole lot more like cocoa than it does a fellow precious metal, silver. Click here to see the whole Libanman COT collection, and judge for yourself the uniqueness of silver's COT.

Here's the gold COT:



You tell me? Are we looking at JPM's continued massive short when we look at that silver COT? Perhaps: we should have more information with today's COT, considering the huge move in silver that has occurred since last week (about +8%). I might attempt to read it, but I'll most likely just wait for Libanman to make a nice pretty picture of it, and post the link for anyone interested.

That's waaaaay easier. Enjoy.

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