Are Precious Metals Futures Heading for a Crisis?

This information is particularly revealing, given that the Commitment of Traders Report shows a substantial reduction in the Commercials’ net position by 34,551 contracts for the week to the same date as the BPR, giving an impression of a market being brought back under control. The BPR suggests otherwise. 

Silver 

While there is a large stock of gold that can theoretically become available at higher prices, the same cannot be said for silver. We shall look at the position of the US banks first. The first silver chart shows that even though silver is trading well below its 2011 highs, US banks’ net shorts are substantially higher than might be expected. The long figure is down to only 625 contracts, while the shorts are 40,198, so these less-than-four-banks that reported last week have a net short exposure of nearly 200,000,000 ounces, or twice the estimated annual supply of silver available to investors after industrial demand is allowed for. 

 

The final chart shows the non-US banks’ net shorts. Unlike their exposure to gold, these banks are in the same deep trouble as the US banks, having made the mistake of turning a broadly level book as recently as the August BPR into a record net short position on the August-October price rise. This is a vicious bear squeeze on them, which added to the US banks’ position amounts to a total short of 290,000,000 ounces. This figure compares with net shorts of only 120,000,000 ounces when the price was successfully taken down from its all-time highs early last year. 

 

Conclusion 

The silver does not exist to cover these short positions, and it will take very little further buying to set off a crisis in this important market. In the case of gold, there have always been central banks with physical bullion available to ease market shortages, but so far as we are aware the strategic silver stockpiles of previous decades are exhausted. There is therefore no price at which these shorts can be closed.

Bank positions in both silver and gold seem to have been adversely affected by “events unknown” from the August BPR onwards. All attempts by the banking community to regain control of these important markets appear to have failed. 

Since the date of the latest BPR (Dec. 4), there have been three serious attempts to reduce these short positions and each time the same $32.60 level has held firm. This suggests that a buyer or buyers larger than the banks are prepared to take them on by buying the dips. This price action supports anecdotal evidence that physical bullion in important markets such as London is in short supply. 

On this evidence, and assuming the trend continues, there will shortly come a time where NYMEX will be forced to declare force majeure in this market, which they can do under their rule book. The consequences of this extreme action could well be destabilizing not only for the price and demand for silver but also disruptive for gold. 

Therefore, we must add the breakdown of precious metals markets to the list of systemic dangers we face in the New Year.

About the Author
Alasdair Macleod

Alasdair Macleod is head of research for GoldMoney. He also runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. He has a background as a stockbroker, banker and economist. He can be contacted at Alasdair.Macleod@GMYF.org and followed on Twitter @MacleodFinance.

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