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Comex Gold Open Interest - Craig Hemke

Comex Gold Open Interest - Craig Hemke
By Craig Hemke 3 years ago 8736 Views 3 comments

May 6, 2016

In defending their long held short positions, the Comex Banks have now issued enough new contracts to drive total open interest back to levels not seen since 2011. Will they be successful in capping price or are they about to get a religious experience? We're about to find out.

Let's start with the basics so that we're all on the same page....

The Bullion Banks act as de facto "market makers" on the Comex. In doing so, they have the ability to create new futures contracts for trading across the board. In a sense, there are three possible transactions:

  • A Bank issues a new contract. A willing Spec buyer (long) takes one side and the Bank (short) takes the other. Net result = 1 new contract and total open interest increases by that one contract.
  • A Bank issues a new contract. A willing Spec seller (short) takes one side and the Bank (long) takes the other. Net result = 1 new contract and total open interest increases by that one contract.
  • A buyer and a seller meet ( the bid and ask/offer) and they exchange an existing contract at the current price. Net result = No change in total open interest as no new futures contract has been created.

On The Comex, where The Banks seek to manage and control the paper price, since time immemorial The Banks have been NET short and the Specs have been NET long the paper contracts. The degree to which The Banks are short and the Specs are long fluctuates daily and, once per week, the CFTC surveys all of the market participants to get their summary positions. This data is compiled and released every Friday as the "Commitment of Traders" report.

OK...so far so good?

Now here's where the fraud begins. The Banks, acting in their capacity as "market makers", have a virtually unlimited power to create from thin air as many Comex paper derivative contracts as they'd like. In doing so, The Banks take the risk of being short while the Specs, in taking the other side of the trade, take the risk of being long. The fraudulent game that The Banks play is in never being forced to deliver upon of their paper obligations. The Specs simply seek gold "exposure" so they buy the paper derivative contract and The Banks sell it to them. If prices go up, the Specs make fiat and The Banks lose fiat. If prices go down, The Banks make fiat and the Specs lose fiat.

Again, though, very little physical gold is ever delivered. Thus, the only price "discovered" is the price of the derivative itself, not the actual physical metal.

Having the unlimited ability to create new contract supply gives The Banks the nearly unlimited ability to control price, too. How? Think of it this way:

  • You call up your broker at Merrill Lynch and tell him to buy you 200 shares of Coca-Cola. A market order is submitted and someone, somewhere sells their existing 200 shares of Coca-Cola to you. The supply of Coca-Cola shares is finite on any given day so price must find an equilibrium where buyers and sellers meet.

However, as we laid out at the beginning of this post, that's NOT how it works on The Comex. Oh sure, most of the volume each day is an exchange of existing contracts. However, volume is also supplied by The Banks simply creating new contracts to sell to buyers. Go back to the bullet point above. How fair and legal would it be if your broker, instead of finding a seller of existing Coca-Cola shares, decided instead to simply create some new shares out of the blue and sell them to you? You'd have your long exposure to Coke and your broker would take the risk of being short Coke.

Not only would this be patently illegal and fraudulent, think of the impact this would have on the price of the Coca-Cola shares. Since willing sellers wouldn't need to be found for new buyers, price wouldn't need to rise in order to entice sellers to sell. Your broker would simply take the risk of being short Coca-Cola, all with the hope and the plan of seeing you eventually give up and sell your Coca-Cola shares back to them, likely at a lower price and at a profit for your broker.

And, again, this is EXACTLY how The Comex operates.

Without having to supply any additional physical gold or other collateral, The Banks simply create new gold derivative contracts whenever demand for contracts exceeds available supply. This has the obvious effect of dampening price moves as "price" isn't forced to find a true equilibrium between buyers and sellers. And this has played out for all to see here in 2016.

We've written about this before, most recently two weeks ago: http://www.tfmetalsreport.com/blog/7576/fun-comex-open-interest However, open interest has expanded so dramatically in the two weeks since, it seemed we had to write about this again today.

Again, what is happening here is an overt attempt to contain and control price. If the total volume of available open interest on the Comex was anchored or tethered to a fixed amount of collateral, then the supply of derivative contracts would be relatively stable like the daily supply of available Coca-Cola shares. Instead, The Banks simply create new supply nearly every day and, in doing so, restrict and manage the daily movements of "price". It looks like this:

DATE
PRICE TOTAL OPEN INTEREST TOTAL "COMMERCIAL" GROSS SHORT POSITION
1/26/16 $1121 385,350 175,176 contracts or 545 metric tonnes of paper gold
2/16/16 $1209 428,912 259,784 contracts or 808 mts of paper gold
3/8/16 $1264 499,110 311,865 contracts or 971 mts of paper gold
4/12/16 $1261 504,523 353,968 contracts or 1,101 mts of paper gold
4/26/16 $1243 497,994 356,553 contracts or 1,109 mts of paper gold

And now here's where it gets particularly egregious. Over the past week, the price of "gold" has risen by $49 to Tuesday's close of $1292. While that's still a significant move of nearly 4%, how much higher would the price of gold had risen if the total open interest, which has already been inflated by over 25% over the past 90 days, wasn't allowed to rise farther still? And, as of yesterday (Tuesday) it looks like this:

5/3/16 $1292 565,774 410,000 contracts at a minimum or 1,275 mts of paper gold

I'm going to stop here to let that sink in for a while....

So, to control/manage price and to keep the rally contained at just $170 or 15% in the past 100 days, The Comex Banks have issued a whopping 180,424 new paper derivative contracts, growing the total Comex open interest by 47%! Not only that, but 180,424 new contracts is the paper equivalent of over 18,000,000 ounces of "gold", created from whole cloth and sold to the Speculators, all without additional capital or physical collateral requirements.

As noted above, the GROSS short position of The Comex Banks has more than doubled from 545 metric tonnes to as much as 1,100 metric tonnes today. This means that if The Banks were ever forced to make good on these paper short obligations, they'd have to physically deliver more than the entire stated holdings of Switzerland! Additionally, the entire Comex vaulting system only purports to hold 7,300,000 ounces of gold. So when The Banks are short 41,000,000 ounces of gold, aren't they fraudulently selling something that they don't own? (And please don't give me that line of garbage about producers hedging and selling forward. That scheme ended years ago.)

At the end of the day, you must understand the implications. The Banks are doing everything in their power to manage price...and why wouldn't they?!? When you're short 40,000,000 ounces of gold, every $10 move "costs" you $400,000,000. A $100 up move from here generates paper losses of $4,000,000,000 so they are fighting tooth-and-nail to keep that from happening by doubling down and putting "bad money after good" in the same way that a blackjack player thinks he will eventually win a hand and get all of his lost money back.

The Banks hope that eventually they can spark a Spec selloff. Once the Specs head for the exits, this Spec selling will be utilized by The Banks. They'll take the other side of the trade and buy their shorts back. The Banks will then "retire" those contracts and total open interest will decline. The Banks will hope to engender enough Spec selling to allow them to cover (buy back) up to 100,000 of their ill-gotten shorts and drop total open interest back to the 450,000 level. The question is: Will they be successful? While this has been a foolproof business plan since 2013, it hasn't worked thus far in 2016 as Spec fiat has continually flowed into the paper gold derivative market.

So watch price and open interest very closely in the days and weeks ahead. The increasingly-desperate Banks are apt to openly raid price in their efforts to spur some Spec selling. The upcoming jobs report of this Friday being an obvious starting point.

In the end, however, I'll leave you with one, final thought. Now that the Chinese have pricing power in gold, they quite literally have the ability to completely screw and hammer the Comex and London Banks. They can raise the Shanghai Fix and enable the immediate arbitrage. They could use this tool to drain whatever gold is left and utterly crush every big, western Bank.

But the time is nigh. If The Banks successfully rig the price back down, squeeze out all the Spec longs and close back up 150,000 contracts of OI, The Chinese will miss their opportunity. So, will they take it? Maybe. Maybe not. Maybe they're not yet ready. We'll just have to wait and see.

Again, watch price and open interest very closely in the days ahead. It's crunch time and things are going to get increasingly volatile. Prepare accordingly.



Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.


The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

SVI 3 years ago at 8:03 AM
What is the difference with a CFD? You also get your exposure (dor example to Coka-Cola), but the contract is legal. And my broker can create as much CFD's as he likes.
Alex Mumm 3 years ago at 1:37 PM
The difference between a CFD - ' contract for difference' and a futures contract is that the cfd is settled by both parties in cash. A futures contract held into the delivery month obligates the buyer to buy when delivered upon and the seller to provide the commodity he/she has agreed to sell upon expiry of the contract.
Alex Mumm 3 years ago at 1:44 PM
A buyer and a seller meet ( the bid and ask/offer) and they exchange an existing contract at the current price. Net result = No change in total open interest as no new futures contract has been created.

Craig...this is actually INCORRECT. When an existing long and existing short offset positions the net result is a DROP in the open interest by one (1).

Also your comment about naked shorts not happening with stocks, is also incorrect as this sort of thing happens quite often especially with penny stocks or even 'blue chip' (if there is such a thing) stocks which are being targeted.
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