The Usual Suspects After All
I said before that the 2 or 3 “U.S. Banks” that have reported, per the Bank Participation report published by the CFTC, a huge short position in COMEX silver and gold were not “money center banks” or “dealers”. Well, after an exhaustive review of the bank quarterly Call Reports filed by each U.S. commercial bank with the Federal Financial Institutions Examination Council (FFIEC), it seems that I’ve established that in fact the primary U.S. banks involved in the futures market are the usual suspects after all. The specific banking entities reported by the CFTC are not “dealers” per se in the sense of being futures brokers but they most definitely have “swap desks” and they are “money center banks”.
Before getting to my findings, I will discuss the process I used so you can try to recreate, if you wish, what I did. First, I took the Quarterly Banking Profile as of 6/30/08 issued by the FDIC and noted the total “Commodity & Other” derivatives were $1.137 trillion in notional value across all FDIC insured commercial banks and state-chartered savings banks. See Table VI-A on page 11 of the report. Also, I noted that “Futures & Forwards” were $23.6 trillion. In addition, I noted that more than 99.9% of derivatives were held by banks with assets greater than $10 billion. Then I ran an “FDIC - Statistics on Depository Institutions” report that matched and reconciled the derivatives totals to the Quarterly Banking Profile. This statistical report indicated that the top 84 commercial banks over $10 billion in assets held the vast majority of commodity derivatives and all futures and forward contracts, while the top 48 savings institutions held almost none. Note that savings institutions file quarterly Thrift Financial Reports, not Call Reports, and the TFR does not provide notional amount information on derivative positions (only market value or credit risk equivalents are reported). Still, we can safely assume that savings and loans are not involved in commodities or futures and forward contracts to any large extent on a notional basis (this is probably why they don’t report the notional amount of derivative positions in the TFR).
Next, I ran the Call Report for each of the 84 commercial banks with assets over $10 billion as of June 30, 2008 and came up with the following (Schedule RC-L, Page 29).
Total Commodity and Equity Futures & Forwards Notional Amount: $308.1 billion (from FDIC Statistics report — this is the closest breakdown for commodities)
COMMODITIES (including off-exchange forward contracts):
(1) JP Morgan Chase Bank, National Association: $126.3 billion (futures only: $74.5 billion)
(2) HSBC Bank USA, National Association: $36.2 billion (futures only: $4.5 billion)
(3) Citibank, N.A.: $16.8 billion (futures only: $15.1 billion)
(4) Bank of America, National Association: $12.6 billion (futures only: $12.2 billion)
(5) Wachovia Bank, National Association: $12.2 billion (futures only: $12.2 billion)
(6) Bank of Oklahoma, National Association: $0.3 billion (futures only: $0.3 billion)
(7) Other: $0.1 billion
TOTAL COMMODITIES: $204.5 billion (futures only: $118.8 billion)
EQUITIES ((including off-exchange forward contracts):
(1) JP Morgan Chase Bank, National Association: $82.3 billion
(2) Citibank, N.A.: $15.0 billion
(3) Bank of America, National Association: $4.0 billion
(4) Wachovia Bank, National Association: $1.1 billion
(5) Suntrust Bank: $0.3 billion
(6) Other: $0.9 billion
TOTAL EQUITIES: $103.6 billion
Not a lot to be surprised about except I didn’t think Wachovia would have that much in commodity futures ($12.2 billion). What does come as a bit of a surprise is that more than 99% of commodity (and equity) futures and forward contracts held by U.S. banks are concentrated in just 5 institutions. Yet if we look back at the Bank Participation report for July 1, 2008 (which corresponds very closely timewise with the 6/30/08 Call Reports), we indeed can see that no commodity futures were held by more than 5 U.S. banks. And now we know the names of those 5 banks: JPMorgan, BofA, Citibank, HSBC and Wachovia.
Let me note at this point that even though the Bank Participation report showing the huge increase in COMEX gold and silver short is dated August 5 (more than a month after the June 30 Call Reports), there is little reason to believe that the top 5 banks have changed. Indeed, I’ve looked at a selection of historical Call Reports and did not see a lot of change in the composition of the top futures-holding (or should we say wielding) banks.
So, which of the 5 are the actual 2 big shorts in COMEX silver and 3 big shorts in COMEX gold? Well, the Call Reports seem to reveal that as well (Schedule RC-R, Page 40):
JPMorgan
Gold Contracts: $85.2 billion
Other PM Contracts: $10.9 billion
HSBC
Gold Contracts: $27.5 billion
Other PM Contracts: $6.9 billion
Citibank
Gold Contracts: $0.5 billion
Other PM Contracts: $3.0 billion
Bank of America
Gold Contracts: $0.4 billion
Other PM Contracts: $0.2 billion
Wachovia
Gold Contracts: $0.0 billion
Other PM Contracts: $0.0 billion
Bank of Oklahoma
Gold Contracts: $0.0 billion
Other PM Contracts: $0.0 billion
Note that it makes sense that 2 of the 3 are JPMorgan and HSBC simply because these two have the largest commodities forward contract books of business ($83 billion out of $85 billion or so). The third (in COMEX gold) is likely to be Citibank, which has a $1.7 billion commodities forward book of business, although it could very well be Bank of America. We should know when the 3rd quarter Call Reports come out later this year assuming one or more of these banks made a killing shorting gold and silver (gains and losses on derivatives are reported in the Call Reports, although without breaking out commodities separately).
You can draw your own conclusions at this point but I would like to make a couple of observations before I’m done. First, the very large commodities forward contract book of business run by JPMorgan and HSBC could very well mean that the huge COMEX short futures positions that showed up in the August Bank Participation report are hedges or offsets against the forward contracts. The 33,805 COMEX silver contracts have a notional value around $2.5 billion, and the 90,568 (I’m counting both long and short) COMEX gold contracts have a notional value around $7.7 billion. JPMorgan and HSBC’s commodities forward contract books of business are almost an order of magnitude larger than this.
Second, based on some of the incongruities between the Bank Participation and COT reports that I’ve already pointed out, I believe it is somewhat likely that the huge COMEX silver and gold short positions of the 2 or 3 U.S. banks (I am no longer placing “U.S. banks” in quotes because I have now determined they are in fact just plain old U.S. banks in the generic sense of the word) represent an intercompany transfer between the futures dealer subsidiaries and the banking subsidiaries of JPMorgan and HSBC. Such a transfer could be accomplished by having the banking entity enter into a swap with the dealer entity. What would remain on the dealer’s book is just the forward contract.
Now, I understand if you are scratching your head in bewilderment as to why the dealer and bank subsidiaries of a bank holding company would bother to do such a swap. Well, I have an answer for that as well. Take a look at the CFTC Financial Data for Futures Commission Merchants reports. Do you notice anything interesting? Hint: HSBC Securities and JP Morgan Futures (I’m talking about the futures dealer subsidiaries otherwise known as Futures Commission Merchants) have relatively little “Adjusted Net Capital” compared to a number of other futures dealers. In fact, their reported capital (HSBC Securities: $829 million; JPMorgan Futures: $1.7 billion) does not come anywhere near to being able to support the total notional amount of commodities futures contracts (HSBC Bank USA commodities: $36.2 billion; JPMorgan Chase Bank: $126.3 billion) and futures contracts in other markets (for example, JPMorgan Chase Bank has $1.2 trillion–trillion with a “T”–in interest rate futures contracts alone) held at the bank level, as reported in the respective Call Reports.
Thus, it appears that the swap of forward contracts for futures contracts is being driven by the need of the JPMorgan and HSBC banking subsidiaries to hold most of the consolidated capital reserves. And that, in turn, could be the result of the massive loan write-offs on subprime mortgages and collateralized securities, which apparently have required JPMorgan and HSBC to boost banking reserves at the expense of the reserves held at the futures dealer subsidiaries. You can see what I’m talking about by reviewing some of the historical Futures Commission Merchant reports, noting that most other large futures dealers have increased their reserves by a multiple in the past couple of years whereas JPMorgan and HSBC have remained near historic levels despite a large increase in their futures trading activities.
One final note. JPMorgan and HSBC are obviously huge individual players in the gold and silver markets and that includes the COMEX. The Call Reports prove, I believe, without a shadow of a doubt that these two U.S. banks constitute a significant portion, and probably the outright majority, of commercial short positions (both gross and net) in COMEX gold and silver futures. That might get the conspiracy-minded among us to start hootin’ and hollerin’, but I do want to point out that JPMorgan and HSBC have a much larger book of forward gold and silver contracts than they do COMEX gold and silver contracts. As a result, it is impossible to conclude with any degree of certainty that the COMEX gold and silver short positions are not in fact hedges of forward gold and silver long positions. Unless, of course, we have an agenda and a propensity to jump to conclusions.
in essence, the way I understand your analysis, you put names and numbers behind Jon Nadler’s email to Mike Shedlock ( http://tinyurl.com/686yaf ) where he refutes Butler’s theory?
So what kind of conclusions can be drawn from the data (I wish I was smart enough to draw my own)? JPM/HSBC have huge short postitions - but needed to take them off the books of one company (futures div?), and they ended up on the books of another (banking div?)?
If I put my conspiracy hat on - both banks got the shorts transfered ahead of an engineered drop to increase the reserves of their banking divisions that have huge losses from MBS/CDOs?
So, just to boil this down to the salient points, when you said the U.S. banks in the BP report weren’t money center banks you were wrong, and while you have no affirmative data to support the claim, your gut tells you that this was not new banking entities taking over other commercials trading positions, but just bookkeeping representing an intercompany transfer. Is that about it?
Also, you correctly point out that these banks have significant OTC and COMEX positions. Is it your theory that these positions have at their foundation hundreds of millions of ounces of silver, silver that Mr. Nadler said were recently sold to banks, prompting them to short the COMEX to hedge their risk? Wait a minute, that is a different theory than the inter-company transfer your gut tells you is what happened. So which is it, Nadler’s theory that tech funds sold 27,606 contracts (over the OTC market I guess because this number doesn’t show up in the COT reports), or your’s that this was all just a simple bookkeeping exercise?
Your research was great in revealing jp morgan and hsbc as the holders of the short positions. I would like to make a couple of observations. Looking back to Dec. 07 cftc banking participation you will find that 4 US banks held a 15% short position in gold with 73,041 contracts. This is only 13,357 contracts less than August, 08. Because of the small difference in contracts between these two months I feel your conclusions may be in error. This short position in August may be just what it appears to be on the surface, a large bet on gold and silver dropping in price or an effort to push the price of gold and silver down. In the Dec. 07 silver contracts there was however no large short position by the banks.
Toto, there may be a few who were not already aware that JPM and HBSC are active in the COMEX, but they would have to have never bothered to look at the NYMEX delivery notices, where they show up constantly. Speculation without substantiation that the increase in bank participation on the short side in silver and gold is due to an intercompany transfer in order to strengthen the balance sheet of the parent company is interesting, even if it makes no sense whatsoever from the standpoint of GAAP. I would be interested to see if the CFTC decides this is the explanation that will fly as it is so easy to disprove from the data, but one would have to wonder if that was the simple explanation why the CFTC, who has been deluged with communication from silver investors hasn’t offered this simple explanation. Possibly because it isn’t true? Time will tell.
What this short position represents ‘on the surface’ is 27,606 new contracts short by two banks, which given the COT data, means these 2 banks took over the short position of other commercials. In other words, 2 banks bet the market is going down, while some other commercials conclude exactly the opposite. Does that make sense to you, given the sheer size of the bet? Szabo says it is all just intercompany bookkeeping, but the rationale for such an entry that he provides makes no sense from an accounting standpoint. The capital reserves of a subsidiary wholly controlled by the parent (as in this case), would flow through to the balance sheet of the parent, so the motivation offered for taking over the position by the parent makes little sense, although I am sure some will be able to come up with a few thousand words explaining why it isn’t so.
You correctly note that there is some difference between gold and silver. What we can say, is that this size of short position in silver has never been attributed to banks before. Again, why the position and what effect does selling 138,000,000 ounces of pretend silver have on the COMEX price. I think we have our answer. It goes down $6.00.
THANKS TED………………..
My pleasure, Tom.
But just to be clear, I think Butler has stated that he would rather saw his leg off with a rusty butter knife or some such that engage in discussion on a forum like this. My thoughts are my own.
I think all should read Jon (nads) Nadler’s commentary from today! Using only fundamental research, (no technical, elliot wave,fractal whatever, etc.) Jon’s calls have been stunningly accurate in the end.
He believes the trigger for the big money exiting silver/gold was the ECB’s change of heart on interest rates. The herd stampeded.
He also said that the banks mentioned here and elsewhere are market-makers and ” must stand ready to buy or sell the commodities in which they make markets, and take the “other side” of a trade from other people or institutions entering a market. Therefore, it is clear that the market-makers (the banks) were heavy BUYERS, not SELLERS, during the time when prices declined. Now, because market-makers do NOT take naked, one-sided positions, as they were BUYING the metal in a sharply declining price environment, they were immediately seeking to HEDGE their large (and growing) LONG positions. How do you think they did that? Yes, they SOLD in the futures market, thereby hedging their LONG positions.”
A very long article indeed with lots of links to support his views…makes much more sense than all the conspiracy stuff to me. I like to call him “nads” because, like Tom, he has the kiwis to question some popular peoples beliefs at the risk of angering their supporters. Best to you all.
John Nadler is the lead speaker for the ISMS, Illegal Silver Manipulators Society. Everyday he writes 2 columns saying PM’s will fall. He is a full time PM basher. His sole function is to jaw bone silver and gold down, it’s a full time job for him.
I think it’s funny that you consider him credible. Too bad though, if people would stop reading his drivel, he might shut up and go away.
Many scenarios could be painted that would seem to imply that commitments of traders data must be meaningless. What is amazing is that we have consistent testimony from traders and analysts over the years that commodity markets, including gold and silver, tend to go in favor of commercials’ positions. For gold and silver, this is astounding when you think about it.
If a bank had inside information about the structure of the market, or forthcoming government actions, it could pull an “Enron,” take huge countervailing positions, itself, opposed to a non-reporting subsidiary, and load up all the profits in one and all the losses in the other. Given the extreme degree of concentration in the numbers, it might make sense to do the opposite of what was indicated in the article, namely load up the banks with all the losses, and take the profits offshore or into the pockets of non-public partners. These banks are considered to big to fail. No matter how much they lost on gold trading, it would be covered by government bailouts at the taxpayers’ expense, while the insiders became immensely wealthy.
The other thing not mentioned in the article are investment banks, GS, Lehman, et. al., and foreign banks, such as other members of London Fix, foreign central banks, and foreign corporations, such as Sumitomo, and the rest of the Japanese gang of four. How can one speak intelligently about a worldwide market with only reference to US commercial banking corporations?
Yes, it’s a wonder that Commitments of Traders have been so often correct in pointing out market extremes. Could that paradigm fail when it most counts?
STUPID IS….STUPID DOES…
This is part of my REPLY from TOM’s Butlers Smoking Gun Article:
“Lastly?.as regards to who those 2 Banks might be?.I know J.P Morgan is one of them?.most of the CORRUPTION and FILTH stems from that ROTTEN EGG. Now how was it done? Who was the actual BANKS that PULLED the TRIGGER and ASSASSINATED SILVER and GOLD?.we just might find out?.but the GUNS and BULLETS were bought for by J.P MORGAN?.in my humble opinion.”
I knew J.P MORGAN CHASE was the TOP CHEESE in this FIGHT. I had an IDEA that it was HSBC…funny….NADLER used to work for REPUBLIC NATIONAL BANK now (HSBC).
http://www.cambridgehouse.ca/ch_jnadler.html
So I have to agree with Mark on this one…..NADLER is an HSBC PAPER POY HACK. Come on folks….stop being so FRICKEN NAIVE….TOM…think about it….we all know GOLD is being MANIPULATED…..HELL, GREENSPAN said it back in 1998 ON RECORD they were going to SELL GOLD to keep the PRICE DOWN….so STOP BEING SO FRICKEN STUPID thinking NADLER is giving a PLAUSABLE EXPLANATION.
HAVE IQ’s suddenly DROPPED in the PAST several years????
The SUA- SILVER USERS ASSOCIATION is the only CARTEL other than OPEC in keeping prices LOW for the MANUFACTURERS. HOW come people are TOO LAME to understand this simple princible? Where are those with GOOD FUNCTIONING BRAIN STEMS…..NADLER is a BANKER PAPER BOY HACK…if you can’t read through it in his articles….then you folks need to invest in REAL ESTATE…..WHY??? Because CNBC another COMEDY CHANNEL is saying the BOTTOM IS HERE. IF people think the BOTTOM in REAL ESTATE is here….they need to go get their HEAD checked. Real Estate will not bottom for years if not decades….COMMERCIAL is right around the corner for its COLLAPSE to begin.
Tom….you did some fine WORK on FINDING more DETAILS….but I already knew that the KING SOUR CHEESE was J.P Morgan. After a while you don’t need MORE and MORE DATA to know the PERSON going to DIE FROM CANCER….all you got to do is just look at them. Too much DATA makes one LOSE FOCUS…..use the FORCE.
Lastly……PEAK OIL is here….PEAK GOLD has already taken place…..probably in 2001. PEAK SILVER will OCCUR within the next several years…possibly by 2009-2010…..by 2015 you can see 10-30 MILLION OUNCE of PRODUCTION LOSS ANNUALLY. The PARTY is over…but the CLOWNS and MAGICIANS on WALL STREET and at the FED are doing their BEST in the STUPIDIFICATION of AMERICA.
But at some point in time……it will BLOW UP…..and those with PAPER ASSETS in their HAND…..will have some of the most EXPENSIVE JOHNNIE (toilet) PAPER in HISTORY…
Word….
Other than hard money enthusiasts, who cares? Jake, it’s Chinatown. We’re canaries in the coal mine, blessed to have experienced the Future. Cash in your chips, take delivery and walk away. The hour is getting late.
Well put, Kipling,
But it is still very useful to understand what exactly is happening and why at each stage of the game. It may be getting late, as you put it, but the flash-over to a hard metal world might still have many complications for physical au/ag investors.
I am grateful for all the commentators’ input, but especially for Tom Szabo for creating and leading the forum we are now enjoying. It keeps our minds sharp, and we may need every last bit of mental fitness to capitalize on the coming opportunities.
SRSrocco, if all you’re concerned about is accumulating physical for the long haul, waiting for the eventual loss of confidence in fiat, you should be THANKING the manipulators for driving silver to unnatural lows. You can now accumulate at a much lower price.
But if a guy ever trades, he has to go by the old saying “the market is always right”.
You guys that so easily identify manipulation should, by now, be able to see it coming and all be multi-millionaires.
And, good luck with that “use the Force” thing. Best to you, really.
forwill….I trade paper assets….but this is for fun and profit…..mostly stocks. We will not have to wait long for the end of the DOLLAR….its in its last state of NECROSIS….and Death. Sure there is some TRICKS left and more STUPID in the STUPIDIFICATION of AMERICA….but in exponential systems…..they get weaker exponentially…..no different with the DOLLAR.
There are no real ASSETS of value left anymore, besides precious metals, energy and commodities….oh yes…WATER. But besides a few good COMMERCIAL and RESIDENTAIL PROPERTIES…..most assets will become worthless as time goes by. Pension Plans, IRA’s 401k’s, Mutual Funds, CD’s, etc and etc are nothing more than IOU’s on FUTURE EARNINGS. As the American Dream Vanishes as CHEAP OIL from PEAK OIL comes into FULL STEAM….there will be a MAD RUSH out of SUBURBIA.
Understanding this PRINCIBLE will force Americans to put their money in HARD ASSETS. Real Estate was a PONZI SCHEME along with most RETIREMENT ACCOUNTS….so this will prove to be FOLLY for the MASSES.
I don’t need to wait for SILVER or GOLD BULLION to hit…..but I do enjoy the DRAMATICS along the way. Nothing like a GOOD OLD FASHION ECONOMIC COLLAPSE to wake up those SLEEP WALKING the AMERICAN DREAM. Again…..SUBURBIA has no FUTURE….and the FUTURE is now here…..so all we can do is hope more people GET INTO REAL ASSETS….before the STAMPEDE out of PAPER BEGINS.
Roland: Not entirely, I’m putting names to the numbers revealed in Butler’s “naked gun”. I’m also saying these banks are not necessarily “naked” short.
Ed: You’re thinking a step ahead of where I’m willing to go.
Limpet Mine: Yes, unlike you and Butler and your kind, I can actually admit when I’m wrong. Clearly these were money center banks after all. Gloat some more if you wish. Notice I went out, did the research, and then presented everything including links and all the data. I don’t care about Nadler’s theory, but mine is that these large positions were not NEW positions (at least not the majority) put on sometime between July 1 and August 5. That means I believe they were transfers of some kind. I presented a plausible theory for why such transfers would have been made. You have presented no counterpoint other than your usual pointless claptrap.
toto: The U.S. banks have held a significant short position in COMEX gold at various times. In December 07 that short position was clearly not in their favor (gold went up more than $200 from there). One cannot take a selection here and there and just draw conclusions in a vacuum. I tried to synthesize various other factors such as COT, the banks’ forward books, the CFTC FCM reports, etc. to come up with a theory. It could be wrong, but it is more than the one-legged stool that Butler etal offer as an alternative.
Limpet Mine: I see you are now an expert in bank regulatory ratios as well! Not to mention GAAP! Well, I suggest you spend a bit of time studying the fascinating field of regulatory capital, making sure you pay particular attention to the difference between the Federal Reserve requirements which are applied at the holding company level as well as to the Office of the Comptroller of the Currency requirements which are applied at the bank subsidiary level. Once you’ve got your facts straight, please come back and tell us how it is. And don’t forget to deal with that wonderful little corner you’ve backed yourself into wherein you actually state that “this size of short position in silver has never been attributed to banks before”. Does this mean JPMorgan, HSBC and all the other big bad banks weren’t the ones who were short silver before August 5? Or just that they’ve always before held the short silver positions at the dealer, not bank subsidiary, level. Either way, I won’t hold my breath waiting to hear from you that you were actually wrong.
JOHN: He’s not Ted, but close enough so it doesn’t make much of a difference.
forwill: Agree with your sentiments and Nadler is right about the mechanics but he is ignoring the COTs in this instance, which show the commercials were BUYING on the COMEX as silver and gold went down. July 1: 27,495 and 92,817 gross long and gross short held by commercials. July 15: 30,013 and 101,164. August 5: 35,217 and 90,678. August 26: 37,361 and 80,469. So, the commercials BOUGHT during the decline.
Just to make sure I said it clear enough, let me repeat: THE COMMERCIALS BOUGHT DURING THE $200 DECLINE IN GOLD AND $6 IN SILVER. Those planning to join a class action lawsuit, good luck with it, that’s quite a first hump to get over.
George Drake: Anything is possible, but I like to deal in the realm of plausible. I only referenced the U.S. banks because they were the ones that the CFTC bank participation report shows allegedly took a huge short position right before gold and silver prices dropped. Clearly the international banks have a role to play. As for COT analysis, I don’t like to get into a very rigid type of formula like most other people precisely because a particular set of rules or patterns can be voided “when it most counts”.
SRSrocco: Appreciate the viewpoint, don’t agree with most of it but that is what makes the world go round (well, that and primordial inertia and gravity).
Kipling: I don’t think we’re quite there yet. The basis will tell us–hopefully not too late–when it’s time to cash in all the chips. Of course, there is probably nothing too wrong with being a bit early.
OpenMint: Thanks, I too like to keep my eyes open as much as possible. Never understood why one would close their eyes, for example, as they were going down in a plane. Yeah, it’s certain death but if there is something left to see, I want to see it especially when it’s something that interesting.
A little more claptrap, Tom. The Bank Participation Report shows the largest concentration of banks short silver by many factors. I stand by my statement that ?this size of short position in silver has never been attributed to banks before?, as one can verify by looking at the reports. You take this to be incorrect because apparently you know that the commercial shorts in the COTs include these same federally regulated banks, even though their identity is protected by the CFTC by law. Perhaps you divined this insight by the same method that you used to determine that there are 3/4 billion ounces of silver sloshing around warehouses in London, the regional nature of the banks in the BPR, the true position of Vitol in the oil market, the meaning of lease rates, and the wisdom of changing your short term signal to ‘buy’ just before the price dropped $5.00. I can’t wait for what your ‘gut’ tells you next, but whatever it is, I can be assured it will be immune to all evidence of contrary data.
Speaking of your buy signal, I note that former Professor Emeritus Fekete stated recently that the gold silver basis predicted the recent sell off (http://www.professorfekete.com/articles%5CAEFSaveMyFace.pdf ). Are you two following a different basis calculation? Fekete, being the insightful analyst he is, predicted the sell off. So wha’ happened? Inquiring minds want to know.
Limpet Mine: I know the identity of the banks because I went through all of the Call Reports and found which banks held commodity futures and which banks held gold derivatives. Sorry if this was too confusing for you. I never said there were 3-4 billion ounces of silver sloshing around warehouses in London, I said there was a multiple of the monthly trading volume (which is around 120 million ounces) with perhaps as much as 1.5 billion ounces in total wholesale form including the 200 million ounces held by SLV. I also told you that much of that silver is probably not available at any price south of $50. Not only are you spouting claptrap, your math is about as good as my 6 year old’s (who’s actually quite advanced). The regional nature of the banks in the BPR was based on my discussion with the CFTC, and when I realized that could not be right, I did my own research, discovered the real facts and then presented them. More bad math from you: I didn’t change my short term signal to “buy” just before silver dropped $5, it dropped less than $3 and is now about $2 below that level. Still better than your hero Butler who wants people to buy at any and all prices all the time. Finally your reading comprehension actually seems worse than my 6 year old’s: Prof. Fekete never said the gold/silver basis PREDICTED the recent sell off. He said the basis explained that it was a purely paper phenomenon indicating a disconnect between paper and physical markets. I’ve already discussed this several times in my commentary (the disconnect). The fact is that the disconnect is mainly in retail bullion at this point and it hasn’t yet moved to wholesale bullion (one reason why is that the wholesale market is orders of magnitude larger than the retail market). Keep up the claptrap, bad math and kindergarten reading comprehension.
Limpet Mine: Please be sure to come back in 2 months and 5 days to call me out again on my short-term “buy” flag. Here is what I said on Friday, August 8 at the close of the COMEX pit session with silver trading at $15.30:
“But let us not be sad ourselves. Instead we should relish the thought that the recent decline in the price of silver will allow a new wave of investors to join us in enjoying the white monetary metal for fun and profit. With that said, I am officially flipping the “Alert Flag” for the speculative term to Green, which represents the first change since last October when I turned it from Green to Yellow. There is the possibility of further downside but this is not about picking exact bottoms, it is about risk and reward. I think it is fitting that this change (reversal) to Green gets made right about the same price level as the previous change to Yellow. Back then, who would have believed that we would be at the same place 10 months later?”
The very next week, silver traded between $12.50 and $15.00, a level that so far has held. Now, I’m not particularly proud of my timing but I’m not going to let you get away with misrepresenting it.
This is a fantastic article, that explains John Nadler’s motives.
http://silverstockreport.com/2008/nadler.html
Tom, you are quite right in your correction on how much someone would have lost following your signal. One only would have been under water by $15,000 rather than the $25,000 per contract I suggested. My apologies.
You are also correct that my use of the fractional notation of “3/4 billion ounces of silver” was inappropriate, since someone with your data analysis skills (never mind your six year old) would have been confused. I should have spelled it out in words “three quarters of a billion ounces” so the average analyst wouldn’t think I was talking about 3 to 4 billion ounces as you did.
I was also wrong in characterizing your estimation of London silver as three quarters of a billion ounces, because above you state that London holds “perhaps as much as 1.5 billion ounces in total wholesale form.” You based this on a “monthly trading volume (which is around 120 million ounces)”, but the LBME claims that this is their DAILY trading volume - “Ounces transferred in silver fell 1.4% to a daily average of 119.5 million” (http://www.lbma.org.uk/stats/clearrct). Since you were off by a factor of about 20 on this key piece of data, does that mean that you feel the correct amount of silver in London is 20 x 1.5 billion or 30 billion ounces?
I am surprised that someone at the CFTC told you that the Bank Participation Report only included regional banks. Are you sure you didn’t talk to someone at KFC rather than the CFTC? When I spoke to the CFTC Chicago office to get clarification about what a ‘bank’ is, they didn’t seem to indicate any regional limitations in the data.
Finally, on your theory that JPMChase etc. entered into a swap with their trading subsidiaries, and therefore the Bank Report is of no impact - “Thus, it appears that the swap of forward contracts for futures contracts is being driven by the need of the JPMorgan and HSBC banking subsidiaries to hold most of the consolidated capital reserves.” If this is what happened, could you explain why the Bear, Sterns entities still have over $10 billion in Adjusted Net Capital per the FCM reports, even though JPMChase owns them outright now? Did they need the consolidated capital from some subs, but not others? I am sure you can clear this up.
Yes, and if one were “following” Butler, one would be $50,000 under water per contract.
Sorry for not understanding your notation format, 3/4 billion is very sloppy shorthand for 750 million. As for 1.5 billion ounces, that is my estimate of the total number in wholesale form, not just London, although a lot of it is likely to be there (certainly at least 750 million). I realize 120 million ounces is a daily volume, not monthly, so nice catch there bucko.
As for “regional” bank, that is a distinction from “money center bank”. What I was told is that the bank list excluded “money center banks” that serve as swap dealers. Maybe I didn’t hear it right, but I’m fairly certain that is what was said. Clearly that was wrong. Go ahead and keep rubbing it in, but realize that I did the research and corrected myself.
I stated the need for capital at the bank level was a theory so let’s by all means examine it. Bear Stearns had $10 billion in Adjusted Net Capital, so why not move this to JPMorgan Bank to boost its capital? Well, for one it is not really possible to “move” capital itself. But it is possible to rearrange assets and liabilities to maximize capital ratios. So I don’t rule out Bear Stearns being a swap counterparty to JPMorgan Chase Bank. But 30,000 contracts in COMEX silver and 80,000 contracts in COMEX gold? Come on, JPMorgan Futures is the one with NYMEX as the Designated Self-Regulatory Organization, while Bear Stearns has CME and NFA. Also, Bear Stearns is rarely ever a big player on the delivery side in COMEX (you indicated before that is where we should look to see who the big players are) while JPMorgan and HSBC are there much more often. While not impossible, I do think your reasoning strains credulity almost to the breaking point.
I would also argue that it is possible to upstream trading profits over time to keep capital to a minimum where it is not needed and raise it to a maximum where it is needed. This may be one reason why JPMorgan Futures’ excess capital has remained so low over the years relative to other FCMs.
In addition, I would note that cash, L/C and security collateral for NYMEX futures must be held at an approved bank: http://www.nymex.com/deposit.aspx . I have no idea where Bear Stearns held these “margin” instruments for their NYMEX positions (if any), but it is possible they were moved to JPMorgan Chase Bank after the acquisition. I haven’t figured out how that would impact things, but it seems to me that might provide a reason for transferring or swapping futures positions between entities. Perhaps there is a reader out there who has used Bear Stearns in the past or might still be a customer today and is in a position to tell us where Bear had/has its customer segregated funds bank accounts.
Finally, let me make the point that capital is not the same thing as liquidity, and one thing we know for sure is that Bear Stearns was not liquid. Thus, it seems preposterous to me that Bear could contribute anything positive to a bank capital ratio. Furthermore, if Bear Stearns was underwater in COMEX gold and silver short positions, that would have been more so the case on July 1 than August 5. If there was a conspiracy to drive down gold and silver prices during this period, and these positions were “naked” short, why not just leave them with Bear?
On this topic and many others, Butler’s logic completely escapes me.