Same As It Ever Was – Craig Hemke

August 10, 2017

While we’ve all noticed some of the extreme and
historic changes to the Commitment of Traders report over the past two
months, the once/month Bank Participation Report belies the fact that
nothing has yet changed. Whenever price rallies, The Banks are still
quick to take the short side of the trade.

First, we should probably begin this post with the usual background and disclaimer:

We’ve written about these CFTC-generated
reports so many times, it would be impossible to link every post.
However, nearly every post began with these bullet points. Here they are
again, just so that we’re on the same page:

  • The CFTC’s Bank Participation
    Report is issued monthly from a survey taken at the Comex close on the
    first Tuesday of every month. The report summarizes the combined
    positions of the
    four largest U.S. banks (primarily JPM, MorganStanley, Citi, Goldman but occasionally others) and the twenty largest non-U.S. banks (Scotia, HSBC, DeutscheBank, UBS, Barclays and others).
  • Always keep in mind that these reports might be utter nonsense
    and complete falsifications, designed to mislead you and get you leaning
    the wrong way. In 2014, JPMorgan was fined by the CFTC for “repeatedly
    submitting inaccurate reports relating to the required reporting of
    positions”. See here:
    http://www.cftc.gov/PressRoom/PressReleases/pr6968-14

Again, we know that what The Banks report as
their “positions” provides an incomplete picture at best. Not only do
The Banks maintain considerable long and short bets in the OTC market,
they also operate numerous, offshore hedge funds and utilize these funds
to take positions not included in the CFTC data as “commercial”. So,
what good are these reports? Similar to the weekly Commitment of Traders
reports, the Bank Participation Report is only useful/interesting when
considered historically…and that’s what we’ll do again today.

OK, with that said, let’s take a look at the
latest report that was surveyed on Tuesday, August 1 and released late
last Friday, August 4.

If you’ve followed along for any length of time,
then you know how The Banks make a market on the Comex. Once upon a
time, The Banks operated as agents for the miners. The mining companies
would hedge and/or sell forward their future production and would do so
by having the agent Banks issue contracts on the Comex. The miner,
through The Bank, would be on the short side of the trade and a
speculator would bet on the long side. This is largely how the commodity
markets functioned since they were first created.

However, over the past two decades, the amount
of mining company hedging has declined to nearly zero. The most recent
estimate we’ve seen showed only a total of about 270 mts of production
in 2016 (
http://www.reuters.com/article/us-gold-hedging-idUSKCN0ZS02B).
Even if ALL of this hedging occurred on the Comex, this would only
represent a need for about 87,000 contracts of open interest. However,
we all know that total Comex gold open interest routinely averages in
the 450,000-500,000 contract range. Thus the difference between 87,000
and current open interest is simple Bank speculation.

Again, we can’t attribute EVERYTHING to the
Comex and surely some of the stated Bank Comex positions are offset with
other positions in London and on the opaque OTC “markets”. However,
when we consider the history of the Bank Participation Report data, a
clear trend emerges and its one that, unfortunately, is quite clearly
still present today.

I suppose that the best ting we can do is give
you the data. In doing so, you should be quickly able to discern for
yourself how this works:

1/5/16 @$1078 GROSS LONG GROSS SHORT TOTAL NET

US
Banks
6,387
49,447 -43,060

Non-US
Banks
35,499
37,698 -2,199

TOTAL
-45,259

2/2/16 @$1127 GROSS LONG GROSS SHORT TOTAL NET

US
Banks
9,136
54,150 -45,014

Non-US Banks
22,313
42,663 -20,350

TOTAL
-65,364

3/1/16 @$1231 GROSS LONG GROSS SHORT TOTAL NET

US
Banks
8,183
81,050 -72,867

Non-US
Banks
20,514
72,777 -52,263

TOTAL
-125,130

4/5/16 @$1230 GROSS LONG GROSS SHORT TOTAL NET

US
Banks 11,099
88,208
-77,109

Non-US
Banks
22,788
93,900 -71,112

TOTAL
-148,221

5/3/16 @$1292 GROSS LONG GROSS SHORT TOTAL NET

US
Banks
10,791
118,437 -107,646

Non-US
Banks
21,905
109,511 -87,606

TOTAL
-195,262

6/7/16 @$1247 GROSS LONG GROSS SHORT TOTAL NET

US
Banks
12,704
73,928 -61,224

Non-US
Banks
21,004
93,076 -72,072

TOTAL
-133,296

7/5/16 @$1359 GROSS LONG GROSS SHORT TOTAL NET

US
Banks 9,314
102,684
-93,370

Non-US
Banks 14,622
113,086
-98,464

TOTAL
-191,834

As price fell through the second half of 2016,
Speculators dumped longs and The Banks used this selling to buy back and
cover their short positions. By January of 2017, the BPR looked like
this:

1/3/17 @$1162 GROSS LONG GROSS SHORT TOTAL NET

US
Banks 11,393
60,352
-48,959

Non-US
Banks 24,501
49,264
-24,763

TOTAL
-73,722

As you know, price has rallied in 2017 is a sort
of 3-steps-forward, 2-steps-back pattern. As you’d expect, the Bank
positions reported via the BPR has ebbed and flowed, too. And by June,
with price near its 2017 high (thus far), here’s where the BPR stood:

6/6/17 @$1297 GROSS LONG GROSS SHORT TOTAL NET

US
Banks 8,500
108,153
-99,653

Non-US
Banks 20,128
96,962
-76,834

TOTAL
-176,487

As you can see, The Banks were playing the same
game in 2017 and they played in 2016, taking the short side of the trade
versus the hedge fund and other Spec longs. In what should then come as
no surprise at all, price was hammered lower over the course of the
next five weeks, falling from $1297 on BPR survey date June 6 to $1215
on BPR survey date July 11.

At this point, the July BPR data was surveyed from the Commitment of
Traders data taken that same afternoon. The CoT data was astounding,
showing some of the lowest Speculator and Commercial positions since
late 2015. It looked like this:

And the July BPR revealed this:

7/11/17 @$1215 GROSS LONG GROSS SHORT TOTAL NET

US
Banks 14,013
78,063
-64,050

Non-US
Banks 26,675
67,373
-40,698

TOTAL
-104,748

Since the CoT and BPR had changed so dramatically in a month, there was hope across the gold blogosphere that maybe, just maybe:

  • The Banks were moving to quickly cover shorts and get out of the manipulation business
  • The Banks knew that the game was nearly over and they needed to act fast
  • The Banks were fearful of Andrew Maguire’s alleged 250 mt order and were desperate to reduce their potential short liability
  • And so on and so forth

Instead, while price has rallied form those
early July lows, the latest BPR reveals that nothing has changed at all.
The Banks aren’t afraid of anything. There’s no banker blood in the
streets. Instead, the data shows that they’re still just playing the
same old, tired game.

8/1/17 @$1270 GROSS LONG GROSS SHORT TOTAL NET

US
Banks 9,767
103,249
-93,482

Non-US
Banks 20,357
81,733
-61,376

TOTAL
-154,858

So, The Banks used the latest 4.5% rally in
price to increase their summary NET short position by nearly 50%. And
again, this is not a sudden rush of mining companies beating down the
Banker’s doors in a desperate attempt to sell forward their remaining
2017 production. Instead, The Banks are simply once again playing their
(profitable) game of supplying the paper derivatives to The Specs while
using their infinitely deep pockets to wait them out until price can
once again be rigged lower. Again, unlike what some had so fervently
hoped back in July, nothing has changed. The Banks haven’t changed
course and they certainly aren’t taking any preemptive measures against a
sudden price “reset”.

In the end, what does this mean? Business as
usual, I guess. We’ll continue to monitor the Bank and “Commercial”
positions and look for buying/selling signals based upon historical
references. And in the meantime, we’ll have no illusions about who is
really in charge of these fraudulent and manipulated paper metal
“markets”.


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.

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