Gold futures market heading for crisis

Alasdair Macleod – 10 December 2012

I thought I had a good idea what disasters we might face in 2013, and then I saw the most recent US Commodity Futures Trading Commission’s Bank Participation Report for gold and silver. On the basis of recent BPRs these markets are heading for a crisis, which is generally unexpected. I shall break the reader in gently by looking at gold first.

The first chart below shows US banks’ net short exposure to gold up to December 4. Between February and August the US banks managed to reduce their net shorts from 104,717 to 57,689 contracts against a background of a declining gold price. This is logical, to be expected and sensible position management. However, when the gold price turned up after the August BPR, net shorts rapidly rose to new highs, and over the last month unexpectedly increased again while the gold price actually declined. This is a sign that the US banks, of which only five made returns for December, are having difficulty keeping a lid on the market that emotionally at best is neutral, but most probably somewhat oversold. This differs from an over-bought market with potential profit-takers to shake out, as was the case when gold traded at $1,900 per ounce and the same banks were able to bring the gold price back under control.

US banks net short contracts

The next chart is of Non-US banks’ net shorts, which tells a very different story. From October 2011 these banks increased their short positions, with a sudden jump between August and October, before sharply reducing their net positions to 44,707 contracts this month. It appears that some of the shorts have ended up on the US banks’ books, pushing their shorts to uncomfortable levels as shown in the first chart.

Non-US bank net shorts

The jump in these net shorts between August and October was comprised of sharp rises in both longs and shorts involving swap dealers and the other commercials. Longs more than tripled from 9,199 to 34,881 and shorts rose even more from 49,772 to 113,445 on a rising gold price. The likely explanation is that buyers materialised through some of these non-US banks, who hedged by buying futures contracts. A dealer or dealers at one or more other non-US banks saw the price go against their shorts and tried to kill it by massive intervention. Subsequently, when the US banks sold the market down from the October rally these non-US banks took the opportunity to reduce their shorts to more normal levels.

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.


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.

Silver: US bank net shorts

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.

Silver: Non-US Banks Net Shorts


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 (December 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 destabilising 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.

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

23 thoughts on “Gold futures market heading for crisis”

  1. Thank you for this valuable information.
    Just to be sure I understand the message: is “the breakdown of precious metals markets” to be understood as:
    – a sky-rocketing of prices?
    – closing of the markets?
    – a shortage and delay for buyers?

    I am not sure how this “breakdown” is to be understood and others probably will be helped with some more explanations.

      1. Thank you, Mr. Macload,

        What I do not understand is the nature of a “net short exposure of nearly 200,000,000 ounces”.
        Is part of this amount coverable by certificates (that is “paper silver”) or are these ounces to be delivered as metal? That is e.g. from mining or recycling existing silver such as jewelry.
        I always thought 99% of the silver (and gold) is traded as paper silver – that is a non-allocated quantity, a sort of “bet” trading “following the silver-price”.
        (Maybe these questions may unveil my ignorance, but I do not understand how economic professionals allowed such a crazy system to be developed and menace the economic global structure).

          1. This reminds me of the Hunt Brothers’ silver imperium, which had to be ruined by “modifying the rules” by the “imperium”.
            They probably already may have found a solution to get rid of the contracts…

  2. Hi Alasdair,

    Your articles have helped me tremendously in understanding what is finance and economics since I am just an engineer.

    May I know what is the impact if all Silver paper buyers take delivery even at paper loss to kill the short raids by the banks or other short sellers?



    1. CH
      I think you are asking what happens if the longs in the futures markets are forced to take cash instead of physical. The circumstances under which this would happen would be after a sharp rise in price and the likely bankruptcy of one or more of the shorts. So any settlement would be at a higher price (probably the price at which trading is suspended) and those that genuinely wanted metal would have to go into the physical market and buy it there.

      Whether or not the price rises subsequently depends on future supply and demand, and what happens to the gold price. And as we know, that depends ultimately on monetary policy.

      1. Those in default are likely to be big Wall Street Too Big to Fail Banks. Does this mean the Fed and US Treasury will stand behind this large short positions?

          1. “Can you imagine the exchanges not being too big to fail, when their individual members are? What chance do you think there is of the Federal Reserve allowing the entire COMEX or NYSE-Liffe exchange going bankrupt? In my opinion, the chance is close to zero. A massive failure to deliver is highly unlikely, but, if it did happen, and if the exchanges were unable to comply with their legally binding guarantee, the government will step in and provide gold from Fort Knox and enough money to buy silver in the open market, no matter what the price. The end result will merely be a huge price increase, and an end to the assumed legitimacy of futures market prices, not a default.”
            –Avery Goodman

      2. Hi Alasdair, Great article. You certainly made the suppression easier to understand than most other commentators. I may be wrong, but I had heard that if you buy futures from LBME and Comex there is very, very print somewhere in the hundreds of pages of futures contracts trading rules, where it stipulates that in fact the LBME can pay settlement inn cash. I believe it was Jim Rickards who sated this. I guess if in doubt buy from respected bullion dealers. They only sell slightly above spot and you don,t have to worry about been “liquidated” or been told you must accept a cash settlement.

    2. It may be just an internet rumor, but it was reported that the MF Global scandal involving John Corzine was used by MF to liquidate without compensation to date a large portion of the futures contracts that had been waiting for physical delivery. Well known Futures Trend Research writer Gerard Celente was among the individual investors that got screwed by MF. It would be interesting to hear from Gerard in an interview if it is in fact true that he and others that lost money in the MF scandal where in fact waiting / requested delivery of bullion.

  3. Hi Alistair,

    The $32.50 support for Silver by the taker-on-er, appears not to have held. Might the holders of the huge numbers of shorts be now starting gradually to buy to square their books? Price action does not suggest this though.Not being a shorter myself I am wondering if they have plenty of time in which to close and level off their books, so maybe they can continue forcing down the price of Ag.

  4. Hello Charlie

    For the shorts to close their positions the open interest has to contract, so that is the stat to watch. It is holding up well.

    The problem they have is the shortage of physical, and I note that for the current month of December there are about 17,000,000 ounces standing for delivery. Of course, if they have it they can always deliver….

  5. If there are 17,000,000 ozs for December delivery to effect the squaring of short sales does that mean 17m/5000 per contract = 3400 transactions?
    Comex Silver today shows a typical 38,000 contracts as at 2.22 EST. This does not seem to be onerous in ‘squeeze’ terms.
    What have I missed? I’m new to this area !

  6. It’s 3400 contracts (a transaction is usually for a number of contracts. The problem with the futures market is that speculators only take delivery of a small number, usually preferring to close an expiring position or roll it into a future month. But when supply of bullion is tight, 17m oz can make quite a difference.

  7. If there is a default on the Comex, then the bullion banks will just settle in cash. And once everything has been settled, presumably the bullion banks will just carry on as per usual; ie: they will start piling on the short positions again?! They just won’t have such a concentrated position, initially…

    What do you think about this scenario Alasdair?


  8. Mike
    If a default occurs and the bullion banks manage to settle in cash, the default will have likely imposed considerable losses in the tens of billions on the bullion banks. The default will be the only way they don’t go under.

    There is no way their own management, or indeed their central banks will permit them to accumulate unmarketable short positions afterwards. The whole scandal will have become very public.

    If the central banks are trying to manipulate gold and silver prices they will either have to find another way of doing it or abandon all attempts and let markets take over.

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