Thursday, December 24, 2009

The Truth About The Comex

My commentary here combines two thoughts to two separate inquiries in my comments section concerning the state of affairs on the Comex:  whether or not the Comex will ultimately default and whether or not China will be the one to force the issue.

Let's look at JPM as an example. JPM is short silver contracts representing 200 million ounces. The Comex has only 111 million total ounces of silver, of which only 56 million are registered, meaning available to be delivered. So JPM is short nearly 4 times the amount of deliverable silver on the Comex.

Aside from the extreme manipulation that is going unenforced here, if enough silver longs were to stand for delivery, theoretically JPM would blow up - or be forced to cover - driving the price of silver significantly higher.

My fund partner and I were just discussing the idea that ultimately, just like in 1980 when the Hunts tried to corner the silver market from the long side, the Comex will change its rules in order to avoid a default.  This time around the rule change I anticipate will allow JPM to settle those contracts in cash OR, as they've already done in terms of changing the rules, allow JPM to settle those contracts using the SLV ETF.  The Comex may even go as far as allowing JPM to "force settle" its silver shorts using SLV.  Remember, there is precedence for the Comex's changing the rules in order to protect itself.

IF/When this occurs, it will send a big signal to the global market about the true condition of the growing scarcity of physical gold/silver. But in the meantime, as JPM has shown with its ever-increasing weekly silver short position, JPM can just keep selling as many contracts as it wants to try and keep a lid on the price of silver knowing that it ultimately will never have to deliver the underlying amount of silver.

We have already seen the Comex bailed out of a gold squeeze last May when Deutsche Bank, a large gold futures short seller, suddenly transferred 800,000 ounces of gold from London to the Comex, alleviating a potential blow up delivery short squeeze.

So, the short answer to the issue is that I don't believe the Comex will "blow up" any time soon because the CFTC refuses to enforce market manipulation standards on the gold/silver market. And I don't believe it ever will enforce those standards, contrary to Ted Butler's dreams, and I think the Comex will continue being an illegal short-selling operation of gold and silver until there's a "de facto" default, which will occur when JPM has to force-settle its silver shorts with either a huge cash premium offer or several 10's of millions of shares of SLV.

Eventually Comex will be rendered useless. I don't know if this will occur from a physical squeeze, or if the cause will be the Comex changing the rules - as they've done in past - to allow for cash settlements, or if global players will just ignore the Comex altogether.

The 9 million ounces of gold and 111 million ounces of silver supposedly sitting in Comex depositories, even if all were made available for delivery (which would require private investors using the Comex as a safekeeping depository to register and make available their metal), and notwithstanding the fact that the total Comex inventory would fall far short of satisfying delivery demands if all the longs decided to stand for delivery, wouldn't put even a small dent in the global demand for physical gold/silver

My best guess is that China is leaving the Comex alone for now, letting the manipulating bullion banks keep a lid on the price - thereby allowing big buyers like China to accumulate metal at artificially low prices. When it becomes impossible for big chunks of gold (i.e. like the IMF gold for sale) to be acquired in the context of the current trading range, my best guess is that China will force the paper price up to the point at which a seller would be willing to offer a big chunk of metal. The price right now is transitioning into a dynamic in which the price at which big sellers are willing to sell is really where the real market clearing price will be established.  And since the IMF hasn't yet sold its remaining chunk of gold (I'm assuming they are waiting for higher prices, since they would be shooting themselves in the foot hoping for a lower price, right?), I would surmise that the market clearing price for a big chunk of gold is much higher than the current price.

I don't know if the big buyers will blow up the Comex in 2010 because, for now anyway, the Comex is a big buyer's best friend.

I will say with 100% conviction that silver at current prices is the investment opportunity of a lifetime.  Happy Holidays.


  1. Dave,
    Good article. I love silver as well.

    Have a great Christmas holiday and take a break!
    All my best.

  2. If you want to get annoyed:

    "Treasury removes cap for Fannie and Freddie aid
    Fannie Mae and Freddie Mac receive unlimited future funds from taxpayers to stay afloat"

  3. Dave
    Where did find out about the short position of JPM?


  4. Dear Dave,

    I don't think it happens like that. The COMEX is not important in the sale of physical silver. The LBMA is important in the sale of physical silver. The COMEX won't blow up as you say they can change the rules. The LBMA will blow up as they can't change the rules. The option open to the LBMA are call a default as they did in the case of the TIN Council insolvency. The SLV run by JP Morgan relies on an operating LBMA not an operating COMEX. SLV will bow up, the LBMA will go into a ring out. The short volumes on the LBMA are not as great as the COMEX as they are held on OTC contracts. This allows the COMEX to call a default and ring out quickly. The blame will be placed on London not Chicago or New York. London is where the big boys go to play Cowbys and Indians with real bows and arrows, a murky place of loose regulation.

    This will happen when real silver shortage occurs and they can't stop the physical players buying. The silver price is the inverse of the dollar and a coming dollar default puts an absolute cap on the time period of the LBMA default and afterwards the COMEX.

  5. Agree the LBMA is where the real game is played, but the Comex, for now anyway, sets the price. This is changing, as we transition from a market in which paper crooks set the price to one in which the real buyers craving real gold/silver become the new price-setters.

  6. @ 1st anonymous: there's a monthly or quarterly report that comes out that shows the breakdown of the COT categories. JPM is not specifically listed, nor are the names of any of the players, but it is well known, widely accepted and never denied that JPM is the big silver short. HSBC is the second largest silver short. You can pull up Ted Butler's work, as he has studied this for over 20 years and has given the world a brilliantly detailed map of how the Comex operates.

    It is also public fact that JPM inherited a massive Bear Stearns Comex silver short position (something like 56 million ounces worth) when JPM subsumed Bear's carcass

  7. @gyc: Happy holidays back at ya! Hopefully the next week brings a lot snow to the Rockies because I plan on doing a lot of skiing. No Pain, No Jane (Mary Jane, Winter Park).

    UGH on the FNM/FRE thing. I said several years ago that FNM/FRE would be used as monetization conduits when the housing bubble collapsed - that's what is going on here. Taxpayers are geting plugged in the ass with no lube by Geithner/Obama/Summers...

  8. The LME ran out of nickel a couple of years ago and changed the rules to allow for cash settlement.

    I believe these corrupt elites will change the rules at any time, in any market, to suit their own needs.

    Additionally, the FED will never stop the printing press until the dollar is dead. History has shown this.

    Joe M.

  9. Dear Joe,

    Yes, the LME ran out of nickel and called a default, a force majeure. Under the contracts they paid out at a ring out price on old contracts and traded almost immediately on new contracts. The trick in silver is to avoid the payouts on:

    1. The short sales on the SLV's. JPM has been shorting SLV shares and under the rules has to deliver real silver to the SLV. How do they get the SLV to accept a ring out price for the SLV shares shorted?

    2. The COMEX has been using SLV as a paymnet method how do this continue when SLV obviously is less than physical silver. Looking at the shorted shares.

    3. How do they co-ordinate the ring out price with London on the force majeure?

    As Ted Butler says the longs are going to suffer a spiritual experience. I can't see why they are still trading.

  10. Regarding the LBMA, it cannot "call a default" as it is not an exchange, just a trade organisation. All precious metal deals done in London are OTC as Anonymous says, but by definition OTC are off market, off exchange and are just private deals between parties. If there is a default it will be by a single bullion bank, not the LBMA or the London market as a whole.

    My understanding is that futures contracts cannot be settled with SLV shares. SLV shares can be used as one of the legs of an exchange for physical (EFP), which is not the same as settling a futures contact.

  11. Hey dave

    Just dsicovered your blog. Good stuff.

    I manage my own site at:
    Investing Contrarian

    I work for Private Equity fund for emergin markets and also do personal trading in precious metals.


  12. fresbee - thanks for the feedback. I have your site bookmarked now.

  13. Bron, you are being scrutinizingly pedantic with semantics here. Of course the LBMA would not itself default, but it does essentially regulate all aspects of bullion trading on the LME. I use LBMA/LME interchangeably, as do many commentators. Sorry for the confusion.

    As for EFP vs. "settlement," if I'm long a contract, and you ask me if I'll take SLV instead of cash or silver, that is "settling" the contract.

  14. The LBMA does not default it calls a default to allow the ring out to occur, but;

    When the International Tin Council (ITC) called a default in the tin contract they hired Mansion House and 850 Queen's Council attended. There was not enough room in the building for solicitors, bankers or even barristers. The ITC then got hit by a blizzard of writs well over 10,000, and called in the receiver as a step to avoid and mitigate the legal fees.

    Now as some have quite rightly pointed out the LBMA is much, much bigger than than the lowly ITC. We can therefore expect a much, much better response from the legal community for the LBMA. I would anticipate that they would at least hire the Queen Elizabeth Convention Centre to discuss the default in the contract. I would anticiapte a very miserly turnout of Queen's Councils to be 3,500 before we look at any junior ranks. Then of course we have the American Bar Association members who will be looking for any scraps of American litigation that may be on offer.

    The poorest and lowest of Queens Council will eeking out a living on the scraps offered by a minimum daily fee of 10,500 guineas. We can expect the day cost of the workout to be running at a measly minimum of $10,000,000. Trial dates usually require at least year to prepare and the cases will go on for, well, years. Even the fattest of associations must be tempted by idea of creditor protection faced with this prospect.

    There are those who may say that the LBMA is not responsible for the contracts. Well I can firmly say that the ITC argued the same way and do you know what? These clever Queens Councils had been polishing up libraries of case law that differed with this simplistic view.

    So I bet you donuts to dollars that the default in the contract will soon be followed by a receiver in the LBMA, whatever you may else you may believe.