Open Letter To Gold Investors: Will The Real Manipulator Please Stand Up?

Includes: GLD
by: Russ Winter

Monday's flash crash in gold has predictably brought about commentary from the gold community. Nanex has the up close details of how fourteen 338 contract sells were carpet-bombed into the Comex gold pit for maximum effect. Unfortunately, it appears that many of the folks who normally do their homework on gold activity seemed to regress into a pattern of blaming these dumps on the Fed and/or bullion bankers. Few, if any, commentators are looking at the actual reported data, such as the bankers participation report and commitment of traders, which points the smoking gun at speculators -- or conceivably even a whale. I use the term "slinger" to describe the activity.

The suspect for the indiscriminate attack behavior is again and again stated to be some powerful Oz-like central bank specifically the Fed. Subsequently, participants in the precious metals market have considerable pause, which contributes to a loss of confidence. After all, if one thinks the causa proxima of this is JP Morgan (NYSE:JPM)/the Fed, then the response is duck and cover or even to hit the sell button on that GLD ETF.

Rather, the real debate should center on who is really conducting this gold attack activity. Financial journalists should be looking at this as well. Proper journalism would recognize that whales in a thinly traded market, which the Comex has become, is not a new concept. There have been recurrent offside rogue traders and whales in various markets throughout the last two decades. With the poor oversight regulation today, I believe markets are full of them. Such markets become highly distorted. The regulators should be checking into the source and position sizes of these trades. Will the real manipulators please stand up.

If it was revealed to be a rogue trader or a cartel of leveraged funds, the reaction of gold investors would be entirely different from malaise, duck and cover and discouragement. Since this is an open letter to the public at large (and I apologize to my subscribers for being redundant), let me state my case categorically and open it for intelligent discussion in the comments below. Please connect the dots with evidence as opposed to circular logic and opinion.

To that aim, here are my main points:

The Commodity Futures Trading Commission's most recent banker participation report on positions as of Dec. 1 shows the U.S. banks as four participants. They are not identified by name, but historically and deductively, JP Morgan is the largest and most dominant participant. Over the last quarter this report has shown that the four big banks have continued to build a net-long position, now at 57,408 futures contracts, or 5.741 million ounces.

I have read comments that bullion banks don't make directional bets; that they are effectively paper shufflers and trade skimmers. Oh? Still, there is a plausible second theory out there. Namely, it is that JPM is acting as an agent, or for agents, on behalf of the serious buyer of gold: the Chinese [see "China Successfully Hunts Where There is Gold"].

So JP Morgan the short manipulator of gold some are continuing to suggest? At one time perhaps, but now I believe the answer is unequivocally "no" and, in fact, the complete opposite. JP Morgan and the three other U.S. banks have a large net-long position equal to nearly 15% of Comex open interest.

The next forensic report shows managed money's short position in gold. Here, we see the off-the-chart short position of the managed-money complex. I suppose a true conspiracy commentator might offer up the Fed has an secret agent conducting business in this complex. But to that, I ask this question: What national interest is served by distorting the price of gold to such a degree that the Chinese can cheaply acquire thousands of tonnes, eventually announcing they have more gold than Fort Knox?

I prefer to call a spade a spade. The managed-money cohort is extremely short with a directional bet, and to such a degree that it points to a single slinger or group of slingers who are willing to throw thousands of short contracts into thin markets, with the bullion bankers taking the other side of the trade. In its early phase several months ago these attacks had good success in taking out long stops. Of late, this doesn't seem to be working as well. Small speculators, who are traditionally long, are now flat.

The chart shows this short position at its peak in mid December. Since then some initial short covering has developed, with the most recent Commitment of Traders report for positions on Jan. 7 showing slingers short 74,421 contracts, or 7.4421 million ounces. Contrast that with the four U.S. banks and ask yourself: Who is naked shorting into this market?

Chart source:

Finally, if a whale or rogue trader was operating in the paper Comex market, we might expect to see price and supply distortions. Indeed, that is exactly what has happened. Currently, the Gold Offered Forward Rate, which is the rate at which dealers will lend gold against U.S. dollars, is in backwardation. That suggests tight physical supply and a measure of distrust in the so-called market.

  • One Month: - 0.035% (backwardation)
  • Two Months: - 0.01667% (backwardation)
  • Three Months: - 0.00333% (backwardation)

I rest my case.

Disclosure: I am long PHYS, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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