J.P. Morgan's Silver Hoarding Demystified

by: Simple Digressions


Ahead of the last FED meeting, large speculators in US treasuries increased their long bets on 10-year treasury notes prices.

It looks like these large traders are not buying the thesis that the FED is going to continue its hawkish approach to US interest rates.

In my opinion, hoarding of silver at J.P. Morgan's warehouse at the COMEX is nothing special; simply, the bank tries to hedge its huge position held in silver futures.

The last US Commodity Futures Trading Commission's report (the COT report) was published just one day ahead of the FED meeting so it is a little bit out of date today. However, let me summarize it briefly because the data delivered by this report is quite interesting for precious metals investors.

The COT report

Below I have plotted the table depicting the last week's changes in net positions held by big speculators (mainly hedge funds) in a few futures markets related to gold and silver:

Source: Simple Digressions and the COT data


Although market participants were expecting another rate hike, the 10-year treasury notes futures traders increased their long bets on treasury prices (and lower interest rates). So they did something strange - instead of fleeing this hot market they stayed and loaded up 61.9 thousand contracts, increasing their total net long position to 274.0 thousand contracts.

It looks like these big traders do not take the possibility of next rate increases too seriously. If they are correct, gold prices should be supported by developments on the treasury futures market. At least in the medium term because shortly after the rate hike both markets went in the opposite directions:

Source: stooq.pl

The red circles indicate the Fed announcement and the green arrows show the direction US treasuries and gold prices went after the announcement.

As the upper panel of the chart shows, now the 10-year treasury prices are higher than they were ahead of the announcement (and market interest rates are lower). However, gold prices reacted negatively on the Fed rate hike and now they are below the level seen just ahead of the announcement.

I think that somebody is wrong (treasury traders or gold speculators) so in the short-term we should see some rebalancing and then both markets going in tandem. In other words, either treasury prices will go down (with gold prices continuing the last downward trend) or gold prices will go up (and join the treasuries on the march up).

Anyway, I am very curious about the next COT report but impatient investors can look at the charts below - maybe a clue is here:

Source: Simple Digressions

Briefly, gold is not only lagging US treasury prices but it is also relatively weaker than the inverted US dollar index (in other words, despite the US dollar going down, the price of gold is not going up). As the lower panel of the chart shows, the inverted US dollar index has been going up since the beginning of this year (the red arrow). For some time gold prices were following the inverted US dollar (or the inverted US dollar was following gold prices) but since the beginning of April 2017 they stalled below their technical resistance at $1,290 per ounce. Let me say this:

As a rule, in the medium and long term gold prices go in tandem with the inverted US dollar index but in April 2017 this rule, due to some undisclosed reasons, stopped working. However, I think it is just a question of time when both instruments go in the same direction again. The only question is this: is it gold that leads the market or the US dollar?

J.P. Morgan demystified

I am strongly criticized by a few of my opponents for the way I discuss the COMEX precious metals stocks. For example, the main thesis of my last article on the COMEX was that J.P. Morgan (NYSE:JPM), due to its uniqueness, should be excluded from the calculations of COMEX stocks. Today I would like to show another chart supporting this thesis:

Source: Simple Digressions

The chart shows:

  • J.P. Morgan's warehouse silver stocks (green area)


  • short positions held by four largest traders in silver futures (red line)

For better comparison, I have divided the total short position held by four largest traders by 4 (so the red line shows the position held by the average single trader).

I think it is very easy to spot that the amount of silver stored in the J.P. Morgan's warehouse at the COMEX is closely replicating the position held by a large short seller on the silver futures market. In other words, if J.P. Morgan is one of these short sellers (and I believe it is), the bank tries to hedge its large position held in the paper market (silver futures) through hoarding physical silver in its COMEX warehouse. It is nothing special and the fans of conspiracy theories will be definitely disappointed…

Note: most recently the average short position held by a single, large trader in silver futures has been going down. However, nearly every day J.P. Morgan reports new flows of silver into its warehouse at the COMEX:

Source: Simple Digressions

It seems that lower silver prices make this metal attractive for some investors…

On the other hand, this year the iShares Silver Trust (NYSEARCA:SLV) has been reporting the outflows of silver from its vaults. The only exception was May, when 10.7M ounces of silver were added to SLV:

Additional disclosure: I hold a long position in gold futures.

Disclosure: I am/we are long GDXJ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.