gold~massive short position: time to take care?

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    By Theodore Butler

    The latest Commitments of Traders Report (COT) was a
    shocker for gold, as the tech funds plowed onto the long
    side and dealers went short in massive numbers.

    Adjusting for the trading since the Tuesday cutoff, the
    commercial net short position in COMEX gold is at the
    highest level ever. This raises the strong possibility of a
    selloff, where the funds sell out their long positions and
    the dealers buy back shorts, as has occurred every time
    the dealers have previously reached record short position

    Of course, it is always possible for the dealers to be
    overrun when they are holding giant short positions, but
    that has yet to occur in gold.

    For those who doubt that the dealers can orchestrate and
    engineer the funds in and out of the markets, as I contend,
    it might be instructive to review how the dealers
    manhandled the funds in the sugar market recently. I have
    rarely witnessed as severe a beating of the tech funds by
    the dealers in any market as what just took place in sugar.
    That the regulators sit by and allow speculators and
    speculating commercials to set and control the price of
    vital commodities with paper games is outrageous.

    Of course, there is no guarantee that the dealers will prevail
    in gold and succeed in flushing the tech funds from the long
    side once again. For instance, there is strong evidence that
    the dealers lost big, for the first time, in copper over the past
    few months, as strong physical demand bailed out tech funds
    longs and the dealers actually covered short copper positions
    to the upside. In fact, this is the litmus test for determining
    whether the dealers have been defeated or not in a market
    -- whether they close out positions at a loss after a big net
    position has been established or whether they just keep
    adding to a losing position until they overpower a market

    In my mind, the only way for the dealers to be defeated
    after they have taken a large net position (long or short) is
    for the real physical market to trump them, like recently
    happened in copper. I'm describing the rare instance of
    the dealers actually losing (being overpowered by the real
    physical market), which is, by law, how the markets are
    supposed to function all the time. The real world of supply
    and demand should be setting the price continuously, and
    not be the rare exception. That's why I claim that these
    paper-trading games are manipulative.

    Since gold is not an industrial commodity, like copper, it is
    not likely to experience an industrial physical shortage. This
    makes it easier for the dealers to maneuver the tech funds
    in gold. This is not to say that the buyers of physical gold
    can't be more aggressive than the sellers, causing the price
    to rise, just that gold is unlikely to be in an industrial
    shortage, like copper, steel, or silver.

    So when the dealers put on a record net short position, like
    now, it would take something other than a physical shortage
    to cause them to panic and cover those shorts at a loss.
    That "something" has yet to occur in gold, as the dealers
    have yet to panic and cover at a loss. It appears that the
    dealers and tech funds have basically broken even for the
    past 15 months or so in their COMEX gold trading. The
    price of gold has advanced over that time, so I'm not
    suggesting that the dealers have been cleaning the tech
    funds' clock in gold, as they did for many years. What I'm
    suggesting is that the dealers continue to maneuver the
    tech funds in gold, and even if they aren't booking big
    profits, they aren't losing big either.

    There has been no COT dealer defeat in gold (yet), and the
    next time will still be the first time.

    What about silver?

    Whereas gold has just experienced a big jump in
    commercial shorting, silver's COT position has remained
    near a record net dealer short position for months. While
    this has not prevented the price of silver from climbing
    sharply, the dealers haven't covered their shorts as they
    have in copper. Therefore, the issue is still open and

    As in gold, the dealers, as a group, have yet to cover their
    short positions in silver at a loss. My sense is that the
    dealers have set the tech funds up on the long side of
    gold, in the hope that a resultant selloff in gold will cause
    a corresponding selloff in silver.

    While it remains an open question as to how the extreme
    COT positions in gold and silver will be resolved, there are
    a number of important things we can say specifically
    about the silver short position.

    As you know, I have long maintained that COMEX silver
    has the largest short position of any commodity in history,
    when compared to world annual production and total known
    world inventories. You've never seen anyone contradict that
    statement, nor will you. Today I'd like to examine the
    extreme silver COMEX short position in some new ways.
    As always, I'll try to rely on the public record and common

    Let's look at the public record. Each week the Commodity
    Futures Trading Commission releases the COTs for all
    U.S.-traded commodity futures. The positions of traders, by
    categories, is listed on both a gross and net basis. Net is,
    obviously, smaller than gross, and is more "pure," in that it
    represents the true overall position by category.

    Looking at the net commercial short futures position for all
    real commodities traded (leaving out financial futures),
    COMEX silver still stands out like a sore thumb when
    compared to all other commodities.

    Even on a net basis, the short commercial position in silver,
    at nearly 500 million ounces (including options), almost
    equals total world production, while most commodities have
    a commercial net short position rarely greater than 5 to 10
    percent of their respective world productions. Some
    commodities (cotton and cocoa) don't even have a current
    commercial net short position, as the dealers are net long.

    In fact, over the past 20 years COMEX silver is the only
    commodity in which the commercials have always been
    net short. The commercials have been significantly net long,
    at some point(s), in every commodity except silver.

    You should be asking yourself: Why are the commercials
    always net short in silver, and why are they usually net
    short, as now, in amounts many times larger than any other
    commodity, when comparing net short positions and
    respective world productions?

    What is it about silver, alone among all commodities, that
    attracts such massive commercial shorting, consistently
    for 20 years?

    There is another clear aberrant pattern that comes into focus
    when comparing the commercial category of silver and the
    other major commodities, as posted in the COT, for positions
    as of March 23. Major commodity is defined as one having a
    total futures open interest of at least 75,000 contracts.

    When you compare the gross long commercial position, to the
    gross short commercial position of every major commodity in
    the current COT (futures only) report, you see that the gross
    short position rarely doubles the size of the gross long position.
    (A gross short twice the size of a gross long equals a 2.0 ratio.)
    Here's the actual breakdown (in contracts):

    Commodity Gross Gross Short
    Commercial Commercial Ratio
    Wheat (CBOT) 63,555 100,288 1.58

    Corn 291,610 469,505 1.61

    Soybeans 97,222 166,079 1.71

    Soybean Oil 71, 324 151,413 2.12

    Soybean Meal 89,788 142,870 1.59

    Live Cattle (CME) 50,818 62,395 1.23

    Cotton 51,358 51,198 1.00

    Cocoa (CSCE) 84,053 70,220 0.84

    Sugar 114,630 217,011 1.89

    Coffee 41,838 82,971 1.98

    Heating Oil (NYMEX)92,092 113,815 1.24

    Natural Gas 185,484 210,214 1.13

    Crude Oil 387,245 483,735 1.25

    Unld. Gasoline 81,350 30,204 1.60

    Copper 27,411 54,600 1.99

    Gold 49,762 204,617 4.11

    Silver 10,670 97,561 9.14

    Certain numbers should jump out at you, namely, the ratios
    of gold, but particularly of silver. Why are the commercials
    so lopsided in their short versus long positions in gold, but
    especially silver?

    These are aberrations that demand a reasonable explanation.
    Let's first eliminate what isn't a reasonable explanation --
    because the price is up. The price of many commodities on
    this list are up, and there is no lopsided ratio. That's because
    commercials should have legitimate hedging needs on both
    sides of the market in a rising price environment, such as
    users protecting themselves. In most of these commodities,
    it is clear that there is significant and legitimate commercial
    long side participation, even though the short side may be
    larger. In silver, it should be obvious that there is virtually
    no long side commercial participation. Let's cut to the chase
    and explore why that is so, even though the last thing we
    need is still more evidence that silver is manipulated.

    There is one reason, and one reason only, why the
    commercial dealers are overloaded on the short side and
    barely inhabit the long side in COMEX silver -- because there
    is no competition between the dealers. They are all reading
    and acting from the same playbook. They act in unison.
    They never break ranks with one another. They operate as
    one against all comers -- the tech funds, the big and small
    speculators, the real silver value investors, and anyone who
    stands to gain from a free silver price.

    The silver commercials are a disciplined and unified wolf pack,
    kept in tow by the leaders of the pack, the Silver Managers.
    This wolf pack operates by the rules of force and the wild,
    and not by the rule of law. The pack is protected and coddled
    by the CFTC and the NYMEX/COMEX.

    The key feature of the silver dealer short wolf pack is that it
    is operating against the laws of true supply and demand. Nothing
    that they are doing is in conformity with legitimate economic
    purpose, save one -- take as much money as possible, the
    law be damned. And stay alive.

    Aberrant short figures and ratios aside, there is no sound
    economic reason for holding the largest short position on
    record in a commodity in a structural deficit. I'd like to see
    someone step forward with a plausible and legitimate
    explanation for a net short position, of anything, greater
    than what exists in the real world. And this epic short
    position didn't materialize as a result of the recent increase
    in price, as it was just about as obscenely large $3 lower.
    It can't be covered to the upside without destroying the
    wolf pack.

    For that reason alone, the manipulation couldn't be more

    You've read, many times, where I highlight how
    unprecedented the COMEX silver short position is compared to
    world production and total known inventories. It doesn't matter
    if I'm talking of total gross or net position, held by all the
    commercials or just the concentrated largest traders; it's
    always bigger than known bullion inventories, currently no
    more than 150 million ounces.

    But even that vastly understates the real short story. That's
    because the commercials don't control anywhere near that
    total 150 million ounces. They'd be lucky if they controlled
    10-20 million ounces of that total. There's a verified and
    documented net short commercial position of nearly 500
    million ounces and they have less than 2-4 percent in real
    silver backing. Their short position may be 50 times larger
    than what they really own.

    No wonder they stick together. If one breaks rank and
    covers to the upside, they all will perish.

    There has never been, in all of financial history, such a case
    as we have in silver, where the public has been so favorably
    aligned against the insiders. The public holds a long position
    that cannot collectively be shaken out. The insiders hold a
    short position that they can't collectively deliver against in
    a thousand years. All the insider shorts can do is to stall
    to shake out as many longs as possible.

    The short insiders must resort to spreading false private
    stories of fading silver demand, while the true stories of
    delayed delivery, whether on the COMEX or the silver
    purchased by Central Fund of Canada, are open to all.
    (In another recent public offering, CEF has committed to buy
    another 5-6 million ounces of real silver, even though they
    haven't received the last million or so ounces from their
    previous stock offering, four months ago. They've been told
    it may take three to six months for the new silver to be

    Does that sound like fading silver demand?

    Think I'm overstating the cohesive and predatory pack
    behavior of the commercial silver shorts?

    Play a little mind game with me. Imagine, if you would,
    that the tables were reversed. Instead of the dealers being
    massively short silver, imagine that they were massively

    I know it is hard to realistically picture anyone else going
    short to the extent necessary to enable the dealer silver
    wolf pack to be massively long, but just imagine it did.
    Knowing what you know about the real silver fundamentals
    and the deficit and evaporating inventories, etc., and adding
    the silver wolf pack being long and not short -- what price
    would you put on silver when the wolf pack longs put it to
    the hapless shorts? $100? $500? $1,000?

    But the commercials have a record net short position, and
    not a record net long position, so you must behave
    accordingly. The wolf pack is always on the prowl for
    unsuspecting and innocent victims. Don't expect help from
    the regulatory authorities, as they are a big part of the

    Don't expect the miners to fight back.

    You must arm and defend yourself.

    How? Easy. Rely on your common sense. Hold only fully
    paid-for positions. Don't hold leveraged positions that you
    will be forced to jettison and lose in a sharp selloff. Prepare
    and steel yourself for the coming volatility.

    Let's face it -- we can't control the volatility. All we can
    control is our reaction to it. Focus on the long term. If the
    pack succeeds in engineering one more manipulative selloff, put
    it to your advantage by being prepared to buy, both financially
    and emotionally.

    Even when the COTs stink, like now, you must hold a full core
    position because, in the long run, we will go shockingly higher,
    probably without notice, as the fundamentals play out.

    The bad news is that any selloff, if it comes, is likely to appear
    disorderly and designed to frighten those who are unprepared.

    The good news is that any selloff should end dollars higher than
    the average prices of recent years. Now is the time to harden
    your resolve about silver and prepare for whatever the
    increasingly desperate shorts throw your way.

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