After giving it some thought, I've decided to publicly release this post from yesterday. The information here would seem to be pretty important and I don't see many other "analysts" talking about it.
The latest BPR was released back on Friday. Though the information is old and stale, it still tells us quite a bit about where prices are likely headed in the short term.
Because of the U.S. government shutdown, the survey for the latest BPR was taken on Tuesday, October 1 but the data wasn't compiled and released until last Friday, the 25th. Yikes! Certainly a lot has changed in the intervening 24 days...however...the report is still instructive as to the positioning of the big U.S. banks, namely JPMorgan.
Recall that, since time immemorial, all of the banks have been NET SHORT Comex gold futures. While some of this is due to their hedge books for producers, the vast majority of these shorts are placed utilizing leased gold from the central banks, with the intention of suppressing and controlling price. This has gone on for decades and, if you don't believe this, then you obviously haven't read Ferdinand Lips' book: https://www.tfmetalsreport.com/blog/5151/gold-wars
Lately, though, something amazing has happened. While the non-U.S. banks surveyed for the BPR have remained NET SHORT, the U.S. banks have moved NET LONG. Several things to note before we go on:
- The report summarizes, without naming names, the positions of the 4 largest U.S. banks and the 20 largest non-U.S. banks.
- The Gorilla in the U.S. bank space is JPMorgan. They are joined at times by the likes of BoAML, Citi, MorganStanley and Goldman.
- The non-U.S. banks are firms such as Scotia, Barclays, HSBC, Deutsche et al.
Now, you also need some history. QE∞ was originally announced by The Bernank back in September of 2012. There had been a BPR survey taken earlier that month and it looked like this:
GROSS LONG GROSS SHORT NET POSITION
U.S. Banks 37,571 122,154 -84,583
Non U.S. Banks 10,710 64,144 -53,434
So, right before ∞ was announced, the entire global bullion banking cartel was NET SHORT 138,017 contracts of Comex gold. That's 13,801,700 paper ounces or 429 paper metric tonnes.
As you might expect, that announcement of QE∞ sparked quite a bit of interest in buying gold (real and paper). Over the next 90 days, The Cartel tried desperately to contain the rally and protect their shorts. However, by the time The Bernank confirmed QE∞ in December, it was clear that they were in a losing battle. Below is the BPR dated 12/4/12:
GROSS LONG GROSS SHORT NET POSITION
U.S. Banks 37,790 144,183 -106,393
Non U.S. Banks 35,326 80,033 -44,707
Though the non-U.S. banks had actually trimmed their NET position by tripling their GROSS longs, the U.S. banks were seen to double down, increasing their NET SHORT position by over 25% over just these three months. One week later, on 12/12/12, The Bernank confirmed that QE was indeed to infinity. Desperate, the banks knew they had to act....fast!
On December 12 of last year, gold closed at $1728. It then almost immediately began a counter-intuitive selloff that continued for nearly six months before bottoming at $1180 on June 28 of this year. Let's take a moment and see how the banks' positions have changed over that time period. Let's first look at the BPR from March 5, 2013 when price had "survived" a very nasty February raid but had already declined nearly $150 since December to rest at $1581.
GROSS LONG GROSS SHORT NET POSITION
U.S. Banks 40,685 86,924 -46,059
Non U.S. Banks 29,219 72,545 -43,326
Well, what do we have here? In just three months, the U.S. banks (again, mainly JPM) had managed to trim their NET SHORT position by nearly 60%! The non-U.S. banks apparently failed to get the memo. Notice that their NET position has barely budged.
As you most certainly know, the most brutal part of the scheme was enacted in April and the selling it engendered culminated with the final bottom on June 28. Another BPR was taken the next week and what do you suppose it revealed? The numbers are below. Again, this survey was taken on 7/2/13 with price at $1246, down 28% from the announcement of QE∞ six months earlier.
GROSS LONG GROSS SHORT NET POSITION
U.S. Banks 69,656 24,939 +44,717
Non U.S. Banks 34,904 58,656 -23,752
Holy Toledo!! Let's see if we've got this straight. On 12/4/12, one week before The Bernank confirms QE∞, the U.S. banks (namely JPM) are NET SHORT 106,393 Comex gold contracts. That's 331 metric tonnes of paper obligation. Just six months later, after a massive and counter-intuitive selloff that ripped over 30% out of price and "costing" investors worldwide BILLIONS of dollars, the U.S. banks are now NET LONG 44,717 contracts or 140 metric tonnes of paper gold. WOW! (Again note that the non-U.S. banks have apparently been cut out of the deal. Yes, they've trimmed their NET SHORT position by 50% but their still NET SHORT 23,752 contracts.)
On balance, price rallied through July but, by the time the next BPR survey was taken on August 6, the change was not that great. From 7/2 to 8/6, price only moved $36 higher, closing at $1282. On the August BPR, we saw that the U.S. banks utilized this time to increase their NET LONG position by another 30%.
GROSS LONG GROSS SHORT NET POSITION
U.S. Banks 90,949 31,476 +59,473
Non U.S. Banks 25,957 47,996 -22,039
Again, notice that the non-U.S. banks are still clueless. They just keep trudging along with their shorts. The U.S. banks however are now NET LONG 185 metric tonnes of paper gold. Now, from the initiation of QE∞, the U.S. banks have made a NET move of 516 metric tonnes. Simply incredible!
At this point, with price oversold and persistent negative GOFO indicating extreme physical tightness, gold was bound to rally and it did, moving higher through August and peaking at $1434 on August 28. The next BPR survey was taken on September 3 and what did it reveal?
GROSS LONG GROSS SHORT NET POSITION
U.S. Banks 69,510 24,604 +44,906
Non U.S. Banks 23,626 60,350 -36,724
Obviously, the non-U.S. banks are oblivious to what's going on. The U.S. banks (JPM) used the rally in August to ring the register on a portion of their NET LONG position. In order to help cap the rally, the non-U.S. banks were adding shorts all month, increasing their NET SHORT position by over 50%.
So this brings us to the latest BPR. Again, the survey was taken four weeks ago today, with price again at $1286. What does it reveal? Well, at least as of 10/1, the U.S. banks (JPM) were right back to where they were in August, prior to the rally.
GROSS LONG GROSS SHORT NET POSITION
U.S. Banks 80,735 22,638 +58,367
Non U.S. Banks 24,296 57,665 -33,369
A few other key points here:
- Price was, of course, raided the first 10 days of October (Comex delivery month) in order to inspire liquidations (provide rhetorical cover) from the GLD. Price bottomed on the 15th at $1251 and closed that day at $1273.
- No doubt this time was used to increase the NET LONG position of the U.S. banks even more.
- Price has since rallied nearly $100 so it is likely that the current positions of the U.S. banks mirror the positions from the survey taken on 10/1.
THIS NEXT SECTION IS CRITICAL. Feel free to disregard it, argue with it...whatever...but this is what I think and this is how I decided that JPM has cornered Comex gold on the LONG side.
- Note how the non-U.S. banks consistently maintain a ratio of about 1:2 gross long vs gross short. Certainly it varies month to month but, on balance, it's safe to summarize it as a policy of 1:2.
- I think that the other U.S. banks (those NOT named JPMorgan) maintain a similar policy. Using this methodology and by allocating nearly all of the GROSS shorts to the other three U.S. banks, this supposes an "other three" U.S. banks GROSS long position of about 11,000 contracts.
- This leaves the balance of the GROSS LONG position in JPM accounts.
- Subtracting 11,000 or so from 80,735 and you get a JPM NET LONG position of 70,000 but, in reality, is likely anywhere from 65,000 to 75,000 contracts.
And now here's where it really gets fun...
The total open interest for Comex gold stands at 397,000 contracts, of which 227,000 (57%) resides in the front (delivery) month of December 2013. If I'm right and JPM is NET LONG about 70,000 Comex gold contracts, how many of those are Dec13s? 40,000? 50,000?? All of them??? And what's going to happen to this position as we approach First Notice Day and deliveries begin at the end of November? Will JPM simply roll the position into Feb14 and April14 or will they stand for delivery? And if they stand for delivery, how many contracts will they seek to have delivered?
Either way, as we've clearly established over the past few months, price is only raided during delivery months where JPM is issuing deliveries. In August, when JPM was taking delivery (stopping), price rallied. Since JPM is clearly NOT going to be issuing in December, should we expect a rally? ABSOLUTELY! This is why I've been telling you for weeks that price would bottom again in mid-October and then rally through the end of the year. This latest BPR, though dated and stale, nonetheless confirms this forecast.
Keep calm and stack on. The next two months are going to be very, very interesting.
TF
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10:00 am Wednesday UPDATE:
It dawned on me yesterday that we should also look at these numbers on a ratio basis and we discussed them in yesterday's podcast. For this updated post today, I thought I should include them here.
Note that the numbers above indicate a NET LONG position for the U.S. banks as of 10/1 that was equivalent to their net position back in August. However, numbers can be slightly deceiving when they stand alone. Because of the always-changing open interest, I've often found it helpful to look instead at the ratio of long:short. This gives me a better overall feel for position changes. In this case, we need to divide the GROSS LONG position by the GROSS SHORT position of each month in order to derive a NET LONG RATIO. So let's do just that and see what is revealed.
MAY: U.S. Banks still NET SHORT but the ratio had declined to just 1.28:1
JUNE: For the first time, the U.S. Banks are NET LONG with a ratio of 2.09:1
JULY: The NET LONG ratio has grown to 2.79:1
AUGUST: A little higher at 2.89:1
SEPTEMBER: A little lower at 2.82:1
OK, let's pause here for a moment. Go back and look at the NET POSITION CHANGES listed in the body of this post. Note that the July U.S. bank NET LONG POSITION was 44,867. In August, it rose to 59,473 but, in September, it fell back to July levels at 44,906. That's a pretty big swing of over 30% but note that the NET LONG RATIOS barely changed over that time period.
Now let's look at the October 1 numbers. If we divide the 80,735 GROSS LONG position by the 22,368 GROSS SHORT position, we get a U.S. Bank NET LONG RATIO of 3.61:1 and this is considerably more bullish than any of the summer months.
Perceived from this point of view, the October Bank Participation Report only serves to increase my optimism and bullishness. Prepare accordingly.
TF
