JPM Getting Smaller in Silver
(Bloomberg) -- JPMorgan Chase & Co. reduced a large position in the US silver futures market, the Financial Times said, citing an unidentified person familiar with the mater. The decision was made to try to deflect public criticism of its dealings in silver, the FT said. The bank's silver positions would from now on be "materially smaller" than in the past, according to the paper. Two calls and an e-mail to Jennifer Zuccarelli, a New York-based spokeswoman at JPMorgan, were not immediately answered outside of office hours. – Retrieved from GoldCore.com
Aye, but are they finished reducing that size? And, does that reduction of exposure to silver extend to other markets outside the glaring view of US regulators?
As of Monday, the open interest for silver on the CME was reported as 129,712 contracts. That is down 3,427 contracts from last Tuesday's (December 7) COT report open interest of 133,139 contracts. From Sept. 28 to Dec. 7, as silver rose from $21.71 to $28.06 (a historic $6.32 move higher) we saw the open interest for silver futures fall from 154,219 to 133,139 open, a plunge of 21,080 contracts.
As Vultures (Got Gold Report subscribers) and long-time readers know, it is extraordinary to see the price of silver rise materially as the open interest is falling. It is even more so for that to occur over a period of more than one or two weeks. Just below is a chart showing the relationship of the open interest on the COMEX and the silver price.
Notice, please that up until just recently there has been a direct correlation in the price of silver and the open interest. That makes perfect sense because as prices rise, hedgers become more confident in lower prices and they are willing to put on more hedges and vice versa. Normally, the higher the price goes, the more willing hedgers are to fade them.
That "normal relationship" has broken down just recently.
Hedgers are the price police in the futures markets. Speculators are the speeders and red light runners. (For lack of a better metaphor.)
Consider how strange it is, then, to see the price of silver on a historic rise, the likes of which we have not seen for three decades (since September) and to see that fantastic price increase in the context of a 13.7% plunge in the futures open interest. The chart above does not lie. The historic drop in open interest is as real as the day is long.
Perhaps the quote above about JP Morgan "getting materially smaller" in the silver market is the equivalent of the largest price policeman in "Silvertown" going on holiday, or perhaps retiring.
Since there is no other policeman in town with the kind of muscle as JPM wielded, and with lawsuits and regulators under JP Morgan's Christmas tree this holiday season, we suppose there are two interesting questions to ponder. First, with the news now surfacing in the mainstream press, is JPM about done "getting smaller?" And, since we doubt that JPM is exiting a formerly "money making" business for altruistic reasons, what are the real motivators behind their decision to lessen their "footprint" in the futures markets? (We would argue that being able to manhandle the market from time to time is the money making part, but that is arguable at this point and at this time.)
Our sense is that if, repeat, if there was an upward bias to the market because of JPM's reducing their net short exposure (we think there was), then unless they are all the way done with that, we will almost certainly see more of it before they are done. The other trading "gentlemen and ladies" on the Comex bourse are very highly unlikely to be sympathetic and accommodative so that JPM might have an easier go of it. To the contrary, the other traders can be likened to large, hungry sharks with the scent of blood in the water.
That underscores our question, then, if JPM is done or near done, because if they are about done reducing their "hedges," then we should be speaking in the past tense for the upward pressure they brought to the silver market in this event. If they are not done, perhaps not in the past tense – yet.
As we reported for our subscribers in Sunday's COT Flash report, probably two US banks still held 53.2% of all the commercial net short positioning for Comex silver futures although the two banks did reduce their net short positioning by a small 3,905 contracts from the Nov. 2 to the Dec. 7 reports. (We are estimating the number of US banks because the CFTC no longer reports the number when it is under four.)
That suggests the bullion banks and JPM were still in reduction mode as of last Tuesday. On the other hand, the fact that this has surfaced in the press now, just ahead of an important CFTC meeting on Thursday hints that the JPM brain trust wants it known they "get it." For some that would be a fun way to look at it, but we suspect that what is occurring is a combination of multiple factors coming together at once. Not merely one "price policeman" moving off the beat.
Let's nutshell the factors for today: Exploding demand into dwindling available inventory of silver and heightened scrutiny and interference in the old silver game by more energetic and motivated regulators; coupled with a large fraction of the world's available bar silver being removed from availability has rendered the "old way" of trading in silver futures just not nearly as much "fun" for the Big Dogs at the Comex. How does that sound?
And maybe, just maybe, the price policemen see something that scares them just ahead. Something that scares hedgers more than anything – the possibility of a true supply squeeze.
Maybe getting smaller or getting out of the silver hedging business (except for clients) is simply the prudent thing to do.
We Vultures cannot know if the current silver market is poised to explode higher from here. It certainly might, and it might not. We cannot know in advance if this is "IT" this time, or if this is merely the rehearsal for the Big One to come. We are nicely positioned long, but we are not arrogantly long. We have our stops in place for our short term trading, allowing for wide and extreme volatility just ahead, in case this is not yet the big move higher we have been writing about and talking about for nearly a decade. We have our core metal positions which are not yet for sale at any price behind those.
If this is merely the warning, and silver prices are set to correct harshly, we want out to the sidelines with a majority of our profits in our short-term trading, then having plenty of ammo to fire when silver shows us where overwhelming support will form thereafter, but if this is the Big One, the blast off, the rocket launch of a lifetime we have been preparing for, there is one overriding concern on our part. We want to be on board, just as we are today, Tuesday, Dec. 14, 2010.
The next few COT reports could be the most important COT reports we have ever had in the tiny silver market. To subscribe to the full Got Gold Report, please click on the GGR Subscribe button above and to the right. And thank you for doing so! Subscribers help make GGR possible.
That is all for today. Thanks for honoring us with your time and your business.
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