A Run on The Building & Loan
Before we study this week's Commitment of Traders report, we first need stop by Bedford Falls, circa 1933.
So your first assignment this weekend is to watch this clip. On one level, it's a wonderful explanation and indictment of fractional reserve banking. For this discussion, it's a great metaphor for the global paper charade, derivative leveraged and rehypothecated gold and silver markets.
What is the evil Mr. Potter doing in the clip? He instituted a bank run by calling the loans of the Bank of Bedford Falls and the Bailey Brothers Building & Loan. Once the cash on hand was gone (illiquidity), there was no money left over to pay out to depositors. Mr. Potter then offers "50¢ on the dollar" to anyone so frightened as to take whatever they can get. As Tom says after hearing that Randall has taken Potter's offer, "better to get half than nothing". Then, later in the clip, George Bailey offers the true explanation:
"Can't you understand what's happening here? Don't you see what's happening? Potter isn't selling, Potter's buying? And why? Because we're panicky and he's not, that's why."
As we relate this to the precious metals, what do we see? The collection of Bullion Banks, primarily JPMorgan, are today's "Mister Potter". (In fact, many cinema historians believe that Capra broadly based the character of Mr Potter on J.P. Morgan himself.)
When QE∞ was announced, the Bullion Banks were net short 737 metric tonnes of paper gold. As of today's CoT report, The Banks are now short 44,000 contracts or just 136 metric tonnes. That's a staggering drop of over 81%! I'll go one further for you...since the CoT-cutoff last Tuesday, total gold OI has risen by over 16,000 contracts while price has fallen by $75. Clearly, the vast majority of those new 16,000 contracts were fresh Large and Small Spec shorts. If that's the case, then right now...right this very instant...the total net short position of The Gold Cartel is around 30,000 contracts or just 93 metric tonnes. An incredible reduction 87%, all while price has fallen nearly $500.
Specs have sold, motivated by either fear or greed, and The Bullion Banks have bought. Just like Mr. Potter, The Banks aren't selling, they're buying. Using the fear and greed of the public at large to position themselves to dominate in the future.
The same is obviously true in silver, too. From a net short position last autumn that nearly exceeded 50,000 contracts, today's CoT showed a Silver Commercial net short position of just 6,000 contracts. This is a drop in excess of 90%! Just like gold, the total silver OI has increased since Tuesday, rising 4,000 contracts on a price drop of nearly $2. If The Silver Commercials absorbed all of this selling through buying longs and covering shorts, the total Silver Commercial net short position as we head into the weekend is likely under 2,000 contracts. That's incredible! While silver has fallen from $35 to $20, the Banks have been buying, not selling, and this has helped them to decrease their net short position from 7,800 metric tonnes down to just 311 metric tonnes.
Again, like Mister Potter, the Cartel Banks are using the public panic to BUY, not sell. They are positioning themselves for the next move up. So, are you Randall? Are you Ed? Are you Ms. Thompson? Or are you George Bailey, willing to stand against Mr. Potter and hold firm, keeping your emotions in check and remaining rational.
Those who remain steadfast now, defiant against the naysayers, will ultimately be proven correct. More importantly, they will have safe harbor from the coming storm and a position of strength preserved for when the storm finally passes.