By The Short Hairs

Thu, Jan 16, 2014 - 11:52am

Just two weeks from today, The Comex will begin the process of delivering February2014 contracts. More than ever before, JPMorgan has The Comex "by the short hairs". Will they let go?

I've been telling you for some time that the biggest factor for the paper price of gold in 2014 is JPM's NET LONG market corner in Comex gold futures. From a NET SHORT position in the fall of 2012 that grew as high as 75,000 contracts, JPMorgan utilized the price weakness of 2013 to build a NET LONG position of similar size by last summer. This position has since warbled between 55,000 and 80,000 contracts as price has fluctuated and bounced along The Bottom.

Last Friday, we received another Bank Participation Report from the CFTC. On it, there were several changes of note...most notably the non-U.S. bank position that is also now nearly NET LONG. This latest report also gave us an updated peek under the hood at JPM's position. By no means is this an exact science so I've always pegged JPM's NET LONG position to be about 90% or so of the U.S. Bank GROSS LONG position on the report. Using this "formula", we can calculate JPM's NET LONG position to be around 55,000 contracts as of last Tuesday. For what it's worth, this is about the same level at which Uncle Ted has it pegged, too.

Why has it declined? Primarily it was the expiration of the Dec13 futures. Recall that initially, over 10,000 stood on First Notice Day. Since the JPM House Account ultimately stopped over 96% of all Dec13 deliveries (6254 of 6493), I think it's safe to conclude that JPM also held the vast majority of the other 3,664 contracts that were NOT delivered, instead being sold and closed via Comex trading. So, in the end, about 9,500 of the decrease in JPM's NET LONG position came from the exercise and/or closing of December positions.

So now JPM has a NET LONG position of 55,000 contracts, likely spread across the board as such:

  • 20,000-25,000 in the front-month of Feb14
  • 10,000-15,000 in April14
  • 5,000-15,000 in June14
  • 0-5,000 in August14
  • 0-5,000 in Dec14

And the questions you need be be considering are:

  1. HOW many will they use to stand for delivery in February?
  2. WHY are they so furiously taking delivery?
  3. WHAT are they trying to accomplish?
  4. Perhaps, most importantly, do they have any other, more sinister motives?
  5. And, finally, how many deliveries can The Comex withstand without "breaking"?

Let's start with #1.

As mentioned above, there were 10,157 Dec13 contracts standing at First Notice Day. As of November 13, 2013 (equal in trading days to this past Tuesday) there was a total Dec13 open interest of 171,848 which, as a percentage of total gold open interest was 42.54%. Last January, on an equivalent date, the Feb13 open interest was at 195,146, the percentage in Feb13 was 44.26% and, ultimately, a whopping 13,070 stood on First Notice Day. As of last Tuesday, there were 165,856 Feb14 contracts still open and this represented 39.93% of the total open interest. So, at this point in January, is it safe to conclude that at least 8,000 will stand for February delivery? Yes.

Moving on to #2.

Why? That's a very good question and it ties in with #4. Perhaps NOW would be an excellent time to go back and read this: During the price collapse last year, as JPM was rapidly converting their cornering NET SHORT position into a cornering NET LONG position, JPM got hooked for quite a bit of gold. As the non-U.S. banks, primarily HSBC took massive deliveries, JPM was stuck providing the metal. In fact, in just the first six months of 2013, the JPM House and Customer accounts delivered an amazing 31,939 contracts! That's 3,193,900 troy ounces. Not coincidentally, at the same time, registered stocks in the Comex vaults began to decline dramatically, from 3,000,000 ounces in January down to about 700,000 by the end of June.

Could it be stated that JPM delivered and then the other banks took it and left the building? Yes. Could it be concluded that JPM is now stopping 96% of deliveries because they want "their" gold back? Yes. Did they take (stop) just enough in December to avoid breaking The Comex? Yes. (They could have taken A LOT more and even cash-settled 30%+ of what they had on First Notice Day.) Will they likely pull the same move in February? Yes.

Now #3.

And this is where it begins to get real interesting. What do we KNOW about JPMorgan?

  1. This NET LONG position is real, not imagined.
  2. They "lost" A LOT of gold in the first six months of 2013.
  3. They're in deep doo-doo with the U.S. government for all kinds of lawlessness, ranging from mortgage fraud to market manipulation.
  4. The Dodd-Frank Law with the coming CFTC position limits, JPM's internal business restructurings and The Fed's latest actions all hint at MAJOR changes coming to a paper metal market near you.

In the end, I think JPMorgan is attempting to "get back" the gold that it "lost" in 2013 before they and the other banks may be forced to curtail their trading activities in the months and years ahead. The question for 2014 is: Will the other bullion banks play ball?

But why would they? If you, as head of HSBC, know that gold is going higher AND you know that supplies are tight AND you know that Chinese demand continues unabated, why on earth would you be short on The Comex and let JPM stand and demand delivery from you? Wouldn't you, instead, be moving to reduce and eliminate your NET SHORT position on The Comex? With no short position, JPM would have to get "their" gold from someone else. And what did I mention earlier about the latest non-U.S. bank position? Oh's down to just 6,364 contracts NET SHORT. As recently as two months ago, it was 39,480 contracts NET SHORT. Do you think these guys have wised up to JPM's plan?

So that leads us to #4.

IF JPM wants "their" gold back and IF the CFTC and Fed wants them out of paper metal and IF the other banks are unwilling to play along and provide the gold...what is JPMorgan going to do?

Last fall, I speculated that JPM could, ultimately, break The Comex on purpose....just like the did BearStearns. Want to grow your company and increase its TBTFness? Grab a rival by the short hairs and don't let go. Call their note and force them into bankruptcy. Then, ride in as a White Knight and save the day by buying them on the cheap. In a terrific piece of investigative reporting, ZeroHedge uncovered this exact behavior in the demise of Lehman Brothers, too.

With this as a model, could JPM be scheming to break The Comex if they don't "get their gold back"? I have no idea BUT they certainly could! Again, the CFTC has allowed JPM to build a NET LONG position of over 50,000 contracts, at least 20,000 of which is in the front-month Feb14. JPM already knows that the CFTC is powerless to stop them as, back in December, they stopped 6,254 contracts IN CLEAR VIOLATION of the current front-month position limits. They might stand for 20,000+ in February. They might stand for 30,000 in April. The point is: Since they have a cornering position, they could stand and break The Comex at any time. Just as in the case of Bear Stearns, JPM could then just ride in and buy out a desperate CME Group.

Again, is this likely? No. Is it possible? Absolutely!

Finally, #5.

Much of this depends upon the willingness of banks such as HSBC, Scotia, Barclays, DeutscheBank et al to play along, stay short and provide the gold to satisfy JPM's delivery demands. Take a look at this chart (courtesy of Jesse), does it look to you like they're playing ball?

And notice these Gold Stocks changes. The oldest daily report I can find on my hard drive is the one from 9/30/13. Note the reported positions of each depository, keeping in mind that "this information is taken from sources believed to be reliable..."

Now look at the same report as of yesterday:

Besides the oft-noted continued reduction of total registered, note the rather dramatic change in the size of JPM's eligible account.


And now, with just 280,000 ounces of registered gold (if you exclude JPM's), The Comex only has enough registered gold to physically settle 2,800 contracts in February. Of course, eligible gold can always be reclassified into registered in order to meet settlement demand...BUT...will it? Probably...but we'll see.

Again, JPM will likely stand for just enough gold that The Comex will be able to continue on toward April. The purpose of this post is NOT to make you think that The Comex's demise is imminent. What you do need to be aware of though is that, by virtue of their massive and cornering NET LONG position, JPM has The Comex "by the short hairs" and they can break it anytime they want. Just another reason that 2014 is going to be a very interesting year.


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