Position Limits

The newly-installed chairman of the CFTC, Dr. Heath Tarbert, in office for only two weeks, submitted an op-ed to Fox Business News the other day, in which he laid out his goals for the agency. Dr. Tarbert comes to the agency with an impressive educational and professional background and as a Republican nominee, I had assumed he would continue in trying to lighten the regulatory burdens on the big guns in the financial industry. Instead, I came away with a very different take upon reading his opinion piece.

https://www.cftc.gov/PressRoom/PressReleases/7986-19. Here’s the key passage – “[T]he CFTC must issue long-awaited rules to limit derivatives positions that help unscrupulous traders corner commodity markets.  The trick will be making sure these rules do not strip those markets of the flexibility needed to perform their fundamental risk-management functions.”

I’d be lying if I said Tarbert’s words didn’t resonate with me. It wasn’t that long ago that I had complained to the public integrity section of the FBI/DOJ about the CFTC’s failure to do its job when it came to JPMorgan and silver. Position limits were a non-issue while JPMorgan came to completely dominate the silver market – selling short in unlimited amounts and acquiring almost all the available physical silver in the world. Nevertheless, one must not become so jaded to not recognize clear evidence of someone trying to do the right thing.

Chairman Tarbert’s words about position limits come at a noteworthy time. In the 35 years I have followed silver, there has always been a large concentrated short position in COMEX silver futures. That’s why I alleged the silver price was manipulated. There was never a legitimate economic reason for the large short position. Had position limits been enacted, it would have eliminated the concentrated short position, allowing the price to rise. But while the large and uneconomic short position still exists in COMEX silver futures, it has recently been joined by a large concentrated long position. The one big difference between the very large concentrated short and long positions in COMEX silver futures is that only the long position seems economically justified. When the price of anything becomes extremely depressed, it makes a lot of sense for market participants to buy that asset and makes no sense for market participants to sell short that asset.

The price of silver is the only commodity down nearly 70% from price peaks of both 8 years and 39 years ago. It is the only metal where primary miners can barely make a profit at current prices. Relative to other precious metals, particularly gold, silver is priced at such depressed levels so as to defy a reasonable explanation. In such circumstances it makes sense for large buyers to appear and absolutely no economic sense for there to be large short sellers. The only possible reason for large short sellers to exist in a commodity that is depressed in price is to depress the price further. Thus, should the new chairman of the CFTC mean business about enacting legitimate position limits, I hope he sees the difference between a large position that makes economic sense and one that doesn’t. The concentrated long position has not driven prices to unreasonably high levels, while the short position has depressed the price.

The imposition of legitimate position limits on derivatives, as Chairman Tarbert clearly states, is essential and must be applied to both longs and shorts. Futures traders holding in excess of 15,000 COMEX silver contracts, as is currently the case for the average long and short positions of the 4 largest traders should be disallowed. Position limit in COMEX silver futures should be no more than 1500 contracts (7.5 million oz.). That the average position of the 4 largest traders on both the long and short side is ten times that amount is downright shocking.

The big concentrated longs in COMEX silver futures are deluding themselves if they think they will be able to hold on to these derivatives long positions if and when silver gets cranking to the upside. These big silver paper longs will be forced to divest (sell) their futures contracts by the regulators when prices heat up. Any thought of these big paper longs holding silver as it hits $50, $100 or higher is a pipe dream.  The irony is that the CFTC will be fully justified in cracking down on big concentrated longs should silver prices truly get frothy, regardless of the fact that it should have previously cracked down on the big shorts. Chairman Tarbert would be more than justified to crack down on both speculative longs and shorts who exceed reasonable position limits.

The big paper silver longs have a perfectly legitimate alternative to the day when (not if) they are ordered to divest their big COMEX futures positions. The solution is what I have advised for decades – buy and hold physical silver. There is no position limit on how much physical one can own – not in real estate and not in commodities or anything else tangible (as long as one doesn’t intend to manipulate). The recent large inflows of physical silver into the world’s silver ETFs strikes me as part of a conversion from COMEX silver futures to actual metal and I am highly encouraged by this development. I suspect that a large COMEX futures long may have converted a third or so of its paper into physical silver. But there is more to go and if other big paper longs haven’t thought of converting to physical, they better start thinking of that quickly. Once silver prices get uncorked, the regulators are also certain to disallow paper to physical conversions in order to slow the price rise.

While the big paper longs have a legitimate conversion option at this time, no such option exists for the big concentrated shorts (apart from JPMorgan). The big paper shorts can try to stall by converting COMEX futures to short positions on SLV or by borrowing physical metal to, effectively, sell short, but that’s like jumping from the frying pan into the fire. Truth be told, the big silver shorts can burn in hell for all I care. They’ve gotten away with decades of depressing the price and nothing will save them should the CFTC disallow them from continuing to dominate the price. I just hope Chairman Tarbert agrees.

The one thing the new chairman should recognize is that the big commercial shorts in COMEX silver futures have never collectively bought back shorts to the upside and at a loss. Never is a very long time, but COT data confirm this clearly. The big shorts have never taken a loss on their short position. I would submit that such a trading record would only be possible in a rigged market. This one glaring fact, by itself, explains why there has been a decades-long silver price manipulation. The only question is whether the COMEX commercial crooks will rig yet another sell-off, enabling them to keep their perfect trading record intact.