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The Real Lesson of LME Nickel

The recent debacle in LME nickel led to the London Metals Exchange breaking trades and defaulting on contract terms. Press coverage has been detailed and this offering from CNN is among the most comprehensive.

The culprit who caused this market debacle was “Mr. Big Shot” – head of the Chinese steel and nickel producer Tsingshan Holding Group Co. They held a short position in LME nickel of 30,000 tons on the exchange and an additional 120,000-ton short position off the exchange in OTC derivatives – a combined short position of 150,000 tons. The exchange-listed short position of Tsingshan Holding amounted to 1.2% of world nickel production and, when added to the OTC short position rose to 6% of world production. That was enough to bring the LME to its knees, an institution that has been in existence for 145 years.  I can’t help but make comparisons between the concentrated short positions in nickel and silver.

On the listed, or COMEX silver futures short position, the CFTC provides data on the concentrated positions – both long and short. For the 4 largest shorts in COMEX silver, their net short position is around 52,000 contracts (260 million ounces). It can be reasonably projected that the largest COMEX silver short holds 20,000 to 25,000 contracts short. Using the lower number, that means that the largest COMEX short is holding the equivalent of 100 million ounces short or roughly 12% of total annual mine production. This is ten times the equivalent listed net short position held by Mr. Big Shot in LME nickel. Ten times. So, if the listed short position in LME nickel of 1.2% of world nickel production contributed mightily to the effective default in that market, what would a listed short position of ten times that amount imply for COMEX silver?

Moving on to the over-the-counter (OTC) or unlisted short position, the 120,000-ton nickel short position held by Tsingshan amounted to 4.8% of total annual world nickel production (6% when combined with its listed short position) on nickel’s 2.5-million-ton annual production. The latest (as of Dec 31, 2021) OCC derivatives report indicates that Bank of America holds a precious metals derivatives position of $27 billion. It is easy to infer that BofA may be short 800 million ounces of silver or more and if it is, that means that it may be short close to 100% of total annual silver mine production, more than 20 times the 4.8% level of the widely reported Tsingshan OTC nickel short position. So, if an over-the-counter short position of 4.8% of annual world production is at the heart of why the LME is on the ropes in nickel, what potential damage and liability await Bank of America which may be short 100% of the world annual mine production of silver? Does this real-world comparison not rise to the occasion where the regulators – the OCC, the U.S. Treasury Dept, The CFTC and the CME Group – should address and clarify Bank of America’s OTC precious metals position?

Tsingshan was one of the largest, if not the largest processor of nickel in the world, meaning there was a reasonable case of assuming it was legitimately hedged and not speculating wildly. So, the fact that it ran into serious trouble on the run-up in nickel prices proves even a “legitimate” hedger can run into real trouble when too heavily short. If Bank of America is short 100% of annual world silver mine production in the OCC report and can’t possibly be considered a legitimate hedger – is that not a situation the regulators should be all over?

Let’s face it – if a concentrated short position in nickel caused the eventual run-up in prices to the point where they doubled and tripled in a matter of a few days, causing the exchange to bust trades and effectively default, what do you suppose the price reaction will be in silver, with the concentrated short position anywhere from ten times to more than twenty times larger, when the concentrated short position is eventually reckoned with?

Ted Butler

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