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Friday, December 10, 2010 12:30 PM

Investors Hold Biggest Commodity Positions On Record; Viral Nonsense About Silver

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The Commodity Futures Trading Commission says futures positions in commodities are 17% higher now than when the commodity index peaked in June 2008. The Wall Street Journal picks up the story in Investors Pile Into Commodities

Investors are holding their biggest positions on record in the commodities markets as prices surge and debate intensifies among U.S. regulators about whether to limit the amount that any one trader can bet in markets for energy, metals and agricultural products.

Hedge funds, pension funds and mutual funds dramatically ramped up their holdings in everything from oil and natural gas to silver, corn and wheat this year. In many cases, the number of contracts held for individual commodities now far exceeds the amount outstanding in mid-2008, the last time commodity markets were soaring to records and debate raged about whether excessive speculation was driving up prices.

Contracts held by investors have risen 12% this year through October and are 17% higher than June 2008, according to data from the Commodity Futures Trading Commission, the market regulator.

In several commodities, including the $200 billion crude oil market, so-called speculative investors now make up a significantly larger proportion of the market than they did in 2008. Investors increased their bullish bets on crude oil by 24% since June 2008 and now represent 16% of the market, up from 13% just over two years ago. Bets in the copper market are up 58% and for silver they are up 52%, according to the CFTC data.

Debate within the CFTC is adding to the tension. Bart Chilton, a CFTC commissioner, has been pushing fellow commissioners to crack down on excessive speculation.

"Speculative money from the likes of hedge funds, index funds and pension funds is coming into the commodity markets at a blistering pace," Mr. Chilton said in prepared remarks for a speech he plans to make on Wednesday at a conference in New York. He said that while speculation may not drive up prices, it can distort them. "If prices are skewed in a manner that is not fair by speculators, consumers can pay more than they should," he said.
Anti-Fiat Sentiment

The rise in the number of futures contracts is not based on anti-dollar sentiment alone, but rather a distrust of fiat currencies in general.

$CRB Reuters/Jefferies Commodity Index

Commodity prices peaked in June 2008.

$USD - US Dollar Index

The US$ index was 72-74 in June of 2008. The US$ index is 80 now yet the number of futures contracts keeps going up.

The Journal reports ...
The CFTC is under increasing pressure to meet a January deadline set by the Dodd-Frank Wall Street reform law, which requires the regulator to set limits on how many commodity futures contracts in energy and metals a speculator can own. An agriculture proposal is to be implemented by mid April. So far, the agency hasn't developed a formal proposal on position limits; it says it is still collecting data on the over-the-counter market in order to come up with a comprehensive regulatory framework.
Dangerous Position for Commodity Players

The CFTC setups makes for a dangerous situation for commodity investors.

All those screaming about JP Morgan manipulation silver prices should think twice about their screaming. Whatever ruling the CFTC comes up with, if any, that ruling is highly unlikely to be unfavorable to JPM.

Moreover, if the CTFC limits contracts, it will lead to equal long and short liquidations. Mathematically it has to. For every long there is a short.

Guess who will have advance notice?

Viral Nonsense About Silver

Emails and videos regarding silver are going viral. There is no evidence to support the theory that JPM will be forced to cover silver futures no matter how high the price of silver goes.

JPM did not have to cover shorts at $7, at $10, at $15, at $25, or at $30. JPM has been short silver futures for something like forever. If JPM has not been forced to cover yet, perhaps the reasonable conclusion is no price would force JPM to cover shorts. Yet these "force JPM to cover" theories have gone viral with everyone plowing into the buy silver meme.

JPM can easily be hedged. To hedge, all JPM would need to do is offset its short positions with an offsetting position in SLV or some other mechanism.

The ultimate irony would be if JPM gets a small benefit out of rising silver prices. It would not surprise me in the least were that to be the case.

I am a fan of physical gold and silver, but I certainly do not advise buying silver because of some alleged short squeeze that is unlikely at any price.

Thoughts on Controlling Speculation

Speculation in commodities is a measure of distrust in fiat currencies in general. China, Great Britain, Europe, and the US are all engaged in various beggar-thy-neighbor competitive currency debasement policies.

The proper way to stop commodity speculation (and a vast number of other problems far more important than commodity speculation) is to fix the root cause of speculation (currency debasement), not to place limits (long or short) on the number of futures.


Shortly after writing the above I received an email from "KD" regarding JP Morgan and the Massive Silver Short - The Greatest Story Ever Told

In his post that I had not yet seen, KD came to the same conclusions as I did above. We arrived at our conclusions independently. Moreover, he put the numbers together to show JPM cannot possibly be short the amount of silver that Max Keiser says.

KD concludes "If the long contract holders think there is a massive shortage of physical silver, why don't they just force the sellers to deliver the physical and create their own squeeze?"

I have made similar comments myself many times. However, were that to happen, the CTFC probably would step in.

Finally, Max Keiser is a friend. I just happen to think he is wrong on this issue.

Addendum 2:

My friend "HB" at the Acting Man blog chimes in with these thoughts:
This stuff people are putting out about JPM's silver short is really a pile of crap.

The biggest problem JPM might have could relate to the term structure of their shorts and offsetting longs. The OTC longs where they are counterparties to miner forwards have delivery schedules stretching out to up to 10 years, while they can only hedge at COMEX in the front month contract (due to other contracts not having enough liquidity) and have to roll that over.

So if someone were to ask for huge deliveries like the Hunts did, then there could really be a problem - alas, absent the Hunts, it just doesn't happen.

Note also, no one has as of yet reported any big losses in silver, which would have happened some time ago if the commercial shorts were 'naked'. I find it far more likely that there will one day be a problem involving unallocated gold accounts.
Mike "Mish" Shedlock
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