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The Gold Futures Open Interest Caper
In the recent Gold Basis Report, we published a graph showing the open interest in gold and silver futures (i.e. the number of contracts held at any given time). At the time of the crash and in subsequent days, the open interest number decreased only modestly in both metals. A number of people asked me the question: why did the numbers drop so little? Wouldn’t one expect to see a big drop?
Here is a chart that zooms in to a close-up on the days around the crash, labeled as clearly as possible so the date of each data point is clear. We included only gold for clarity, but silver looks similar (in this article whatever I say about “gold” applies equally to silver).
On April 11, the price was still steady around $1560. The first big crash occurred on Friday the 12th, with the price dropping $80 to around $1480. It is noteworthy that open interest rose about 13,900.
On Monday, the price dropped an additional $130 to $1350, and the open interest declined slightly by around 3,300.
There is no evidence in the open interest graph for the naked shorting of 163,000 that is alleged to have occurred on Friday, April 12.
Now let’s look at the basis (short explanation of the basis here) graph. Basis is Future(bid) – Spot(ask). What would happen to the basis if mass quantities of futures were dumped (on the bid)? As we see below, it didn’t happen.
Note the scale of the graph. Each line is 1/10 of one percent. In absolute dollars, that is about $1.50. The basis is annualized, so for the June contract, approximately 1.5 months from going off the board, each line represents about 20 cents.
Before we go any further, let’s just take note of that. Supposedly, 163,000 futures are dumped with the effect of causing the price of “paper” gold to drop by $80 and then (presumably) more futures are shorted to cause the price to drop by an additional $130. The change in the spread between physical gold and “paper” gold falls by about 20 cents in the June contract, and even less in the farther months.
Just so we have this straight.
Much of this fall in the basis occurred before the price drop on Friday. From Monday to Tuesday, the basis rose in the largest move we show on this limited graph. From Monday to Tuesday, “paper” went up relative to physical about 30 cents.
Sorry Gold Bug Man, the basis cannot be faked.
I have written here, here, here, and here (and elsewhere) to debunk the conspiracy theory that “they” are selling futures short, naked, in order to suppress the price. We also address the conspiracy in
the Gold Basis Report. I went on Capital Account to talk about it. I am sure I will write about it again in the future. But for now, let’s move on.
This whole caper is like the dog that did not bark in the night. We did not see the kind of change in open interest or in the basis that we would expect for a $200 drop in the price caused by naked shorting.
Conversely, this leads to another question that a number of people have asked me via email: why did we not see a sharp drop in the futures to correspond with the sharp selloff in price?
This is an area that seems simple and obvious and yet it is actually counterintuitive. Let’s drill deeper.
In Part II (free registration required), we look at the identity of the typical trader who is short gold and the mechanics of creating and destroying futures contracts within the computer that runs the COMEX market.
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or maybe they were married but were divorced in 1971,
so it has been some time since they had a "serious"
relationship / commitment, the 70's were a swinging
time.
@"There is no evidence in the open interest graph for the naked shorting of 163,000 that is alleged to have occurred on Friday, April 12."
there is also no data point, odd. not that I trust them anyway.
.
you have asked if the paper market has divorced from the physical
market and I would say they were never married , common law?,
in the first place. one is an abstract reference to the perception
of the other, there be plenty to engage the masses.
.
the question that seems relevant is what does actual metal
exchange hands for, what price, including all the delays and premiums
and shipping and storage and etc. as compared to the posted
paper futures contract and leveraged to unknowable limits "price"?
.
they are not married, perhaps dry humping on occasion in a dark place,
but there is no commitment there. they are as good as divorced
I say.
Writing controversial material generates traffic.
Read part II at my site with free registration.........
Even if complete and utter hog sweat
Cuprus: " Hey ECB/IMF we need $10 Billion Euros"
ECB/IMF: You can't have $10 BB Euros
Cyprus: But we have to have $10 BB Euros or we're BK
ECB/IMF: NO
Cyprus: Look we have to get $10BB Euros. Aren't you watching the news" Its a Must
ECB/IMF: Well, the only way we will give you $10BB Euros is f you give us $400 Million in Gold, about 10 Metric Tons
The International Monetary Fund (IMF) is supposed to release a $1 billion euros aid package to Cyprus. Cyprus has finished the bailout talks locking in a $10 billion euro loan until 2018 to hold together the small indebted country. Cyprus also had to sell about $400 million euros of Gold or about 10 metric tons of Gold from their reserves to qualify for their bailout.
Do the MATH = POG
I thought the drop was traced to a single entity through Merril-Lynch, not the market activity of multiple players.
EVIL IS AS EVIL DOES. ALL HAIL THE CRIMEX!
http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?fiidarticulo=201
What crap! Only the profoundly ignorant fail to see through your bullshit, Mr. Monetary Metals Man.
I hope zero hedge got paid well for posting this bullshit article.
Yeah, it's pathetic, almost as bad as those fap-athons from the mad hedge fund wanker.
BUT ... Zero Hedge provides an otherwise great service, for free. I have the ads blocked out, with Adblock Plus and Ghostery. I even have avatars blocked, for fast page loading. So, I feel I have an obligation, of sorts, to read the bullshit articles and contribute to the page view counts. It's a dirty job, but ...
Thanks for the Ghostery tip. I run noscript as well, and have been noticing all of the invisible trackers in websites I've had to shut down.
How come the gold plunge was preceded by tons of negative publicity and the crash had a huge amount of press coverage? Now it's zooming back and the media is silent.
Because the media's job was to help scare people into selling their physical, so the bankers could cover.
It's hard to scare longs when the price is rising.
"watch my hand ... watch my hand ... you will now trust everything I say ..."
http://www.rollingstone.com/politics/news/everything-is-rigged-the-bigge...
This clown obviously believes the Open Interest numbers.
How bizzare.
As laid out by several others here, they could be completely accurate and STILL not make the case put forth by our intrepid sophist.
Simply put, models are NOT reality, but merely rough approximations of it. Thing is, he's so attached to the model, he has to ignore the reality blatantly evidenced by the massive amount of trades that hit the exchange. Otherwise, cognitive dissonance would consume him as his theoretical world crumbles around him.
Off topic, but at some point these HFTs will have to be dealt with. Taxed or outlawed, it matters not. They are blatantly manipulative volatility generators that put all the advantage in the hands of those running them.
A one dollar transaction tax would slam the brakes on but good, while being almost a non-issue to living beings trying to do their trades.
The proceeds could be used to start up a bankster rehabilitation program, where they learn to drive picks and short handled shovels.
They, along with the wall street banks, would get a "carve out" exempting them from the transaction tax. Just like congress is trying to do for themselves with obamacare. The only ones stuck with the tax would be us.
Yep. There's little value to demanding that the criminals outlaw or otherwise destroy their scam. If you do manage to make enough noise to force them to react, well, let's just say, like all times prior, you won't be please with the results (as your mandate becomes their next scam).
If I were to save and sort every ZH article, I would place this one in the "dumbassery" folder.
Looking at daily charts in today's world of HFTs is folly. HFTs can move the markets at will and are programmed to look at order books and to invoke followup trading from other algos. They can get in, move the price, and get out - without leaving any footprints. If they really left 163,000 contracts open at the close, in a naked short, they would show themselves. This is why the SEC has trouble prosecuting them - and why they will continue.
Three points:
1) So the price dropped like a stone because no one was selling in size? Everyone read the Goldman piece at exactly the same time and freaked out at exactly the same time? Because everyone woke up and thought, "hey, the price of gold should be $X lower even though 15 minutes ago, I theught the price was fine"
2) The king of the basis, Antal Fekete, would appear to disagree with Monetary Metals.
3) What is the source of the spot price MM uses? IIRC, Fekete argues that the true cash spot price is not publicly reported.
"What would happen to the basis if mass quantities of futures were dumped (on the bid)? As we see below, it didn’t happen."
If mass quantities of futures weren't dumped why did the exchange say they were? And why did the price drop $200?
Ask all the questions you like, but it's obvious they'll be ignored, as those data points don't fit into the model that supports his theory.
That someone would even focus on long term numbers like OI in the age of HFTs is to display pure ignorance in pursuit of proving a moot point.
Here's what I see when I look at the first chart
Big jump in OI on the 11th as someone monkey hammers gold with $20 billion in short sales
OI falling on the 12th due panic selling, cushioned by short covering by whoever did the big selling on the 11th
Slight rise in price on the 15th and big drop in OI. Huge sales due to margin calls, but Mr Monkey Hammer is still covering so OE falls.
Slow climb after the 15th in OI and price, as Mr. MM accumulates.
In other words OE slammed up on the 11th due to massive short selling then fell back to normal or slightly below, as someone took advantage of the panic selling to cover their shorts at a profit.
M3 brings a fresh perspective.
MM is like any other stage magician, trying to distract the rubes from the tawdry mechanical truth of the trick.
And above all, he does not want the rubes to notice the physical gold disappearing into thin air. Quick, bring on the sexy assistant!
It's the tawdry mechanicals suggested by others that he was refuting.
He was unnecessarily snarky but I've learned/confirmed a number of things from him in the last few weeks.
fwiw, the smallest volume that can be obtained from kitco in the states at present is 1kg.
Quick question. Are there any brokers out there who will allow you to set a stop but only if the rate of change leading to the stop is less than some percentage per hour? That would let you coast through flash crashes.
Yes, pretty much all of them allow small retail customers to automate their trading strategy.
But unless you're signing up for a proprietary strategy that they sell you, it's up to the customer to code up the necessary script.
Just look in the back of the magazine Technical Analysis of Stocks & Commodities to see all the different scripting languages in use.
If you're not a programmer you can pay someone to do it for you, but if they screw it up and it loses you money, you're SOL.
Thanks Trampy. Great info.
But aren't both the future and spot price PAPER prices? They don't relate to what it might cost me to actually buy something in physical form, because they don't include premiums. Additionally, there is a lot of evidence that buyers trying to take delivery from the exchanges at the spot price are being turned away or force settled in cash. This work is unconvincing.
And it has nothing to do with Goldman Sachs calling for a sell on Gold a day or two before.
A price slam all based on "normal fundamentals" that had nothing to do with hedge funds or shadow bank activity (gambling/speculation/manipulation).
*cough*
Hernia!
Cause they were not too greedy. Short at the open, cover 1 hour later. No footprints in the daily stats. Bloody simple.
http://www.goldmoney.com/gold-research/alasdair-macleod/physical-gold-vs...
"...From these charts it can be seen that recent declines in the gold price are failing to reduce open interest further, and in silver open interest remains stubbornly high. Therefore, attempts by bullion banks to reduce their net short exposure by marking prices down are showing signs of failure.
We can therefore conclude that investor sentiment is at bearish extremes and the bullion banks have reduced their net short exposure to levels where it risks rising again. Therefore the downside for precious metals prices appears to be severely limited, contrary to sentiments expressed by technical analysts and in the media..."
I love the smell of burning banker flesh in the morning. Smells like ... victory.
Money metals,
Toy mean you cannot explain why gold drop that much and people should pay attention to what you have to say?
Keep the basis point to yourself.
Is this how it works? If I am not issuing anything and I sell you mine the OI doesn't change. If the transaction was below spot then it exerts negative pressure on the price.
An open interest of one (1) has got both a long and a short as part of that open interest of 1
Let's assume that the short is a hedger and the long is a speculator. If the prices drop to the extent that the long speculator cannot hold on to the position and sells the long (causing selling pressure) to a new long, then the open interest has not changed and remains at one (1).
Same short (the hedger) new long...the position has moved from a weak holder to a new (possibly stonger) holder
Monetary Metals - Your statement : We did not see the kind of change in open interest or in the basis that we would expect for a $200 drop in the price caused by naked shorting." is not correct.
When one sees a big drop in any commodity without a corresponding drop in the open interest it merely means that the long positions have been taken over by new (stong) buyers while the existing long has been shaken out or been forced to sell due to margin calls.
I agree there was probably a size order whether in the cash or the futures market that 'tipped the market' under what should have been support at the $1450 - $1500. Once it got down past support the margin clerks and panicked longs did the rest.
The gold market has just seen a major shift from weak hands into strong hands. Let the game begin!
PS> Been watching this market since 1978 and have paid my dues. Be long to the extent that you can sleep at night. Good luck to all.
"We did not see the kind of change in open interest or in the basis that we would expect for a $200 drop in the price caused by naked shorting."
Straw Man
MM should know that "naked shorting" is meaningless in the futures (and cash gold) markets. Selling is selling and buying is buying.
Several here have already pointed out: price drop with no change in OI is bullish because it usually means weak longs have been replaced by strong longs.
Basis in fact shot up sharply, which caused the futures to rise.
Dup
If one wants to taken seriously one does not dress up in a bug suit with fairy wings.
But thanks for trying
If one wants to be taken seriously one does not dress one's straw man up in a bug suit and then stage a fight. There. All better.
They saw paper stops and they opened the market underneath them after 6 months of shorting. Those trades that went off under the stops could have just been wash trades. The point was to hit the stops. The raid started at 1750, not at 1600. Just take their metal.
It must be FDR coming back from the dead and telling Morganthau the daily price, based on his lucky numbers for the day, plus his grandchildren's age.....just in time for a fireside chat of lies....
Cointelpro boy sez. "Supposedly, 163,000 futures are dumped with the effect of causing the price of “paper” gold to drop by $80 and then (presumably) more futures are shorted to cause the price to drop by an additional $130. "
Rather, 163,000 futures were dumped and blew through the however many stops that were sitting there to be taken out and then were subsequently withdrawn in a thousandth of a blink of an eye and thus as gone as Keyser Soze, who's alter ego Verbal Kint once famously said, "The greatest trick the Devil ever pulled was convincing the world he didn't exist.
Monetary metals.....allege this.......GO FUCK YOURSELF.
So, in the same vein, in a post from yesterday, @MiniCooper posted:
"Calm down everyone. This is just happening because spot gold is at a premium to Forward gold and hence the big banks are selling spot and buying forward. The physical gold demand from retail investors (as ZH has noted) is sky rocketing so it makes sense to sell spot and buy forward. If you want to find bubbles look at gold - it is where the retail investor is most active."To which I would like to ask (in all sincerity) to keep this thought-proces going:
"...bu,bu, buying forward from WHOM? The next question should be; Who is going to actually deliver that "forward" purchase? COMEX? Bueller, Bueller?"
And someone will, obviously reply; "They'll just roll-it-over" at expiration"
Which might seem plausible in the "old regular" market, but with bullion vaults being deplted of the phyz, are these hedgers going to continue trading future paper promises when there is nothing left underground?
Hey monetary metals man: We won't get fooled again. Go peddle your statistics somewhere else.