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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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duk a fuk; gold fatigue, too much shiney shit on da mind.
hey it went back up and in very short supply; WTF else do we need to know?
take aim at the GB, bang, bang, lol...
Couple of points;
1. COT report for the relevant period hasn't actually been published yet - so whilst your report is good 'copy' perhaps it is premature.
2. Whilst OI did not soar are you denying the contract trading volume on Sunday night trading was huge in a thin market? Of course OI did not soar as long positions were folded on technical breakdown. So OI is not in itself the barking dog on "co-ordinated smackdown" that you claim it would be. Barking dogs on a disconnect between paper price and physical price would seem to be soaring physical demand and the huge outflows of gold as reported by Comex vaults themselves.
3. Personally I don't care whether it was co-ordinated or not, the sharp reduction in price was simply a physical buying opportunity. Cheers to whoever did it! I daresay paper will try and drive the price to $0 which perhaps is more representative of the value of a piece of paper where the physical ounce does not exist.
"...paper will try and drive the price to $0 ..."
Indeed. The disconnect between paper and physical will be recognized by paper-holders selling their positions in anticipation of paper's absense of intrinsiic worth, thus diving paper-price down and ultimately to zero [as all holders are forced to recognize the fraud is no longer workable].
That race to zero also releases any shorts as they can cover their positions at zero cost; of course, the game will end sometime before zero is reached.
Good points.
Regarding 3, if you were not fully allocated it was obviously a gift. But anyone who already had a reasonable physical allocation patiently accumulated over years (say to 20-25% of investable funds) can get really pissed off by this sort of shenanigans, it is an irritant like an ass boil.
Anyone that accumulated over many years probably has a cost basis of $7 per ounce of silver and $700 for an ounce of gold. And they are accumlating, not speculating. They DON'T CARE...
Hey MonetaryMetalsMan:
Since yu clearly wanna stick it to GoldBugMan...and most o da bros in da hive be sleepin of the moment....
lemme change into my handy BUGBODYSUIT....there we go!...and take up your challenge.
Jus moments before yur hitpiece hit the wire, I checked my goldprice.org ticker and sure nuff...like clockwork-10 am here...8 am GMT...Londres open and -gold takes a 10 pointer nose dive....nuthin to see here...if yur head be up yur ass!
Speakin of which...yu seem kind of passive-aggressively anal sir...like what's yur deal? "Counterintuitive" or counter-intelpro dude? One more piece o shit post like this and I'm gonna change outta my usual Heckle n Jeckle costume for Mr Chesty's* joke posts here...and into my QuikDraw McGraw** ensemble to take down this ElKabong mofo for good!
*http://tviv.org/The_Heckle_And_Jeckle_Cartoon_Show
**http://www.youtube.com/watch?v=49lFPyzTfjw
Keith Weiner plagiarizes
http://www.plata.com.mx/Mplata/articulos/articlesFilt.asp?fiidarticulo=201
This Weiner is really quite the PM douchebag isnt he? What pitiful nonsense explaining the fraud ridden COMEX futures market.
Shame on the Hedge for putting this garbage up around here.
But...we need a contrarians' contrarian round here! Doubles the pleasure...doubles the fun!
Keith's aimin for a 'negative' vote count...so as to be able to pull out his next 'interest rates doctrine' piece(free registration require to read pt 2!)
Different views are always welcome if they are honest and truthful. Propaganda, spin, misinformation and deception are not.
This article stinks.
You evidently believe the official COT data, congratulations. And where is your "spot" price derived from? On which size of transaction? A handful of american eagles ?
http://www.bmgbullion.com/document/5160
" ALL OF A SUDDEN THE LONDON PHYSICAL PLATFORM THAT BUYS AND SELLS PHYSICAL GOLD GETS LOCKED UP. THE SYSTEM FREEZES.
The screens all freeze. What does that mean? No one can get to the physical market to buy at these low prices but at the same time, they can’t sell or protect their positions either. The system is frozen. Yes, just like at Bit-coin. The system locks up. And of course the results are going to be the same, just on a lower percentage level. "
So much for the "gold basis" calculation. Meaningless.
great post, thanks for the link...