How to Read the COT Report and Price Manipulation

The Furor in the Silver Futures Market
While reports of JP Morgan reducing its silver short position on Comex is a fact we've highlighted in this section for the last few months, we are told it is doing this almost as a public relations exercise. JP Morgan's position in silver would from now on be "materially smaller" than in the past, we are told. This is as a result of the furor around charges it's been manipulating the silver price over a long period. This charge comes from Bart Chilton, a CFTC commissioner, who in October said he believed there had been "fraudulent efforts to deviously control the silver price." (He did not name any party.)

The CFTC's Bank Participation Report shows that one or more U.S. banks held a gross short silver futures position equal to 19.1% of the total number of outstanding contracts in early December. In January the share was 30.2%. This report is of data only the U.S. silver futures market, a small corner of the global derivatives market for the precious metal, which is centered in London and largely traded via private over-the-counter (OTC) deals. As we have said many times before, this data only covers up to 5% of transactions in the physical market. We have had this confirmed by Comex itself. The market's opinion is that JP Morgan's large short positions on New York's Comex exchange, a division of NYMEX, were hedges for the bank's long positions in physical silver and London's OTC market.

The COT reports, which we look at each week, provides a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. The weekly reports for Futures-and-Options-Combined Commitments of Traders are released every Friday at 3:30 p.m. Eastern time. The short report shows open interest separately by reportable and Non-reportable positions. For reportable positions, additional data is provided for commercial and non-commercial holdings, spreading, changes from the previous report.

Due to a request from a subscriber, we thought it appropriate to look at the COT report issued weekly by the CFTC so you can better see the action there. Before looking at these statements a look at the titles used in the report should be understood.

Futures and Options Combined
What does this title mean? A future is a standardized contract traded through regulated exchanges where an investor buys or sells a contract at a specified price for a specific date in the future. The price includes the interest charge due to the seller by the buyer from the date of the contract to the due date. An option is the 'right to buy or sell' a contract at a fixed date in the future at a specific (strike) price. The difference is that a futures contract is an agreement to buy or sell, whereas an option gives the holder the right to buy or sell. An option holder can decide not to take up that right and will only lose the cost of buying the option. His loss is therefore definable at the start of his investment, while the potential profit has not limit to it. A futures contract is usually leveraged (a loan provided) up to 90% of the contract. However, with the owner liable to top up his 'margin' to maintain this 10% his potential losses can rise far higher than his investment. A 'long' (buying) contract limits its loss to the full price of the item, whereas the 'short' (selling) contract has no limit except the height that the price of the item can rise to.

The Commitment of Traders report (COT) is therefore a report on the overall position of the Commodity Exchange (Comex or NYMEX).

Large and Small Speculators
The word speculator implies that the person is simply making a bet on the way he thinks the price of the item is going to move. In essence, he is a gambler. A trader might be this, but then again he might be an Arbitrageur, buying in one market and selling in another to capture the price difference between the two. He wants to deal as fast as possible so as to minimize his risk of a price movement while he is exposed. We would not put him in the same category as a speculator. (We will explain 'naked' positions below)

Contract
One contract is 100 ounces of the commodity (gold or silver in this case). The numbers referred to above are therefore the number of 100-ounce contracts in that position. The net long speculative position is found by adding the large and small speculators bought contracts and deducting the large and small speculators sold contracts. We work on there being 32,150 ounces in a tonne.

Buy (Long)
A long position is where an investor, trader, speculator buys 100 ounces x the number of contracts.

Sell (Short)
A short position is where an investor, trader, speculator sells 100 ounces x the number contracts.

Spreading
For the options-and-futures-combined report, spreading measures the extent to which each non-commercial trader holds equal combined long and combined short positions. For example, if a non-commercial trader in gold futures holds 2,000 long contracts and 1,500 short contracts, 500 contracts will appear in the "Long" category and 1,500 contracts will appear in the "Spreading" category.

Open Interest
Open interest is the total of all futures and/or option contracts entered into and not yet offset by a transaction, delivery, exercise, etc. The aggregate of all long open interest is equal to the aggregate of all short open interest.

Reportable Positions
Clearing members, futures commission merchants, and foreign brokers (collectively called reporting firms) file daily reports with the Commission. Those reports show the futures and option positions of traders that hold positions above specific reporting levels set by CFTC regulations.

Commercial and Non-commercial Traders
When an individual reportable trader is identified to the Commodities Futures Trading Commission, the trader is classified as either commercial or non-commercial. All of a trader's reported futures positions in a commodity are classified as commercial if the trader uses futures contracts in that particular commodity for hedging as defined in the Commission's regulations (1.3(z)).

Non-Reportable Positions
The long and short open interest shown as non-reportable positions are derived by subtracting total long and short reportable positions from the total open interest. Accordingly, for non-reportable positions, the number of traders involved and the commercial/non-commercial classifications of each trader is unknown.

Changes in Commitments from Previous Reports
Changes represent the differences between the data for the current report date and the data published in the previous report.

Number of Traders
To determine the total number of reportable traders in a market, a trader is counted only once regardless whether the trader appears in more than one category (non-commercial traders may be long or short only and may be spreading; commercial traders may be long and short). To determine the number of traders in each category, however, a trader is counted in each category in which the trader holds a position. Therefore, the sum of the numbers of traders in each category will often exceed the total number of traders in that market.

COT Report Perspective
You now understand the definitions, but that isn't much use unless you put it all together and 'see' how it works. So let's look at the current furor in Comex and put that into context. As we said earlier, up to 5% of transactions result in a physical gold or silver transaction. Even then a trader must notify his counter party that he will expect delivery. If he doesn't, then his counter party will expect his position to be closed (If he has sold short, he will buy back the same amount before the original contract date is reached). So 95% of all contracts will be closed before their expiry date. This makes Comex a financial market not a physical gold or silver market. So with JP Morgan holding such a large short position, were they able to manipulate the silver and gold prices? Let's look at this now.

Are Banks Manipulating Silver and Gold prices?
JP Morgan one or more U.S. banks held a gross short silver futures position equal to 30% of the short positions on the Comex silver market. On the surface it does sound as though they were trying to depress the price of silver. The CFTC Commissioner has stated that the prices are being manipulated in the silver market.

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