Not a fat finger report error ... we just witnessed a savvy massive gold trade
Comex’s reporting on the April gold contract has been a roller coaster. To recap … the preliminary print for March 28 report issued on Friday night showed 55,878 contracts standing for delivery. That was revised upward by 50,784 to 106,662 on the final print early Monday afternoon.
On the prelim and final reports for trading on Monday March 31, 52,983 contracts vanished essentially wiping out the weekend surge.
Where does it stand now? Based on the 18,814 contracts that remain open and the 34,865 contracts already delivered, the number set for delivery is 53,679. That is the second highest in comex history not far behind the 59,296 that stood for delivery on the February contract.
Big month … but I want to know what went down behind the scenes. The sequence of events can lead one to believe that this was a fat finger error in comex reporting. I’m not believing that. I think the reporting captured an ambush on the physical markets.
Over the years on several occasions, I have described how a large player could trade the market in the days before first notice. The first trade is to acquire long positions on the incumbent roll month. The second trade is a long position on the contract with the upcoming delivery. The vulnerability is associated with the fact that a high fraction of those positions roll. That conceals the position that would stand for delivery … large in physical terms, but modest relative to the paper market. In the final days before first notice, other players close positions and the surprise physical demand is revealed. If the physical demand revealed in the last days is high enough, both contracts would see a price increase … an extra bonus to the incumbent month being levered on margin.
It’s possible a player improved upon my procedure and spiked positions over the weekend using off market trades after the preliminary report print and before the final report. Gold’s price strength over the recent days supports the reveal of that surprise demand.
Why did the positions close the following day? I’d suggest the folks running the casino told the perpetrator that his game was over. I believe Warren Buffet once had a similar conversation with the “powers that be”.
The alternative explanation is the fat finger. I don’t buy that. There are only 5 active month contracts per year. On those few occasions the big reveal is the number of contracts standing for delivery. This particular April contract was set to be one of the most important in comex gold history following up the record February contract. You can bet the “A” team was in charge when each of these recent reports were printed. Furthermore, in each case the reports were delayed by hours indicating extra scrutiny
"What happened behind the scenes"? COMEX did what COMEX does. I said last week that you can't break COMEX with a large position, they will just liquidate your position and settle in cash. They make the rules.
My money would be that they released metal going back to the US Treasury and everybody else was told, "no metal for you!"
None of this is 'normal'. The whole system is dying. They can't stem the gold buying, so they try slamming silver, to shake out the weak hands... but there are no weak hands, as soon as the slam is over, the buyers return.
Hi Michael.
Your post ends "...It is not apparent how many contracts actually stood for delivery, nor
After the dust settled, ..."
I feel this might have been a mistake?