Dear Commissioner Giancarlo:
I have been conversing and corresponding with the commission’s Mathew Hunter for the past few years about gold and to a lesser extent silver with respect to the contraction of open interest on the approach to an active delivery month. Hunter originally offered no apparent reason for this phenomenon, citing confidentiality requirements. He never mentioned the use of the exchange-for-physical procedure for fulfilling exchange obligations with private contracts, and I had no idea that it existed.
When I brought up the EFP procedure, Hunter said he was familiar with it and had been monitoring and auditing the private contracts. He said it was quite legal to offer an EFP to a futures exchange long in a private deal for cash and a deliverable and verifiable physical product, and I have since discovered that almost all precious metal EFPs get transferred to a London forward contract.
James Turk of GoldMoney.com and Andrew Maguire of Goldstar Global have told me that almost all these EFPs remain in London seeking whatever physical they can get. Andrew Maguire tells me that gold and silver are in deep backwardation in price in London and it is taking more than 13 weeks for delivery there. He suggests that it is most likely that supplemental payments are issued to EFP longs because of the extra time it takes to deliver.
It would be quite easy for an EFP long to sell in London and buy another gold contract on the Comex in New York and renew the process. But this is not happening, as the open interest is not increasing.
I have since learned that in November about 9,700 contracts per day or 622 tonnes were transferred to EFPs , and so far this month more than 14,000 contracts per day. If this rate continues through the month, then 30.8 million ounces or almost 960 tonnes would be transferred. This volume is enormous.
Thus nearly all these gold and silver EFPs longs are staying in London trying to obtain whatever metal is available there. But while this is going on, the banks trading on the Comex continue to supply massive amounts of paper commitments for gold and silver knowing that there is no physical to supply on the Comex.
Obviously there is a huge conflict here without transparency. Why are the banks supplying so many shorts, pushing prices down, knowing that they never could deliver?
Why has the CFTC allowed JPMorganChase to acquire more than 600 million ounces of physical silver even as the bank is the biggest short at the Comex?
The CFTC calls the Comex a price-discovery mechanism. Do you believe that the commission is providing transparency in the gold and silver MARKETS?
Gold and silver consistently have higher prices in Shanghai than in New York. Given that banks are paying Comex longs a cash bonus for shifting delivery obligations to London, as a practical matter the spot prices of gold and silver are higher than future prices. The offering of cash to longs for agreeing to transfer delivery to London and delay delivery indicates additional backwardation and scarcity of metal.
If EFPs, formerly said to be used in emergencies, have become daily occurrences, why is there such an increase in shorting by the banks when there is little metal to supply on the Comex? When there is so little metal available, it can’t be explained as hedging by the banks.
Can you please address this in public?
Harvey Organ, BScPhm MBA