Paper Shorts Are Scrambling

But here is what I find really astonishing, Eric. Look at all the June EFPs. And look at how the April EFPs were declining over the week while the June EFPs were rising. It means that the shorts were unable to deliver on the April contracts, which would have required delivering the metal last week, before the last April contracts expired. The shorts didn’t have the metal, so instead they promised the longs to deliver in June, no doubt with price concessions to the longs to sweeten the deal to get the longs to accept the risk of waiting two more months for delivery.

Here’s another point worth thinking about. In normal markets the shorts who are obligated to deliver physical metal do so as soon as possible at the beginning of the delivery month for two reasons. First, by delivering metal on the first day, they don’t pay storage charges for the rest of the month. Second, the sooner they deliver, the sooner they get paid for the metal they are selling.

It used to be that EFPs were mainly used to sort out a small number of positions at month end, but last week’s EFP volume was huge. It was 111 tonnes, which is about two weeks of annual production. That is a huge volume, and the fact that this activity is taking place at the end of the month means the shorts are trying to put off delivery as long as possible because they don’t have metal.

I need to bring in here a word of caution, Eric, to keep our mind from imagining what could unfold in the weeks and months ahead. Using Comex data is like trying to figure out what an elephant looks like by just grabbing a foot. There may be other interpretations of this EFP data, which is only giving us a brief, limited look under the hood of the bullion dealers.

- Source, King World News