Wednesday, August 12, 2009

Gold and Silver Price Suppression

If a recent Bank Participation Report (BPR) doesn't provide proof that large commercial banks are artificially suppressing the price of gold and silver on the COMEX exchange, nothing will.

This data is readily available on the Commodity Futures Trading Commission (CFTC) website, an independent agency that is chartered to regulate the commodity futures and options markets. They serve a similar role as the Securities and Exchange Commission (SEC), which regulates equities exchanges (the stock market). You know--so fraudsters like Bernie Madoff can't run Ponzi schemes like he did for decades with impunity. Zing.

I've posited before that the CFTC may be even worse than the SEC at regulation and enforcement, if that's possible.

According to their website:

Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, protecting market participants against fraud, manipulation, and abusive trading practices, and by ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk.

The CFTC's mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.

Lately, after numerous complaints on market manipulation, they have begun an investigation on the energy futures market, including crude oil and natural gas. Potential solutions include tightening of margin requirements, limits on naked short sales, including overall monitoring and enforcement against market manipulation.

Fine. So why don't they initiate a similar investigation and enforcement in the precious metals market, namely gold and silver?

Look closely at the long and short positions of gold and silver on the COMEX (sometimes dubbed CRIMEX by cynics) in the BPR. Two U.S. banks are long 15 silver contracts--and short 29,813 contracts, representing 30% of all open contracts. That's a lopsided ratio of long/short contracts. According to the Commitment of Traders (COT) data, these two banks--JP Morgan and HSBC--should have 149,065,000 ounces of silver in their vaults (each contract represents 5000 ounces for delivery). I'm calling BS on that.

With COMEX gold, 2 U.S banks are long 346 gold contracts, and short 106,272 contracts--or 27.1% of the open interest--again a huge discrepancy in long vs. short contracts. That equates to 10,627,200 ounces of gold (100 ounces per contract). Ladies and gentlemen, this is by definition manipulation, when a market has such huge concentrated positions by so few market participants. Similarly, the Hunt brothers were convicted of trying to corner the silver market in the 1970's when they built concentrated long positions.

So why doesn't anyone investigate JP Morgan and HSBC? Could it be they are mandated by our government finance officials to sell short the precious metals, suppressing the price of the two "fear indicators"? After all, when the prices of gold and silver soar, it means financial markets and investors are panicking that Armageddon is upon us.

Normally, gold and silver mining companies will short sell the metals contracts in order to lock in a sales price as a hedge against falling prices, much like a farmer will lock in a futures sales price for their specific crops. When it's time for settlement of the contracts, the farmer or gold miner delivers said respective commodity.

But commercial banks don't possess enough of the gold or silver in their vaults necessary for delivery--hence the "naked" sale. Instead, delivery is settled via cash--with no exchange of the physical bullion from seller to buyer.

The abuse comes in when a commercial bank can just indiscriminately and theoretically sell an infinite amount of gold or silver contracts--with no intention of delivery. Creating a huge surplus of naked short sales contracts places undue selling pressure on the commodity, causing it to decline precipitiously. Suppose every homeowner in your neighborhood put their homes up for sale, whether some of them really had the intention of selling their homes or not. You can imagine what that would do to the value of your own home--if every single home on your block had For Sale signs on their front lawn. In a worst-case scenario, a scam artist can accept payment for selling empty shells as homes with no intention of ever building the homes--the ultimate naked sell.

Similarly, when a few banks can flood the COMEX exchange with thousands of naked short sales contracts--with no intention of delivering the physical bullion, they can artificially and temporarily suppress the prices of gold and silver. Long-term, this distorts the supply/demand dynamics of the market, as miners stop drilling for new supplies, because the price of the commodity is too low to cost-justify exploration and drilling. When miners stop mining, this will ultimately undermine the suppression efforts, as a severe shortage occurs, causing prices of the commodities to soar. Suppression defers the pain of higher prices, but it also exacerbates the resulting bubble.

As both gold and silver are monetary stores of value with no counter party risk, exorbitant increases of money supply by central bankers will eventually induce price inflation across all hard assets. Investors will mistrust their respective currencies, while gold and silver will retain their monetary value. As a result, gold and silver prices will soar. It occurred in the 1970's when we had runaway inflation and budget deficits, because the US government turned on the printing presses. With today's trillion-dollar deficits, there is no telling how high the price of gold and silver will rise. We'll know by the whites of the eyes of government officials.

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