Has Gold Been Manipulated?

By Brad Zigler

Writing articles on precious metals can be an unending job. The time spent researching and composing the piece often seems short compared with the investment required to field questions and defend one's reasoning.

Gold, for example, seems to excite everyone's passions. Everybody's got an opinion about why the metal's where it is today or why it ought to be higher, or lower, in the future. And why not? After all, if it weren't for differences in opinions, there'd be no trading.

But let's be clear: An opinion is just a personal view; it's not a fact. When it comes to the responses to gold articles published by Hard Assets Investor (www.HardAssetsInvestor.com), there seems to be plenty more opinions than facts offered.

One of the most common beliefs held by responders is that the price of gold is being artificially suppressed. Gold, according to subscribers of the manipulation theory, would be higher-priced today if not for the efforts of a banking cabal that cuts short rallies.

But what are the facts, if any, that support this contention?

Articles written by Ted Butler are most often cited as the backup for the manipulation argument. Butler, a newsletter publisher and one-time commodity broker, posits a criminal conspiracy among large commercial interests in the silver - and by extension, the gold - market. The smoking gun Butler offers is the short interest held by a handful of banks.

According to data compiled by the Commodity Futures Trading Commission [CFTC], banks are indeed on the short side of the metals futures markets and have been for quite some time. At present, the market looks like this:

COMEX Gold - Futures Only

	Number of Banks	Long Futures	Short Futures	Ratio Short vs. Long	Open Interest
U.S.	3	1,108	94,561
Non-U.S	23	31,537	25,657
Total	26	32,645	120,218	3.7:1	341,461

Source: CFTC- May 5, 2009

So, bank-held long positions, in the aggregate, amount to a quarter of the size of the financial institutions' short sales. That's supposed to be a smoking gun?

Butler attributes the 2008 gold sell-off to some sort of manipulative action by these banks. In one newsletter, he writes: "Every criminal act must have a motive and an opportunity to commit the crime. By the simple process of elimination, those responsible for this crime are the concentrated commercial shorts on the COMEX. No one else fits the profile. They had the means (through their dominant and monopolistic position), the profit motive and the skill to cause the sell-off."

Okay. Time for a lesson in capitalism. Banks are in the business of making money. There's no crime in that. And while banks strive to earn a yield spread between borrowed and lent funds, they also have proprietary trading desks in which they deal as principals in debt securities, foreign exchange and, to one degree or another (more so for non-U.S. institutions), precious metals. Banks also execute trades as agents for their large customers.

The existence of a large bank position, short or long, does not in itself indicate manipulation. Indeed, if you looked at bank participation in other commodity contracts, you'd see many instances of lopsided positions. Take U.S. Treasury bond futures as an example. Bank short positions in T-bonds are heavier and more concentrated than those in gold:

CBT Treasury Bonds - Futures Only

	Number of Banks	Long Futures	Short Futures	Ratio Short vs. Long	Open Interest
U.S.	4	5,387	11,205
Non-U.S	15	10,053	109,655
Total	19	15,440	120,860	7.8:1	686,278

Source: CFTC- May 5, 2009

Using Butler's reasoning, the Treasury market must be even more highly manipulated than gold; fewer banks with positions twice as short as those involved in metals. But where's the trail of guilty footsteps here?

More interesting still is Butler's one-sided notion of manipulation. As gold's cash and futures prices soared between October 2007 and March 2008, large speculators' net long positions grew atypically outsized. Simply put, institutional accounts and hedge funds (the red line graphed below) jumped ahead of commercial hedgers (blue line) to lead the market to its peak above $1,000 an ounce.

Yet we heard no outcry from Butler or his followers about manipulation then. Clearly, long speculators had means and motive. If we adopt Butler's presumptions, the run-up should also amount to prima facie evidence of criminal conspiracy.

Net Interest Of COMEX Gold Traders

Source: CFTC

Butler believes the subsequent sell-off was so severe that it must have been orchestrated. Forgive me for thinking that the standard of proof for conspiracy hasn't been met. Once again, where's the evidence?

A suspicion of funny business in the metals markets would be bolstered if gold futures sold off in isolation. But it didn't. Gold, silver, crude oil, corn - everything - swooned in the spring and summer of 2008. There was wholesale de-leveraging in the wake of the unwinding of short dollar plays.

Most important, though, is the relationship between gold price peaks in July 2008 and February 2009 and commercial short positions. You'll note there's a direct correlation. In other words, commercial short positions peaked when gold rose in price.

So, how's that fit in with the Butler conspiracy theory?

Now, I'm a reasonable guy. I'm more than willing to look at the gold market with fresh eyes if readers can supply new facts rather than supposition and hearsay. If you've got something to say about gold's manipulation, now's the time.

Comments

[nova:]

BidEd,

Thank you for facts and sound logic.

May 22 01:02 PM

[nova:]

One more comment.

The USA do not control the world economic any more. The world is in a process of a major geopolitical realignment.

Consequently, regardless of how hard the CFTC and the Federal Reserve will be trying to manipulate gold and commodities prices, the initiative is not anymore on their side and they destiny to fail. The more they "try", the more grave will be the consequences.

May 22 01:18 PM

[MeditateMed...:]

this paragraph contradicts itself. doesn't make sense-


On May 20 09:29 AM Brad Zigler wrote:

> COMEX gold contracts are NOT settled in cash. Longs can stand for
> receipt of physical metal during the delivery period. But delivery
> is not the only way a commodity contract obligation can be offset.
> Before a delivery notice is tendered, a futures buyer can sell his/her
> contract at the current market pirce and realize his/her profit or
> loss in cash.
>
> Historically, only 2-3% of futures contracts are actually settled
> by delivery. The vast majority are closed out prior to the delivery
> period by open market transactions. That includes commercial and
> speculative traders.

May 22 01:21 PM

[Brad Zigler:]

But that's the odd thing ...you've provided NO evidence of banks' CURRENT manipulation of PRECIOUS METALS FUTURESas alleged by Mr. Butler.

Where's the data?

I supplied the hard numbers in my article to back my contentions. If I can come up with numbers, why can't you?



On May 22 12:33 PM SW Richmond wrote:

> Presenting you with evidence which any reasonable person could use
> to conclude that the sky is blue seems a waste of time. Anyone can
> set up a strawman and knock it over. Your standard of evidence seems
> to be an eyewitness report, one which you know is not forthcoming.
>
>
> Good day.

May 22 01:29 PM

[Ted Butler:]

Brad,

You keep asking for evidence, when you’ve already provided it yourself. Three or fewer US banks are short 85 times as many short contracts as they hold long contracts. Not shown, but also off the same report is that 1 or 2 US banks are short 250 times as many silver contracts as they hold long. This level of concentration is prima facie evidence of manipulation, by the CFTC’s own past standards of prosecuting manipulation.

In addition, the concentrated silver short position of 1 or 2 US banks has run between 20 to 25% of total annual world production since August. Never has such a level of concentration existed in any commodity.

While I’m not holding my breath for the CFTC to do the right thing, they did, at least, initiate a formal investigation of silver by their Enforcement Division after I wrote about these levels of concentration. That would suggest they see some evidence of potential wrongdoing. Otherwise, they would have responded like you have and saved the taxpayers some money.

Ted Butler


On May 22 01:29 PM Brad Zigler wrote:

> But that's the odd thing ...you've provided NO evidence of banks'
> CURRENT manipulation of PRECIOUS METALS FUTURESas alleged by Mr.
> Butler.
>
> Where's the data?
>
> I supplied the hard numbers in my article to back my contentions.
> If I can come up with numbers, why can't you?
>

May 22 02:20 PM

[Brad Zigler:]

As you may know, there are no position limits on bona fide hedge transactions. Thus, banks using futures to offset large long cash or swap market exposures are bound to look lopsided.

Keep in mind that COT reports produced by the CFTC reflect futures (and futures-equivalent options) positions only, so we don't see traders' NET market exposure.

In August 2007, NYMEX (the parent of COMEX) surveyed several of the largest short metals traders, inquiring as to their activity in the cash and OTC derivatives markets. The exchange found that these firms held significant forward agreeements that left them with a net long exposure. The short futures positions on COMEX/NYMEX were found to offset their cash and OTC positions, leaving them essentially "market neutral."

A manipulation would be evidenced by a biased NET market position.

According to CFTC analyses published in 2004 and 2008, overall short-side concentration in precious metal futures is not significantly different from that found in many other active futures markets.

That said, it's important to note that the tables presented in the article show only BANK trading in the gold and bond markets, not the entirety of traders' commitments. That US banks appear so heavily tilted to the short side in metals futures (compared to foreign banks) is an artifact attributable largely to regulatory legacies.

In foreign venues you're much more like to find unitary regulators, i.e., single agencies that govern banking and brokerage. Offshore banks are much more likely to be financial supermarkets, offering their customers one-stop shopping.

For years, the Glass-Steagall Act kept a wall between investment and commercial banking in the US. Even though that legislation has now been gutted, few US banks fully integrated financial offerings to include futures. After all, there are still separate regulators for banking activities, securities transactions and futures brokerage. To offer all services, an institution must submit itself to three different regulatory schemes and capital requirements, a costly investment.

Most futures brokerage and trading in the US is conducted by CFTC-regulated futures commission merchants rather than banks. Brokers' and non-bank proprietary trading positions would not be reflected in the tables.

On May 22 02:20 PM Ted Butler wrote:

> Brad,
>
> You keep asking for evidence, when you’ve already provided it yourself.
> Three or fewer US banks are short 85 times as many short contracts
> as they hold long contracts. Not shown, but also off the same report
> is that 1 or 2 US banks are short 250 times as many silver contracts
> as they hold long. This level of concentration is prima facie evidence
> of manipulation, by the CFTC’s own past standards of prosecuting
> manipulation.
>
> In addition, the concentrated silver short position of 1 or 2 US
> banks has run between 20 to 25% of total annual world production
> since August. Never has such a level of concentration existed in
> any commodity.
>
> While I’m not holding my breath for the CFTC to do the right thing,
> they did, at least, initiate a formal investigation of silver by
> their Enforcement Division after I wrote about these levels of concentration.
> That would suggest they see some evidence of potential wrongdoing.
> Otherwise, they would have responded like you have and saved the
> taxpayers some money.
>
> Ted Butler

May 22 03:51 PM

[Ted Butler:]

Brad,

Those are all nice-sounding excuses for the super-concentrated short position of a very small number of US banks. Even if they did have legitimate off-setting positions (which no one can prove) it still doesn’t give them a green light to dominate a market. And of all markets why is it so extreme as in silver (and gold)? The banks are hiding behind the bona fide hedge con to avoid legitimate speculative positions. Yes, the CFTC did review this matter in 2004 and 2008, and dismissed my allegations of manipulation. Yet they still turned around and began a new investigation just months from issuing their 2008 review, based upon the new concentration data.

Look, you kept asking for data pointing to a manipulation and I provided it. If you can, in turn, provide specific information on other markets that show such large concentrations held by so few traders as in silver (and gold) and where just one or two traders are short (or long) up to 25% of the world annual production of any commodity, I’d love to see it. I don’t know how any reasonable person could conclude anything but manipulation.


On May 22 03:51 PM Brad Zigler wrote:

> As you may know, there are no position limits on bona fide hedge
> transactions. Thus, banks using futures to offset large long cash
> or swap market exposures are bound to look lopsided.
>
> Keep in mind that COT reports produced by the CFTC reflect futures
> (and futures-equivalent options) positions only, so we don't see
> traders' NET market exposure.
>
> In August 2007, NYMEX (the parent of COMEX) surveyed several of the
> largest short metals traders, inquiring as to their activity in the
> cash and OTC derivatives markets. The exchange found that these firms
> held significant forward agreeements that left them with a net long
> exposure. The short futures positions on COMEX/NYMEX were found to
> offset their cash and OTC positions, leaving them essentially "market
> neutral."
>
> A manipulation would be evidenced by a biased NET market position.
>
>
> According to CFTC analyses published in 2004 and 2008, overall short-side
> concentration in precious metal futures is not significantly different
> from that found in many other active futures markets.
>
> That said, it's important to note that the tables presented in the
> article show only BANK trading in the gold and bond markets, not
> the entirety of traders' commitments. That US banks appear so heavily
> tilted to the short side in metals futures (compared to foreign banks)
> is an artifact attributable largely to regulatory legacies.
>
> In foreign venues you're much more like to find unitary regulators,
> i.e., single agencies that govern banking and brokerage. Offshore
> banks are much more likely to be financial supermarkets, offering
> their customers one-stop shopping.
>
> For years, the Glass-Steagall Act kept a wall between investment
> and commercial banking in the US. Even though that legislation has
> now been gutted, few US banks fully integrated financial offerings
> to include futures. After all, there are still separate regulators
> for banking activities, securities transactions and futures brokerage.
> To offer all services, an institution must submit itself to three
> different regulatory schemes and capital requirements, a costly investment.
>
>
> Most futures brokerage and trading in the US is conducted by CFTC-regulated
> futures commission merchants rather than banks. Brokers' and non-bank
> proprietary trading positions would not be reflected in the tables.
>
>
> On May 22 02:20 PM Ted Butler wrote:

May 22 04:17 PM

[Justice Kinky:]

Ted Butler:

I wonder if you realize that the singular most effective argument to keep anyone out of silver is your consistent harping on the "evidence" that silver is hopelessly manipulated.

If you want people to invest in geese that lay proverbial golden eggs, why keep bleating that there is a conspiracy afoot to keep the population of golden egg laying geese down forever?

Further, where is the evidence that your effort to stop the ongoing "manipulation" is effective? Why should any potential investor believe that you will wrest silver from the dirty hands of the "evil conspirators"?

I read an article where the author (Mike Shedlock) said:

"With respect to the claims of silver commentators that prices are being suppressed, it should be noted that these commentators have never articulated a credible explanation as to why, for more than 25 years, buyers have not entered the market to purchase silver (at the supposedly depressed prices), thereby driving up prices to a level that these commentators believe is reasonable. In this regard, no barrier to entry has been identified that would prevent individuals or firms from buying cash silver or entering into long silver futures positions."

This invisible and unidentifiable "barrier to entry" of which these people speak.....could that be you and commentators like you, who constantly cast doubt on the ability of silver to resist manipulation while paradoxically urging people to buy, buy, buy? Most not-to-bright people (arguably a large segment of the population) who read your stuff and buy your fairytale might be tempted to conclude that silver is a bad bet. The problem is that you keep thinking that the more you scream about "conspiracy" the more people will buy into this "manipulated" market. Why?

I can't answer for the merit of your overall thesis but your writing lacks coherence. Look at your ridiculous statement on this forum:
"Even if they did have legitimate off-setting positions (which no one can prove) it still doesn't give them a green light to dominate a market"

Basically, you're using the premise that people would need to furnish proof you believe is not available.
Second, you nest this within a sentence that assumes the market is being dominated, a fact you fail consistently to prove.

Anyone can wildly make up a bunch of accusations based on the crafty insight that while they can't prove anything, nobody else can either. Sort of like the war between the camps of "unbelievers" vs. "believers" which goes something like this:

Camp 1: "Prove God exists".
Camp 2: "Prove God doesn't exist".

This is idiotic.

Far as I can tell, you and your buddies are one of the most effective hindrances to any confidence in silver as a good investment.

I wish you'd let go the microphone. Unfortunately, I believe you're having too good a time.

Silver will rise. Possibly despite you.

May 22 07:16 PM

[Brad Zigler:]

In order to qualify for the hedge exemption to position limits, traders are obliged to file reports with, and be subject to the scrutiny of, the CFTC. The CFTC has the power to call for additional information from any trader claiming exemption to position limits.

Once reporting levels are attained (200 contracts for NYMEX/COMEX gold; 150 contracts for NYMEX/COMEX silver), daily reports must be filed by the carrying broker, whether the positions are subject to a hedge exemption or not.

A claim that that "no one can prove" legitimate offsets is specious.

There are no "concentration" limits specified under the Commodity Exchange Act (CEA) or CFTC-promulgated regulations. A bank's large or lopsided short futures position is not prima facie evidence of manipulation, especially in light of long exposures created by dealing in swaps, physicals or forward contracts.

A bear raid, as you postulate, is profitable only if a speculative short seller can eventually buy back positions at a price which is lower than the price at which they were initially sold. Since the number of contracts sold is equal to the number of contracts subsequently bought, this can happen if, and only if, the futures price responds asymmetrically to a speculator’s purchases and sales. That is, the price decline caused by the speculator’s sales must exceed the price rise caused by subsequent purchases.

There is no credible evidence that such an asymmetry exists or has existed in the futures markets. Moreover, it is even difficult to construct a theoretical model that exhibits this property.

A showing of manipulation under the CEA requires four elements: (1) an ability on the part of the alleged manipulator to influence prices, (2) a specific intent to create an artificial price, (3) the actual existence of an artificial price and (4) causation.

Thus, proof of manipulation involves a showing of monopoly or domination of the market, trading practices inconsistent with competitive behavior, and the ability to leverage across markets.

The law defines a manipulative act as one that is inherently capable of causing an artificial price. For a manipulation to be established, there must be a showing of “specific intent" to create an artifical price.

Last, it must be demonstrated that the alleged manipulative act was in fact the actual cause of the artificial price.

In short, the evidence HASN'T yet been produced that establishes manipulation.

Put simply, it boils down to this:

-- What the current price of metal be if the alleged manipulation hadn't occured?

-- Do the banks have the actual ability to influence the price of metal?

So far, there's been no data offered to address these questions.

On May 22 04:17 PM Ted Butler wrote:

> Brad,
>
> Those are all nice-sounding excuses for the super-concentrated short
> position of a very small number of US banks. Even if they did have
> legitimate off-setting positions (which no one can prove) it still
> doesn’t give them a green light to dominate a market. And of all
> markets why is it so extreme as in silver (and gold)? The banks are
> hiding behind the bona fide hedge con to avoid legitimate speculative
> positions. Yes, the CFTC did review this matter in 2004 and 2008,
> and dismissed my allegations of manipulation. Yet they still turned
> around and began a new investigation just months from issuing their
> 2008 review, based upon the new concentration data.
>
> Look, you kept asking for data pointing to a manipulation and I provided
> it. If you can, in turn, provide specific information on other markets
> that show such large concentrations held by so few traders as in
> silver (and gold) and where just one or two traders are short (or
> long) up to 25% of the world annual production of any commodity,
> I’d love to see it. I don’t know how any reasonable person could
> conclude anything but manipulation.

May 23 12:11 AM

[Ted Butler:]

Brad,

I am well-versed on the manipulation points you have outlined, and someday I am hopeful that I will be able to debate them with the CFTC directly. Even though the CFTC is on their third silver investigation in five years, due to my private and public allegations, they have yet to engage me. It’s kind of like the police investigating a murder for five years, yet refusing to sit down with the sole eye-witness who tipped them off in the first place. Personally, I think the CFTC is afraid to sit down with me on this issue.

In any event, I don’t see what could be gained by debating all these issues here. This is not complicated. You wrote an article, referencing me, with the simple premise that the concentrated holdings on the short side of COMEX gold (and silver) were not out of line with many other commodities. You claimed this invalidated my argument You chose as an example the Treasury Bond market, which turned out to be a poor choice, as it did not show a concentration by US banks at all, or even by foreign banks, as there were too many (15) to qualify as concentrated. Others and I pointed this out, and rather than address the simple premise of your article you have instead gone off on tangents unrelated to your story line.

In the Bank Participation Report of May 5, which you referenced, 3 US banks held a short gold position 85 times their long position and that short position made up 27.7% of the entire market. In silver, 2 US banks held a short position 250 times their long position and that short position made up 29.3% of the entire market. These are unusually large and concentrated positions, even though they were actually lower than they had been in previous months. In addition, when converted to real world quantities, the silver short position of two US banks has constituted 20 to 25% of the entire world production, an unprecedented and absurd amount.

I ask again, can you provide any specific examples where this has occurred in any other commodity?

May 23 07:22 AM

[steve graves:]

Great contribution, Brad. But conspiracies die hard, as we all know. When two thirds of the U.S. population still believes that Oswald was innocent despite the fact that every last shred of physical, circumstantial and eyewitness evidence points to his absolute guilt - you know you've got an uphill battle. Still, keep up the good work. Conspiracies are the byproduct of small, paranoid minds; we need more like yours to combat them.

May 23 09:29 AM

[Brad Zigler:]

Yes, platinum and palladium. But what makes you think that these, like the other metals positions, aren't offsets to cash or derivatives positions?

Will you also demonstrate HOW, as asserted in your statement: these "concentrated commercial shorts on the COMEX" actually exploited their "means (through their dominant and monopolistic position)," and utilized their "skill to cause the sell-off" in 2008?

You've alleged a crime, viz: " those responsible for this crime," but haven't established the elements of a crime nor even the basis for a civil action.

What would be the metals prices have been if these U.S. banks weren't users of NYMEX/COMEX?




On May 23 07:22 AM Ted Butler wrote:

> Brad,
>
> I am well-versed on the manipulation points you have outlined, and
> someday I am hopeful that I will be able to debate them with the
> CFTC directly. Even though the CFTC is on their third silver investigation
> in five years, due to my private and public allegations, they have
> yet to engage me. It’s kind of like the police investigating a murder
> for five years, yet refusing to sit down with the sole eye-witness
> who tipped them off in the first place. Personally, I think the CFTC
> is afraid to sit down with me on this issue.
>
> In any event, I don’t see what could be gained by debating all these
> issues here. This is not complicated. You wrote an article, referencing
> me, with the simple premise that the concentrated holdings on the
> short side of COMEX gold (and silver) were not out of line with many
> other commodities. You claimed this invalidated my argument You chose
> as an example the Treasury Bond market, which turned out to be a
> poor choice, as it did not show a concentration by US banks at all,
> or even by foreign banks, as there were too many (15) to qualify
> as concentrated. Others and I pointed this out, and rather than address
> the simple premise of your article you have instead gone off on tangents
> unrelated to your story line.
>
> In the Bank Participation Report of May 5, which you referenced,
> 3 US banks held a short gold position 85 times their long position
> and that short position made up 27.7% of the entire market. In silver,
> 2 US banks held a short position 250 times their long position and
> that short position made up 29.3% of the entire market. These are
> unusually large and concentrated positions, even though they were
> actually lower than they had been in previous months. In addition,
> when converted to real world quantities, the silver short position
> of two US banks has constituted 20 to 25% of the entire world production,
> an unprecedented and absurd amount.
>
> I ask again, can you provide any specific examples where this has
> occurred in any other commodity?

May 23 11:25 AM

[Ted Butler:]

Brad,

It’s obvious you didn’t look at the Bank Participation Report before you came up with Platinum and Palladium as examples of overly concentrated positions. In Platinum, 2 US banks are short the grand total of 295 contracts, or 1.4% of the market. In Palladium, 3 US banks were short 1646 contracts or 11.5% of that very small market. In terms of how these amounts compare to real world production, the palladium short amounts to less than 3% of world production, while the platinum short position is 0.25% (one-quarter of one percent) of world production. These don’t come close to the concentrated short positions in either gold (10 to 15%) or silver (20 to 25%) compared to world production, or the 27.7% in gold or 29.3% in silver, in terms of percent of the entire futures market.. Therefore, platinum and palladium are bogus examples, just like Treasury Bonds..

In all due respect, I don’t choose to rehash here all the arguments I have made in my public articles, except to say that it should be obvious that if the concentrated short positions held by the very few US banks in gold and silver did not exist, the price would be substantially higher. In other words, if these concentrated sellers were to be replaced by sellers motivated by free market prices, it would take much higher prices to attract them to sell. This is the essence of the manipulation.

I have only responded because the premise of your story was simple, you referenced me by name, and you were soliciting comments concerning that premise, namely, that the concentrated positions in gold and silver were normal compared to other commodities. They are not.

May 23 12:28 PM

[BidEd:]

Brad,
Thanks for the response. You are obviously very well versed in the inner workings of the markets.

I do think you have helped me further prove my point that the market is "stacked' in favor of the short side. You said speculators are limited as to size of position. Then state that Banks aren't speculators so they don't have to qualify for those limitations.

So it seems obvious to me that if you have all the producers able to hedge their production and the largest financial institutions able to hedge at will, the game is at least a little tilted. In casino terms the short side is the house. The rules/odds are in their favor.

Remember this occurs at the same time that physical delivery is limited in quantity from the depository. So physical demand by industrial users shouldn't be a big factor for the long side contracts. Those users have contracts directly with the miners for the physical product they need.

So that basically leaves the long side primarily to speculators. Which, you have already said are limited. If you are a big money speculator knowing that you are limited in size by the rules of the game or even a little time investor, you would most certainly closely examine the market. You would see that the banks or miners are allowed to short all they want or have production against. You would see that there is no way possible that they will be required to provide even a fraction of those contracts for physical delivery.

You also know that the other side is limited to actual users of the underlying metal. But as a industrial user you would most certainly go to the source to get your metal as delivery from the exchage is limited. So you might hedge some of your needs in the futures market but for the most part you are going to do long term contracts with the producers of the metal you need. Leaving only speculators and small time investors on the long side.

So given those facts and rules of the market you should come to the conclusion that the short side is the preferred side. This is due to the fact that it would take an inordinate amount of speculators to be able to equal your ability to short because as a bank where you have no limits and as a speculator you do. So it would take a large group of speculators fighting at one time to drive the price higher. That might involve considered collusion, which of course would be illegal.

I know you were trying to have someone prove manipulation. I am not trying to do that. I just want to show that the rules of the game appear to be biased. Some could call that "manipulation" but you know the rules of the game going in. So if you don't understand or know how the rules of the game are set up be prepared to lose money.

Just like in a casino, you can go in and have a good run and make money. But the rules/odds of the game are in the Casinos favor. Over the long run the casino makes money by statistical conclusion of the games rules. I think the short side is the Casino.

Until the banks are required to follow the same rules as speculators, which I never see happening, then the biased should be on their side. It is the rules of the game.

So Ted can claim manipulation all he wants but the banks are playing within the rules of the game. So if his objective is to get the rules of the game changed, I wish him good luck, but I don't see how the demise/collapse of the metals futures market is going to be allowed. They didn't allow it to happen with the Hunt brothers, so it would take a much larger force, say a soverign state to force such a change. But when examining the rules, a soverign state isn't going to play the game, they will just go buy the physical product.

I still state, if you want to be in the precious metals market, you should only buy the physical product or the miners of the product.

May 23 12:43 PM

[Brad Zigler:]

But the banks, by your definition, ARE concentrated in platinum and palladium. They report NO long positions in these futures at all. The ENTIRETY of their futures position is short. You can't get more lopsided than that.

World production is immaterial to an allegation of manipulation of FUTURES. For a manipulation charge to stick, the perpetrators must be shown to have skewed FUTURES prices by their actions.

And what actions have these banks actually undertaken? Laying off exposure created by dealing on the long side of the cash and derivatives markets?

Look, the speculative position limits for gold futures is 6,000 contracts. Per the table above, US banks held an aggregate position in excess of 95,000 contracts. Let's just assume that each of the three reporting banks divided the positions equally among themselves and actually held the maximum allowable proprietary speculative position. That would mean each bank is carrying nearly 26,000 contracts EACH as bona fide hedges -- positions with offsets elsewhere.

That's not concentration and that's not prima facie evidence of manipulation.

You have to be able to QUANTIFY and DEMONSTRATE a degree of price alteration to establish manipulation. Merely saying the price OUGHT to be higher is insufficient. HOW much higher? What is the actual damage to the market these participants are alleged to have wrought?

On May 23 12:28 PM Ted Butler wrote:

> Brad,
>
> It’s obvious you didn’t look at the Bank Participation Report before
> you came up with Platinum and Palladium as examples of overly concentrated
> positions. In Platinum, 2 US banks are short the grand total of 295
> contracts, or 1.4% of the market. In Palladium, 3 US banks were short
> 1646 contracts or 11.5% of that very small market. In terms of how
> these amounts compare to real world production, the palladium short
> amounts to less than 3% of world production, while the platinum short
> position is 0.25% (one-quarter of one percent) of world production.
> These don’t come close to the concentrated short positions in either
> gold (10 to 15%) or silver (20 to 25%) compared to world production,
> or the 27.7% in gold or 29.3% in silver, in terms of percent of the
> entire futures market.. Therefore, platinum and palladium are bogus
> examples, just like Treasury Bonds..
>
> In all due respect, I don’t choose to rehash here all the arguments
> I have made in my public articles, except to say that it should be
> obvious that if the concentrated short positions held by the very
> few US banks in gold and silver did not exist, the price would be
> substantially higher. In other words, if these concentrated sellers
> were to be replaced by sellers motivated by free market prices, it
> would take much higher prices to attract them to sell. This is the
> essence of the manipulation.
>
> I have only responded because the premise of your story was simple,
> you referenced me by name, and you were soliciting comments concerning
> that premise, namely, that the concentrated positions in gold and
> silver were normal compared to other commodities. They are not.

May 23 01:17 PM

[Ted Butler:]

Brad,

Why don’t we agree to disagree? Thanks for your article and the discussion, as nothing is better for the reader than disagreement. The best to you

May 23 01:57 PM

[Brad Zigler:]

Banks and miners AREN'T allowed to short the market willy-nilly.

Any entity that can't establish off-market offsets to its futures positions will be subject to speculative position limits. Even banks. Even miners.

As illustrated in the table describing bank-held gold futures above, three banks held an aggregate position exceeding 95,000 contracts.

The speculative position limit for gold futures is 6,000 contracts. Any futures position that can't be tied to an offset would be deemed speculative in nature and subject to the limit.

Let's just assume each of these banks held proprietary (non-customer) futures contracts. Speculative position limits would constrain the banks from holding more than 6,000 gold contracts (each) for their own accounts.

If we assume that each of the three reporting banks divided the positions equally among themselves and actually held the maximum allowable proprietary speculative position, each bank could be assumed to hold nearly 26,000 contracts as bona fide hedges -- positions with offsets elsewhere. It's these, and only, these that are not subject to limit.

The important thing to note is that there must be a risk offset to qualify for the hedge exemption to position limits.

Banks (and miners), as the result of hedging, become essentially "market neutral" to the extent of their offsets.

Hedgers utilize the futures market for its economic purpose: risk tranference. By finding counterparties in the exchange marketplace, a bank can reduce the risks undertaken as a consequence of offering financial products to its customers and a miner can protect its profit margins from market volatility during a production cycle.

Yes, position limits are lower in the spot (delivery) month. For gold, the spot month limit ratcheted down to is 3,000 contracts for each trader. That's equivalent to 300,000 ounces of gold. That's not enough for a speculator?

I'm not seeing how the market is "stacked.'




On May 23 12:43 PM BidEd wrote:

> Brad,
> Thanks for the response. You are obviously very well versed in the
> inner workings of the markets.
>
> I do think you have helped me further prove my point that the market
> is "stacked' in favor of the short side. You said speculators are
> limited as to size of position. Then state that Banks aren't speculators
> so they don't have to qualify for those limitations.
>
> So it seems obvious to me that if you have all the producers able
> to hedge their production and the largest financial institutions
> able to hedge at will, the game is at least a little tilted. In casino
> terms the short side is the house. The rules/odds are in their favor.
>
>
> Remember this occurs at the same time that physical delivery is limited
> in quantity from the depository. So physical demand by industrial
> users shouldn't be a big factor for the long side contracts. Those
> users have contracts directly with the miners for the physical product
> they need.
>
> So that basically leaves the long side primarily to speculators.
> Which, you have already said are limited. If you are a big money
> speculator knowing that you are limited in size by the rules of the
> game or even a little time investor, you would most certainly closely
> examine the market. You would see that the banks or miners are allowed
> to short all they want or have production against. You would see
> that there is no way possible that they will be required to provide
> even a fraction of those contracts for physical delivery.
>
> You also know that the other side is limited to actual users of the
> underlying metal. But as a industrial user you would most certainly
> go to the source to get your metal as delivery from the exchage is
> limited. So you might hedge some of your needs in the futures market
> but for the most part you are going to do long term contracts with
> the producers of the metal you need. Leaving only speculators and
> small time investors on the long side.
>
> So given those facts and rules of the market you should come to the
> conclusion that the short side is the preferred side. This is due
> to the fact that it would take an inordinate amount of speculators
> to be able to equal your ability to short because as a bank where
> you have no limits and as a speculator you do. So it would take a
> large group of speculators fighting at one time to drive the price
> higher. That might involve considered collusion, which of course
> would be illegal.
>
> I know you were trying to have someone prove manipulation. I am not
> trying to do that. I just want to show that the rules of the game
> appear to be biased. Some could call that "manipulation" but you
> know the rules of the game going in. So if you don't understand or
> know how the rules of the game are set up be prepared to lose money.
>
>
> Just like in a casino, you can go in and have a good run and make
> money. But the rules/odds of the game are in the Casinos favor. Over
> the long run the casino makes money by statistical conclusion of
> the games rules. I think the short side is the Casino.
>
> Until the banks are required to follow the same rules as speculators,
> which I never see happening, then the biased should be on their side.
> It is the rules of the game.
>
> So Ted can claim manipulation all he wants but the banks are playing
> within the rules of the game. So if his objective is to get the rules
> of the game changed, I wish him good luck, but I don't see how the
> demise/collapse of the metals futures market is going to be allowed.
> They didn't allow it to happen with the Hunt brothers, so it would
> take a much larger force, say a soverign state to force such a change.
> But when examining the rules, a soverign state isn't going to play
> the game, they will just go buy the physical product.
>
> I still state, if you want to be in the precious metals market, you
> should only buy the physical product or the miners of the product.
>

May 23 02:08 PM

[BidEd:]

Brad,
I have no problem hedging. I do it to protect my own portfolio. Miners hedging is smart business. But they aren't going to hedge more than they have too. They want the price to rise.

That leads us to the banks and the bulk of the short contracts. The banks hedging "financial products" is a more questionable process but within in the rules. However, if the banks are hedging fiat currency exposure via short gold and silver contracts, I would claim that is more of a speculative activity. I would however, like to see better detail of what the banks are being allowed to hedge that is not considered speculative activity. But that is completely beyond the scope of the point I am trying to make here.

My point is there is a bottle neck at the physical delivery point. That is the primary reason I think it is "stacked" towards the shorts favor. That physical delivery limitation prevents or deters demand from the long side. Therefore by definition if you are doing something that prevents or skews demand on one side of the transaction you are "stacking" it for the other side. In this case the short side.

When a realtively small amount of contracts written are all that can be excersied and taken for physical delivery you are limiting the long side from getting the true users, the industrial users on that side of the market. They are going to go directly to the source, and only use the futures market sparingly.

The Hunt Bros example and the fact that physical delivery is limited is enough to deter me from taking the long side in the PM futures market. I am but one small trader but if more feel like me, then again by definition detering investment in one side, even if it is within the rules of the game does mean the game is stacked in my opinion. Not minipulated but biased or in favor of one side.

So I completely understand being market neutral. That is the basic objective of my personal portfolio management. I undertstand risk transferance, I do it every day. But my understanding of the underlying structure of the PM futures market I guess is going to have to differ than yours.

Have a great Memorial Day.

May 23 03:30 PM

[wheelbarrel...:]

So let me get this straight - 1 or 2 firms can account for 25% of the short gold contracts out there and that is fine but when hedge funds short US equities ( and no where near the 25% number) everyone cries foul and demands that short selling be banned? If anything the recent bans of short sales financial stocks is proof that gold is manipulated otherwise why a ban be placed on short sales when the SEC found no manipulation in the shorting of said financial stocks?


On May 22 04:17 PM Ted Butler wrote:

> Brad,
>
> Those are all nice-sounding excuses for the super-concentrated short
> position of a very small number of US banks. Even if they did have
> legitimate off-setting positions (which no one can prove) it still
> doesn’t give them a green light to dominate a market. And of all
> markets why is it so extreme as in silver (and gold)? The banks are
> hiding behind the bona fide hedge con to avoid legitimate speculative
> positions. Yes, the CFTC did review this matter in 2004 and 2008,
> and dismissed my allegations of manipulation. Yet they still turned
> around and began a new investigation just months from issuing their
> 2008 review, based upon the new concentration data.
>
> Look, you kept asking for data pointing to a manipulation and I provided
> it. If you can, in turn, provide specific information on other markets
> that show such large concentrations held by so few traders as in
> silver (and gold) and where just one or two traders are short (or
> long) up to 25% of the world annual production of any commodity,
> I’d love to see it. I don’t know how any reasonable person could
> conclude anything but manipulation.

May 24 10:56 AM

[Brad Zigler:]

wheelbarrelsofcash -

The economic functions served by the futures market and the stock market are markedly different.

Equities are part of a capital formation market. Stocks are issued initially to raise cash for corporations; trading in the secondary market then provides liquidity for the subsequent chain of stockholders.

Futures make up a risk transference market whose purpose is to provide commercial users and producers a means to hedge the risk of dealing in volatile commodities.

Regulators limit the size of speculative positions in the futures markets (in the case of gold, as discussed above, the speculative position is 6,000 contracts in total, no more than 3,000 of which can be in the spot month).

Exemption from these limits are granted to commercial enterprises engaging in bona fide hedges. As an example, let's suppose a bank undertakes a position putting them long one million ounces of gold in the cash, forward or swap market. The bank would be allowed to sell short up to 10,000 COMEX gold futures (each contract represents a delivery commitment of 100 ounces) to offset its resulting risk.

Any short sales ABOVE 10,000 contracts would be deemed a proprietary speculative position and would thus be subject to limit.

In contrast, a hedge fund, as you posited in your comment--despite its
moniker--is a speculative venture. It has no commercial purpose other than attempting to profit from its bets.

You have to recognize, too, that there are two different regulators involved in the comparison you've drawn. The Commodity Futures Trading Commission has the futures market in its purview while regulation of equities devolves upon the Securities and Exchange Commission. Their differing rules reflect the differing markets.


On May 24 10:56 AM wheelbarrelsofcash wrote:

> So let me get this straight - 1 or 2 firms can account for 25% of
> the short gold contracts out there and that is fine but when hedge
> funds short US equities ( and no where near the 25% number) everyone
> cries foul and demands that short selling be banned? If anything
> the recent bans of short sales financial stocks is proof that gold
> is manipulated otherwise why a ban be placed on short sales when
> the SEC found no manipulation in the shorting of said financial stocks?
>

May 24 12:50 PM