Last week, we talked about the latest scandal and conspiracy of the CFTC (Commodity Futures Trading Commission) judges. Since our last newsletter (see Enron Lives On?), it seems every journalist and newsletter is now uncovering the story on commodities price manipulation. And with good reason.
According to Chilton, there have been violations of the Commodity Exchange Act, stating, "There have been fraudulent efforts to persuade and deviously control that price...Any such violation of the law in this regard should be prosecuted."
In 2008, the CFTC said in a report that it had received "numerous letters, e-mails and phone calls" during the last 20 to 25 years alleging prices were being manipulated downward. Finally, after all those years and right before the market crash, they decide to investigate further and in particular, allegations against JP Morgan (JPM) and HSBC (HBC).
Two traders have accused HSBC and JP Morgan Chase of manipulating the price of silver in separate lawsuits filed in a Manhattan federal court last Wednesday. The suits allege that the two banking giants amassed "enormous short positions," which force the price of silver downward.
The lawsuits, filed by U.S. traders Peter Laskaris and Brian Beatty, allege that the banks worked together on the silver futures market, advising each other about large trades.
They claim that the banks would also place large "spoof" trading orders, which are essentially a fake order in the market that, "is not executed but influences prices and is then withdrawn before it reasonably can be executed."
By working together to suppress silver futures, the big banks' call options, which represent the right to buy, would decline, making their short positions more lucrative, according to Laskaris' suit.
This type of event happens in every market, and in every exchange. But when it deals with the commodities market, it makes it that much more lucrative due to the size and liquidity of the trades.
So far, the CFTC is still conducting interviews with traders at JP Morgan, HSBC, industry traders, commodity executives, experts and employees of other metals trading firms. The verdict of whether there was any type of manipulation remains. But take a look at this:
According to a letter to the CFTC from William Murphy, chairman of the Gold Anti-Trust Action Committee, HSBC and JPMorgan Chase held 43% of the commercial net short position in gold and 68% of the commercial net short position in silver. He also said that the two banks were short 123,331 contracts but long only 523 contracts, and in silver they were short 41,318 contracts and long only 1,426 contracts.
Regardless, as Chilton mentions, "the legal definition of manipulation under the law is a high bar to prove." Attempted manipulation and other potential violations of law will be easier to prove than manipulation itself. So the fact remains, charging these banks, or any others, with criminal acts of manipulation will not only be difficult, but may not happen at all.
Just last week, it was made public that CFTC Judge Bruce Levine has been accused by his colleague, George Painter, that he would never rule in favor of investors.
Earlier this year, we wrote an article on the Silver Conspiracy with a short story on Andrew Maguire, a successful metals trader and whistleblower who went to the CFTC with data that strongly suggested that a small number of short sellers had rigged the markets for both silver and gold. Maguire not only provided the regulators with how the manipulation generally worked, but also warned them of a specific scenario where the SPDR Gold Trust (NYSE:GLD) and iShares Silver Trust (NYSE:SLV) markets would be manipulated.
He told the regulators that a massive crime was about to happen, and the crime happened precisely as he predicted it would, forcing the CFTC to take a closer look.
Since then, silver has broken recent new highs. Earlier this month, silver hit $24.95 an ounce - the highest level in 30 years.
Many traders believe this is a result of the investigation, forcing the big banks to tighten up on their "spoof" trades and large short positions.
Earlier this year, during a CFTC hearing, Jeffrey Christian of the CPM Group said that the London Bullion Market Association (LBMA) banks have approximately 100 times more gold deposits than actual gold bullion. This means that for every ounce of gold traded in these markets, 99 of them appear from thin air. Have gold and silver been converted into a fiat currency in these markets?
What happens if everyone decides that they want actual physical delivery of their gold? What about silver? What happens when people realize that we don't have the amount of gold, or silver, that the market says we have?
The answer is simple. It's about supply and demand. No supply and high demand will undoubtedly lead to higher prices as the world begs for more.
Short term, we may see some pullback in prices. But with interest rates remaining at record lows, evidence of price manipulation, and the fact that inflation will take time to catch up with the economy, we are going to eventually enter into a commodities bull market the likes of which we have never seen before (see The Breakout.)
