History Repeats Itself: Silver Futures Manipulation in 2011 Mimics Gold Futures Manipulation in 2008

by: J. S. Kim

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(Click to enlarge)

Above, we see a continuous 48-hour chart for silver from May 10 to May 11, 2011. You will notice in Asia, on May 11, that from the previous close on the New York Globex, silver futures rose nearly +2.5% . Then, after New York opens on May 11, silver precipitously tumbles to a low of $34.87, more than an 11.4% drop from its high in Asia just a few hours prior. Look familiar? It should.

The patterns in the silver futures market now mimic the exact manipulation patterns that manifested in gold futures during a 12-14 week period from July to October in 2008. During this period in 2008, gold exhibited flat or slightly rising behavior in Asia and then waterfall declines at the open in New York that took the price of gold during a 24-hour trading period consistently 2%, 3%, and 4% lower in New York from the highs in Asia on a daily basis. You may see all the charts I produced for gold future behavior in Asia/New York during that period as well as my correspondences with the CFTC regarding this behavior here. Initially, the CFTC responded to the huge same-day anomalies in gold futures pricing between Asia and New York that I sent to them by stating that "the Chinese gold market is not a free market" and by implying that manipulation only occurred in Asia to drive gold higher every day while the New York gold futures market traded freely. Coincidentally, during this period of great anomalies in gold futures prices between Asia and New York, back then, as is the case with silver today, physical gold demanded much higher premiums over the daily low prices of paper gold established in New York, and this divergence in physical/paper prices did not usher in gold’s final gasp and a collapse in gold prices as many are predicting will happen with silver today (gold was trading in the low $800s back then). The only difference in the manipulation of paper silver now and the manipulation of paper gold in 2008 is that the bankers seem to now be intervening not only in London/New York now but also in Asia on select days to take advantage of the thinly traded Asian market to take down silver futures markets by executing a waterfall decline in minutes in the East on occasion as well. Still, from high to low, the prices of silver futures are consistently lower on a daily basis when trading in the West versus when trading in the East.

In response to the CFTC’s allegation that these futures price discrepancies were centered on "the Chinese gold market [not being] a free market”, I sent the CFTC the following questions for further clarification back in 2008:

I am aware that Chinese markets are very highly regulated but that does not necessarily mean because the market is smaller and less liquid, that this market is the one being manipulated to a greater extent than the one in New York. To address this issue, I only have two further points (albeit long ones):

(1) According to Zhang Bingnan, the Beijing Gold Economy Center President, "Gold prices in China should be 1 yuan a gram, or more than $4 an ounce, higher than the overseas market on average. The premium is a result of the spread between bids and offers in different bullion markets and the exchange rate." Is this a reasonable statement to you, or are there perhaps other reasons that explain why the premiums are so vastly greater in Asia’s futures markets for gold than the $4 an ounce premium that Zhang Bingnan stated should be the reasonable expectation? The spreads for the past 10-12 weeks have consistently been $30, $40, $60 and even as much as $100 an ounce between the highs in Asia’s futures markets for gold and the lows in the New York futures market for gold [on the same day].

As I inquired in my previous message, can you let me know if American banks or investment firms are using these huge arbitrage opportunities to enter and exit short futures contracts the same day or within a 48-72 hour period over and over again? If I am not mistaken, the CFTC should have access to this information. If this has indeed been occurring, would it be possible to let us know who these firms are, and if not, is there any reason why this information needs to stay secret? If this has occurred, while not evidence of manipulation, would this not be evidence that arbitrage opportunities are being leveraged to earn enormous profits in a manner inconsistent with the reasons why future markets were established? And would this not be grounds for further investigation?

(2) Secondly, Mr. Chilton, you stated to me that manipulation is most likely occurring in the Asian gold futures market and not in the New York futures market. If this is the case, then why are the spot prices established in Asia much closer to the prices of gold established in physical markets than the spot prices established in New York? Right now, there seems to be four different markets for gold. The spot price in Asia, the spot price in New York later that SAME DAY, the price of bullion (which is often selling at significant premiums over spot) and the price of gold coins (selling for even a more significant premium over the spot price).

While I do understand that soaring demand for physical gold, both bullion and coins, are setting higher prices for purchase of physical (real) gold than the prices in paper markets, I still believe that this begs the question of "what is wrong with the price of gold in the paper COMEX markets?" Perhaps I’m unaware of previous occurrences of enormous price spreads of this nature between physical markets and paper futures markets and this has happened before with some reasonable explanation. If you may be able to provide an example to me of previous times in history when spreads of 15% to 40% existed in physical market prices over the prices established in futures markets for the same commodity or asset, then perhaps it will help me understand what is going on with the prices of gold in the COMEX markets. My quest really is to understand the anomalies that seem to still be occurring between the price of gold in the physical markets and the price established in the COMEX paper futures market.

After I sent the above series of questions, the CFTC stopped responding to my communications. So does the recent behavior and anomalies between silver futures prices in Asia and New York and the large premiums that have existed between physical prices over paper prices all throughout this silver correction surprise me? From what I observed three years ago in the gold futures markets, not one bit. As I stated here, seasoned gold and silver investors understand how to trade around this manipulation and we will continue to do so until this manipulation is broken once and for all.