S&GS Notes: There has been more developing this week on the issue of manipulation of the gold & silver markets. While we've covered this topic in the past, we felt it best to devote this week's newsletter to an update on what is happening on this scene to keep our subscribers informed.
What does this have to do with silver investing you may well ask? Well, it's been driving the price points for some time now; and the more pressure is brought to bear on the guilty parties, we may well see significant spikes in the pricing as they try to cover their short positions, and the downward manipulation of price ends due to public pressure and possible CFTC regulatory activity. Grab your silver and hang on for the ride…
Will the CFTC Actually ACT to Protect Silver Investors?
The silver market has seen a lot of surprises this year, and the statement today made by CFTC Commissioner Bart Chilton is probably the most unexpected yet. After more than two years of "investigation" into the silver market with no acknowledgment of structural issues, Chilton gave a public meeting in which he was quoted as saying "There have been fraudulent efforts to persuade and deviously control that price... the public deserves some answers to their concerns that silver markets are being, and have been, manipulated." He went on to state that the CFTC would be introducing new regulations to curb manipulation in the precious metals markets. Silver rose nearly 80 cents from its intraday low on the news.
Silver analyst Ted Butler has been writing letters and warning the CFTC of the consequences of manipulation in the silver market for more than 20 years. Not many people would bother to warn of these issues when ignored and ridiculed, however Butler persisted with his call for action to remove manipulators from the market. Up until recently, these warnings have been completely ignored.
As Butler and others have documented, a concentrated group of four to eight traders have been responsible for nearly 70 percent of all short positions in silver on the COMEX. These traders have consistently traded in unison to move prices while collecting large profits along the way. It is suspected that JP Morgan holds the majority of these short positions; however the CTFC has refused to acknowledge this and trading positions are not publicly disclosed.
Why Now? What does the CFTC and the short commercial banks know that we don't?
It doesn't take 20 years, or 2 years for that matter, to realize that there are obvious structural problems with the silver market - especially when the issues are spoon fed by letters from thousands of individuals. Given the reactive nature of the CFTC, it is unlikely that Chilton is acting preemptively to protect the small investor. It is more likely that the CFTC position is changing due to the structural change in the silver market. In 2008 weak long speculators were categorically replaced with blood thirsty hedge funds, wealthy investors, and developing nations who buy in cash.
(click to enlarge)
As previously documented on Tradeplacer.com, the commercial banks began to cover their short positions in a rising market about four weeks ago which is highly unusual. While silver has oscillated between $23 and $25 over the last month, the banks have continued to quietly cover. Perhaps Chilten means what he says and the banks began to cover in anticipation of further regulation by the CFTC.
Is it too late?
As of October 19th, the commercial traders were still net short 58,150 contracts - roughly 290 million ounces of silver. There are currently only 52 million registered ounces and 59 million eligible ounces held in COMEX warehouses. It would not be possible to remove the short commercials from the silver market in an orderly fashion. The majority of contracts would have to be settled in paper at much higher prices. As pointed out by Butler, the worst case scenario - and increasingly likely - would be a closure of the paper precious metals markets. If that occurs physical silver would likely trade in multiples of its previous paper price and would be unavailable to most buyers. The apparent choice by the CFTC to act is most likely no choice at all. It is a desperate move to maintain the status quo and a reaction to an eminent emergence of either physical shortages or dollar devaluation instigated by a wave of quantitative easing.
Jeff Lewis, of Silver Coin Investor, has the following perspective on this week's announcement by Bart Chilton:
"Almost every major financial media entity ran the story about CFTC regulator, Bart Chilton's statement regarding silver manipulation.
This is quite a remarkable event for our small, yet growing community.
But given the fact that governments have little incentive to prevent a crisis, I believe this was a very well-crafted and strategic announcement.
Yes, I'm feeling a bit cynical about it.
Other Articles of Interest
Commercials Begin To
Cover Silver Short Positions
Could This Be It?
David Bond, Publisher
Traders Accuse HSBC,
of Silver Manipulation
Silver to 30 In 18 Days
The Return to Good Money
SGS: We saw a 'correction' briefly this past week in the price of silver/gold… this was more likely the combination of manipulative activity plus the drop that usually accompanies the gold/silver options expiration date each month (Oct 26). We see this over and over… when these dips happen, buying RETRACTS… it is the old 'loss of confidence' phenomenon… wise investors don't let themselves get caught by this…. BUYING SHOULD SURGE on the price dips…
SGS Volume Discounts
SGS has received several inquiries of late regarding our volume discount program. Our volume discounts apply only to non-numismatic rounds and begin with quantities of 200 ounces or more as follows:
200 -500 oz - $1.00 / oz discount
501 - 1000 oz - $1.50 / oz discount
1001 or more - $2.00 / oz discount
Volume orders will need to be placed by phone at present. We welcome individuals to enlist acquaintances to join them in a group order to take advantage of these discounts.
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"This fiat currency experiment will end badly in a currency crisis, and when that happens, as it surely will, gold will go parabolic and silver along with it but even more so as the gold/silver ratio adjusts itself to a more historical correlation. The wealthiest people in the world will be those who put 10% to 15% (or perhaps more, much more!) of their portfolios into physical silver today."
Editor Financial Article Summaries today
Dollar, Silver, GDP, QE2, elections
Peter Schiff - Schiff Report
On the surface, The Wall Street Journal's 'C1' article provided one of the most compelling and in-depth accounts:
There was mention of the concentrated short position.
They named the major players -- HSBC and JP Morgan.
Many of the other reports were phrased in such a way that it almost sounded like prices were being manipulated higher, not lower.
But not this one.
And to top it all off, we are now considered 'manipulation theorists', rather than 'conspiracy theorists' - which has a more credible sounding ring….
I don't mean to diminish the significance of this event, but...
Below the surface of this news, I believe we are witnessing a political announcement meant to create the sense that we are being protected by regulators.
If and when the price of silver explodes, the noise from this statement may serve to position blame in such a way that the call for more regulation will once again have the political will of the people behind it.
Recall the politics surrounding the formation of the Federal Reserve Act.
The bill was presented as a way of protecting the people from a crisis caused by banks.
Look what that got us.
I want to believe this is a step in the right direction in terms of the general awareness created in the mainstream.
However, the reactionary nature of governments to form committees after the fact leaves me suspicious.
And the natural laws of supply and demand will come to pass, despite efforts to interfere - for or against. "