Will the CFTC Actually Act to Protect Silver Investors?

Tue, 26 Oct 2010 17:59:00 GMT

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, Chilten 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 Chilten 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.

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.

Are Banks Closing their Shorts on Gold and Silver?

Wed, 22 Sep 2010 17:43:00 GMT

In the past few weeks gold and silver have both broken out of their year-long consolidating trading ranges. This breakout came shortly after the announcement that JP Morgan and other banks would close their proprietary commodity trading desks in order to comply with a new "Volker Rule" which states that banks can either trade their own capital or their client's capital, but not both. This news has led to speculation that JP Morgan and others would be forced to close their short positions in gold and silver which has been well documented.

This speculation is overly optimistic, and the evidence proves to the contrary. From August 24th to September 14th the net commercial short position has increased from 82,158 to 94,825. This short position has most likely increased even more since then although it hasn't been reported yet. Gold's net commercial short position also increased from 436,829 to 464,388.

As most gold and silver traders know, this pattern is a typical setup for a takedown that occurs a few times every year. The banks that consist of the commercial category in the chart will continue to sell into the rising strength of the metals until it causes a sharp drop allowing them to cover at a profit.

If the commercial banks actually begin to reduce their gold and silver short positions as the price rises then it will be an indicator that they are exiting the market as some believe. The result would be dramatic as hedge funds would likely try to front run the banks and sellers would vanish. The structure of paper precious metals markets have made this outcome increasingly likely, however it is not probable that the commercial shorts will simply walk away without a fight. The inevitability of the long run is the least likely outcome in the short run because neither the government, nor commercial banks, nor accumulating smart money want gold or silver to spike higher.

Silver analyst Ted Butler was one of the first to bring this structure to the daylight however he is far too optimistic that government regulation or limiting trading positions will lead to this event. It is more likely that the futures market is closed than banks voluntarily ending their game. They may close their proprietary desks and move the positions to another legal entity.

One reason to be cautious is that gold has not touched its 200 day moving average in over a year. This simply means that the gold price has been very strong, but indicates an extended move. However extended moves can be life changing events. Gold's formation above its moving averages is beginning to look like Potash circa early 2007 which was the beginning of a 10 fold move in its price.

Historical evidence indicates that the precious metals will most likely see a sharp correction in the coming weeks. However, if they don't then Jim Sinclair could be collecting money on his $1 million bet early.

For more news and articles about investing in gold and silver visit Tradeplacer.com

TradePlacer.com Blog - jpm tag

Will the CFTC Actually Act to Protect Silver Investors?

Are Banks Closing their Shorts on Gold and Silver?