COMEX Position Limits on Silver: Don’t Hold Your Breath
It has now been over two months since the CFTC hearings on the COMEX metals and Ted Butler reports this week an Impressive Result of over 3,000 comment letters about the hearings of which apparently 95% or more were Butler copycat comments urging the commission to limit silver positions to 1,500 contracts. Alas, I fail to see anything impressive about this given that the only position limits the commission would consider changing are speculative limits. Unfortunately the big bad bullion banks are not holding their short positions as speculators but rather as commercial hedgers. To hope the commission would limit hedging positions is beyond silly, it is seriously deranged. Doing so in COMEX silver and/or COMEX gold without setting similar limits in all other futures markets will never happen.
What Ted Butler and others concerned about silver price suppression should have done, instead of making an ineffectual plea for across-the-board position limits in silver that includes commercial hedgers, was to ask the commission to institute robust compliance review and enforcement over the hedging designation of commercial positions. By their own admissions during the hearings, neither the commission nor the SRO (the exchange itself) have spent a lot of time or effort historically on reviewing hedging designations of the commercials. This means that the bullion banks are largely taken at their word that their positions are legitimate hedges. Shining a bright light at the bullion banks by instituting thorough periodic policing action would surely result in some commercial short positions being disqualified, and such shorts would likely be closed permanently.
Alas, Ted Butler and some silver bugs are so enamored of the silver market that they believe it is special and unique above everything else. Sorry buckos, silver has some great investment and industrial qualities and it is very shiny as well, but the reality is that very few people in the world care a whiff about it. Silver might be everything to you, but to the bullion banks silver is a tiny profit center hardly worth the effort. That implies the possibility of rogue trading desks manipulating the silver market (probably both up and down) but precludes high level collusion between the banks. If the banks are going to collude, it would certainly be in a market bigger and more profitable than silver.
So, congratulations for derailing a potentially positive outcome by shifting the commission’s focus to your demand that silver and gold are to be treated as special markets deserving of special rules. Let’s hope the commission is able to do the right thing by instead announcing regulatory reviews of commercial designations. Sometimes you are your own worst enemy.
While I would tend to agree with you without some confirmation, I don’t agree that there isn’t anything potentially illegal going on with JP Morgan at the center. The Justice Department doesn’t take initiating an investigation into silver manipulation by JP Morgan lightly. I have to assume that the CFTC found something in the investigation of silver and referred it to Justice.
TOM…you might be right about this. I for one think POSTION LIMITS are a waste of time. Larry Parks on an interview with Jim Puplava stated that any amount of regulation on a dishonest monetary system is a waste of time. So…in reality, the LEGAL TENDER we have today that is called a US DOLLAR is in fact, dishonest FIAT MONEY.
Tom, I am more worried about the DEATH of the JUST IN TIME DELIVERY and SUPPLY CHAIN SYSTEM than any garbage coming of us GOLD and SILVER BUGS.
Interesting topic, insight into the recent silver supply chain and how “in time” it isn’t.
I guesstimated the possible and probable earnings of an assumed manipulation of the silver market based on the saw-tooth patterns clearly visible in 2007, 2008, and early 2009, some arbitralily chosen volume data of the COMEX verified by medium reliable (because not daily reported) COT data and came up with something around 10 billion $$$$ a year.
Since I am not a professional in the trading nor in the precious metals business this number may be completely bogus. However, in other professions my guesses really are worth $$$.
Would 10 billion per year $ a “tiny profit center hardly worth the effort” in your assessment?
Discreet,
Agreed.
Tom makes a good comment in his first two paragraphs. But his third paragraph digresses in an unfortunate fashion.
Regardless of the amount involved, it is a ridiculous premise that the banks are easily satisfied at the money table - happily leaving scraps lying about for others.
That view is inconsistent with clear behavior on so many levels.
Sounds more like wishful thinking.
@counslr2002
How do you know what the Justice Department takes lightly or seriously? Do you know how many investigators and what budget they have allocated to JPMorgan investigation of silver market manipulation? To the CFTC’s credit they realized that it would be more meaningful to have the DOJ involved and that is about all the assuming that is safe to do for now.
@DiscreetSilverBug
Impossible, you need to understand that even if there is manipulation they lose a lot of money on the way up only to make it back and then some on the way down. Silver is a $10 billion market per year in terms of annual mine supply and there is no way COMEX trading can make that kind of profit for a whole cigar-filled backroom of crooks, much less one of them. More likely we are talking at most hundreds of millions and even then it is possible if there is a manipulation that it involves rogue or semi-rogue traders who have actually been losing instead of making money. At least that is what history tells us although I am willing to consider any contrary examples that someone might care to provide.
@BarbarianWho
I stand by my point. The banks don’t give a hoot about silver yet people like Butler and other obsessed silver bugs think the banks are scheming every day to suppress the price of silver. If the banks are going to do something illegal, it is going to be a in a big market like equities, bonds or subprime mortgages. Any silver manipulation would be small by definition and possibly involve rogue traders or a few people but no grand conspiracy.
@DiscreetSilverBug
As an addendum, if the banks made $10 billion a year manipulating the silver market since 2007 that means they can afford to maintain a short position of almost 2 billion ounces at this point.
@BarbarianWho
If the banks don’t want to “leave scraps for others” then WHY THE HELL would they only manipulate silver from the SHORT side? That basically leaves at least half the money on the table. I can get behind a theory that the banks are manipulating the silver market (plus other markets) on both the long and short side. I can get behind a theory that says a bank issues a large unallocated LBMA account in gold or silver and keeps that account naked for a short period of time while manipulating the market down. I cannot get behind a theory that says the banks get together and conspiratorially suppress the price of gold and silver for several decades purely for profit or alternatively as agents for central banks in order to legitimize a failing fiat system. That is wishful thinking.
Tom, your initial focus was apparently high-level manipulative INTENT (collusion)
- as opposed to evidence of manipulative ACTION or clear evidence of manipulative POTENTIAL.
I might have missed something, but how is collusion between banks even relevant to the issue of market concentration – with the potential of and actual (easy) manipulation of a tiny market?
Would not tacit regulatory support suffice? Can a few big banks not individually recognize and exploit a manipulative opportunity on their own if given the chance?
Don’t like the term “grand conspiracy.” Too often it’s used as a straw man argument, or cheap attack to dismiss a broad body of evidence.
I will stand by my comment as well, that it is wishful thinking to assume individual banks (or rogue traders if you prefer) are easily satiated. If the money is there to take, they will take it. The size of the market or existence of collusion is not relevant. If they can utilize their advantage to exploit they will.
Opportunity and constraint appear to dictate a fondness for taking the other side (cover low/short sell high) of that speculative long trade (buy high/sell low). Maybe I’d do the same if I knew I’d be rescued.
@BarbarianWho
If I focused on intent it was because the conspiracies are focused on collusion to suppress prices. People claim money is being made on the short side by these supposed collusive banks but how the hell is that possible with gold up from $250 to $1250 and silver from $4 to $19????????????????????????????????????????????????????????
I will repeat again my second point which is that if the banks (or anybody else) is going to exploit a market by manipulation, they will usually do it from the long side or perhaps from both sides. But there is no money to be made consistently on the short side and nobody who understands 1% about how a market works would try it as a long-term strategy. Let me lay it out in really simple terms. If you are short a market that means you profit when you buy back, but that buying creates demand so it places support under the market at the precise time that prices might otherwise continue to fall. This simple fact makes it extremely difficult to profit from a short position by simple virtue of market movements especially when the short position is dominant in the market. By contrast, a dominant long position can very easily create its own self-fulfilling prophecy — the pump and dump or the ultimate manipulator’s dream, a market corner. Look at the history of manipulations and they are almost to the last instance always from the long side. The only example that seems to work from the short side is the death spiral financing (convertible debt that has anti-dilution provisions) but that is quite a unique scenario that doesn’t apply to other markets. What happens with death spiral financing is that the lender shorts the shares mercilessly (including naked shorting if he/she can get away with it) and ends up making more money from the short position when the company hopefully goes bankrupt then the amount of the loan to the company. Of course this still requires a company with a poor business plan or otherwise no hope for making profits and therefore the death spiral financier is really doing everybody a favor by putting the company out of its misery as soon as possible.
Manipulation to the short side works when you own or are fully hedged to the long side that which you are shorting. That’s precisely what is happening with PM so it must be possible.
It lasted a while and I did some more research with the following result: I stick to my number - 10 Billion $$$. You compare apples - the 10 Billion $ / year physical (mined) silver - with pears - the paper silver market. I come up with an astonishing number for the paper silver market and I hesitate to post it here because it is so large. This number makes the stated possible profit caused by a market manipulation (of the paper silver variant) plausible.
The volume at the LME “physical” (??) silver market also is huge compared to the 10 Billion $ physical silver mined per year. A manipulator present at the COMEX, LME, and OTC markets may profit even a multiple of the stated number.
I still may be wrong in the interpretation of the basic numbers because I might misunderstand their precise meaning. Maybe you post your estimate of the yearly volume of the COMEX paper silver market and we compare the numbers.
Heck, Everyday I can use US Toilet Paper for something REAL makes just for another great day. And it is even more of a special day when I can trade it for PHYSICAL Gold & Silver. America is just one Giant Ponzi Scheme that will soon FAIL with or without the Regulators doing their job they are paid to do. Just don’t come on my farm if you are not waving a white flag.
@rob
That’s not the type of manipulation that is being alleged, and in any case, if you are long then I think by definition shorting is considered a sale and cannot really be considered bona fide manipulation.
@DiscreetSilverBug
The problem is that the LBMA unallocated market has no real bearing on annual production and is functionally disconnected from the physical market. I think the dealers probably make enough profits to just about offset their exposure on unallocated accounts. Other than that, your mistake might be trying to compare trading volume to market size, I don’t think the comparison to other markets holds up as both gold and silver have an extremely large paper market with very small stock to flows while the actual physical market has a very large stock to flows. If you don’t understand this, you are going to make big fundamental errors in the math.
@Lawrence
I can go out and use U.S. dollars to buy Toilet Paper everyday but I can’t do that with gold and silver yet. Good for you if you know for certain when that will change, I don’t and so in the meantime I’ll keep looking at what is actually happening in the world instead of assuming that I am right about the timing.