"Since criminal prosecution is only a remote threat, and since the fines and damages are generally paid by the companies, not by the individuals, the question is: what’s to keep a Sumitomo from happening again, perhaps in precious metals?" - Modern Market Manipulation by Mike Riess, International Precious Metals Institute 27th Annual Conference, 16 June 2003.
The recent statements by Mr Maguire may well prove Mr Riess right. It is well worth reading Mr Riess' presentation. It is not long and neatly identifies the factors that contributed to the copper manipulation, factors that also apply to the metals markets.
For the young'uns, "a Sumitomo" refers to the case where, as the CFTC itself found: "the principal copper trader for Sumitomo engaged in a scheme, in conjunction with an entity operating in the United States, with the intent of manipulating the price of copper. In particular, during 1995 and 1996, Sumitomo, acting through its agent or agents, established and maintained large and dominating futures positions in copper metal on the London Metals Exchange ("LME"). In the fall of 1995, Sumitomo stood for delivery on a significant percentage of its maturing futures contracts. It thereby acquired a dominant and controlling cash and futures market position, which directly and predictably caused copper prices, including prices on the United States cash and futures markets, to reach artificially high levels. ... Sumitomo intentionally exploited these artificially high prices in order to profit on the liquidation of its large portfolio of futures contracts and holdings of LME warrants."
It is because of the Sumitomo case that I am not surprised by the revelations of Mr Maguire. However, the question for me is what sort of manipulation are we talking about? It is being spun as proof of GATA's claim that the gold market is manipulated by the US Government via bullion banks in an attempt to support the dollar. While I don't begrudge GATA some PR mileage, at this time all that Mr Maguire has is potentially another "rouge trader" case, only affecting the silver markets. He is not providing any evidence about gold market manipulations or Governmental involvement.
This may come in due time if the CFTC investigate further but that does beg the question of why rely on the Government. If they are ultimately party to the manipulation, will they not make the issue go away in a backroom deal? Alternatively, if the CFTC presses on and does find something initially in the silver markets, will it just be explained away as a rogue trader who will take the fall?
In this case it may be best to fight fire with fire, in a way. GATA would achieve more, and quicker, by doing a roadshow with Mr Maguire to hedge funds, sovereign wealth funds, etc and making its case that the market has been manipulated via the surreptitious leasing and selling of central bank gold that is now all used up and hence there is a large short position that can be squeezed. The standard of proof would be much lower, just enough to convince an investor that the odds are in their favour.
Would it not be better to use brawn rather than bureaucracy? Only if you're sure the bet your pitching won't turn bad, because then your buddies will be blue (to put it mildly).
The recent statements by Mr Maguire may well prove Mr Riess right. It is well worth reading Mr Riess' presentation. It is not long and neatly identifies the factors that contributed to the copper manipulation, factors that also apply to the metals markets.
For the young'uns, "a Sumitomo" refers to the case where, as the CFTC itself found: "the principal copper trader for Sumitomo engaged in a scheme, in conjunction with an entity operating in the United States, with the intent of manipulating the price of copper. In particular, during 1995 and 1996, Sumitomo, acting through its agent or agents, established and maintained large and dominating futures positions in copper metal on the London Metals Exchange ("LME"). In the fall of 1995, Sumitomo stood for delivery on a significant percentage of its maturing futures contracts. It thereby acquired a dominant and controlling cash and futures market position, which directly and predictably caused copper prices, including prices on the United States cash and futures markets, to reach artificially high levels. ... Sumitomo intentionally exploited these artificially high prices in order to profit on the liquidation of its large portfolio of futures contracts and holdings of LME warrants."
It is because of the Sumitomo case that I am not surprised by the revelations of Mr Maguire. However, the question for me is what sort of manipulation are we talking about? It is being spun as proof of GATA's claim that the gold market is manipulated by the US Government via bullion banks in an attempt to support the dollar. While I don't begrudge GATA some PR mileage, at this time all that Mr Maguire has is potentially another "rouge trader" case, only affecting the silver markets. He is not providing any evidence about gold market manipulations or Governmental involvement.
This may come in due time if the CFTC investigate further but that does beg the question of why rely on the Government. If they are ultimately party to the manipulation, will they not make the issue go away in a backroom deal? Alternatively, if the CFTC presses on and does find something initially in the silver markets, will it just be explained away as a rogue trader who will take the fall?
In this case it may be best to fight fire with fire, in a way. GATA would achieve more, and quicker, by doing a roadshow with Mr Maguire to hedge funds, sovereign wealth funds, etc and making its case that the market has been manipulated via the surreptitious leasing and selling of central bank gold that is now all used up and hence there is a large short position that can be squeezed. The standard of proof would be much lower, just enough to convince an investor that the odds are in their favour.
Would it not be better to use brawn rather than bureaucracy? Only if you're sure the bet your pitching won't turn bad, because then your buddies will be blue (to put it mildly).
Hi Bron,
ReplyDeleteAgree. The regulators appear to be a waste of time, if not complicit. They appear all to have a banking background.
Typo: can you change rouge to rogue, it looks odd.
Hi Bron,
ReplyDeleteCan you comment on the following two concepts:
1.) The nature of "fractional reserve" London bullion market
2.) The manipulation of the gold and silver bullion markets
I understand that 2.) is illegal but I am not quite sure if 1.) is also illegal. Is 1.) simply an indictment of the excessive leverage in the bullion market and hence it's fragility?
Also, would GATA taking McGuire on the road to plant the seed of a large naked (squeezable) short be considered ethical?
Jeffrey Christian at the most recent CFTC hearing said
"..The CFTC, when it did its most recent report on silver, used the term that we use, "the physical market." We use that term as did the CFTC in that report to talk about the OTC market -- in other words, forwards, OTC options, physical metal, and everything else. People say, and you heard it today, there is not that much physical metal out there, and there isn't. But in the "physical market," as the market uses that term, there is much more metal than that. There is a hundred times what there is."
Is the leverage really this bad? Considering London bullion market volume trading, where the same gold contract can be traded multiple times during the day, are people overstating the apparent leverage or degree of "fractional reserve" trading by hinting at a ratio defined as follows?
metal trading volume/real physical metal
Hi Bron,
ReplyDeleteJust goes to show if you scour the net long enough your bound to find what your looking for. I found a very detailed discussion on iTulip concerning the very two points I asked you to comment on:
http://www.itulip.com/forums/showthread.php?p=156095#poststop
The exchange between xPat and Pascal is particularly relevant. It all centers around whether Mr. christian was referring to the LBMA or COMEX when he mentioned 100:1 and "multiples of a hundred" etc.
http://www.itulip.com/forums/showthread.php?p=156411#poststop
I sure would like to hear your take. The transcript of the actual exchange during the CFTC hearing is
http://www.gata.org/node/8478
I will get on to the fractional claim. What exactly did Mr Christian mean by his statement, I'll have to listen first hand and thanks for the links.
ReplyDeleteIt is being spun as proof of GATA's claim that the gold market is manipulated by the US Government via bullion banks in an attempt to support the dollar.
ReplyDeleteUltimately a conspiracy involving government can only be demonstrated when government is undeniably put on notice and fails to act properly (or at all). GATA and Maguire have put the CFTC on toast, under oath, in public, on the record.
Neither the CFTC nor any other part of US or UK government nor the LBMA nor the COMEX has refuted or denied what GATA or Maguire are saying. Silence is confirmation.
In fact the silence from the mainstream "free" US and UK press is deafening so it's safe to say they are co-conspirators to some extent.
It ties in with everything else GATA has said about suppression being official policy.
Up until now market participants have cast doubt on an official conspiracy because they trusted government and the free press to say or do something if it were true.
Now they have as much confirmation as they're ever going to get before the LBMA blows up. So yes, market forces can now kick in. But that couldn't happen until what GATA did to the CFTC. Credit where it is due.
Hi Bron and others,
ReplyDeleteSomeone pointed me to the following link:
http://www.cpmgroup.com/free_library1/HEDGING/Bullion_Banking_Explained_February_2000.pdf
In the 3rd paragraph, the article states:
"With the start of the London Bullion Market Association’s release of monthly trading data, the market has become aware that 100 times more gold and silver trade hands each year, just in the major markets, than is produced or used."
Given Jeffrey Christian's relationship to the CPM Group, I think his 100:1 comment at the CFTC hearing, seems to be based on this document.
The article highlights the notion of "turnover volume" in relation to physical metal produced in a year but seems to suggest there is nothing wrong with this as it is how the bullion market operates.
Do you think there is anything wrong with this?
It appears from the Financial Sense interview (http://www.netcastdaily.com/broadcast/fsn2010-0410-1.mp3) that what Mr Christian meant by the 100:1 was ratio of derivaties to physical.
ReplyDeleteNow theoretically it may be true that only 1% of COMEX longs take delivery (so the 99% of shorts not having the metal doesn't matter) but if the longs do want to take delivery then 100:1 derivates:physical then does matter. Mr Christian I think misses this point.