The silver market is broken and has been broken for a long, long time. Much longer than most people think although many people can finally SEE the problems with the market now as the paper market continues to distort the price of physical silver. It is silver derivatives and computer trading models introduced in the 1970’s that really started to distort the market value and it has never been more distorted than it is today. Hundreds of Billions of silver derivative ounces are transacted by the bullion banks every year to steer and control the price of silver. This volume of silver trading dwarfs the tiny physical silver market that only provides a few hundred million ounces of physical silver to the market annually for investors to buy.
Those of us who know this to be true have tried to position ourselves such that the wide ranging price dynamic would not effect the position we took to take advantage of the inevitable price spike that must happen AFTER price manipulation ends. To do that we have bought physical silver and removed it from the system and out of the hands of the manipulators. Because we knew the price riggers could place the price of silver derivatives at $0/oz or $1M/oz with a click of a mouse it was the only way to ride out the manipulation.
So that’s what we have done and now we sit and await the END of this manipulation. We all knew it would be chaotic and produce very extreme pricing swings (as we are seeing now with sub $20 silver) but we knew it must end.
That is were we are now.
Many around the world are preparing for the end of market manipulation not only from a government/populace standpoint but also from a regulatory standpoint. That is what the CFTC was working on as it related to the Dodd-Frank Rules. It was never intended to end the manipulation but rather it was a way to RESTART the system AFTER the manipulation was OVER.
I’d like to present (again for some) my 17 requirements to restart the silver trading markets after the current manipulative structure ends or AFTER THE CRASH. These are minimum requirements that will have to be addressed in a POST crash environment where nobody would trust the derivative market pricing structure after the years of abuse. This is what the silver market regulation SHOULD look like today.
Goal: A fair and viable silver derivative market where no trader or group of traders can intentionally influence the price of physical silver.
1) End Excessive Concentration — The size of positions held and traded in the silver derivative world should be realistically in line with the physical metal available. Enforceable regulations should be designed to both end the current manipulation and remove the potential for future manipulations using concentrated positions.
2) Require Public Position Disclosure — Any company that cannot operate an honest silver trading operation without a veil of secrecy should not be allowed to participate in the markets. All positions of large silver trading companies should be made public to both instill confidence in the free market and expose foul play. The benefits of transparency far outweigh the argument that public disclosure would impair the proprietary trading ability of the participants.
3) Verify/Certify Physical Metal Backing — Currently, the regulators are blind to the physical markets and should NOT take any traders pledge as fact that they have metal to backup any large short position. The CFTC should actively verify and certify ALL metal that is pledged against COMEX contracts. This certification should include onsite physical audit of bars, drilling of a random sampling of bars, CFTC certification of purity and on going oversight of physical inventories.
4) Physical Reconciliation Audit — The purity of physical gold and silver bars are being questioned like never before. There is very little trust that the metal is pure and has not been tainted by tungsten, molybdenum or lead. Unbelievably, large gold and silver bars are rarely drilled and tested for their purity or for tampering. The CFTC should spearhead a global “re-melt” program of the world’s inventories and set up a certification process such that any tampering with the newly minted and certified bars can be effectively tracked back to the perpetrator.
5) Analyze Significant Price Action — The silver market is highly volatile often moving in concert without any economic or supply/demand justification. These sudden drastic moves in metal prices should be analyzed to determine WHO started the move, WHAT trading actions did they take during the move, WHO benefited from the move and was the move only temporary. An intentional operation to artificially affect the price of the metal is illegal under the Commodities Exchange Act and should not be tolerated.
6) Audit Past Manipulative Maneuvers — The crimes of market manipulation in the past should not go unpunished. There is a mountain of excellent evidence collected by silver advocates that prove silver has been illegally manipulated for many years. Just because the criminals got away with a crime when it was committed does not mean they should be allowed to walk and trade freely among us. The COMEX crimes of the past should be investigated and prosecuted.
7) Audit/Verify/Certify “Approved Warehouses” — The COMEX approved warehouses are owned and controlled by most of the very same entities that are accused of rigging the gold and silver markets. The CFTC relies heavily on the warehouse data in determining the dynamics of the physical markets. The potential for deceptive practices, false reporting, metal alterations and flat out fraud are huge. The CFTC should monitor, verify and certify all metal stored in “Approved Warehouses” to ensure the market has access to correct information.
8) Audit/Verify/Certify Physical Metal Hedges — Commercial hedging of mining production is the reason the futures and options markets exist. Without the need for mining companies to hedge the market price of their product the COMEX would have no reason to exist other than being a gambling establishment. If large mining companies, such as Barrick, wish to hedge their production the CFTC should investigate if the reserves in the ground are verifiable, economic and have little risk associated with extraction such as the potential for nationalization.
9) Remove ETF Physical Substitution — The COMEX now allows shares of the ETF’s SLV and GLD to be substituted for physical metal delivery. This is a flat out scam of epic proportions! There are more holes and loopholes in the prospectus of these two ETF’s than any other investment vehicle in the world. ETF shares ARE NOT physical metal. JP Morgan, for example, is the custodian for the silver in SLV but does not own title to that silver nor do they have any right to justify their gigantic COMEX short using that physical silver. By not speaking up at this obvious attempt to distort the physical supply of metal the CFTC is exposing itself as either the most incompetent regulator in the world or the most corrupt.
10) Investigate Collusion between Large Traders — Collusion is often difficult to prove but it is not impossible. The CFTC should fully investigate emails, phone records, meetings and motives when collusion is suspected on suspicious large price moves. The CFTC “Enforcement Division” should have expanded powers to investigate anyone who wishes to trade gold and silver on the COMEX.
11) Compare Volatility to Supply/Demand Dynamics — Gold and silver has the highest price volatility of any commodity traded on the COMEX and yet they both have one of the most stable supply/demand dynamics. Gold and silver mine production and consumption/investment demand is very consistent year-over-year changing very gradually yet the prices are whipsawed in huge swings. This disconnect should be a glaring red light screaming… “MANIPULATION!”
12) Employ Experts to Regulate Gold/Silver Markets — When I call the CFTC to complain about gold or silver manipulation I get an “economist” who reads from a script off his computer screen which denies any manipulation. When I ask “who is in charge of overseeing the gold market?” he says “we all oversee all the markets”. I find it truly amazing that the CFTC does NOT have a dedicated specialist for silver or gold. What kind of oversight or regulation is possible without the most basic understanding of the commodity you are overseeing?! The CFTC should hire experts to concentrate on understanding all aspects of the gold and silver markets.
13) Engage Outside Expert Consultants — As far as I know the CFTC has NEVER hired an outside expert on the gold or silver markets even though there are many who are willing to assist them for FREE! Not only does this raise suspicion about their competence but it begs the question of WHY NOT? I’d like to suggest that the CFTC create a “Panel of Outside Expert Consultants” to assist them in understanding the gold and silver markets.
14) Control Gold/Silver Derivatives — The most insane part of this whole debacle is the outsized gold and silver derivative complex that dominates the trading activity of a very small physical market. The CFTC should get to the bottom of the gold and silver derivatives held at the major Bullion Banks as well as other institutions to determine if these derivatives were constructed to manipulate/control markets or is there a legitimate economic reason for them. Understanding the entire metal complex will assist them in understanding the COMEX gold and silver markets.
15) Ban High Frequency Computer Trading — High speed computer trading makes a mockery of the entire free market concept. Allowing individual firms or a small collection of firms to make millions of trades back and forth every second has done more to distort the price of commodities than any other pricing dynamic. Bernie Madoff’s firm specialized in trades like these and there are other firm still in operation rigging the markets today.
16) Daily Volume Limits and Public Disclosure — Although position limits are important in order to stop market manipulation, limits on daily trade volumes and public disclosure of participant trades is also vital in making sure no manipulation is taking place. A company that buys and sells tens of thousands of contracts each day but settles out near even won’t stand out as having a manipulative concentration but is clearly manipulating the price. Transparency is key to a free and open market and should trump the desire to hide proprietary trading positions.
17) CFTC Employment Restrictions — The revolving door between US Regulators and the Wall Street firms they are supposed to regulate is one of the most egregious travesties of justice ever perpetrated on the investing public. The CFTC Commissioners and legal staff are clearly as guilty as senior members of the SEC. CFTC employees should not be able to work for or be associated with any company or commodity they regulate for at least 10 years before and after their employment at the CFTC. Without this separation the urge to favor past or future employers is too strong. CFTC employees should be rewarded for enforcing the laws… not bending them.
Until these recommendations are met there is NO CHANCE of a truly free market in silver developing.
Unfortunately, it will likely take another Global Market Meltdown for the regulators to take these recommendations to heart.
May the Road you choose be the Right Road.
Courtesy: Bix Weir
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