Gold Sale Spurs Manipulation Talk

Commodities / Gold & Silver Aug 30, 2008 - 01:35 AM GMT

MarketWatch is reporting Gold Sale Spurs Manipulation Talk
Recent heat from Congress and regulators, along with public speculation, over whether commodity prices are being manipulated has also reached gold pits, where the debate was stirred by a surge in bets last month that gold prices would fall.

"Congress is already investigating allegations of manipulation in the oil market, and it seems likely that it is only a matter of time before a similar investigation will be required in the precious metal markets," said Mark O'Byrne, executive director at Gold and Silver Investment.

"The data in the bank participation report is so clear and compelling that it is hard to conclude anything but manipulation," said Theodore Butler, a precious metals analyst, in a note.

But the fact that three big banks were singled out in the CFTC report is nothing new. The regulator's reports always show the largest three players in futures markets in any given month.

Jeffrey Saut, market strategist at Raymond James, also believes that the commodities bull run may have run out of steam, even if only temporarily, because of the upcoming elections.

"There is a lot of nervousness, especially in energy pits, about the efforts underway to propose wrong-footed legislation from politicians who want to bring down the price of gasoline," said Jeffrey Saut, market strategist at Raymond James.

"I don't believe we have a speculative bubble, but these moves are going to drive a lot of hot money out of commodities pits between now and the elections," he told MarketWatch back in July.

Fundamentals

Many analysts also point to fundamental factors that helped bring down prices in commodities over the past month and a half.

"There is indeed a rational explanation for the decline in the price of gold and silver: the dollar has staged one huge rally, and fundamentals suggested the dollar should rally," wrote Mike Shedlock, an investment advisor at Sitka Pacific Capital Management, in an online blog post on Wednesday.

Banks and markets

As for the banks involved in the recent short selling of gold, they are only market makers, taking orders from large money players, such as hedge funds, said Jeffery Christian, founder of commodities research firm CPM Group.

Banks "stand to buy or sell the commodities, taking the other side from other people or institutions entering a market," said Christian. Gold and silver prices slumped recently "because investors, particularly short-term, technically-oriented funds, were selling."

Short-term funds tend to use over-the-counter channels to trade gold and silver and their positions were therefore not recorded by the CFTC. "What you have here is the footprints of hedge funds exiting the commodities markets en masse," said Kitco's Nadler.

Banks, playing as a market maker to buy contracts from funds, hedge their risks by doing opposite trading in the futures market: They sell, or short, gold and silver contracts in the futures markets.

That explains the recent jump in banks' short positions, said Christian. "Banks are the passive agents usually in markets," Christian added. "They make the markets, and take what is coming at them."

"Banks are the passive agents"

Indeed, banks are the passive agents, acting as market makers. I want to reiterate what Trosky said in The Great Gold, Silver Conspiracy Explained .
Also, I would emphasize the CFTC's explanation - one that has been confirmed by the former CEO of PAAS, who took on Butler's claims as well - that the large commercial shorts do in fact have offsetting positions in both physical and OTC derivatives markets, where they act as middlemen for a much larger group of customers.

Therefore, the apparent 'concentration' comes from the fact that these traders (the 10 biggest) tend to aggregate offsetting customer positions and hedge them in the silver futures market.

The fact remains, Butler and others have ZERO proof because if they had proof, they would present it. Time and time again Butler and others point out the "massive concentrated short position" as if that was proof of something in and of itself. What they fail to acknowledge (because believers in conspiracy theories can never look at any situation logically) is that the alleged conspirators try to remain market neutral.

It is the precious metal bulls who are leveraged long, not the commercials who are leveraged short. The huge irony in all this is that Butler and other conspiracy theorists have the situation completely ass backwards from reality.

Furthermore, and as I have pointed out before, Butler better be careful of what he wishes. If the CFTC does act on this, it will be to reduce speculation in the markets. And hedge fund speculation is one of the factors that has been driving commodity prices higher

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

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Comments

Howard Bryant
30 Aug 08, 12:05

Silver Manipulation - COMEX Floor Trader

Hello - Please review the link below - paying particular attention to the comments from a COMEX floor trader received by David Morgan.

Mr. Morgan:

I enjoyed your newsletter excerpt of Feb 12, which I found on the Kitco website. You stated perfectly some key reasons for silver's problems in getting out of its own way, and your call for further weakness was prescient.

I guess I'm part of the problem. I've traded COMEX futures actively from the pit for over 15 years. Over the years, the amount of futures contracts that we've traded has surely dwarfed the actual physical market, making it difficult for silver to manifest its true fundamentals.

As you alluded, it's "Groundhog Day" again on the floor. Over the past month I watched one fund accumulate an eye-popping long position, and I followed its progress as best I could through the open interest and commitment figures. When prices started slipping away from last week's test of the $4.85-$4.90 level, I could hardly believe my eyes when I saw early evidence that this fund was starting to sell. I went across the pit to a trader who I knew was trying to stick with his longs and I said, "I've got bad news for you -- that selling you see over there may take three weeks."

The fund sold heavily all last week. The usual bank traders were sopping it up, secretly relieved, I think, that prices had failed to break into ground they could not control. Younger traders ask me how these funds can keep getting chopped up like this. They don't realize that a 30-cent chop in silver is a minor inconvenience compared to the strong positions most of these guys have in gold and crude.

As you know, the banks will continue to play puppet master as long as the silver game remains "closed." The banks know the upper parameters of the funds' buying power; the banks know when the funds have reversed themselves into an untenable short position. It will take new "players" to get the "Bill Murray" silver market out of this loop. Certainly investment demand is the wild card that banks and recurrent short sellers cannot control.

Silver will be called lower on Tuesday a.m. and, although I'm a bull, I'll be getting short on the bell. There is no short-term success in getting in the funds' way.

A Comex Floor Trader

http://www.silver-investor.com/davidmorgancommentary/articles/5-22-08_ibtimes13_silverpricemanipulation.html

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