Sunday, December 14, 2008

Silver investigation: CFTC does U-turn

By Rob Mackinlay 

Allegations that the price of physical silver has been manipulated downwards by short-selling on the silver futures markets have been made for decades. 

These allegations have gathered pace recently and if proven would have a substantial impact on both the silver and gold markets, where similar allegations have been made. 

The frequency with which investors and analysts have made these claims has led 
the Commodities Futures Trading Commission (CFTC), the US futures market regulator, to respond on a number of occasions. 

The most recent was in May this year when the CFTC dismissed every claim of manipulation as either "implausible" or "tenuous". The 
May report also appeared to attack the credibility of the people making the allegations, warning investors to "evaluate the motives of commentators dispensing advice on markets" adding that they may have a financial interest in silver prices going up. 

On 25 September, four months after the publication of the May report, The Wall Street Journal 
said the CFTC had confirmed an ongoing investigation into the silver futures market. This could have been a significant U-turn, but clues about when and why the CFTC opened its investigation were contradictory.   

At first the regulator said it could not comment because "the Division of Enforcement typically does not reveal how or why it begins investigations." But when asked if it stood by the findings in its damning May report, the regulator made it clear that the ongoing investigation could contradict its findings. 

The CFTC said: "The current investigation is not complete. As of this point-in-time, there is nothing to indicate that anything in the May 2008 report is inaccurate." This suggests that the CFTC is looking at the same allegations it had rubbished four months previously - this is the implied U-turn. 

Silver ETF performance: beholden to futures market?

It seems likely that the CFTC has a specific concern as the new investigation is being carried out by the CFTC's Division of Enforcement which, 
according to the CFTC , "investigates and prosecutes alleged violations of the Commodity Exchange Act and Commission regulations." 

This is in contrast to its Division of Market Oversight, which carried out the May report and which has task of "fostering markets" through "market surveillance, market compliance, and market and product review functions." 

Another difference is that the Division of Enforcement has asked silver investors for evidence. The Division of Oversight's May report was completed without interviewing the people who had been making the original allegations. 

Although the CFTC has mentioned a high number of complaints in relation to its current investigation, these complaints were part of an organised email campaign and related to one specific event in August. This new evidence galvanised the silver investor community and could have led the investigation. 

The new allegation: 

Ted Butler, a veteran silver analyst who has been in various disputes with the CFTC since 1984, spotted what he believed to be evidence of manipulation. In a piece called 
"The Smoking Gun" Butler said that CFTC figures showed that two US banks had increased their silver short positions from 6,199 contracts in July 2008 to 33,805 contracts in August 2008. 

In effect the two banks had commitments to deliver 31m ounces of silver in July and, one month later, this had increased to 169m ounces of silver. Butler said that this increase represented 20 per cent of the annual global supply of silver and was "the largest such position by US banks I can find in the data, ever." 

Then, on 2 September, Butler proposed a 
new theory to explain the large short positions. He said that the short position may not have been "new" but could have been an existing short position that had been transferred from one bank to another. 

He said: "This coincides with JP Morgan’s takeover of Bear Stearns. In fact, it would not surprise me if the bailout was JP Morgan taking over Bear Stearns' short silver position, at the government's request." JP Morgan declined to comment. 

In October 2008, the CFTC wrote a letter to a US congressman, Gary Miller, which appeared to lend weight to Butler's theory. The letter said that the increased short position mentioned by analysts like Butler "reflected a one time acquisition of positions that were acquired through a merger in the industry, and not new trading by a bank." 

Butler is concerned at how large some of the short positions held by institutions could be and that the US government and regulators must be aware of the position because they had sanctioned its transfer to another bank. 

In the CFTC's 
"enforcement roundup" for 2008 the regulator lists the three investigations that have been made public this year: silver, cotton and crude oil. 

For its cotton and crude oil investigations the regulator has published official press releases saying that it was "taking the extraordinary step of disclosing" these investigations "because of today’s unprecedented market conditions." 

No similar announcement has been made for the silver investigation. 

The CFTC said: "As a matter of course, the CFTC does not reveal the existence of an investigation.  Once an investigation results in sufficient evidence to justify the Commission’s Division of Enforcement seeking the Commission’s approval for issuance of a Formal Administrative Complaint, then the investigation becomes a matter of public record." 

Some of these issues are addressed in: 

Could owning gold be banned? 
Gold conspiracy: can you afford to ignore it? 
or visit 

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Oh gold! I still prefer thee unto paper, which makes bank credit like a bank of vapour. - Lord Byron, English poet, 1819

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