Saturday, January 31, 2009

Attali Warns of ‘Worldwide Weimar’ as Governments Print Money

Interview by Farah Nayeri

Jan. 30 (Bloomberg) — Imagine a country so ravaged by inflation that $1 will buy you 630 billion in the local currency, where a loaf of bread costs tens of billions, and where wheelbarrows are the new wallets.

That was the Weimar Republic in November 1923. A similar prospect may now await the world economy, says French economist Jacques Attali in “La Crise, et Apres?” (“The Crisis, and Then?”), a stinging new critique of the financial meltdown.

Attali, 65, served as a special adviser to French President Francois Mitterrand in the 1980s and later became the first head of the European Bank for Reconstruction and Development. He went on to found microfinance agency PlaNet Finance. In 2007, he steered a panel on economic growth that made recommendations to Nicolas Sarkozy, the current president.


Peak Oil… What about Peak Gold?

by Jon Herring on 1/23/2009

Over the years, I’m sure you have heard a lot about “peak oil” - a condition whereby the remaining reserves of oil become harder to find, harder to extract and of lower quality. This results in declining production, even in the face of rising demand.

But you probably haven’t heard much about “peak gold”, where a very similar scenario is playing out.

In a free market, increasing demand and rising prices provide a significant incentive for producers to increase the supply of an item. And that’s usually how it works. But that’s not what is happening in the gold market.

Demand is certainly increasing. According to the United States Geological Survey, the demand for gold reached 1,133 tonnes in 2008, an 18% increase from the previous year. In dollar terms, this represented a 51% increase to an all-time record $31.8 billion.

2008 was also the year when the price of gold hit an all-time high over $1,000 an ounce. In fact, the price of gold has risen every single year since 2001.


Thursday, January 29, 2009

The Perfect Storm hits Davos

Financial crisis hangs over Davos
The dismal economic outlook has cast a pall over the once glitzy forum in the Swiss resort [AFP]

The World Economic Forum has got under way in Davos, Switzerland, as the International Monetary Fund predicted global growth is set to fall to its slowest pace in six decades.

In a sharp downward revision of its November forecasts, the organisation said world growth was projected to fall in 2009 to "its lowest rate since World War II", reaching just 0.5 per cent.

PricewaterhouseCooper, the financial consultant company, had earlier released a report in the Swiss ski resort showing confidence among business leaders around the world had hit a new low. 

The hopes of more than 1,100 chief executive officers worldwide that the global recession would be short and sharp had all but evaporated, the findings suggested.

In depth

Reporter's diary: Savouring Davos
Brazil's alternative to Davos

Davos marred by grim outlook

World views on the summit

Twenty-one per cent of respondents said they were very confident of growing revenue in the next 12 months, down from 50 per cent a year ago, the survey suggested.

The dismal economic forecasts have put a damper on the normally glitzy start of the annual four-day economic summit.

The financial crisis has also meant that politicians are taking centre-stage at the summit over the rich bankers and other financial heavyweights who normally run the show.

More than 70,000 job cuts were announced on Monday this week alone and world leaders are hoping to find ways out of recession.

Murdoch's views

Arriving in Davos on Wednesday, Rupert Murdoch, the chairman of News Corp, a media conglomerate, said the economic crisis was deepening.

"It's going to take drastic action to turn it around, if it can be turned around quickly. Personally, I believe it will take some time," he said.

Absent from Davos

Some of the world's most powerful bankers - taking the blame for the global economic crisis - have skipped this year's summit:

 Richard Fuld, the man who presided over the collapse of investment bankLehman Brothers last September

 The former boss of Merrill Lynchpulled out at the last minute after losing his job at Merrill's new owner, Bank of America

 Goldman Sachs chairman Lloyd Blankfein is giving Davos a miss

 The chief executive of Citigroup is staying home as his company struggles to stay afloat

"The great majority of the people in the world are depressed and traumatised by the fact that their savings, the wealth in their homes or pension funds ... a big percentage of it has disappeared."

Trevor Manuel, South Africa's finance minister, said there was a risk developed nations would emerge from the crisis with massive debts.

He said wealthy nations appeared to be adopting a "lemming-like approach, trying to get to the precipice without knowing what their money would buy".

Wen Jiabao, the Chinese prime minister, said in a speech to the forum that the global economic crisis was having a "big impact" on his country's economy and posed "major challenges".

Wen called on rich countries to "assume their responsibilities" and minimise the impact of the financial crisis on developing countries.

He said: "When governments fufil their responsibilities with resolution and courage they can help maintain a stable financial order and prevent the crisis from causing more serious damage on the world economy.

"Political leaders must be forward-looking. They should be responsible to the entire financial community as well as to their own countries and people".

China has sent one of its biggest-ever delegations to the forum, which some analysts interpreted as a sign of Beijing's desire to engage with the rest of the world in finding a way out of the crisis.

'Perfect storm'

Officially opening the summit, Vladimir Putin, the Russian prime minister, called the international economic crisis the "perfect storm".

He said: "There is the notion of the 'perfect storm' when the natural elements come to a point and multiply their destructive capacity. This crisis looks exactly like this perfect storm."

Wen called on rich countries to 'assume their responsibilities' [AFP]
Notably absent from the summit was a senior delegation from the United States, despite hopes that the new administration of Barack Obama will be able to lead a recovery.

Speaking to Al Jazeera, Lionel Barber, the editor of London's Financial Timesnewspaper, said economies should be looking to the US for a way out of the crisis.

Barber said: "America is spending too much and China is saving too little, so we need to get the economies back in balance and the key players are America and China.

"The biggest myth in this story was that, somehow, the rest of the world could decouple from the American economy, that they were strong enough ... to stand on their own two feet."

But Barber said this was wrong "because they depend on American growth, American markets".

"So all eyes I'm afraid, even though they are on Davos this week, should be on Washington," he said.

New World Order hitting a speed bump?

MARY ELLEN SYNON: Rioting Greeks, angry Germans and why the euro may well collapse

By Mary Ellen Synon
Last updated at 8:05 AM on 27th January 2009

Jean-Claude Trichet

Nothing to panic about: Jean-Claude Trichet insists the euro is not in trouble

The Brussels elite are pretending the question does not arise, but the financial world knows the question is there, hanging over the entire European Union economy: is the single European currency going to break apart?

One answer was given last week by the Swedish economist Gabriel Stein at Lombard Street Research: 'Euro RIP - not yet, but not unthinkable. Why not? The grass might indeed be greener on the other side of the fence.'

Another answer was given by the hedge fund boss Hugh Hendry, founding partner of Eclectica Asset Management: 'I fear it is becoming more likely that the euro will break up.' 

And his investment portfolios are reflecting that likelihood.

All of which kind of talk has forced Jean-Claude Trichet, president of the European Central Bank, to give an interview to the financial news service Bloomberg.

In it he tried to kill speculation about the collapse of the eurozone by saying that the current financial crisis poses no threat to the euro area. 

It was a miscalculation by Trichet. The interview only increased speculation.

As Stein said, 'The mere fact that M Trichet had to address this hitherto taboo topic at all shows that financial markets are taking a less sanguine view.'

Indeed, the financial markets are showing just what they think of Trichet and his assurances by piling even more pressure on the eurozone's PIIGS - an acronym for the weakest eurozone countries, Portugal, Italy, Ireland, Greece and Spain.

That ever-increasing pressure from the financial markets may lead to the collapse of the euro. Not that the markets have such power directly.

But because financial markets now reckon the chronic deficits of the PIIGS may lead at least one of them to default on sovereign debt, the markets now are making debt so expensive for them that it may put them under an intolerable fiscal strain.

The markets could also downgrade their debt so much that the weak eurozone countries would find it increasingly hard to borrow. This month Portugal, Spain and Greece have seen their credit ratings downgraded. It is likely the ratings agencies will hit Ireland's next. They will then find it not only more expensive to borrow money, but more difficult to find any investors willing to lend to them.


Protestors clashed with police in several Greek cities in riots fuelled by growing economic hardship

The PIIGS will then find their economies grow even more shaky. Their citizens will grow more angry at rising unemployment and shrinking state services. Already there have been riots in Greece. Hendry reckons civil unrest is likely to spread. At some point in this downward spiral, the money markets think at least one of these PIIGS will default on debt.

In the days before the euro, when Italy had the lire and Greece had the drachma and so on, a country in such trouble could devalue its currency to help increase its exports and take pressure off its jobs. Escape from the euro would also allow a country to regain control over its own monetary policy.


All of these remedies are available to Britain because sterling remains independent. But none of these remedies is available to any country that stays in the eurozone. The only way out for them is - out.

So worried are the Brussels elite that this might actually happen that they are threatening to force Germany and some of the other stronger countries to bail-out the PIIGS.

Last week the German finance minister reacted in fury at the suggestion, as well he might. Germany has euro problems of its own.

According to Charles Dumas, also of LSR, its exports fell 11 percent (by volume) in November (from October) and its industrial production is down further from its peak than Britain's. Germany is finding it tough trying to export from the eurozone when the ECB keeps exchange rates so high.

As Dumas puts it: 'Euroland has unpleasant surprises in store.' Except some of us won't be surprised in the least.

Dudley to succeed Geithner at New York Fed

...putting foxes in the chicken coup....

By Kristina Cooke

NEW YORK (Reuters) - William Dudley, the head of the New York Federal Reserve Bank's markets group, has been chosen to succeed Timothy Geithner as president of the regional Fed bank, a source familiar with the decision said on Monday.

Dudley, 56, has played a central role in the Fed's response to the financial crisis, helping to design, develop and implement the central bank's emergency lending programs.

His elevation to the top job, which opened up when Geithner was approved as U.S. Treasury secretary on Monday, will put him in the forefront of efforts to combat the crisis and pull the U.S. economy out of a year-long and deepening recession.

"The New York Fed is going to need a president who can take a hands-on approach over the next couple of years," said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey. "Bill Dudley already has that due to his role in crafting the New York Fed's response to the crisis thus far."

A spokesman for the bank, which earlier had said it would announce its decision on Tuesday, was not immediately available to comment and a spokeswoman for the Fed's Washington-based board declined to comment.

As head of the markets group, Dudley has managed the Fed's system open market account, which executes U.S. interest-rate policy through operations in the bond and money markets. He has also overseen foreign-exchange trading and provisions of account services to foreign central banks.

The role entailed briefing the Fed's policy-making Federal Open Market Committee about market developments. As president of the New York Fed, Dudley will be a permanent voting member on the panel, which meets on Tuesday and Wednesday to consider its next move.

At its last meeting in mid-December, the FOMC lowered its target for benchmark overnight rates to zero to 0.25 percent and said it was focusing its efforts to support the economy on actions to unclog frozen credit markets.

Before becoming the Fed's chief trader in 2007, Dudley was chief economist at Goldman Sachs for 10 years, a role for which he was ranked No. 1 in Institutional Investor magazine's league table of economists several times.

He had joined Goldman Sachs in 1986, working in a number of capacities, including as former Treasury Secretary Robert Rubin's senior economic adviser.

Prior to his years at Goldman, Dudley was in charge of regulatory analysis at J.P. Morgan, where he co-authored a pamphlet that advocated repealing the Glass-Steagall Act, a law put in place during the Great Depression to separate commercial and investment banking. Some economists have criticized the repeal of Glass-Steagall in 1999 as paving the way for the risk-taking that has led to the current crisis.

Dudley began his career as an economist at the Fed's Board of Governors in the early 1980s. He holds a PhD in economics from the University of California at Berkeley.

Comex and Silver and Gold Demand Tsunami

Tuesday, January 27, 2009

Internet Users Top 1 Billion, Most of Them Asian

Internet metrics company comScore on Friday reported that the number of worldwide Internet users in December topped 1 billion users, the first time that barrier has been breached.

The key metric in the number of users is that most of them are from Asia, predominantly so: 41 percent, compared to 28 percent in North America and 18 percent in Europe. Although a sizeable percentage of Europe speaks English in some capacity (as does Asia), the numbers indicate that most of the world's Internet traffic will most likely be communicated using some non-English language. China, for example, had 179 million users, topping the list of wired countries; the U.S. was second, at 163 million. Japan, Germany, and the United Kingdom rounded out the top five.

Given the relatively low percentage of Latin American users, Spanish may play a disproportionately low role in the online world, at least for now. Spain and Mexico ranked 12th and 13th, respectively, in the comScore table, with a combined total of about 3 percent of the world's 'Net population.

The top sites worldwide? About what you'd expect, with Google topping the list with a 77 percent share, or 776.0 million unique users. Microsoft was second, with 64.2 percent of all users, followed by Yahoo (55.8 percent), AOL (27.1 percent) and the Wikimedia sites, including Wikipedia, at 27.1 percent.

U.N. crime chief says drug money flowed into banks

Sunday, January 25, 2009

The United Nations’ crime and drug watchdog has indications that money made in illicit drug trade has been used to keep banks afloat in the global financial crisis, its head was quoted as saying on Sunday.

Vienna-based UNODC Executive Director Antonio Maria Costa said in an interview released by Austrian weekly Profil that drug money often became the only available capital when the crisis spiralled out of control last year.

"In many instances, drug money is currently the only liquid investment capital," Costa was quoted as saying by Profil. "In the second half of 2008, liquidity was the banking system’s main problem and hence liquid capital became an important factor."

The United Nations Office on Drugs and Crime had found evidence that "interbank loans were funded by money that originated from drug trade and other illegal activities," Costa was quoted as saying. There were "signs that some banks were rescued in that way."

Profil said Costa declined to identify countries or banks which may have received drug money and gave no indication how much cash might be involved. He only said Austria was not on top of his list, Profil said.


Monday, January 26, 2009

On the Internet, a university without a campus

By Tamar Lewin

NEW YORK: An Israeli entrepreneur with decades of experience in international education plans to start the first global, tuition-free Internet university, a nonprofit venture he has named the University of the People.

"The idea is to take social networking and apply it to academia," said Shai Reshef, an entrepreneur and founder of several previous Internet-based educational businesses. "The open source courseware is there, from universities that have put their courses online, available to the public, free. We know that online peer-to-peer teaching works. Putting it all together, we can make a free university for students all over the world, anyone who speaks English and has an Internet connection."

Online learning is growing in many different contexts. Through the Open Courseware Consortium, started by the Massachusetts Institute of Technology in 2001, universities around the world have posted materials for thousands of courses - as widely varied as Utah State University's "Lambing and Sheep Management" and MIT's "Relativistic Quantum Field Theory" - all free to the public. Many universities now post their lectures on the iTunes music store.

For-profit universities like the University of Phoenix and Kaplan University have extensive online offerings. And increasingly, both public universities, like the University of Illinois, and private ones, like Stanford, offer at least some classes online.

Outside the United States, too, online learning is booming: Open University in Britain, for example, enrolls about 160,000 undergraduates in distance-learning courses.

The University of the People, like other Internet-based universities, would have online study communities, weekly discussion topics, homework assignments and exams. But in lieu of tuition, students would pay only nominal fees for enrollment ($15 to $50) and for exams ($10 to $100), with students from poorer countries paying the lower fees.

Experts in online education say it is an interesting idea, but one that raises many questions.

"We've chatted about doing something like this, over the last decade, but decided the time wasn't yet right," said John Bourne, executive director of the Sloan Consortium, a nonprofit group devoted to integrating online learning into the mainstream of higher education. "It's true that the open courseware movement is pretty robust, so there are a lot of high-quality course materials out there, but there's no human backup behind them. I'd be interested to know how you'd find and train faculty and ensure quality without tuition money."

Reshef said his new university would use active and retired professors - some paid, some volunteers - along with librarians, master-level students and other professionals to develop and evaluate curriculum, and oversee assessments.

He plans to start small, capping enrollment at 300 students when the university begins in the autumn, and at first offering only bachelor's degrees in business administration and computer science. Reshef said the university would apply for accreditation as soon as possible.

"It is very visionary idea, and if they get the enrollment and the accreditation and they're around for a while, it could work," said Frank Mayadas, a distance-learning expert at the Sloan Foundation.

Reshef said he hoped to build enrollment to 10,000 over five years, the level at which he said the enterprise should be self-sustaining. Start-up costs would be about $5 million, Reshef said, of which he planned to provide $1 million. He said he was currently trying to raise the other $4 million. For all the uncertainties, Reshef is probably as well positioned as anyone for such an enterprise.

Starting in 1989, he was chairman of Kidum Group, an Israeli test-preparation company, which he sold in 2005 to Kaplan, one of the world's largest education companies. While chairman of Kidum, he built an online university affiliated with the University of Liverpool, enrolling students from more than 100 countries. That business was sold to Laureate, another large for-profit education company, in 2004.

Reshef is now chairman of, an online study community offering homework help to college students.

"Cramster has thousands of students helping other students," said Reshef, who has a master's degree in Chinese politics from the University of Michigan. "These become strong social communities. With these new social networks, where young people now like to spend their lives, we can bring college degrees to students all over the world, Third World students who would be unable to study otherwise."

Chinese New Year: Year of the Ox

Iceland’s Government Could Topple

As if the herring blight weren’t bad enough, “Iceland’s Government Could Topple”headlines the AP today.  

The poor little island. First, its banks collapsed, then its curency, then its No. 1 industry… then the rest of its little economy. Now the rats are leaping overboard as the whole ship starts to sink. Iceland’s prime minister and commerce minister resigned over the last few days. 

“The anger and distrust of the public is too deep for me to be able to regain their trust," commerce man Bjorgvin Sigurdsson said, trying to take the noble route. He quit… effective immediately. Prime Minister Geir Haarde announced this morning he plans to dissolve the government and then resign.

That’s the Icelandic parliament in the background.  


Well, at least, this kind of thing could never happen in the U.S.

Sunday, January 25, 2009

US Global Investors: Rosenberg - the case for gold

“Gold was, of course, one of the investment world’s few bright spots in 2008, and after a slow start in 2009, it began a rally that climbed above $900 an ounce on Friday. This is gold’s highest price since early October.

“David Rosenberg at Merrill Lynch sent out a short but useful research note Friday titled ‘The Case for Gold’ that explains that gold’s value is enhanced by declining bullion supply and increasing money supply.

“‘It’s the only currency not going up in supply. Pretty simple. South African gold output declined 14% last year in the steepest decline since 1901. US production was down 2%. The leading producer in terms of growth last year was China at +3% (and global central bank selling activity dropped 42% in 2008 to 279+ tons, the lowest since 1996).

“‘Meanwhile, money supply is up more than 10% YoY in the USA (M2); +16% in Australia (M3); almost 11% in Germany (M2); 18% in the UK (M2); almost 9% in Italy (M2); 13% in Canada (M2); 14% in Korea (M2); 18% in India (M2); 12% in Singapore; and 18% in China (M2).

“‘Outside of gold, the only country where money is not being poured into the financial system as if it was water from the tap is Japan, where trends in the monetary aggregates are flat-to-negative. Be that as it may, and in view of all the problems in the US banking sector, we think the dollar is unlikely to lose its reserve currency status any time soon … Confidence in the ability of European governments to service their sovereign debt is being called into question in the debt markets (‘in the land of the blind …’ ).’”

Source: US Global Investors - Weekly Investor Alert, January 23, 2009.

Jim Rogers: Sterling in peril

“The pound is a currency with no underpinning and should fall against the dollar and the euro, says Jim Rogers, chairman of Rogers Holdings and co-founder of the Quantum Fund with George Soros.

“He says his view reflects the UK’s dire economic situation: ‘It’s simple, the UK has nothing to sell.’

“Mr Rogers says the two main pillars of support for sterling have been North Sea oil and the strength of the UK financial services sector, in particular, the City of London’s role.

“But Mr Rogers says just as North Sea oil is running out, so London’s standing as a major financial centre is set to suffer.

“‘I don’t think there is a sound UK bank now, at least, if there is one I don’t know about it,’ he says.

“‘The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the West? You don’t need London,’ says Mr Rogers.

“Mr Rogers thinks the pound is more vulnerable than the dollar or the euro. He says the UK housing market is arguably in a worse state than that of the US, given pockets of strength in the US and prices that are sliding across the board in the UK.

“Meanwhile, he says, the UK is in worse shape economically than the eurozone, where most countries are not big debtors and do not run huge trade deficits. ‘If the UK discovers more North Sea oil, I might change this view,’ he says. ‘But I don’t see that happening.’”

Source: Jim Rogers (via Financial Times), January 21, 2009.

Paul Kedrosky (Infectious Greed): Banks are just a circle of their former selves

“Nice graphic of how the major banks are just a fraction of their former selves, at least as measured by market value.”

Click on the image below for a larger graph.


Source: Paul Kedrosky, Infectious Greed, January 21, 2009

Reuters: US and UK on brink of debt disaster

“The United States and the United Kingdom stand on the brink of the largest debt crisis in history. While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt.

“To understand the scale of the problem, and why it leaves so few options for policymakers, take a look at the chart below which shows the growth in the real economy (measured by nominal GDP) and the financial sector (measured by total credit market instruments outstanding) since 1952.

“The solution must be some combination of policies to reduce the level of debt or raise nominal GDP. The simplest way to reduce debt is through bankruptcy, in which some or all of debts are deemed unrecoverable and are simply extinguished, ceasing to exist.

“But widespread bankruptcies are probably socially and politically unacceptable. The alternative is some mechanism for refinancing debt on terms which are more favorable to borrowers (replacing short term debt at higher rates with longer-dated paper at lower ones).

“The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.”


Source: John Kemp, Reuters, January 21, 2009.

Minister unleashes savage attack on 'masters of the Universe' over recession

Britain's banking system was less than three hours away from collapse before the Government's first bail out, Gordon Brown's City Minister revealed last night.

Lord Myners said that 'things were very bad, nervous and fragile' in the moments before the Government announced a ?500 billion rescue package last October.

In an interview with the time, Lord Myners revealed that the financial crisis was far worse than released.

The government pumped up to ?37billion into Royal Bank of Scotland, Lloyds TSB and HBOS in an attempt to prevent the UK's banking sector from melting down last year - resulting in the part nationalisation of Britain's banking system.

Lord Myners revealed: 'How close were we to a systemic collapse of the banking system? We were very close on Friday, October 10.

'There were two or three hours when things felt very bad, nervous and fragile. Major depositors were trying to withdraw ? and willing to pay penalties for early withdrawal ? from a number of large banks.'

The City minister's comments came as new figures revealed that Britain is heading into a longer and deeper recession than feared.

In a furious onslaught, Lord Myners blamed banking's 'masters of the Universe' for the crisis.

He said that too many top bankers fail to realise they are grossly over-rewarded and have no sense of society around them.

Lord Myners added that there will have to be fundamental changes in the way that banks operate and that 'the golden days of huge bonuses in the investment banking arms are gone'.

The minister went on to argue that there was no economic justification for senior executives? pay rising 'exponentially' in the past 20 years.

Asked whether they should pay back their bonuses or lose their knighthoods, he says 'that?s a decision for individuals' and adds that if people have committed crimes they should be prosecuted.

Lord Myners says: 'I have met more masters of the Universe than I would like to, people who were grossly overrewarded and did not recognise that. Some of that is pretty unpalatable.

'They are people who have no sense of the broader society around them. There is quite a lot of annoyance and much of that is justified.

'Let us be quite clear: there has been mismanagement of our banks.'

His comments are the most ferocious yet by a Labour minister on Britain's banking bosses.

Lord Myners joined the Government from the City in October.

The former chairman of Marks & Spencers and hedge fund manager went on to admit that more bailouts could be in the pipeline.

He added that the Government still did not know the scale of 'toxic debts' on the books of Britain's banks.

George Osborne, the Shadow Chancellor, said: 'The Government?s endless announcements and summits are commanding neither public confidence at home nor confidence abroad.'

Silver investigation: Stakes are enormous

By Rob Mackinlay 

If the US regulator’s current investigation into the silver futures market is looking at allegations of ongoing price manipulation it is the first of its kind – according to a former CFTC director of enforcement. 

Previous Commodity Futures Trading Commission (CFTC) investigations have been into market manipulations that have already taken place. The potential for the current silver investigation to halt an ongoing manipulation could have significant implications for the price of silver. 

Geoffrey Aronow, a partner at law firm Bingham McCutchen and Gregory Mocek a partner at McDermott Will & Emery, both former directors of the Division of Enforcement at the CFTC, said that the division would not be carrying out the investigation if there were not legitimate grounds for concern. 

Aronow, who oversaw an investigation into manipulation of the global copper marketin the late 1990s, said: "I don’t know if this is allegedly ongoing conduct that an investigation will stop. Usually, an investigation occurs after the behaviour stops and the price moves back to where it’s supposed to be in an 'unmanipulated' market." 

"Usually what’s happened is that the conduct has stopped. The evidence that there was price movement back to a new equilibrium is in fact part of the indication that there may have been a manipulation. Usually the return to a 'normal' equilibrium is pointed to as further evidence that there was manipulation. Now I don’t know if that’s the argument here." 

However the existence of  long-term manipulation is an issue of contention in itself. Aronow said: "One of the things I will observe is that anyone who has looked at manipulation would say they [manipulations] can only be maintained over the short-term. So most of the time what you have are short-term manipulations. Prices spike and that becomes part of the investigation." 

Are UK investors ignoring silver?

Financial Express data show that only one fund in a database of 56,000 has a silver ETF in its top ten holdings. 

Silver ignored by UK investors: will it all be gone by 2034? 
Analysts say silver fundamentals are strong with or without manipulation.

Leon Diamond, portfolio manager for New York-based Castlestone Management including Castlestone Aliquot Precious Metalwhich holds equal measures of physical gold, silver and platinum, notes that the correlation between gold and silver is key to understanding the latter's importance as an asset that can withstand economic downturn. 

At current consumption rates it is likely that by 2034 there will no longer be silver left that can be economically mined, Diamond says, against estimates that gold production can be sustained until 2060. 

"Roughly speaking, silver is twice as rare as gold in the long term since it is not recycled like gold. It is recycled only about 40% of the time, compared with 99% for gold. This means that silver is literally disappearing, never to be recoverable." 

"Currently the gold to silver ratio is around 75:1 measured by troy ounces. The long-term mean for the last 350 years has been 30:1. Gold and silver tend to move in similar direction, therefore if the reversion to mean theory stands, silver must move nearly twice as fast as gold on the upside and twice as slow on the downside."

"If they’re looking over the long term, to maintain a manipulated price, that’s a very different notion. To sustain that for an extended period of time, that would be an extraordinary situation. The amount of resources required to maintain an uneconomic price against the market would be huge and the question would be: what is the economic benefit that is gained from that?" 

He said: "For the CFTC, in recent years, virtually every investigation has been based on the notion that the uneconomic behaviour in one market benefited the behaviour in another market. For example manipulating the closing price in an uneconomic way in the futures market but you had a much larger position in the OTC market that was settled off that price. But that’s a short-term manipulation at close of contract. Part of the question that has to be asked is that, if they are doing it for an extended period, what is the pay off?"

Ted Butler, whose allegations of ongoing manipulation are believed to be the subject of the current investigation, said that Aronow’s points were “encouraging”. 

He said: "He (Aronow) confirms a number of contentions of mine: One, the CFTC has never busted up an ongoing manipulation (crime in progress), and therefore, has no experience with one." 

"Two, the allegations are based upon evidence that is from their own data, so it doesn't matter what participants may say or know about the entire market. 

"Three, that evidence is credible enough that it obviously warrants an investigation. 

"Four, they are obviously afraid or reluctant to talk to me, even though it is clear I am the instigator of allegations. 

"Five, because it is a long-term manipulation, the stakes are enormous." 

Butler agreed with Aronow that there had to be an intent to manipulate the market and an economic justification for doing so: “There is no legitimate economic justification (for large short positions held by one or two players in the silver futures market) and the intent to manipulate couldn't be more clear, namely, financial survival for the big concentrated shorts.“ 

Butler said: “To lose control and be forced to cover shorts would set off a price explosion that would cripple them (those involved in the alleged manipulation) financially and expose the manipulation for all to see. The "return" to free market prices he talked about.” 

When the current investigation was revealed in US press in September 2008, CFTC Commissioner, Bart Chilton, said he had received 700 emails complaining about large short positions in the silver futures market. 

In an email to a member of the public on 27 December, Chilton said: “I requested an investigation, which is ongoing. I have been briefed and believe that the investigators are making progress." 

Greg Mocek, who left the division in July 2008, said that the division only responds to legitimate tips, not political pressure and that the validity of complaints had to be vetted before full investigations were initiated. He said that “if” Chilton had requested the investigation it was probably not politically motivated: "since you don't hear U.S. politicians crying about silver prices being too low." 

He said: "There are currently four commissioners and they are all political appointees, so everything they do is politically motivated to a certain degree. But that being said, I ran the division for seven years, and we investigated hundreds of tips that were legitimate." 

"The CFTC will look to the source of the allegations and the conduct involved to determine whether a tip is in fact legitimate. If it is, then the government will pursue a matter and use government resources to investigate the facts. 

"However, a tip and a subsequent open investigation do not indicate illegal conduct. It just means that the CFTC saw smoke." He also said: "When I was there, there were no politically motivated investigations. I assume that has not changed." 

Aronow made a similar point: "Often you get someone complaining and then market surveillance sees nothing. My guess here is that there was enough that they (CFTC staff) said at least they could look behind it and use enforcement power and look at people’s trading. At least it got past the stage of market surveillance taking a look at it."

However Aronow had a different take on the CFTC’s reaction to political pressure. In essence he agreed that political pressure was subservient to evidence. 

He said: "I’m certainly not aware of circumstances where some influential person says there’s something going on and they start a full scale investigation. They take information from wherever it comes from and treat it seriously." 

However, he added: “The reason I say 'in a certain sense' is because, if there’s a major problem or issue in the world, they (the CFTC) are going to be sensitive to that and the oil investigation is a perfect example of that." 

"If there are widespread public concerns expressed, they’re going to take a look to see if there’s anything amiss. In that sense the CFTC will respond to 'politics' in the broad sense of the word." 

Allegations of manipulation in precious metals markets are not a new phenomenon.

However, this may be the first time they lead to action by the CFTC that could result in regulatory changes that would affect the price of an asset that could in turn affect the NAV of metals funds. 

Silver Investigation: CFTC does U-turn 

Similar allegations have been made about the price of gold. 

Gold Conspiracy: Can you afford to ignore it?

"Again the length of time that these allegations have been around and the attention that they are given, may be why they are taking it seriously.” He said that whatever the outcome of the investigation, the CFTC might “feel that the attention and interest in this, even if the answer is that there’s nothing, is that they want the full and complete picture." 

As such the silver investigation may be politically motivated. Aronow said: "This goes back to what I was saying about how 'politics' in the broad sense can affect investigations and that a government agency may, properly from my perspective, respond in different ways to a subject that has keen public interest and make sure they run an investigation that will satisfy the public attention or interest." 

Mocek and Aronow’s comments suggest that there must be some validity to the complaints – as does the CFTC’s initiation of an investigation so soon after publishing a report that had rubbished similar allegations. However Aronow’s view that the CFTC can start investigations for political reasons, suggests that the CFTC may still be unconvinced by the allegations it is investigating in relation to the silver market. 

Ted Butler said: "I do agree with Mocek that Chilton's calling for an investigation wasn't political in the normal sense of the word, as low silver prices aren't a political topic." 

Mocek was aware of Ted Butler and his allegations. He said: "The rest of the story is that over the years, there have been many Butler subscribers who have made public allegations based on Ted Butler’s silver newsletter. Mr. Butler and his followers want silver prices to be higher." 

Butler said: "While it's true to say I want higher silver prices, that's a personal matter that should have no reflection upon whether my allegations are correct. It's more than just my sense that the CFTC is biased in this matter. When the investigation was 'announced' by the Wall Street Journal, the CFTC took pains to say they were still skeptical but were relenting anyway. What kind of impartial footing does that set for the investigation? And almost 4 months (and 23 years) have gone by and still they haven't interviewed the one making the charges?" 

For Butler, a major concern is that the CFTC remains unconvinced by the allegations and he believes that the regulator’s efforts to gather information from the silver analysts and investors who have complained in their hundreds about manipulation, is a delaying tactic and a red-herring. 

A spokesman for the CFTC told Investegate that this was not the case: "It most definitely is genuine. The Commission would not waste the public’s time or staff’s time on a 'charade'." 

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