Word on the street is that previously silent victims of precious metal manipulation are now, for the first time, grouping together to do battle in the courts of the United States of America. Class action lawsuits are being planned against the suspected manipulators of the gold and silver markets. What is the basis of the lawsuits?
About two weeks ago, on August 18, 2008, I published an article titled “The Disconnect Between Supply and Demand in Gold & Silver Markets”. In the article, I explained how relatively small amounts of money can be strategically used to collapse the price of multi-billion dollar commodities markets, such as gold and silver. In short, unscrupulous manipulators can use either fictional silver/gold, or gold “swapped” to them by Central Banks, to create an artificial supply. This fake “supply” can then be strategically used to attack the price, on the futures markets, which, in turn, will profoundly affect the spot price. Collapsing the spot price can, in turn, destroy investor confidence, market stability, and the willingness of more conservative investors to take large permanent positions in precious metals. After collapsing a market, using the techniques described, unscrupulous manipulators can buy back their short contracts, from shell-shocked long position holders, at a profit.
Soon after my article was published, hard evidence of a vast change in short positioning began to emerge. The first discovery was made by tireless silver market researcher, Ted Butler. The data he found led to yet more work, and, soon, similar activities were revealed in the gold market. All this begs the question. Why would a handful of banks suddenly have the infinite wisdom to take incredibly large short positions, immediately before the unexpected rise in the value of the U.S. dollar, and the collapse of precious metals prices? Remember, these are probably the same players who got us, and themselves, into the credit crisis.
We don’t yet know all the details, but the information uncovered so far, is already of great importance to holders of physical gold, shares in streetTracks Gold (GLD), iShares Silver Trust (SLV), and/or the various gold and silver mining companies, such as Newmont Mining (NEM), Goldcorp (GG), etc. According to Rob Kirby, a precious metals market analyst, the most recent CFTC positions report shows that:
…as of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold. This is the largest such position by U.S. banks I can find in the data, ever. Between July 14 and August 15th, the price of COMEX silver declined from a peak high of $19.55 (basis September) to a low of $12.22 for a decline of 38%.3 U.S. banks held a short position of 7,787 contracts (778,700 ounces) in July, and 3 U.S. banks held a short position of 86,398 contracts (8,639,800 ounces) in August, an eleven-fold increase and coinciding with a gold price decline of more than $150 per ounce. As was the case with silver, this is the largest short position ever by US banks in the data listed on the CFTC’s site.
[See “Wake-Up Call”]
The 3 banks in question are only the tip of the iceberg. The Commodity Futures Trading Commission [CFTC] does not group secondary controlled entities, like hedge funds and private equity groups, in the “bank” category, even though the funds may be wholly controlled by the banks. Beyond that, the visible portion of the futures market, though it has the most effect on the spot price, is not the biggest portion. A vastly greater unregulated inter-institutional market exists, and this market takes place inside so-called “dark pools”. The total short position taken by the alleged perpetrators, and the losses sustained by their potential victims, who include other institutions, is probably vastly greater than the researchers now realize.
Before we continue, it is important to understand what it means to take a “short” position in the futures market. The general concept is vaguely related to “shorting” stocks because, in both cases, you are betting that the price will go down. However, when you short stock, you borrow someone else’s shares, and, later, you buy them back, and replace the shares you sold. Issuing a futures short position, however, does not involve borrowing a long position, although it may involve borrowing the underlying commodity. Typically, a bank or futures dealer will sell a short position in, for example, silver or gold that it says is sitting in a vault somewhere. This alleged stockpile may have “leased” from either a bigger bank, or, in the case of gold, even one of the central banks, like the Federal Reserve or the ECB. As I mentioned, back on August 18th, it doesn’t really matter if the metal really exists, because less than 1% of all futures contracts will ever see delivery, and the CFTC never does any vault audits.
In other words, being “short” in the futures market means that you hold the opposite end of somebody’s long position. The “short” promises to deliver by a certain date, but knows that he won’t have to, because, as previously stated, less than 1% of all futures contracts are ever delivered. European futures markets overtly and honestly tell you that the “contracts” are settled on paper, only. However, COMEX keeps up the fakery, and its prestige, size and ability to influence the spot price arises out of this fiction. A rule, requiring futures contract writers to maintain a stockpile consisting of 90% of whatever commodity they are writing on, was established years ago, in an effort to keep the market honest. It is not enforced in any meaningful way.
Normally, when supply exceeds demand, prices must fall. Investors, however, unlike jewelry fabricators, electronics manufacturers, etc., do not physically use, and, in many cases involving the precious metals, don’t ever physically even see the gold and silver metal that they ostensibly buy. Their agents just store it for the future. This unusual set of circumstances allows for the use of fictional gold and silver to create fake supplies of the metal, which can be used to divert investment demand. The futures contract writer may not even know the gold or silver underlying his contracts really doesn’t exist. Only the vault owner really knows. CFTC would know if they bothered to do unannounced vault inspections, but they don’t do any. It has never once bothered to check a vault.
As a result, there is nothing to prevent paper-fake claims to fictional silver or gold. Indeed, there is every reason to create fake claims, because the lessor of fictional precious metals can give a very lower lease rate and still make lots of money. If, on the other hand, you really have to go to the expense of buying real gold and silver, and putting it into a real vault, you must charge more.
On almost every day, with the exception of a few, since January 1, 2008 (227 days days to be exact), lessees of silver have been paid a fee for borrowing silver, because the lease rates are lower than LIBOR. This is known as “negative leasing rates.”
The alleged vaults essentially pay you to lease their silver, because you can “sell” the metal, take the paper money, deposit it, and make a profit on the difference. These payments are happening in the midst of a real market so short on precious metal that the U.S. Mint has run out of both gold and silver, and the Royal Canadian Mint is going around, hat in hand, asking for gold, as described in my other articles. This need to subsidize leases implies that there is a major shortage of silver metal. For the moment, refiners, like Johnson Matthey, in Salt Lake City, have transferred all available resources into meeting the needs of physical users like the electronics industry and jewelry manufacturers. They and, probably, others have stopped production of all retail sized blanks and bars. The U.S. Mint, for example, has run out of both silver and gold. However, as the shortage deepens, the wholesale market will also eventually go into shortage. At that point, the price will take off, as the open market becomes aware of the situation.
At least one lawyer, and a horde of market commentators, have taken note of the fact that the sum total of COMEX silver futures contracts is many times larger than the world’s known supply. It is very close to impossible for all the claims to be real. As noted in my prior article, in 2007, Morgan Stanley paid millions of dollars to settle a class action lawsuit that alleged it had never bought silver and other precious metals for its clients. Instead, the complaint alleged that the bank, one of the most prestigious in the world, simply listed client silver holdings on monthly statements, charged big fees for storing it. According to the complaint, the Morgan Stanley silver was fictional, and its customers were paying for storing nothing but air. There wasn’t any real precious metal in the vaults. Fake claims upon precious metals, allegedly stored in vaults, therefore, are not merely the figment of conspiracy theorist imagination.
A dramatic and unexpected rise in the dollar was the initial, but not the only cause, for the sudden fall in precious metals prices. That the U.K. and Europe are joining the USA in a recession does not explain the dollar surge. The depth of European contraction does not compare, and will never compare, to the devastation being wrought inside the U.S. economy. Furthermore, common sense tells us that, though the world economy may be falling apart, the particular paper currency that is the basis of that economy would not be particularly attractive to investors.
If we look behind the double-speak market chatter, however, the true reason behind the recent dollar surge is clear. In March, a group of central banks planned a huge and coordinated currency intervention to buy dollars, in the world currency markets, to support the U.S. dollar. No doubt, these same players have finally acted on their plans. Beyond that, in August, China got the blessing of the US Administration to impose new currency controls, “forcing its commercial banks to build up large dollar reserves, using them as arms-length proxies in a renewed campaign of exchange rate intervention.”
Although, in times past, this obvious bid to lower the value of the yuan would have caused outrage in the Bush Administration, now, there is no criticism at all. In addition, recently, there has been a very large overall increase, in the buying of American treasury bills by foreign central banks, generally. The increase exceeds that needed to simply offset the trade deficit. The buying happened right before the value of the U.S. dollar started surging. (See here (pdf warning).)
None of these factors can stand alone, of course, but, together, they constitute a coordinated and highly effective effort to prop up the dollar. The U.S. dollar’s upward surge is obviously NOT based upon fundamentals. It is based on coordinated currency intervention. The rally is being used, by our Orwellian double-speak Federal Reserve, and its coordinating foreign central bankers, to “break the back” of anti-dollar, pro-gold market sentiment.
What they fail to realize is that the dollar is not merely the victim of negative market psychology. It is the victim of many years of corruption, within the Federal Reserve and the U.S. Treasury, including repeated FMOC action that has sacrificed the good of the nation, in favor of a small group of favored Wall Street bankers. When the coordinated efforts relax, the U.S. dollar, being an incredibly flawed currency, will fall deeply. We must remember that there is an unsustainable $750 billion dollar per year current account deficits, enormous federal budget deficits, and a failing economy that continues to fall, deeper and deeper, into a broad downturn.
The hollowed out economy of the United States of America is no longer efficient enough to sell manufactured goods into the world marketplace, unless its currency is allowed to deeply depreciate. Therefore, this currency intervention cannot continue permanently. Manufacturing for export has been, up until the intervention, the only bright spot in the U.S. economy. The Federal Reserve and its friends are now busy destroying that bright spot, in the interest of helping a few favored banking institutions. Part of the reason for the timing of the current dollar intervention may be a desire to help Lehman Brothers executives sell their company to the Koreans for a nice price. This attitude, however, and the Fed’s consistent actions in favoring some financial institutions over others, permeates Fed thinking, and has led to the current crisis. In the long run, the same thinking will lead to the long term downfall of the U.S. dollar as an international medium of exchange. The abuse of public funds to favor one institution over another is an important reason to shut down the Federal Reserve, permanently.
When the currency intervention ends, a new round of U.S. dollar depreciation will begin. The currency will fall much lower than before. In their turn, gold and silver will rise much higher than anyone is now imagining. Now is an excellent time for dollar holders to unload dollar denominated assets. Those assets will start heavily depreciating when currency intervention ends, and gold and silver will go up. If you buy precious metals now, the world’s central bankers will be paying part of your bill. If you wait, you will have to pay the entire bill yourself, which, simply put, means you will pay a higher price.
We are currently in a “sweet spot” for buying precious metals, because, as the world’s economy progressively gets into worse condition, and as central banks, all over the world, progressively loosen monetary policy in response, more and more paper money will be chasing the same amount of real goods.
But, let’s get back to the discussion of the 3 perpetrator banks, who wrote all those shorts, right before the dollar began taking off. They probably had inside information about the currency intervention. By taking advantage of it, they achieved several purposes.
First, by collapsing precious metal pricing, they shell-shocked most “long” futures participants. This allowed the perpetrators to unwind tens of billions, or even hundreds of billions of dollars (when we add the invisible, but much larger, derivative trading world of inter-institutional “dark pools”) worth of short positions that they had written at much higher prices. The unwound positions are much larger than anyone now realizes because they include, not only direct bank assets directly, but, also, off-balance sheet entities – short positions owned indirectly, through controlled entities that are not be formally listed as “banks” inside CFTC’s position papers.
Second, they were able to carry out their own wishes and that of the politician-economists at the Federal Reserve. There is an ongoing need to suppress gold and silver prices so as to support dollar hegemony. The Fed’s primary dealer system runs a closed show, in which the U.S. dollar must be the dominant world currency. If it loses that status, they lose their ability to profoundly affect and manipulate markets worldwide, including, most importantly, on the American stock market. The Federal Reserve and its client banks do not enjoy unfettered access to unlimited amounts of gold, and the U.S. Treasury no longer holds any silver at all. So, they must settle for inducing heavy crashes, now and again. While this technique cannot stop the rise in value of the monetary metals, nor their inevitable return to the basis of international exchange, it can and does slow that rise. High levels of volatility discourage highly conservative investors from taking large permanent positions in gold and silver, as all financial institutions and people always did, prior to the time that the price became volatile, during less manipulated times.
Third, and finally, they did what most people do with illegal inside information that can be converted to cash. They made a lot of money by taking very large short positions immediately before a known price crash. Direct profit to their bottom line, not including the unwinding of other short positions, amounted to several billion dollars, at minimum.
Market manipulation is, of course, a felony level offense. We don’t yet know who the perpetrators are, but it is reasonable to assume, from the fact that they were privy to the most sensitive information, that they are very well connected. That is the only way they would have known of the upcoming central bank currency intervention. In all likelihood, therefore, no help will come from the U.S. Justice Department or the CFTC. Some official help, however, might come from some of the more honest and aggressive of the state district attorneys, and/or attorney generals. State based criminal charges could be brought, based upon violation of state blue sky laws, regardless of the refusal of federal authorities to act. For the most part, however, victims will need to lead the charge, possibly with a RICO based civil class action that could include hefty awards of punitive or triple damages.
Disclosure: Author owns physical gold, holds a long position in GLD & SLV.