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Debunking the Precious Metals Fear Mongering
Campaign
By Erik Townsend - April 16, 2010
Executive Summary
There is good reason to question JP Morgan's concentrated short position in
COMEX silver futures, and to investigate allegations that JPM used it to
manipulate the silver market.
The Gold Anti-Trust Action Committee (GATA) has handled this matter
poorly by focusing its attention on baseless, unproven conspiracy allegations
pertaining to the London gold market (outside CFTC's jurisdiction). GATA
should instead focus on the compelling evidence that is directly material to the
still-pending CFTC investigation.
Jeffrey Christian's testimony at the CFTC Hearing has been taken completely
out of context, and allegations that it reveals a scandal or revelation are
baseless.
¯
Despite the best efforts of some responsible journalists including Jim Puplava,
others including Tyler Durden (ZeroHedge) and Eric King (King World
News) have contributed to the misinformation campaign by promulgating
GATA's baseless allegations.
¯
There are legitimate reasons to be concerned about the ratio of"paper gold" to
real gold, but they are not the reasons GATA has made so much undue fuss
about. They also have nothing to do with
leverage.
Investors should focus on understanding the inherent risks and limitations of
their precious metals investment vehicles. The most popular are reviewed and
contrasted.
Introduction
Ever since the U.S.
Commodities Futures Trading Commission
(CFTC) ~ on
position limits in the COMEX precious metals futures markets on
March
25
th,
the
blogosphere has been on fire with talk of conspiracy, scandal and fraud. Eric King of
.__~_____n_g World
News has run a series of audio interviews in which he repeatedly
suggests that what's being uncovered may actually be "The greatest fraud in history".
Meanwhile, the Gold Anti-Trust Action Committee (GATA) has made numerous
allegations pertaining to fraud on the London Bullion Market Association (LBMA),
which is arguably the largest marketplace in the world for sale and purchase of
physical gold bullion. The story gets even more juicy - at the CFTC hearing, GATA
brought forth information from a whistleblower named Andrew Maguire. Then, just
days after this disclosure, Mr. Maguire and his wife were victims of a hit-and run car
accident in London. In what read like a 1960s spy novel, the blogosphere immediately
went wild with allegations that JP Morgan, an investment bank that trades in the
precious metals market, had arranged to have Mr. Maguire assassinated for revealing
their devilish plot to manipulate precious metals markets! To the casual observer, all
this smacks of exactly what Eric King has called it: The greatest fraud in history!10-005
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But to the not-so-casual observer, i.e. someone who actually understands metals
markets and how they function, it's quickly apparent that most of the hype circulating
in the blogosphere is utter nonsense. In fact, there appears to this author to be far more
misinformation than accurate information circulating on the Internet with regard to
this subject. Sadly, GATA, the watchdog organization that is urgently needed by
investors to keep an eye on wrongdoing in these markets, appears to be more at fault
than any other party for distorting the facts and making baseless allegations. While
that organization's chartered mission is certainly noble, the organization's execution
of that mission warrants some harsh criticism. This article will review the history of
what has transpired, and will debtmk the false information that has been spreading
rampantly in the coverage of these events by otherwise-respectable websites including
ZeroHedge and King World News.
Ted Butler's Discovery of the J.P. Morgan Silver Short
A logical place to begin this story is with the work of Ted Butler, a precious metals
analyst and newsletter author whose firm Butler Research specializes in analysis of
the government-published
Commitment of Traders
reports. These reports reveal the
positions of large commercial traders who are required to disclose that information
publicly on a weekly basis. Ted's analysis of the COT reports is quite involved and
tmfortunately, the full details of his work are only available to his paid newsletter
subscribers. For the purposes of this discussion, all you need to know is that from the
official COT reports, Ted concluded that Bear Stems was holding a very large
concentrated short position in COMEX Silver futures, and that J.P. Morgan has since
taken over this position. According to Ted, JP Morgan continued to hold the
concentrated silver short at least until just before the recent CFTC hearing. For
readers not familiar with commodities trading terminology, a
short
position means
that J.P. Morgan was selling silver futures contracts.
Roughly speaking, there are four reasons that someone might sell Silver futures
contracts. The first three are entirely legitimate:
They had a btmch of physical silver bullion they wanted to sell by actually
delivering the metal.
They needed to hedge another transaction in another market. For example, a
silver miner might want to lock in a price as soon as the mining operation is
complete, hedging exposure to price changes while
a 3
rd
party smelter reduces
the mined ore to finished product, a process that can take weeks.
Their opinion was that silver was over-priced, and they wanted to make a
speculative bet that the price would go down, yielding them a profit when they
eventually closed their position by buying back those same contracts at a
lower price after
other fundamental factors in the market
caused the price to
decline.
The fourth possibility is both illegal and tmethical:
By aggressively selling a very large number of contracts, they endeavored to
intentionally
manipulate the market to push the price down,
by creating
enough downward price momentum through their own selling to induce
technical ftmds, which trade on price momentum indicators, to begin selling.
An illegal price manipulation scheme would involve first selling enough10-005
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contracts to move the price lower, intentionally "tricking" other investors into
selling because of a perception the market was crashing for unrelated reasons,
then buying back the contracts they initially sold, but at much lower prices.
They would thus derive a profit from illegally tricking other market
participants into selling on a bogus price signal.
To summarize Ted Butler's research, he is convinced that in J.P. Morgan's case, #4
applies. He makes a case for why he believes this to be tree, and points out that JP
Morgan's concentrated short position is so large that it exceeds the annual global
production of actual silver bullion by all of the silver mines in the world combined.
Up until the CFTC hearing, Butler was working from circumstantial evidence only. It
wasn't until Andrew Maguire arrived on the scene that evidence would be presented
apparently corroborating Butler's suspicions. More on that later.
Meanwhile, in the conspiracy-minded reaches of the blogosphere, several
commentators alleged that JP Morgan was actually acting as an agent for the Federal
Reserve Bank of New York, perpetrating an evil government conspiracy to
manipulate the price of precious metals downward. That's actually not as far fetched
as it sounds. While at Harvard, Larry Summers wrote a paper describing how the
Gold market could be manipulated downward in order to protect the U.S. Treasury
Market. So for someone to speculate that the U.S. Government was behind this price
manipulation, first using Bear Stems and now J.P.Morgan as their agents to carry out
this illegal dirty deed... As conspiracy theories go, this one really isn't all that
implausible. But even so, the fact remains that this is pure speculation. I'm not aware
of any conclusive evidence that the NY Fed is behind whatever J.P. Morgan is up to.
Thankfully, Ted Butler has shown the good judgment to leave the conspiracy theories
out of his work, and focuses instead on the contention that JP Morgan has a large
concentrated short position and appears to be using it to perpetrate an illegal market
manipulation.
The Long-Awaited CFTC Hearing on COMEX Position Limits
The CFTC held a public hearing on position limits in the COMEX Precious Metals
futures market on March 25, 2010. GATA was invited to testify at the hearing. In a
dramatic moment, GATA head Bill Murphy testified that GATA had been contacted
by a "whistleblower" named Andrew Maguire. Murphy went on to testify that
Maguire, an ex-Goldman Sachs metals trader based in London, had first-hand
personal information that J.P. Morgan traders in London had boasted to him that they
were manipulating the silver market through a large concentrated short position, and
that they had made extraordinary profits by way of illegal market manipulation
tactics.
Later in the hearing, Jeffrey Christian of CPM Group testified. Mr. Christian's
testimony was factual and, frankly, unremarkable. But it would later be taken
completely out of context by GATA and used as the basis for some absurd allegations
also made by GATA and echoed by Maguire in King World News interviews that
would ensue. More on that later in this article.10-005
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Andrew Maguire and Wife Victims of Suspicious Hit & Run
Accident
Just days after the CFTC hearing, news broke that Andrew Maguire (the London-
based metals trader and whistleblower) had been involved in a hit and run car
accident, where another driver struck first his car and then another vehicle, before
fleeing and eventually being apprehended by police. To my knowledge, no
information has been released pertaining to the identity or possible motive of the hit
and mn driver. Whether this was a freak coincidence or a conscious malicious act
remains unclear. But of course the blogosphere immediately jumped to the conclusion
that J.P. Morgan had hired a hit man to assassinate Maguire for exposing their scam.
The rather obvious fact that J.P. Morgan would only be adding credibility to
Maguire's claims against them was of course never mentioned in the numerous
conspiracy theory-laden blog posts that ensued.
The King World News Fear Mongering Campaign Begins!
Before continuing, I should acknowledge that I chose the above heading text with
some reluctance, but it needs to be said. For the record, I think Eric King of King
World News is a really good guy who means well, and I have always respected his
interview style. But in this case I think he has been suckered into trusting the market
knowledge of several interviewees, particularly the representatives from GATA, who
have been woefully derelict in their duty to their own stated mission. So before going
on, I want to be clear that I excuse Mr. King for his error of putting faith in the
knowledge of the wrong people. I offer no such compassion to Bill Murphy or Adrian
Douglas of GATA, whose conduct in these interviews has been nothing short of
outrageous.
The Maguire and Douglas Interview
Eric King's first interview was with Andrew Mag__ui___r__e_. (the London-based metals
trader and whistle-blower) and GATA's Adrian Douglas. Eric King opened the
interview by intimating that the subject at hand was "The Greatest Fraud in History",
a line he would go on to repeat many times in subsequent interviews. Maguire
explained that the metals trading world is a small one, and that everyone knows what
goes on. He says that he "knew for quite some time" that there was "heavy
manipulation", "particularly in the silver market". Maguire then alleges that after
taking over Bear Stems' short position, J.P.Morgan "took down" the silver price from
upwards of $20/oz to below $9/oz, more than halving the price of the metal through
what Maguire implies was a conscious manipulation strategy perpetrated by J.P.
Morgan. Maguire then describes how despite knowing how to profit from what was
going on, he felt a moral obligation to contact Bart Chilton at CFTC to explain how
J.P. Morgan was manipulating the COMEX silver market. Eric King then describes
how Maguire sent e-mails to CFTC,
in advance,
explaining how a manipulation was
to unfold on February 5, 2010, and explaining exactly what would happen and when.
On the whole, Maguire's comments seemed, so far, to reveal a credible disclosure of
compelling evidence about illegal market manipulation that J.P. Morgan was
apparently guilty of perpetrating.
Next came GATA's Adrian Douglas. Forget about rational, intelligent commentary
from this point forward. Douglas immediately began talking about the London
Bullion Market Association (LBMA), the London-based precious metals market. One10-005
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might have hoped that Eric King would intervene and point out that the hearing in
question was held by CFTC, an American regulator with no jurisdiction over LBMA.
No such luck. Now don't get me wrong here - fraud on the LBMA is a critically
important issue that affects all metals markets worldwide, but as we'll see, GATA's
allegations about LBMA are baseless. Next, King asks the leading question, "Isn't
this the greatest fraud in history?" Douglas takes the bait, and makes some comments
about how
The London Market
is enormous in size. King never picks up on the
obvious jurisdictional issue.
Eric King then baits Maguire with another leading question, inviting him to agree that
what's at stake is in fact a matter of national security. But here's where it gets
interesting. Maguire runs with it and goes on to describe Douglas' "questioning" of
Jeff Christian. I watched the CFTC hearing and didn't get the impression that
Douglas, as a witness giving testimony, had the authority to question anyone. But that
aside, Maguire goes on to emphasize Christian's "admission" (Maguire's words) that
the "leverage" (again, Maguire's words, not Christian's) was 100:1. Maguire then
goes on to describe his astonishment about this "admission", saying that in his
"wildest dreams" he imagined that perhaps there was a 10:1 or 20:1 leverage, but he
never envisioned anything close to 100:1
leverage.
Whoa.
Full stop. This is where Maguire blew his credibility completely, both by
using the term
leverage
incorrectly and by completely distorting Mr. Christian's
testimony. In my opinion, if Maguire were really a trader with the experience he
claims to have, he would have already known the approximate ratio of paper to
physical trades. No "wild dreaming" is required, and Christian was only stating well-
known information. And to be certain, he certainly would know better then to misuse
the term
leverage.
Before continuing with the subject of Mr. Maguire, we need to take
a side trip to understand what Christian really said and what
leverage
really means.
Jeff Christian's Now-Famous 100:1 Comment
If you take the KWN interviews at face value, you'll be shocked to learn that someone
named Jeffrey Chritian has "admitted" to "what could be the largest fraud in history",
by acknowledging that the London precious metals markets are "leveraged" 100:1,
apparently diluting the value of investors' holdings by 99%, and exposing a fraud that
would make Bernie Madoff look like a boy scout. And Christian "admits" to all of it.
That Bastard!!! Let's hang him by his short hairs and beat him to death with blunt
instruments! Oh wait, before doing that, perhaps we should dispense with the
nonsensical distortions being put forth by Eric King, GATA, and Andrew Maguire,
and instead focus on what Mr. Christian
reallF said
in the CFTC hearing. I admit that
focusing on fact rather than hyperbole has fallen out of vogue, but please bear with
Here's what Mr. Christian actually said. You can find this testimony in the
official
video recording of the hearing, beginning at 05:32:05:
One of the things that the people who criticize the bullion banks and talk
about this undue, uh, large positions, don't understand, is the nature of the
large positions in the physical market And we don't help it The CFTC,
when it did its most recent report on Silver, uh, used the term which we use
in the market: "The Physical Market". And we use that term, as did the10-005
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CFTC in that report, to talk about the OTC market: Forwards', OTC options',
physical metal and everything else. And people will say - and you've heard it
today: "There's not that much physical metal out there." There isn't! But in
"The physical market" as the market uses' that term, there's much more
metal than that. There's a hundred times' what there is:
What Mr. Christian says here is entirely accurate, and should come as no surprise.
Physical gold bullion isn't the only thing traded in the marketplace, and he goes out of
his way to explain that he thinks it tmfortunate that so many people incorrectly use the
words "physical market" to refer collectively to not only the market for purchase and
sale of physical gold bullion, but also the market for exchange
of derivative contracts'
such as forwards and options. His point is that when you include the derivative
contracts, far more "paper gold" is traded than there is actual physical bullion. The
same is true for most commodities. Far more crude oil futures contracts are traded
than there are physical barrels of crude oil, and far more copper contracts are traded
than there is physical copper to be delivered. Speculators who make economic bets on
prices of precious metals or other commodities going up or down routinely enter these
contracts with the intention of cash-settling the contract before its delivery date. In
most cases, both parties (buyer and seller of the contract) get in with the full intention
of getting back out through cash settlement for any change in price of the tmderlying
commodity. Neither "buyer" nor "seller" ever intended to buy or sell anything in such
cases.
For example, as I glance at my own futures account screen in another window as I
type this, I see that I am "short" well over a million dollars worth of S&P 500 stock
index futures, and also short about the same dollar amount of 30-year U.S. Treasury
bonds, with each contract calling for Jtme delivery of the underlying commodity.
Guess what? I don't have the shares, nor do I have the bonds that I "sold" through the
futures market. No, I'm not up to anything sleazy here. I didn't actually sell anything.
What I did was to enter a contract that requires that I do one of two things: My first
option is to close these positions before
thefirst notice date
listed on the contract
description, and settle up for any gain or loss on the price of the underlying
commodity in cash. That's what most futures traders do: Make directional bets that
wind up being settled in cash. Most of the people on the other side of these trades
don't actually intend to buy any bonds or S&P shares either. They too intend to exit
the positions before the deadline, settling any gain or loss on their wager in cash.
Upwards of 95 % of futures contracts are closed and settled in cash prior to delivery.
All that Jeffrey Christian said was that when you consider all the guys like me making
speculative bets in the paper markets, there are a lot more bets being made on the
price of an ounce of gold than there are ounces of gold. What he doesn't say explicitly
(because it should be obvious) is that there's nothing wrong with that. Everyone who
participates in these markets is supposed to tmderstand the difference between buying
paper that represents an economic bet on the price of an tmderlying commodity and
buying the commodity itself. For example, I'm also presently "long" several thousand
barrels of crude oil futures. I don't have a big tank to put the oil in, and a lot of the
guys selling those contracts don't have any oil to deliver either. But perhaps most
importantly, I don't have enough cash to buy all that oil even if they did! This is
because oil futures are a leveraged instrument (explained in the next section). This10-005
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point will be critical later on whenwe debunk GATA'sabsurd claims ofthe "greatest
fraud in history".
There is a legitimate issue here, but it's not a new one: For decades, many people
have questioned whether it makes sense to combine speculative "paper markets" with
the market for real physical commodities. Warren Buffet famously called derivatives
"financial weapons of mass destruction", because they allow speculators to make
large bets without actually buying or selling the stuff they are betting on. When the
underlying prices change dramatically and unexpectedly, massive financial losses can
result, potentially posing a systemic risk to the financial system. But this is a very old
debate, and it's not in any way, shape or form specific or unique to precious metals.
Personally, I question whether there is really as much as 100 times as many ounces of
"paper gold" as there is physical gold, and I wonder if Mr. Christian was
exaggerating. But in any case, the point is simply that like all commodities, there are
more paper bets on the price of gold and sliver than there are transactions where the
metal itself changes hands. Nothing should come as a surprise here, yet this comment
seems to have become the central "evidence" of a scandal that GATA and Eric King
would like us to believe represent "the largest fraud in history"!
What "Leverage"
Really
Means
A key aspect to understanding GATA and Maguire's allegations involves the
incorrect application of the word
leverage.
So let's take a moment to review how that
term is commonly used in finance, and how it's being applied here.
Leverage
pertains to buying (or selling) more of something than you have money to
buy outright. For example, a speculator can "buy" paper contracts that represent a
million dollars worth of crude oil without actually having a million dollars to invest.
They might (for example) only have $200,000 of actual account equity, but they are
still allowed to
buypaper contracts'
representing a million dollars worth of crude oil.
In that case, the investor is said to be "leveraged 5 to 1". The reason this is possible is
that in most cases, speculators in the market have no intention of actually taking
delivery of the oil. They are betting on the price going up or down by some relatively
small percentage. As long as the investor puts up enough collateral to cover any
sudden price change, he can settle any profit or loss in cash when he closes out the
position. This feature of "leverage" is the principal reason that most speculative
investors use derivative investments in the first place, and is true (with slightly
different mechanics) for both futures and options. The maximum degree of leverage
for trading futures contracts is controlled by the rules of the futures exchange. For
COMEX gold and silver contracts, it works out to a maximum leverage ratio of less
than 10 to 1.
When you hear about derivatives like options and futures being "dangerous"
investment vehicles, it's precisely because of the high leverage ratios they make
possible. At 10:1 leverage, if the price of the underlying commodity goes down by
only 10%, a long investor would loose everything and a short investor would double
his money. The ability to make really big bets when you only have a fraction of the
cash being wagered is dangerous business. A big part of the reason that the 2008
market crash was so dramatic was that many large hedge funds were highly leveraged,
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to make wagers in the billions. When prices started moving beyond the range that
these ftmds originally presumed would fall in the range of realistic possibility, many
were forced to
de-lever
simultaneously, resulting in massive sales of securities
pushing prices ever lower. This is why Warren Buffet has called derivatives financial
WMDs.
So as the term is normally used,
leverage
refers to the ratio of investor's equity to the
notional value of assets. But suddenly Mr. Maguire and his friends at GATA are using
the term in a completely different way. They are now alleging that Mr. Christian's
testimony amotmts to, in the words of Eric King, "an extraordinary admission" of
"100:1 leverage in the LBMA Physical market". Of course if you go back and re-read
Mr. Christian's testimony you'll see that he goes out of his way to clarify that he's
talking about the paper market, not just the market for tree physical bullion.
A true
leverage ratio
of 100:1 would be a very scary thing. It would mean that for
every dollar traded, there's only one penny of actual capital, and therefore a 1% price
change could wipe out any long position. But Mr. Christian's statement had nothing
to do with
leverage,
at least not in the sense that term is conventionally used in
finance. All he said is that for every transaction where real metal changes hands, there
are 99 more where the parties are trading in paper contracts, and choosing to settle in
cash. Those 99 other trades may very well be leveraged transactions, but the leverage
involved will be limited by the exchanges and will generally not exceed 10:1.
COMEX vs. LBMA
I've used the example of a COMEX futures contract to explain the concept of
leverage because, after all, the matter at hand is the CFTC's still-pending public
comment period pertaining to COMEX futures position limits. In researching this
article, some reviewers of the first draft alleged that it was bogus to use an analysis of
the futures market to debtmk GATA's arguments, because GATA is talking about
"The Physical Market", i.e. the LBMA. But recall that what GATA is alleging
pertains to an "admission" supposedly made by Jeffrey Christian. And Christian's
testimony (above) clearly pertains to LBMA
derivatives',
not to physical bullion
transactions on the LBMA.
Similar to COMEX Futures contracts, LBMA Forwards are not binding obligations to
buy or sell anything. They offer the parties the option to exit the position with cash
settlement any time before the maturity date on each contract. In the over the cotmter
(OTC) market, each contract is tailored to the trade. Some trades are for 10,000
otmces. Some are for 40,000 otmces. The maturities vary for contracts as well. That a
party to one of these principal-to-principal contracts closes out the position prior to
the maturity or delivery date is the most common resolution of London OTC trades.
That is not a default nor is it fraud, as GATA has alleged. It's the normal functioning
of the market. In fact, it's by far the most common circumstance. The London market
association and its members do not make data available on such aspects of their
markets, but Jeff Christian's testimony implies that 99% of London forwards are
cash-settled and never involve physical delivery. This has nothing to do with
leverage!10-005
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Back to Andrew Maguire and GATA...
Returning to Eric King's interview of Andrew Maguire, the first red flag pops up
when Maguire claims that in "Adrian Douglas' questioning of Christian, where an
admission was made that the leverage level was 100 to 1". As noted earlier, Mr.
Douglas wasn't questioning Mr.Christian and had no authority to do so. It was CFTC
Chairman Gary Gensler who was questioning Christian. And Christian certainly never
abused the term
leverage
in the way Maguire does. All he said was that more paper
contracts are traded than ounces of physical metal. In fairness to Mr. Maguire, he does
go on to clarify what he means by saying
"I
always figured maybe 10 or 20 to 1, i.e.
for every single ounce of gold or silver, there'd be 10 or 20 ounces of paper gold, but
I never imagined it would amount to 100 times that!"
I question why Maguire is using the term
leverage
to describe this relationship of
physical to paper in the first place. His statement seems to imply that the physical
bullion in LBMA vaults somehow serves as collateral for LBMA derivatives, which is
not the case. But what Maguire says next just defies reason: "Now here's the problem:
For every physical ounce that actually leaves the LBMA and leaves the country, and
this is what we are witnessing, leverage works in two ways! Now you're looking at
one hundred ounces of paper gold
that has to be somehow accounted for,
for every
physical ounce that disappears!" Huh? What is he talking about? Why would an
ounce of physical gold being sold and leaving the LBMA have anything to do with
the paper contracts also being traded in London, and why in the world should we
believe that there is a necessary accounting relationship between the two? Maguire
insinuates that this is
"a
massive problem", but never elaborates. He goes on to talk
about futures contracts being rolled over, but says that cannot go on indefinitely. In
point of fact, so long as the parties on both sides of those futures contracts are happy
settling their bets in cash, there's no reason at all that they can't be rolled over
indefinitely. Under such circumstances, whether or not there is physical metal in the
vault is irrelevant. It's very hard for me to believe that a metals trader with the
experience Maguire claims to have would make such absurd statements, or would
misuse the term
leverage
in this way. I'm forced to question whether an intentional
disinformation campaign is in play here.
Maguire goes on to insist that a day of reckoning is coming. He never really makes a
comprehensible argument to support that assertion, but if we consider GATA's
allegations we can infer what he's talking about: The hypothetical scenario where
buyers of COMEX futures contracts and LBMA OTC Forwards (aka "Paper gold")
suddenly all demand physical delivery of metal, and there isn't enough metal to go
around. There's a small amount of justification for that concern, but it's being taken
completely out of context here and its significance is grossly misrepresented.
The Day or Reckoning Fallacy
Recall the earlier discussion of leverage, where a speculator can control a million
dollars worth of gold bullion even though he doesn't really have a million dollars. The
minimum account equity needed to place that trade is called the
initial margin,
but
please don't confuse this with borrowing on margin in the stock market; same word,
different usage. Most speculators don't have anything close to enough money to
actually buy and take delivery of all the contracts they have bought or sold on
speculation. That's the whole reason they are trading paper in the first place - to take10-005
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advantage of the leverage (using the term correctly now) afforded by the derivatives
markets.
It would seem that the scenario GATA and Maguire want us to panic over is the one
in which suddenly, all of the buyers of paper futures contracts and OTC Forwards
simultaneously and unanimously decide that they want to take delivery of physical
metal rather than settling their contracts in cash. As GATA points out with great
fanfare, that would require way more physical metal than exists. But it would also
require that all those long investors suddenly come up with far more money than they
actually have! This is analogous to saying "Mercedes Benz is perpetrating the
largest
~aud in history!
(spoken in Eric King's dramatic announcer voice of course). If every
single American with a driver's license walked into a Mercedes Dealership tomorrow
and said they wanted to buy a Model 500SLK, Mercedes doesn't have nearly enough
cars to deliver! And if you sell something you don't have, isn't that fraud?" The
point is, that would never happen because most of the people with a driver's license
don't have the money to buy the 500SLK in the first place. Similarly, most of the
people who hold long positions in gold and silver futures don't have the money to
actually stand for delivery. And even if they did, many brokers won't even allow
physical delivery transactions! They're only set up for the far more common case
where the parties on both sides of the futures contract prefer to settle in cash.
A realistic perspective on the Paper-to-Physical ratio
So is there a real problem here? To some extent, yes. But it's nothing new, and it has
been well understood for decades. Nothing changed at the CFTC hearing, and there is
no fraud or scandal. But since there is a real (and well-known) issue here, let's
explore it.
Suppose that some big geopolitical event (such as a war or more sovereign debt
defaults) caused everyone who deals in paper gold to want instead to buy as much
physical gold as they could afford. Of course the ratio isn't really 100:1 any more
because most of the 100 contracts were held by leveraged investors with insufficient
cash to stand for delivery. But suppose that all of a sudden there was enough demand
for physical delivery that twice as much gold was requested for delivery as actually
existed in both the COMEX and LBMA vaults. The answer (as Jeff Christian pointed
out elsewhere in his testimony) is that this is a well understood risk, and that the
markets are designed to accommodate it. Every [competent] futures or OTC Forward
trader who buys a long contract understands what they are really buying: It's a
promise to that one of two things will happen if they choose to stand for delivery:
Either they'll get to buy the physical commodity assuming some is available, or
they'll get a
cash settlement
equal to the value of the commodity on the delivery date.
Those are the rules: You're never guaranteed that you'll get to buy the actual metal
when you buy a futures contract or OTC forward. If you want to buy the metal, you
only get to take delivery if there is enough to go around, and if there isn't, you'll get
cash instead. If you don't like those rules, don't trade in the derivatives markets where
they necessarily exist!
Maguire goes on to describe how wealthy Asian investors need only to "realize in
their minds" that this is
"a
naked short", then they will seize the opportunity to
squeeze it! Frankly, I have to wonder whether Maguire's whole agenda here is to
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precisely that, so that they will employ Maguire to carry out just that trading strategy
for them. If only the market really worked the way Maguire implies, they might get
much richer by doing so. But it doesn't, and they won't. Perhaps Maguire will make a
handsome commission setting up the trade for them. Remember, this guy is ex-
Goldman Sachs. Whether his advice will pan out for investors is a whole different
matter than whether it will pan out for him.
The GATA Round Table Interview
The next chapter in this saga is Eric King's GATA Round Table interview, where
much fuss is made over the fact that shortly after the CFTC meeting, Maguire was
involved in a hit and run car accident that is now being portrayed as an assassination
attempt. There is never a direct allegation that assassination is what was attempted,
but the innuendo clearly seems designed to bring the listener to the conclusion that the
evil market manipulators at J.P. Morgan must have retained the services of a hit man,
to have Maguire killed for revealing their plot. That's plausible, I suppose. But
considering the absurdity of the statements Maguire makes in the previous interview
and the fact that he seems (to me) to have a financial incentive in drawing more
attention to himself, I can't help but wonder whether Maguire himself would have a
greater incentive to stage his own assassination attempt. The news certainly got a lot
of attention when it came out, and one would think that J.P. Morgan would be smart
enough not to add credibility to Maguire's story by attempting such a stunt. But this is
all speculation. The most likely explanation is probably freak coincidence. My point
is simply that any number of explanations are possible, and there's no reason to
assume this car accident "proves" anything. One would think that GATA would have
obtained and publicized the police report. Perhaps they did obtain it and it didn't
support their story?
The allegations made by the GATA representatives were nothing short of absurd.
"When
you try to sell something you don't own, how can that be anything other than
fraud?", GATA challenges! The answer is rather simple: When what you're selling is
a derivative contract such as an LBMA OTC Forward, fraud only occurs when you
violate the terms of that contract. If we're talking about futures or OTC Forwards, the
contract is designed to accommodate the fact that in the vast majority of cases no sale
of the physical underlying thing was ever intended by either party. That's just how the
market works. It's not fraud, but rather, it's the normal and usual operation of the
market. No fraud, no conspiracy, and no scandal. Just business as usual. In fact, the
vast majority of these contracts are closed this way. If GATA's leadership really lacks
such a basic understanding of how derivative markets function, perhaps someone else
should be leading their noble cause?
In the interest of space I won't bother with a point-by-point analysis of the roundtable
interview, other than to say it was utter nonsense and I was disappointed in Eric King
for allowing such absurd statements to go unchallenged.
The Harvey and Lenny Organ Interview
The next KWN interview featured Harvey and Lenny Organ, and Adrian Douglas of
GATA.
This time, the scandal of the week was allegations of absence of gold in a
Canadian bullion bank. Mr. Organ claims to have personally visited Scotia Mocatta's
Toronto vault, where he discovered that hardly any gold is actually present, despite
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storage fees for doing so. Organ alleges that there's really very little gold there, and
that this bullion bank is involved in a cover-up where customer demands for physical
delivery must be serviced by sending away to Hong Kong for actual product, in a
process that he claims took weeks in a case where he demanded delivery of his
bullion.
I don't know this person and wasn't there, so I can't comment personally on the
veracity of his claims. But they were later strongly refuted by Mr. Nick Barisheff, a
much more knowledgeable expert who stands to lose a whole lot more than Mr.
Organ if Organ's allegations were actually true. Frankly, the very fact that Mr. Organ
is affiliated with the GATA people is a red flag against his credibility in my book.
You should listen to both the Organ and Barisheff interviews yourself, and form your
own conclusion. My money is on Barisheff.
Putting It All In Perspective
The Botched Opportunity of a Lifetime
Let's pull this all into perspective now. This all began with a CFTC hearing on
position limits in the COMEX futures market. Clearly, the CFTC's jurisdiction is
limited to U.S. markets. GATA was in possession of compelling evidence that is
directly pertinent to this hearing: First, there's Ted Butler's research alleging that J.P.
Morgan has a concentrated short position in the COMEX silver market. Next comes
Andrew Maguire's [alleged] first hand accotmt of JP Morgan traders boasting about
how this short position was consciously and intentionally used to illegally manipulate
the market. Finally, they have Maguire's claims that he had provided CFTC with
advance notice
of one such manipulation, telling them
in advance
exactly what would
happen and when, as a JP Morgan-perpetrated manipulation went down on February
5
th
.
Wow! That's some damning stuff! Surely, one would expect GATA to stay
focused on the matter at hand - position limits on the COMEX futures market. After
all, that was the issue that CFTC actually has authority to regulate.
GATA's next moves should have been crystal clear: Keep the focus on the matter at
hand. Lobby the CFTC hard and focus on the JP Morgan silver short and Maguire's
evidence that it was being used to manipulate the market. In other words,
Focus
on
what the regulators actually have authority to regulate, and what you can prove
with solid evidence.
GATA's decision
not
to focus on the matter at hand makes me
wonder whether they really have the evidence they claim to have. To my knowledge,
nobody other than GATA and Maguire has acknowledged the existence or veracity of
Maguire's supposedly damning e-mail messages.
Instead of focusing on the matter at hand, GATA contorted Jeff Christian's testimony
completely out of context, and made a big fuss about a scandal on the LBMA that
doesn't really exist. As a result, the investment commtmity has become confused
about what CFTC actually has jurisdiction to regulate. I am outraged by GATA's
botched handling of this opportunity. I do think the markets probably are manipulated,
and as a futures trader it costs me real money out of my own pocket every time these
manipulations occur. But instead of staying focused on the facts in evidence, GATA
decided to go on a tabloid-style scandal rampage, facilitated by a series of fear-
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Voice of Reason #1: Ted Butler
Ted Butler (the guy who first made the case that JP Morgan had a concentrated short
position in silver) never got involved in the conspiracy theories and allegations of
fraud and scandal. Instead he stayed focused on the matter at hand. Namely, the issue
of position limits for COMEX gold and silver futures contracts.
Mr. Butler penned an excellent article titled
A Time to Act, emphasizing to his
subscribers the importance of limiting communications to CFTC during the open
comment period to the facts in evidence and the matters the CFTC has jurisdiction to
regulate, not on wild speculation about what might be going on in another country
outside CFTC's jurisdiction. Ted never mentioned GATA by name, but my own
impression from his article (and I agree wholeheartedly) was basically "Stop listening
to those GATA idiots and their conspiracy theories, and stay focused on what's
important and real!" Ted never used those words, but that was the essential message I
took away. I was so elated by that message that (with Ted's permission), I promptly
cross posted the article on several Internet discussion groups to help spread Ted's
important message: Focus on reality, not conspiracy theory!
Voice of Reason #2: Jim Puplava
After the KWN interviews were released, the blogosphere was on fire with talk of
scandal and conspiracy. Even Tyler Durden of ZeroHedge, normally an excellent
writer, took the bait and added credence to GATA's ludicrous assertions of
"100:1
leverage" and "the greatest fraud in history". In apparent reaction to these events, Jim
Puplava's Financial Sense Newshour was inundated with calls from investors who
had listened to the KWN interviews. Sadly, most of the callers had taken GATA's
bait, posing questions to Jim such as
"When
you sell something you don't own, how
can that be anything other than fraud?" The poor guy sounded like he was quoting the
GATA people from the KWN interview verbatim. (Or maybe the caller
was
the
GATA guy trying to spread more fear, uncertainty and doubt?)
Jim Puplava is one of the most level-headed, no-nonsense people in the industry. He
responded by scheduling two interviews: Jeff Christian (the guy who made the now-
infamous 100:1 comment) was invited to come reiterate and explain what he
really
said.
The second interview was with Nick Barisheff, who was interviewed to debunk
the Organ interview on KWN. Barisheff said that he had personally visited the Scotia
Mocatta vaults at least 10 times, and that the gold had always been there. He went on
to explain that "the vault" actually comprises several different secure rooms, and
speculated that perhaps Mr. Organ had only visited one room and mistook it for the
whole vault. I know people who've had direct dealings with Mr. Barisheff, and he
comes highly respected. I'll take his word over Organ's, but you can draw your own
conclusions.
My hat is off to Jim Puplava. The investment community was clearly very confused
by all the inaccurate nonsense GATA had circulated about LBMA when they should
have been heeding Ted Butler's advice and staying focused on the business at hand.
As I listened to the interviews, I felt relieved, thinking to myself, "Finally, all this
hype and nonsense in the blogosphere will die down and people will get back in touch
with reality..." Well, no such luck. Tyler Durden of ZeroHedge fame immediately
penned an article titled Jeffrey Christian Has a Second Chance To Disprove The Gold
Ponzi Scheme, Fails.
Durden rips apart Christian's interview on FinancialSense, and10-005
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makes the baseless and nonsensical assertion that the 100:1 business somehow
amounts to the derivatives market having "applied fractional reserve psychology to
your [gold] holdings". Duden's arguments are categorically without basis in fact.
In the reader comments area trader Durden's article, Jim Puplava is lambasted and
labeled a "PumpMonkey". The words used there with reference to Mr. Christian
cannot be quoted in polite company. It would seem that the ZeroHedge commtmity is
hell bent on perceiving a conspiracy to exist where none does. A couple of sensible
commentators tried to point out that Mr. Christian's testimony was entirely factual
and no cause for concern, but they were quickly silenced with personal insults and ad
hominem attacks. ZeroHedge readers are a reality-resistant commtmity, it would
seem.
Mr. Durden seems to enjoy tearing apart other authors' articles and assaulting their
arguments, often with abrasive language. I suppose that this article might become the
target of another such attack by Mr. Durden. As I contemplate that possibility, Clint
Eastwood's famous line from the film
Dirty Harry
comes immediately to mind:
Go
ahead, punk. Make my day.
Separating The Issues
It's essential to tmderstand that there are really two separate and distinct issues here,
which have unforttmately been confused by GATA:
1. The use of large, concentrated positions in the futures market to manipulate
the price of precious metals, particularly silver
2. The allegation that the ratio of "paper gold" to real gold (or paper to real silver
for that matter) tmdermines investors' best interests.
Let's do what GATA should have done, and keep these separate issues separate. I'll
address each of them separately below.
Are Gold and Silver Prices Being Manipulated With Concentrated
Futures Positions?
Ted Butler's research alleges the presence of a very large concentrated short position
in the COMEX futures market, held by J.P. Morgan. I'm inclined to believe that this
much is true. Is it really being used to manipulate the market? Based on Ted Butler's
research alone, I would say
maybe.
Ted's argument is, essentially,
what other purpose
could there be for a short position larger than the annual global production of silver?
I can't think of any plausible alternatives, but this argument still lacks certainty. The
fact that neither Ted Butler nor I can think of such a reason certainly speaks toward
the
possibility
that JP Morgan is manipulating the market, but doesn't prove anything
conclusively.
Andrew Maguire's "evidence", taken at face value,
assuming it credibly exists' as
represented by Maguire and GATA,
seems to provide the needed missing link to
clearly establish that the JPM short is a tool of market manipulation. Given Maguire's
performance in the KWN interview, I find his motives highly suspicious and am not
inclined to believe his "evidence" until I've seen hard data to back up what he says. It
may well be there, but all I've heard so far is a lot of talk. And frankly, a lot of that
talk appears to me to be designed to entice wealthy investors to retain Mr. Maguire to10-005
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conduct that short squeeze trade he conveniently outlined in his KWN interview. He
may be completely credible, but until I see more hard evidence, I'm in the
"jury
is still
out with red flags apparent" camp on Maguire's story.
One thing is for certain: There is enough evidence to warrant a thorough investigation
of what JP Morgan is up to, and CFTC should be petitioned aggressively to carry out
just such an investigation. I can't say for sure that JP Morgan is guilty of market
manipulation, but I think there's more than ample probable cause to warrant an
intensive investigation.
Is there a real problem with the paper-to-physical ratio or not?
Based on how sharply I've criticized GATA for distorting the facts, you might be
expecting me to say there's no problem here. But nothing could be further from the
truth. There are definitely real issues here, but they don't legitimize GATA and Eric
King's allegations of "the greatest fraud in history", and there is no grand conspiracy.
The problem is simply that derivative markets are complex, and most people don't
understand how they work. As a result, I believe that a lot of people think they own
physical gold when in reality they are invested in "paper gold". To my mind, that's
the real issue: Many "gold investors" don't fully understand what, exactly, they have
invested in. But let's stay the course and examine this whole "paper to physical ratio"
thing a little more closely.
When someone "buys" or "sells" in the futures or LBMA OTC forward markets, they
really aren't buying or selling anything. They are entering a contract that entitles them
to buy or sell that thing, should they ever want to, at some time in the future. Most
futures and forwards market participants never want to consummate an actual sale.
They're there to place an economic bet on the price of something going up or down.
The word "bet" is perhaps inappropriate because many participants are hedging
another business activity as opposed to gambling on a speculative opinion about
which way a price will move. But in either case, they are entering a contract that will
allow them to derive a cash profit (or loss) depending on which way the price of the
underlying commodity goes during the time they keep the position open. Many
futures brokers including my own
only allow
this sort of cash-settled trading. If I were
to attempt to keep a long position open (to accept physical delivery) my broker would
automatically close the position the day before it became eligible for physical delivery
assignment. My point here is that the scenario GATA keeps raising -
What if all the
gold (or silveO longs suddenly demanded physical delivery? -
isn't even realistic.
First of all, most of us got into these position with a 10% - 15% margin, and don't
have the money to stand for delivery. Even if we wanted to, our brokers would tell
many of us to get lost because they don't want to deal with physical delivery
situations. So the premise is bogus from the outset.
But there is a realistic scenario here: What if all the people who invest in "paper gold"
realized that there's not really enough gold for everyone who thinks they own gold to
go around, and what if they all simultaneously decided to take whatever steps they
needed to take in order to get physical delivery of bullion? Now that's a more realistic
scenario. If they're doing it in the futures market they'd have to find a broker that
permits taking physical delivery, which many don't. But some do. Then they'd have
to pay not just the 10% - 15% initial margin required to open a position, but the full
100% cost of the bullion at their contract entry price. Again, remember that the vast10-005
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majority of investors represented by the 100:1 ratio GATA has made so much fuss
over don't have the money to do this. But some do, and there's really not that much
"extra" gold and silver in the COMEX warehouse, so the risk of a
run on the
warehouse,
so to speak, is real.
The most plausible scenarios would occur relatively gradually. After years and years
of most metals contracts being settled in cash, it's pretty unlikely that all of a sudden,
wham-o, everybody stands for delivery during one specific contract month. So what
would happen is that month after month, more longs would take delivery than there
were shorts making delivery. The COMEX warehouse inventory (a publicly disclosed
statistic) would decline. That tmto itself would cause the price to move higher. In
"normal times", the increasing price would reduce the number of buyers taking
delivery and entice more sellers to make delivery, in a self-correcting system.
But these are hardly normal times, and a sudden event like a nuclear strike on Iran or
an abrupt escalation of the sovereign debt crisis could very possibly induce a large-
scale retreat from paper assets to physical precious metals. In that scenario, the
COMEX warehouse inventory could very possibly be depleted in a single month. But
what's important to understand is that this is a known risk that futures and OTC
forward traders are expected to understand before they make their first trade. It is not
a revelation, nor is it a scandal, nor is it a validation of GATA's nonsensical claims.
It's just a fact of life in the derivatives market: When you buy something and stand for
physical delivery, it's possible that the other guy won't deliver and the warehouse
won't have enough inventory to cover for him. It's a remote possibility, but it's still
possible. When it happens, the buyer gets the cash price of whatever he bought at time
of contract expiration. If you want the physical stuff, you have to take that cash and
go buy it yourself, either on the spot market on in a future delivery month in the
futures market.
There is an entirely plausible "investor gets screwed" scenario here: Suppose (for
example) that you buy Jtme 2010 Gold futures, and stand for physical delivery. But
then in May a nuclear war begins, and everyone wants gold. You will get back not
only the money you paid, but also any price appreciation that occurred between when
you entered the contract and the delivery date. But you won't get any gold.
Meanwhile, in the few days that pass between your contract delivery date and when
you get the money back, the price of gold quadruples because of the war. GATA
would like you to believe this is "fraudulent default", but in reality it's just an inherent
risk of buying anything through the derivative market. It's part of the game - one of
the stated rules you're supposed to understand going in.
The bottom line is that having possession of physical gold or silver bullion is much
better than having a futures contract that entitles you to buy that bullion at a set price
provided that the counterparty doesn't default.
That should be obvious, and it's really
not a scandal or travesty of justice. Just part of how the market works.
The REAL Issue: Understanding What You Own!
It occurs to me that the real problem that tmderlies all this hype and hoopla about the
precious metals markets is that many investors are confused about the various
investment vehicles available to them, and/or don't understand the real risks inherent
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need, it will be easier to ignore all the hype GATA has been spreading about bogus
scandals and conspiracy theories. So let's rtm down your options, starting with the
safest.
Take delivery of Physical Bullion Yourself
The advantage here is that you know first hand that you really have the bullion,
because you receive it personally. There are some drawbacks, however. First, you
need to make sure you're getting real gold and not a counterfeit product. You can
have the bullion professionally assayed (a fancy word for having an expert make sure
it's real), but that costs money. When you want to sell that gold some day, you're
going to have to prove to the buyer that it's real, and that may mean paying to have it
assayed again at your expense. Next you have to figure out where to store it. Keeping
any significant amotmt of bullion in your home is a really bad idea. In a crisis, bad
guys will come kill you and your family to get your gold. Very bad idea. All the other
options cost money and have inherent risks. When the U.S. Government confiscated
privately held gold in 1933, all Safe Deposit boxes were sealed and could not be
opened unless an IRS agent was present. So if you are concerned about confiscation,
bank safe deposit boxes might not be the best bet. A private vault (Brinks and other
reputable firms offer this service) is an option, but they're expensive.
There's a lot to be said for having a small amotmt of silver in coin form stored in a
safe place. You might need it in a crisis to barter for food or transportation to the
place where you've stored the rest of your bullion. But given all the hassles involved
in finding a place to store significant quantities of bullion, I wonder if an allocated
bullion vault accotmt would be a better choice than taking delivery yourself and
having to deal with storage. If the bullion vault sells you the gold and maintains
physical custody, they will know it's real and you'll be able to sell it back to them
later without paying to have it assayed again.
There's one more important downside to taking physical delivery yourself: When you
try to buy bullion, you're very likely to be the victim of a bait-and-switch scheme
where a "rare coin consultant" attempts to mislead you with false information about
confiscation risk in order to persuade you to buy a high mark-up product you don't
want or need. The defense to this is simple: If you hear the word "numismatic", hang
up the phone immediately and never talk to that guy again. He's trying to rip you off.
ALLOCATED Bullion Bank Account
An allocated account with a bullion bank means your gold is sold to you in physical
bars that you own, which are then stored in the bullion bank's vault. You should
expect to pay 1% - 2% of the purchase price, per annum, for having the metal stored
for you. The advantage of an allocated account is that your bullion is yours, and isn't
pooled with anyone else's. You should receive a certificate showing serial numbers of
your bars, purity to three decimal places, and weight to three decimal places. In my
opinion, provided that you are dealing with a reputable bullion bank, this is the safest
and most sensible option. You should go in person to inspect your gold and make sure
the serial numbers match up. For an account of any significant size, the bullion bank
shouldn't balk at this request; if they do you should ask yourself (and them) why
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There is always the risk that an unscrupulous bullion bank could sell you and ten
other guys the same gold, and just tell each of you it's yours. This is exactly what Mr.
Organ seems to be accusing Scotia Mocatta of in his interview with Eric King. I'm
not buying his story and think he's confused about the facts, but you can form your
own opinion. The only way I know of to mitigate that risk completely is to take
physical delivery yourself and make your own storage arrangements. But you still run
the risk of having your gold stolen by whomever you rent vault space from.
UNALLOCATED Bullion Bank Account
The proposition here is that you can save all those pesky storage fees by pooling your
gold with other investors' gold. The sales pitch will usually imply that the bullion
bank always has all the gold and there is never any double counting or "fractional
reserve" schemes. But in an unallocated account, it's possible that the bullion bank
may
hypothecate
your bullion, meaning that they rent it out to someone else in the
same way that stocks in a margin account can be lent out to short sellers. In normal
economic times, this isn't a problem because the bullion bank will be able to produce
all the gold when needed. But you probably didn't buy gold in the first place to cover
the "normal economic times" scenario. If you are tempted by an unallocated account
for the sake of saving storage fees, be sure to do adequate due diligence work to make
sure you know how much gold really backs up your claim.
Laws will vary from one jurisdiction to another, but my understanding is that in most
cases, an unallocated account holder is an unsecured creditor if it should ever be
revealed that the gold is not there. You can sue them in bankruptcy court and share
whatever assets can be recovered with other claimants. In contrast, in an allocated
account you own specific serial-numbered bars, and if they're not there when you
come calling for them, you can prosecute the bullion banker in criminal court for
stealing your property. I'm no legal expert and the laws vary depending on
jurisdiction. But I still like the odds on allocated accounts much better.
Gold and Silver ETFs
These investment vehicles track the price of the metals, and are
supposed
to actually
own the physical bullion. The problem is that with the case of GLD in particular,
detractors have alleged they own the physical gold through a complex network of
custodians and sub-custodians. A whole lot has been written about the potential risks
of there being more than one claim on each physical ounce of gold in these funds, and
alleging that the custodian system is so complicated that fraud would be hard to find
and prove. I personally don't have enough information to comment authoritatively.
They probably have all the gold. Probably. But for me personally, I'd feel more
comfortable absorbing the storage fees inherent to an allocated bullion bank account.
The "No, Seriously, We really have the Gold!" ETF
This new class of investment (notably Eric Sprott's PHYS gold fund) seems to have
arisen in reaction to the controversy about whether or not GLD really owns all the
gold it claims to, and whether or not there is any validity to the allegations of multiple
claims. The concept is the same as with GLD, except that all the gold is kept in one
place and the fund differentiates itself by making clearer representations about what's
really there. Also, in the case of PHYS, even small investors have the option of
redeeming their shares for physical bullion when they want it. This is a brand new
trend and I have no first-hand experience with these new funds.10-005
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Precious Metals Funds
These mutual ftmds that invest in precious metals. They may own physical bullion, or
they may invest in "paper gold" products including futures and options, or they may
buy mining shares. Read the prospectus carefully and make sure you know what
you're buying.
Futures and Options Contracts
These are
derivative instruments',
meaning what you get is a promise from somebody
else that they will sell you something at a set price, provided that they don't back out.
In the case of listed instruments, if the counterparty backs out the exchange covers for
them, so in theory you're covered. But in a systemic crisis, the exchange itself could
default. These instruments offer leverage and trading efficiency benefits that make
them ideal for short-term trading and leveraged speculation strategies, but you're not
buying precious metals when you invest in these "paper gold" products. You're
entering a contract with a counterparty who may or may not keep their end of the
bargain. Stay away from these unless you're absolutely sure you know what you're
doing!
If you invest in other instruments such as mutual funds or ETFs, be alert to the
possibility that they may be investing in futures contracts. That means that in a panic
situation where futures longs are forced to accept cash settlement, the funds that
invest through futures could take a big loss in contrast to other ftmds actually holding
physical bullion. Make sure you know whether you own futures or options
either
directly or indirectly,
and if you do, be sure you understand the inherent risks.
Conclusions
I find it shocking that GATA has so badly botched the opportunity to stay focused on
the compelling evidence they allegedly have in hand pertaining to COMEX futures,
the market the CFTC actually has authority to regulate. The JP Morgan silver short
appears to be real, and very possibly a real scam. But instead of focusing their
attention on those issues, now, while CFTC is directly considering position limits,
GATA instead insists upon spending their efforts spreading baseless propaganda
about scandals that don't really exist in the LBMA, a market system that is
completely outside the jurisdiction of CFTC. Eric King has meanwhile perfected his
ability to say the words "greatest fraud in history" with a ring in his voice that a sports
annotmcer would be challenged to match. Sadly, Mr. King has failed to do his job as a
journalist and check his sources or ask his interview guests challenging questions to
test the veracity of their arguments.
What's important now is the JP Morgan silver futures short, and the still-open CFTC
Comment Period. Readers who want to help the cause would do well to read Ted
Butler's A Time to Act memo, and follow the directions therein to get their comments
to CFTC before April
26
th
.
Ignore GATA's fear mongering campaign, and encourage
Eric King to return to his past pattern of excellent j oumalism. If you're a GATA
member, for heaven's sake hold the leadership accountable for their atrocious
handling of this entire affair.
