Comment Text:
As a retail market participant in physical metals and mining equities, I find it completely untenable that banks with no legitimate hedging interests are able to maintain paper short positions in the tens of millions of ounces. This represents a very significant concentration within the overall market, seriously manipulating the fundamentals of supply and demand. The selling short of metals and minerals on paper without the actual physical commodities or legitimate claims thereto as backing is tantamount to fraud on a massive scale.
When this charade finally unwinds, as it surely must, blame will not lay solely with the banks making the transactions, but with the regulators who have been tasked with ensuring an honest and efficient market but have done nothing to prevent it. It will be the financial collapse of 2008 all over again.
When commodities are priced too low because of manipulation in the paper futures markets, they are consumed to excess since nobody is aware of just how dear they are. Moreover, resources that ought to be produced or extracted are not because the prices do not warrant the expense. But when the imbalances finally come to light, they incite panic and hoarding, sending prices to the stratosphere. Production is unable to be mobilized quickly enough to avert serious shortages, causing dire consequences.
Accurate pricing signals are absolutely essential for a free market system to properly regulate production and consumption without bubbles and panics. No government regulation at all would be better than poor regulation because it gives the market an inappropriate sense of safety and integrity. If the CFTC does not enforce rational short position limits, they should give up any pretense of regulating commodity futures trading at all. Market participants should not be lulled into believing someone is "ensuring the integrity of the futures and options markets" when no such thing is actually occurring.
JPMorgan -- which is neither a producer nor consumer of silver -- holding 25,000 contracts (125 million ounces) of silver net short is simply inexcusable when annual U.S. mine production is only around 40 million ounces. This on-paper-only supply is necessarily suppressing actual physical production, undermining the capacity for mining employment and capital investment, and setting up severe shortages in the future which will adversely impact the electronics, battery, solar energy, biomedical, investment, and currency markets, among others.
A reasonable short position limit would be around 1-2% of open interest (with no exemptions), which would be approximately 1,600 - 3,300 silver contracts, not 25,000. That amount would still be larger than what the vast majority of either the world's silver producers produce or consumers consume in any given year. In this way, no single speculator such as JPMorgan will have inordinate pricing power to manipulate the market beyond actual supply and demand fundamentals.
